Tara O'Neill Hayes April 14, 2020
Executive Summary
Over the past year, Congress has put
forward several
proposals to lower prescription drug costs, including numerous
proposals to reform the Medicare Part D benefit structure. This study analyzes
how these plans would be expected to impact spending in 2022, estimating
aggregate impacts by looking just at those drugs for which annual spending is
high enough to require a manufacturer payment if a beneficiary took only that
drug (and not taking into account behavior changes resulting from the reforms).
While the plans are conceptually similar, the differences in the details result
in significantly different impacts for the various stakeholders.
·
All of the pending proposals
seek to put downward pressure on prescription drug prices, specifically by
requiring manufacturer rebates in the catastrophic phase of the benefit (at
least) rather than (solely in) the coverage gap, ensuring the mandatory
discount increases along with a drug’s price, and increasing insurers’
liability and thus their incentive to control costs.
·
Each plan also caps
beneficiary spending and significantly reduces the government’s reinsurance
liability, providing greater financial protection to both beneficiaries and
taxpayers.
·
Despite H.R. 3 setting
the lowest out-of-pocket (OOP) cap and requiring drug manufacturers to pay the
greatest share of overall costs, it is expected to reduce beneficiaries’ OOP
costs and the federal government’s reinsurance costs the least, relative to the
other congressional proposals.
·
H.R. 19 and S. 3129 are
expected to provide the greatest OOP savings to beneficiaries and will provide
nearly the same level of reinsurance savings to the federal government as the
revised S. 2543.
The Proposals
This study examines the potential impacts of
three congressional proposals to reform the Medicare Part D program and
compares them to proposals from the American Action Forum (AAF) and the
Medicare Payment Advisory Commission (MedPAC). First, the Senate Finance
Committee (Finance) has considered, approved, and then revised S. 2543, the
Prescription Drug Pricing Reduction Act (PDPRA) of 2019, and this paper
assesses the most updated version. Second, Speaker of the House Nancy Pelosi
has introduced H.R. 3, which includes both a Part D reform and other, much more
sweeping changes. Third, several House Republican committee leaders have
introduced H.R. 19, the Lower Costs, More Cures Act, and S. 3129 includes an
identical Part D reform.
For an overview of the structure of the various
proposals, read this primer.
Estimating the Impact
Summary of the Overall Impact
According to this analysis—detailed below, and
sans any assumptions regarding behavioral changes—H.R. 19 and S. 3129 would be
expected to provide beneficiaries with the greatest out-of-pocket (OOP) savings
and the federal government with the second-greatest reduction in reinsurance
costs. The revised Finance proposal would provide slightly greater savings in
reinsurance costs but less than half the amount of overall OOP savings to
beneficiaries. Of note, while H.R. 3 would set the lowest OOP cap and impose
the greatest financial liability on the pharmaceutical industry of all the
plans, it is not projected to reduce either beneficiaries’ OOP spending or the
government’s reinsurance costs as much as the other two congressional
proposals. There are two key reasons for these unexpected findings. First, most
beneficiaries do not incur enough costs to reach the $2,000 limit and thus will
not see any reduction in their OOP costs due to that cap. Further, because H.R.
3 maintains a coinsurance rate of 25 percent while H.R. 19/S. 3129 and S. 2543
would reduce coinsurance to 15 percent and 20 percent, respectively,
beneficiaries with spending below the OOP limit would not see savings under
H.R. 3 but would under the other plans. Second, for all those who do reach the
OOP threshold, the lower limit offered by H.R. 3 would result in a greater
share of overall spending occurring in the catastrophic phase—where the
government becomes liable for costs. This shift would result in less
reinsurance savings. Finally, insurer liability does not increase as much under
H.R. 3, which has two important—but competing—implications: It may help to keep
premiums from rising (since expected insurer liability is essentially what
determines premiums), but it does little to change their incentives to more significantly
control costs.
Table 1: Estimated Change in Liability by
Stakeholder, Relative to Current Law
*This stakeholder analysis does not include
estimated costs of premium changes for either the beneficiary or the federal
government, aside from the discussion at the end regarding estimates done by
others.
Stakeholder Liability on an Individual Basis
Table 2: Stakeholder Liability Before the
Catastrophic Phase, Assuming Patient Reaches Catastrophic Threshold
Table 2 illustrates various stakeholder
liabilities and relevant spending thresholds on an individual level, assuming a
beneficiary incurs enough costs to reach catastrophic coverage taking only
brand-name drugs and/or biosimilars. Under all reform proposals, beneficiaries
would not owe anything more once they reach the catastrophic phase; under
current law, beneficiaries must continue to pay 5 percent of all costs in the
catastrophic phase. OOP spending before the catastrophic phase would be closest
to that expected under current law in S. 2543, H.R. 19/S. 3129, and the MedPAC
proposal. Insurer liability before the catastrophic phase, shown in Column 3,
would be closest to current law liabilities under H.R. 3.
Under current law, rebates are required in the
coverage gap; under each of the proposals introduced in Congress, rebates would
be required once a beneficiary reaches their deductible. Under the AAF and
MedPAC proposals, rebates would not be required until the beneficiary reaches
catastrophic coverage.
