Issue No. 50: Senate Plan for Medicare Price Controls Raises Ire, But Benefit Redesign Is Broadly Attractive

The Goal: Lower Out-of-Pocket Costs and Intensify Price Bargainin

The Senate Finance Committee on Thursday plans to take up a drug pricing bill, put together by the panel’s chairman, Sen. Chuck Grassley (R-Iowa), and ranking member, Sen. Ron Wyden (R-Ore). The bill is extensive, but its main focus is Part D, Medicare’s prescription drug benefit.

The legislation would make two major changes: It would place an inflation cap on pharmaceutical prices, and it would redesign the benefit – that is, change who pays for what and at which stage. Those changes are poles apart. One imports European-style price controls; the other fits Part D’s original philosophy of price constraint through competition.

Sudden Attention for Inflation Cap

An inflation cap gained sudden attention a week ago, when, eager to make a deal with Speaker Nancy Pelosi (D-Calif), Treasury Secretary Steve Mnuchinproposed the idea as a way to reduce federal spending. An inflation cap had already been discussed in the Finance Committee, where it was advanced by Wyden. The concept Is laid out in Subtitle B – Part D - Section 128 of the Chairman’s Mark of the Prescription Drug Pricing Reduction Act of 2019:

This provision would establish a mandatory rebate if a pharmaceutical manufacturer increases their list price for certain covered Part D drugs above inflation…. Rebatable drugs would be defined as Part D-covered products that are brand drugs (and not a generic drug) or that are licensed as a biologic (and not a biosimilar).
 
According to Inside Health Policy, “Senate Finance Republicans have been skeptical about incorporating those rebates in Medicare Part D.” The article on July 19 by Rachel Cohrs and John Wilkerson continued, “The Trump administration, however, reportedly is open to the rebates, and sources say those rebates account for the brunt of the $115 billion in drug savings that the administration is proposing as part of a budget deal.”

In the end, the inflation cap was absent from the budget agreement that White House and congressional negotiators reached on Monday. (That deal still requires formal House and Senate approval and the President’s signature.) But the cap is front and center in the bill the Finance Committee is considering, and late Tuesday, the White House said it was backing the legislation.

Reports last week that the White House was willing to agree to an inflation cap immediately touched off a firestorm of protest from conservatives. Sally Pipes, president of the free-market Pacific Research Institute, wrote on Forbes.com July 19 that “the proposal would hurt vulnerable seniors and stifle medical innovation.” And former House Speaker Newt Gingrich tweeted, “Pelosi’s #Medicare price control plan” grows government, won’t reduce what seniors pay for drugs out of their own pockets, and “would just encourage manufacturers to have higher initial prices.”

On Monday, Grover Norquist’s Americans for Tax Reform led 17 conservative groups in signing a letter to the Finance Committee, stating, “We are concerned that this proposal institutes a new price control on Part D that will do nothing to directly help seniors and will instead create distortions that will undermine the free market and the success of Medicare Part D.”

A Solution Is Out There

One reason conservatives – and others as well – are so exercised about an inflation cap is that it runs counter to the strategy behind Part D, and, if implemented, the policy will likely trigger a host of unintended consequences. An obvious one is that pharmaceutical companies will, as Gingrich notes, have a bigger incentive to bring out new drugs at especially high prices since those prices will become the base for sub-inflationary increases. Another is that U.S. pharmaceutical employment will be jeopardized at a time when China is moving in the opposite direction, changing laws to attract more drug research and development.

Part D has, in general, worked exceptionally well. For example, using federal data, the Kaiser Family Foundation (KFF) found that Part D costs have risen slowly – an annual average of just 2.2% annually from 2010 to 2017, or just one-half of one percentage point faster than inflation overall.

Still, there are two problems with Part D currently. The first is the one we highlighted in issue No. 48 of our newsletter: When people get very sick and need innovative, specialty medicines, the structure of Part D requires them to pay large amounts out of pocket. The second is that insurers and manufacturers need to negotiate harder. A fairly easy solution to both problems is out there, but it has nothing to do with government price controls.

In fact, price controls could threaten the entire structure and even existence of Part D, a program that was opposed in 2003 by nearly all the Democrats in Congress, including Pelosi herself. A market-based federal program that is succeeding may constitute a threat to some politicians. So one of the best arguments for opposing inflation caps may simply be to defend Part D, and Medicare as a whole, from more extensive attacks.

The good news is that, in addition to the scheme for federally imposed price controls, the Finance Committee is also proposing, in Section 121 of its bill, a redesign that would remain true to Part D’s structure while at the same time addressing its two problems more effectively than inflation caps. That redesign is not perfect, but it moves in precisely the right direction.

