Medicare’s prescription drug benefit is known
as the one federal entitlement program that routinely comes in under budget.
Now, a new push is on in Congress to make changes to the program that could
increase costs.
Medicare’s unique drug benefit
Medicare, originally enacted in 1965, has many
outdated design flaws. One of those was that the original law only covered
prescription drugs if they were administered by a hospital (Medicare Part A) or
in a physician’s office (Part B). Drugs that we obtain from retail pharmacies,
like CVS or Walgreens, were not covered.
In 2003, under George W. Bush, Congress
changed that by adding Medicare’s prescription drug benefit, also known as Part
D, in a bill known as the Medicare Modernization Act of 2003. Under Part D,
seniors choose among dozens of private plans, who compete for seniors’ business
by negotiating drug prices effectively enough to offer retirees the lowest
possible premium. Roughly three quarters of the cost of Part D are paid by
taxpayers; the rest by seniors through their premiums and out-of-pocket costs.
This structure—insurers competing for market
share through lower prices, with seniors incentivized to choose low-cost
drugs—has worked remarkably well, so much so that in 2011 I described Part D as
“the most successful cost-control
experiment in Medicare.”
Per-enrollee spending
in Medicare’s prescription drug benefit has been stable over time. FREOPP.ORG
Indeed, during the 12 years from 2006 to 2018,
per-enrollee spending in Medicare Part D actually declined in seven of them.
The notable exception came in the period from 2013 to 2016, when the launch of
new treatments for hepatitis C substantially increased Medicare drug spending.
Pretty good, right? You’d think so.
Seniors unhappy with out-of-pocket exposure
Even though three fourths of the Medicare drug
benefit is funded by other taxpayers, seniors are still unhappy with the costs
they pay for prescription drugs. As prices for branded pharmaceuticals continue
to skyrocket, seniors’ out-of-pocket spending is increasing.
When Democrats passed Obamacare in 2010, they
funded their subsidies for the uninsured in large part by significantly cutting
Medicare spending. Democrats tried to make this medicine go down more easily
by pairing the Medicare cuts with more
subsidies for Medicare Part D’s “donut hole” deductible. In total,
over the law’s first decade, Obamacare paired $768 billion in Medicare cuts
with $48 billion in prescription drug subsidies and $4 billion for preventive
care.
Drug companies loved this, because less
out-of-pocket spending for seniors would translate into less price-sensitive
consumers. That, in turn, would increase the ability of manufacturers to raise
prices.
Sure enough, the government’s share of
Medicare D spending has risen sharply in recent years, as more and more
enrollees reach the “catastrophic” portion of their coverage.
(The Medicare Part D benefit goes through four
stages. In stage 1—the deductible—the senior pays 100% of his drug costs. In
stage 2, the “initial coverage phase,” the enrollee pays 25%, and the insurer
pays 75%. In stage 3, the “donut hole” or “coverage gap” phase, the enrollee
pays the same 25%, but the remainder is split between the insurer (5%) and a
rebate funded by drug manufacturers (70%). In stage 4—the “catastophic”
phase—80% of the costs are paid by Medicare, 15% by the insurer, and only 5% by
the enrollee directly.)
Concerns about Part D’s current structure
Some Part D wonks are concerned that insurers
don’t have a strong incentive to worry about drug costs once an enrollee
reaches the catastrophic threshold because, as noted above, most of the costs
are paid by the government, not the insurer.
Earlier this year, the Center for Medicare
& Medicaid Innovation, led by Adam Boehler, set up a pilot program under
which, beginning in 2020, insurers can volunteer to take on Medicare’s 80%
responsibility in the catastrophic phase. Insurers would be on the hook if drug
spending exceeded Medicare’s standard spending, but insurers could keep the
change if they found a way to save more than Medicare.
In May 2018, Andrea Sheldon of the actuarial
firm Milliman, at the request of Aetna, modeled a proposal to cap seniors’
out-of-pocket costs at $2,500, eliminating their cost-sharing
responsibilities in the catastrophic phase. Instead, Medicare would pay 20% of
catastrophic costs, with insurers paying 77% and drug manufacturers 8% to 10%
(their role in funding the “donut hole” would be eliminated).
Like the CMMI pilot, this approach would give
insurers a stronger incentive to manage seniors’ drug costs, because if they
fail at doing so, they will have to charge higher premiums and risk losing
market share to more efficient competitors.
On the flip side, manufacturers are likely to
react to the 9 percent Part D rebate by raising their prices by that amount.
And with seniors’ out-of-pocket costs capped, a significant amount of the
political pressure to reduce drug spending will vanish, giving manufacturers an
incentive to raise prices even more.
Faulty reform assumptions
As you can imagine, the idea of capping
seniors’ out-of-pocket costs is popular with seniors, and therefore popular
with politicians. But it would likely lead manufacturers to take even higher
price increases than they usually do, because if insurers refuse to pay up,
patients will likely blame insurers instead of drug companies.
Critically, Aetna asked Milliman to assume
that manufacturers would not increase prices in response to the cap on
out-of-pocket costs. In one scenario, “we assumed the benefit structure changes
have no impact including no changes to plan formularies, drug pricing, or
beneficiary behavior.” In the other scenario, “Aetna asked that we demonstrate
the impact of a 5% reduction in non-specialty brand drug spending as a result
of drug pricing changes and plan management of high cost drugs.”
In other words, Aetna asked Milliman to assume
that drug prices would go down, not up, with the new structure. In
that second scenario, Milliman estimated that federal spending on Part D would
decline by $23 billion from 2020 to 2029. (In the first scenario, with no
behavioral changes or savings, the federal government would save $1.6 billion,
but beneficiaries would spend $1.6 billion more.)
But what if prices went up? For example,
manufacturers would almost certainly raise prices to make up for the 8% to 10%
“rebate” imposed by the new Part D structure. In addition, capping seniors’
out-of-pocket costs would significantly reduce political pressure among
retirees to rein in costs, giving manufacturers more ability to get away with
higher price increases. At the very least, one could envision federal spending
on Part D increasing by $23 billion over the next decade, if not more.
According to multiple sources, however,
Congress is not considering these reasonable negative scenarios, let alone
worst-case scenarios in which costs explode. Instead, key policymakers are
taking the Milliman analysis and running with it, ignoring the caveats and the
important scenarios that Milliman did not model out.
Reforming the reform
The positive incentives in the Aetna
proposal—giving more incentives to insurers to rein in costs—would work better
if it contained more ways to control costs.
For example, Congress could eliminate the Part
D “protected classes” rule which forces insurers to pay for any drugs in six
arbitrary categories, regardless of their price or value. (The Trump
administration had proposed just such a reform, but withdrew it in a sop to the drug
lobby.)
More substantially, Congress should require
that drug companies selling drugs into Part D rebate any price increases above
consumer inflation to Medicare, to offset the program’s taxpayer-funded
subsidies.
Without reforms of this type, it’s highly
likely that restructuring Part D would drive costs upward.
At a time when what we really need is
entitlement reform, such a change would be more like entitlement deform: taking
a reasonably well-performing public program and undermining its ability to be
sustainable in the future.
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