Table 3: Stakeholder Liability in the
Catastrophic Phase for a Patient with $30,000 in Drug Costs
Table 3 shows the costs that would be covered by
each stakeholder in the catastrophic phase for a beneficiary with $30,000 in
spending solely on drugs for which the manufacturer would be liable for a share
of the costs.
The chart below illustrates total costs by payer
for the same scenario. Each proposal will significantly reduce government
liability. Total manufacturer liability is smallest under the AAF proposal and
largest under H.R. 3 from Speaker Pelosi. Insurer liability is most limited
under current law and highest under H.R. 19 and S. 3129.
Aggregate Stakeholder Liability
Considering the effect of the various proposals
at both the individual and aggregate level is important because, as shown in
the preceding and succeeding graphs, the impacts at the individual level are
not representative of the overall impact at the aggregate level. Both the
graduated impact of the manufacturer liability as a drug’s cost increases and
the significant differences in utilization across the beneficiary population
drive this difference.
Using spending and utilization data from 2018
provided in the Centers for
Medicare & Medicaid Services (CMS) Medicare Part D Drug Spending Dashboard,
this analysis estimates some of the expected costs to the various stakeholders
in 2022—the first year that these proposals would be implemented. Only drugs
for which estimated average annual per beneficiary spending exceeds the
threshold at which a rebate would be required are included in the estimate of
total rebates that manufacturers must pay. Assumptions and limitations of this
analysis are explained in the appendix, but one important note is that the
limitations of this analysis likely most impact the estimates regarding
manufacturer liability under the MedPAC and AAF proposals, and as a result
these estimates most likely significantly underestimate manufacturers’
liability. The underestimate is a result of the fact that much less of the
overall spending expected to occur in the catastrophic phase—the only phase
under each of these plans when manufacturers would be required to cover a share
of the costs—is captured by this analysis. The estimates for the other three
proposals, because they require manufacturer liability for all spending above
the deductible, capture a much greater share of total program spending and thus
more fully capture the manufacturers’ liability. It should also be noted that
none of these estimates assume any behavioral changes.
Table 4 illustrates the number of drugs and
beneficiaries for which manufacturers would be required to pay a share of the
costs under each of the plans (subject to the limitations of this detailed in
the Appendix), as well as the expected total manufacturer liability for those
drugs, both in nominal terms and as a share of overall program costs. The AAF
proposal was designed not to extract additional funds from the pharmaceutical
industry but rather to create natural market pressures to control costs. The
congressional proposals and the MedPAC recommendations, on the other hand,
would require significantly larger discounts from the pharmaceutical industry.
The discount rates may be large enough to harm the industry and may result
in reduced
investment for future innovation. And that is to say nothing of
the numerous other hits to the industry included in other sections of some of
the bills, as discussed hereand here.
Table 4: Total Estimated Manufacturer Liability[1]
Costs to Beneficiaries and the Federal
Government
The impact to beneficiaries depends on two
primary components: any change in OOP costs and the change in premiums. Of
course, beneficiaries may also be impacted by utilization management and
formulary changes imposed by plan sponsors or product changes made by
manufacturers as a result of the new policy, but those are beyond the scope of
this analysis.
High-cost beneficiaries who are expected to
reach the catastrophic phase under current law (roughly 1 million people) will
certainly benefit from lower OOP costs under each of the proposals.[2] Table 5 below shows the various OOP
requirements that would be required of beneficiaries under current law as well
as each of the proposals at various total drug costs. Under H.R. 3,
beneficiaries would begin to see OOP savings after just $6,545 in total drug
costs. Under the revised Finance proposal,
the $3,100 OOP cap would not reduce beneficiaries’ OOP liability, relative to
current law, until total drug spending surpassed $13,560, while beneficiaries
would not reach the OOP cap under H.R. 19 or S. 3129 until $17,918.
Table 5: Out-of-Pocket Requirements Under
Various Proposals, 2022
The Milliman analysis
of the AAF proposal, which does account for expected behavioral changes
resulting from the reforms, estimates that beneficiaries would save up to $41.3
billion in OOP costs from 2020-2029. A preliminary
estimate of the Finance proposal from the Congressional Budget
Office (CBO), which also accounts for behavioral changes, found that
beneficiaries would save $20 billion in OOP costs as a result of the redesign;
an updated estimate of
the revised proposal finds that from 2021-2030, OOP costs would be reduced by
$72 billion—the increase resulting from reducing coinsurance below the OOP
limit.
Beneficiaries with lower drug spending may be
worse off under these proposals, as they may experience higher premiums without
the benefit of reduced OOP costs.
Higher premiums, however, would be indicative of
a better functioning insurance program. Premiums reflect expected insurer
liability. The premise of these plans, in part, is that increasing insurer
liability will increase their incentive to control costs. The proposals also
aim to reduce OOP expenses for those with the highest costs; doing so typically
requires shifting costs to other beneficiaries and the insurer, although in
Part D the government and drug manufacturers also pay some of the costs. To the
degree that insurer liability rises, premiums will necessarily rise
proportionately, all else being equal. Under current law, beneficiaries
in Medicare Part D pay 25.5 percent of the premiums, and the federal
government subsidizes the remaining 74.5 percent; the cost of any increase in
premiums will be distributed accordingly.