A Brief History of Part D

It’s hard to believe, but for 41 years Medicare, the federal health care program for seniors (as well as those under 65 with certain disabilities), had no comprehensive prescription drug benefit.

In December 2003, President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act. The vote was close. At the time, Americans over 65 were spending $2,322 a year on average, for their medicines. That’s the equivalent of $3,232 today.

Part D, launched on Jan. 1, 2006, allowed beneficiaries to choose a Prescription Drug Plan (PDP) as their insurer. PDPs, following rules administered by the Centers for Medicare and Medicaid Services (CMS), work with Pharmacy Benefit Managers (PBMs) to establish a “formulary” of listed drugs, based on negotiations with drug manufacturers. CMS approves each plan. There are now more than 900 of them, a 15% increase since 2018.

The base Part D premium is $33 a month, a figure that has barely budged since 2011 and is far lower than estimated when the program began. But there is a wide range of premiums – from $10 to $156. In addition, higher earners pay a surcharge of up to $77.

Part D was structured to use competition as a discipline to hold costs to beneficiaries down, and it has largely worked. Overall spending over the first eight years was $349 billion less than expected. Here is a good video on YouTube, from the group Medicare Today, that explains. A report by the Government Accountability Office stated that plan sponsors have held prices down…

through their ability to negotiate prices with drug manufacturers and pharmacies. To generate these savings, sponsors often contract with pharmacy benefit managers (PBMs) to negotiate rebates with drug manufacturers, discounts with retail pharmacies, and other price concessions on behalf of the sponsor.

PBMs have enormous clout in negotiations because they are so large and can deploy the leverage of their entire medicine-using membership. There are 45 million Part D enrollees, but that figure is dwarfed by, for example, the PBMExpress Scripts, which alone has 83 million members who last year filled 1.4 billion prescriptions.

Private-Sector Negotiations Have Led to Price Declines

Express Scripts reported earlier this year that in 2018, the average price of a prescription for its members on Medicare plans fell by 1.4%; meanwhile utilization rose by 1.1%, so total costs fell by 0.3%.

The reason is competition. PBMs know how to play drug companies off against each other. According to a study released in June by Avalere, “less than 1% ($0.9 billion) of total Part D spending was for single-source brands that were the only product available in their therapeutic class.” Price reductions typically come in the form of rebates off the list price, and, according to the Altarum Institute, Part D plans score higher rebates on brand medicines than commercial plans.

PBMs and insurers already subject drug manufacturers to what are called “price protection penalties,” establishing a ceiling for increases by requiring rebates if prices rise beyond a certain amount. According to a study by Milliman, these rebates “have become more common and represent an increasingly large share of total rebates.”

The law that established Part D has a “non-interference clause,” which states that the government “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.” An inflation penalty instituted by the federal government would probably violate that clause unless new legislation is passed.

Medicare Part D was founded on the premise that competition and choice would manage costs and increase patient satisfaction – and that is what has happened. Premium growth has been low or non-existent, the plans are negotiating discounts of more than one-third for branded drugs (UnitedHealthcare, for example, paid $7.3 billion in prescription drug claims under Part D and received $4.1 billion in rebates), and seniors like the program (nine in ten say they are satisfied).   
The Path to Real Reform for Part D

Part D, however, is not perfect. The current payment system is complicated and counter-productive. A Medicare beneficiary first pays the full costs of medicines up to a deductible, which in 2019 is a maximum of $415. Next comes the initial coverage phase, where the beneficiary is subject to coinsurance, paying 25% of the cost of the drug. That phase ends at $3,820 in total drug costs. In the next phase, the “donut hole” or “coverage gap,” the beneficiary pays 25% coinsurance for branded drugs and 37% for generics up to total costs of $8,100. Finally, the catastrophic phase begins, and beneficiaries face 5% coinsurance with no limit.

As a result, some Medicare beneficiaries have to pay huge out-of-pocket (OOP) costs. Nearly one in ten reached the catastrophic phase in 2017. Of those 3.6 million people, 2.6 million had costs buffered by low-income subsidies, but that left 1 million seniors exposed to unlimited drug costs. According to KFF, among those million seniors, average OOP spending for those with leukemia or lymphoma was $5,000; for those with multiple sclerosis, $4,900; with viral hepatitis, $4,300.

Simply capping catastrophic OOP spending by eliminating 5% coinsurance in the catastrophic phase would end the problem, as we showed last month, but many analysts believe that a more sophisticated change that accelerates incentives to hold down costs would be better.

Under the current system, insurance plans (that is, the pricing police) pay only 5% of costs in the donut hole and 15% in the catastrophic phase. Manufacturers pay 70% in the donut hole and nothing at all in the catastrophic phase.

According to Tara O’Neill Hayes of the American Action Forum (AAF): “Because insurer liability is very limited in the catastrophic phase, insurers have little incentive to keep beneficiaries out of that final phase.” A new alignment of responsibilities is necessary.

