Issue No. 15: The Lessons of Part D's Success

Better Drug Coverage Means More Adherence, Which Means Less Spending on Other Parts of the Health-Care System 

It’s hard to believe, but for 41 years, Medicare, the government-run health insurance system for seniors, did not provide coverage for prescription drugs. In 2003, with support from both President George W. Bush and Sen. Ted Kennedy (D-Mass), slim bipartisan majorities in the House and Senate passed the Medicare Prescription Drug, Improvement, and Modernization Act. Three years later, Part D went into effect.

Today, not only is Part D working well but also the program is illustrating a powerful dynamic: Providing better coverage for drugs, increases adherence to doctors’ prescriptions, and taking medicines in turn reduces costs in other parts of the health-care system, especially expensive hospital stays.

Before Part D, seniors were spending an average of $2,322 a year on their medicines. The new program allowed them to choose among competing private plans, with the federal government providing subsidies. The Part D benefit structure can be complicated for Medicare beneficiaries.  Under the “standard benefit design,” you pay a monthly premium and there is an annual deductible ($400 in 2017) before coverage kicks in. After that, you pay 25% until drug costs reach a total of $3,700. You then enter the coverage gap, or“doughnut hole,” and pay 40% of your plan’s price for branded drugs and 51% for generics. Beyond the doughnut hole, when you hit approximately $8,700 in total drug costs, you move to “catastrophic coverage” and pay no more than 5% while the plan itself pays 15% and federal government pays 80%. (There is extra help for patients with financial need.)

According to a Morning Consult survey last year, Americans love Part D. Roughly 90% of seniors say they are satisfied with their coverage, and 92% say the plan is “convenient to use.” Competition is working. Nearly every state has at least 20 plans from which to choose. As a result, the average monthly premium for 2017 is $34 (roughly stable since 2011), and total Part D costs for the first decade were 45% below the original estimates of the Congressional Budget Office (CBO). 

Where Do Those Rebates Go?

Medicare Part D is one of the most successful government programs in history, but it has its critics. A recent article in the Wall Street Journal concluded that “expensive medicines are increasingly denting the pocketbooks of seniors…in Medicare’s prescription-drug program, known as Part D, despite federal legislation meant to reduce out-of-pocket costs and drugmakers’ increasing discounts.” The median out-of-pocket cost for a drug purchased under Part D rose 38% between 2011 and 2015, according to the Journal’s analysis.

One problem, of course, is that doughnut hole. The Affordable Care Act will help; it calls for reducing the patient’s share of a drug’s cost by about half between now and 2020. (That promise, however, could change if the ACA is repealed and replaced.) Another problem is the cost of specialty drugs, coupled with insurance benefit designs that place these drugs on coinsurance tiers that charge patients from 25% to 50% of the price of the drug. The article cites as an example the blood-cancer medicine Revlimid, with average annual out-of-pocket costs of about $4,210. 

Pharmaceutical companies give substantial rebates on such drugs. But under Part D, the rebates go to insurers, not to patients. The Journal article says that spokesmen for two drug companies (including Celgene, maker of Revlimid) “said they would prefer that rebates were used to help lower patients’ out-of-pocket costs.” The article continued:

An Amgen spokeswoman said that despite the significant rebates it provides to insurers, “many intermediaries continue to shift costs to patients, resulting in out-of-pocket payments based on the list price rather than the discounted price of products."

Unfortunately, this is the same story throughout the health insurance system. Rebates aren’t used to reduce what patients pay out of their own pockets for their medicines. As we have noted many times, the average American pays15% of drug costs out-of-pocket, compared with just 3% of hospital costs. 

The Bigger Issue: Health Costs Are Integrated

There is a bigger issue here as well – the importance of considering health costs in an integrated way. Spending in one category can reduce spending in another. Listen to two Senators during the debate over Part D in 2003: 

[M]any of the sicknesses you used to go to the hospital for and stayed for 3 or 4 days can be taken care of by taking a pill. Yet Medicare says if you go to the hospital and run up a bill of however many tens of thousands of dollars to stay that many days, we will pay for it. But if you take the pill that makes the hospital visit unnecessary, we will not. That clearly doesn't make sense. There is the need for the benefit of prescription drugs, and the Medicare system needs to catch up to circumstance. – Sen. Robert Bennett (R-Utah)

There is a dramatic change in the pattern and practice of medicine. Perhaps no better example is what happens with stomach illness. Twenty years ago, there was not much one could do for somebody who suffered from ulcers other than to have surgery. But now with prescription drugs that address the underlying causes, stomach surgery has been reduced by two-thirds. Yet, in Medicare there is no coverage for those prescription drugs. You can't have a modern Medicare without a prescription drug component.” – Sen. Kent Conrad (R-ND)


In other words, spending on one part of the system reduces spending on other parts. “Taking an antibiotic,” says a Congressional Budget Office report, “may prevent a more severe infection, and adhering to a drug regimen for a chronic condition such as diabetes or high blood pressure may prevent complications. In either of these circumstances, taking the medication may also avert hospital admissions and thus reduce the use of medical services.”

The term for this phenomenon is “medical offset.” Incredibly enough, the “CBO did not include any offsetting effect on medical services in its estimates involving changes to prescription drug policies” – most notably, Part D. But in an important report in 2012, the CBO changed course. 

CBO validated the view that not only are innovative medicines one of the most valuable and cost-effective segments of health-care spending, but also medicines lower overall costs in other health-care sectors. Specifically, CBO concluded that a 1% increase in the number of prescriptions filled by Medicare beneficiaries results in a 0.2% reduction in Medicare’s medical spending. 