Because insurer liability is expected to be
lowest under H.R. 3, some may expect premiums would be lowest under that
plan; CBO estimates,
however, that the Part D redesign in H.R. 3 would increase direct spending by
the federal government by $9.5 billion. While CBO does not specify what would
account for these costs, it may be the result of higher premiums (since insurer
liability will increase relative to current law) without a commensurate
decrease in reinsurance payments (since the low OOP threshold will result in
beneficiaries reaching the catastrophic threshold much more quickly).
CBO’s analysis of the revised Finance proposal
found that beneficiary premiums would likely be reduced by $1 billion, relative to
current law, as a result of the redesign as well as the reduction in
beneficiary premium liability from 25.5 percent to 24.5 percent (plus another
$5 billion reduction associated with inflation rebate penalties). CBO also
estimates federal spending would be reduced by $3.4 billion under the revised
Finance proposal as a result of reduced reinsurance liability.
Premiums would likely be highest under H.R. 19
and S. 3129, the bills where insurers would have the greatest liability,
relative to the other plans and current law. Milliman predicted beneficiary
premiums under the AAF proposal (which is expected to increase insurer liability
to a similar degree as H.R. 19 and S. 3129) would rise by $33.9 billion over 10
years (if behavioral assumptions proved true); when combined with the OOP
savings, this premium increase would mean beneficiaries have an overall net
savings of $7.4 billion.
Conclusion
In the 16 years since Congress created the
Medicare Part D program, the prescription drug market, insurance structure,
and pricing
practices have changed. Patterns have emerged that make it
clear the current system is encouraging undesirable
behaviors that increase costs for the government and consumers.
Reforming the benefit structure in a way that realigns the financial incentives
of both the insurers and drug manufacturers may help to reverse these trends by
putting downward pressure on drug prices. Such a substantial reform, however,
requires careful consideration of the many trade-offs that will result from
those changes. Putting too much pressure on drug prices could instead result in
reduced innovation, fewer new treatments, and restricted access to existing
medicines.
Appendix
Methodology, Assumptions, and Limitations
These estimates are based on the 2018 data
provided in the Medicare Part D Drug Spending Dashboard. This data, provided by
CMS, does not account for any discounts or rebates provided by drug
manufacturers after the point of sale; as a result, total estimated spending is
greater than the Medicare Trustees’ estimated net costs for the program.
In the estimates for aggregate stakeholder
liability, it is assumed that the average cost per beneficiary using a given
drug will increase 6 percent from 2018 to 2022 to account for expected price
increases. Utilization of each drug is assumed to increase 10 percent, equal to
the expected increase in program enrollment during that time, according to the
latest Medicare
Trustees Report.
The deductible under all proposals is assumed to
be $485, as the Trustees estimate for 2022. In the current law estimate, the
initial coverage limit is assumed to be $4,490 (also from the Trustees Report).
For all other proposals, the initial coverage limit (also the catastrophic
limit) was calculated based on the plan’s OOP cap and the beneficiary
coinsurance rate. For these estimates, it is assumed that beneficiaries only
take drugs for which a manufacturer would be required to pay a rebate. These
estimates also assume no behavioral changes.
Further, only drugs for which estimated average
annual per beneficiary spending exceeds the threshold at which a rebate would
be required is included in the estimate of total rebates that must be paid.
These estimates do not include rebates that will be required from all other
drugs provided after a beneficiary surpasses the threshold for which rebates
are required but have an average annual per beneficiary cost that is less than
the rebate threshold. Since a beneficiary will likely also take lower-priced
drugs throughout the year, these estimates may represent the low-end of the
amount likely to be collected. Conversely, these estimates do not exclude drugs
that may be generic products. Not every drug with a high price is a brand-name
or biosimilar and thus, these estimates include discounts for possible generic
products that would not be owed, resulting in a potential overestimate.
Finally, it is important to note that these estimates do not account for any
new drugs that have come to market or are expected to come to market after
2018. For these reasons, it is difficult to determine whether these estimates
are overstated or understated. That said, these limitations apply equally to
the analysis of each plan. The estimates for rebate collections under current
law and each of the Congressional proposals are likely much closer to the total
collection amount than the estimates for the AAF and MedPAC proposals, because
the rebate collections under current law and the Congressional plans begin at a
lower spending threshold and thus more of the total program spending is
captured.
[1] See
the Appendix for an explanation of why the estimates of the manufacturer
liability under the AAF and MedPAC proposals are likely significantly less than
the liability would be in actuality.
[2] This
only includes beneficiaries who do not qualify for the Low-Income Subsidy (LIS)
program since LIS beneficiaries have only very limited liability throughout the
benefit.
https://www.americanactionforum.org/insight/analysis-of-the-competing-proposals-to-reform-medicare-part-d/#ixzz6JgxdLq6h
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