In August 2018, Hayes issued a Part D reform plan that received a good deal of attention. The Medicare Payment Advisory Commission, or MedPAC, a congressionally mandated agency, began addressing a similar redesign in 2016 and in April weighed in again with new research and on June 14 with itsannual report to Congress. Two weeks later, Hayes issued her own revised proposal, which some are calling AAF-Plus. Her approach and MedPAC’s are similar, and MedPAC summed it up this way:

In general, we expect [a redesign] would provide stronger incentives for plan sponsors to manage enrollees’ spending and potentially restrain manufacturers’ incentives to increase drug prices or launch new products at high prices.

Such a redesign, as the Senate Finance Committee proposed in its legislation, has broad support -- though some analysts will disagree with the proportions.

Under the committee’s plan, beneficiaries would start with the same deductible as now. The initial coverage phase and coverage gap would be conflated so that beneficiaries pay the same coinsurance across the spectrum. The Senate bill proposes 25% -- though previous plans proposed 20%.

Across this unified phase, the committee proposes a constant liability for plans of 75% to go with the 25% for beneficiaries. (Currently, in the initial coverage phase, plans have a liability of 75%; manufacturers, zero. In the coverage gap, manufacturers have a liability of 70%; plans, 5%.)

The big change would come in the catastrophic phase, where, under the Senate committee bill, the government liability would be reduced from the current 80% to 20%, and the plans’ liability would rise from 15% today to 60%. Manufacturers would be responsible for the final 20%, where currently they face zero liability. Under this plan, beneficiaries would be out of the picture altogether, with no liability for catastrophic costs. As of 2022, beneficiaries would pay no more out-of-pocket than $3,100.

Restructuring Addresses Problems Better Than Price Controls

This restructuring – and it is a proposal that can be tweaked in many ways -- addresses both of the current problems.

First, the OOP cap for non-low-income-subsidiary Part D beneficiaries would fall from unlimited today to a much lower figure. Hayes presents a table in her paper showing that with $40,000 in total drug costs, a beneficiary today faces OOP expenditures of $11,861. Even if they are healthy, seniors endure tremendous anxiety about getting sick and not being able to afford their medicines. The reimbursement structure would be limit OOP to $3,100, in addition to low-cost premiums. (Even $3,1000, though a major improvement over the current situation, would be a hardship for many Americans; previous proposals had limited OOP to $2,500.)

Second, as Hayes concludes, “Reforming the benefit structure…realigns the financial incentives of both the insurers and drug manufacturers” in a way that will put additional pressure on prices.

Under the committee bill, the plans – that is, the insurers and PBMs (often one and the same with recent mergers) -- will have substantial skin in the game when it comes to reimbursements for innovative specialty drugs. The plans will be on the hook not for just 15% of the tab in the catastrophic phrase, but for 60% (a previous proposal put the level at 75% with the government paying 20% and manufacturers, 5%). Even at 60%, the plans will undoubtedly ratchet up pressure on drug manufacturers, which themselves will have to reimburse for catastrophic costs from which they were immune for 13 years.

Unlike under the current design, both plans and manufacturers will have a big incentive to keep beneficiaries from going over the $3,100 out-of-pocket cap and reaching the catastrophic phase. Almost certainly, a redesign would increase the liability of drug manufacturers, but it is a solution which -- unlike artificial, government-imposed price controls – fits the philosophy and strategy that has guided Part D Medicare to its successes.

This piece that is missing in this restructuring is a resurrection of the plan to end hidden rebates to pharmacy benefit managers, which would have the effect of lowering not just prices at the pharmacy but the list prices on which Medicare coinsurance is calculated, thus cutting out-of-pocket costs to seniors. On July 11, President Trump suddenly killed this plan, which he has once so passionately advocated. Bringing it back would be another boon to Medicare beneficiaries – and to everyone who values transparency in pricing.

Hospitals and Drugs

In closing, we find it hard to resist noting the irony of an April paper on drug prices issued by the American Hospital Association (AHA). It called on Washington to “require mandatory, inflation-based rebates for Medicare drugs.”

Hospitals in this country have benefited from political protection and from consolidation. As the Center for American Progress reported on June 26, “Many hospitals are able to sustain profits and high prices because of their market power, which has grown as competition has dwindled and providers have consolidated through mergers and acquisitions.”

But hospitals are receiving closer scrutiny. After all, in 2017, Medicare hospital spending was nearly triple Medicare drug spending. As an article in Modern Healthcare concluded, “Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward.” 

Still, however policy makers decide to address hospital costs, they would do well to remember why Part D works as well as it does: private-sector competition and minimal government intervention. An inflation cap imposed by Washington is the opposite approach.