Given that Part D drug spending is approximately $140 billion a year and that Medicare’s medical spending is about $500 billion, the CBO estimate implies that increased drug use of $1.4 billion could reduce medical spending by $1.0 billion ($500 billion x 0.002). Therefore, the medical savings associated with the increase in drug utilization could offset approximately 70% of the cost.

Even more dramatic are individual diseases. For example, in a paper published in 2014 in the journal Value Health, Y.J. Wei and six colleagues at the University of Maryland looked at the effects of taking anti-Parkinson drugs (APDs) on the rest of the health system. They examined two groups of patients – those with low and with high adherence to taking APDs. The high-adherence group “had significantly lower rates of hospitalization…, emergency room visits…, physician visits,” and so on. Over 19 months, the high-adherence group had total health expenditures (including drug costs) that were $2,242 lower.

The CBO’s 2012 report cited as “particularly relevant” a study published in theAmerican Economic Review by Amitabh Chandra, Jonathan Gruber and Robin McKnight because it “examined a large group of Medicare beneficiaries, considered changes in cost sharing similar to those included in the original Part D legislation…and rigorously compared beneficiaries before and after changes in their cost sharing to an unaffected control group.” 

What happened when patients had to pay more out of their own pockets for drugs and doctor visits? They ended up having to go to the hospital more because they used drugs less:

[W]e find significant “offset” effects in terms of increased hospital utilization in response to the combination of higher copayments for physicians and prescription drugs. These offset effects are concentrated in the most ill populations. While our dataset precedes the implementation of Medicare Part D for prescription coverage, this finding has implications for the design of Medicare Part D… for beneficiaries with relatively high levels of spending—who are likely to be similar to the chronically ill enrollees who experienced disproportionate offsets in our analysis.

Another study, published as a National Bureau of Economic Research working paper in 2014, examined whether Part D produced offsets – that is lower costs elsewhere in the system. The answer was a resounding “Yes.” The authors – Robert Kaestner, Cuiping Long, and G. Caleb Alexander – wrote:

We find that obtaining prescription drug insurance through Medicare Part D significantly reduced hospital admissions and Medicare expenditures for those admissions. Overall, gaining prescription drug insurance through Medicare Part D was associated with an 8% decrease in the number of hospital admissions, a 7%, or $138, decrease in annual Medicare expenditures for hospitalization, and a 12%, or $728, annual decrease in total resource use (i.e., charges) associated with hospital admissions.   

Among specific types of admissions, prescription drug insurance was associated with significant decreases in admissions for CHF [congestive heart failure] (18%), coronary atherosclerosis (13%), and COPD [lung disease] (32%). 


Besides its benefits to seniors, Part D has demonstrated conclusively that when people use medicines more, they use other parts of the health-care system less. And those other parts can be very expensive. American Heart Association data show that bypass surgery averages $117,000 and valve replacement, $164,000, not including doctors’ fees.

The lesson here is that policy makers need to look at the system in an integrated way. When drugs that cured Hepatitis C came on the market a few years ago, politicians complained about high costs, but those drugs have prevented liver transplants that cost hundreds of thousands of dollars. More investment in medicines means not only better health and longer lives but also less time in the hospital.

Government Negotiation Not the Answer

The concerns raised in the Wall Street Journal article about rising out-of-pocket costs to seniors under Part D are real and need addressing, but the answer is not the one you hear from some politicians: have the government negotiate lower prices. We examined this issue in detail in this newsletter a few months ago, and the points we made are worth repeating:
First, the U.S. government has less clout as a price influencer than private pharmaceutical benefit managers (PBMs). Let’s assume that the government negotiates on behalf of all 40 million Medicare beneficiaries. That’s a lot, but private PBMs, since they also cover other Americans in business or individual plans, negotiate on behalf of many more. For example, Express Scripts, at last count, covered 83 million; CVS Health, the second-largest PBM, covers 65 million. 

We can see the results in drug costs. Express Scripts managed to keep the average increase of spending on drugs used by its members down to 3.8%.  (That includes increased use of medicines; for unit prices alone, the increase was just 2.5%.) The average spending increase for CVS Caremark was just 3.2%; for another large PBM, Prime Therapeutics, 2.5%; for Medimpact, 4.4%.
 
Second, the way a government tries to hold down drug prices is by restricting access to innovative medicines rather than by increasing market-based competition. Consider the Department of Veterans Affairs, which squeezes drug companies for discounts by using its authority to set its own formulary, or list of accepted medicines. 

The one government program that squeezes drug companies for discounts by using its authority to set its own formulary is the Department of Veterans Affairs. VA health economist Austin Frakt calculated in 2011 that the program covers about 59% of the 200 most popular drugs, while Part D Medicare insurers covered an average of 85%, and some plans covered as much as 93%.

The VA is a big customer, and drug makers will offer significant discounts to stay on its list. The VA’s drug costs are lower than Medicare’s, but, as Frakt wrote, “If Medicare plans looked more like the VA, a lot fewer drugs would be covered.” Because of these “tightening formularies, beneficiaries would lose low-cost access to many drugs." 

Governments in Europe use the same model as the VA. The result is that the best new drugs in the U.S. are often unavailable in European countries. Several studies indicate European patients face major delays in gaining access to new drugs, especially for cancer. That is one reason that cancer patients have better outcomes in the United States than in other developed countries. For example, five-year survival rates for breast cancer are 89% in the U.S. and 81% in the U.K.; for colorectal cancer, 65% in the U.S. and 54% in the U.K.

There are better ways to put downward pressure on prices than by government fiat. “Enhancing competition and eliminating unnecessary regulation” were two more constructive suggestions urged by Jane Norris, a spokeswoman for the Centers for Medicare and Medicaid Services quoted in the Wall Street Journal. That’s the direction the new FDA chief, Scott Gottlieb, wants to take.