President Trump delivered a major speech to describe steps his administration is taking to address the high cost of prescription drugs.
Congress should be called on to fix two problems with the federal government’s largest prescription drug program: Medicare Part D. That program has made prescription medicines more affordable for millions of seniors, offering them broad coverage choices while holding down costs for taxpayers.
Part D, established in 2003 through the Medicare Modernization Act, has led to more than nine out of 10 seniors having drug coverage, and they are paying less than predicted for their coverage. Their premiums average $33.50 in 2018, less than the Congressional Budget Office said they would average in 2006, the program’s first year.
Part D has consistently come in under budget. Under the initial 10-year budget projections, Part D was expected to cost $770 billion. Actual cost after 10 years: $421 billion. That’s 45 percent less than expected.
That underestimates the value of Part D. Innovative new medicines reduce the need for hospital stays and physician visits. A 2016 study found that Part D actually resulted in net Medicare savings of $679 billion over its first nine years.
Instead of building on this island of success in the sea of red ink in other government programs, Congress has chipped away at the unique features that have produced its success—a judicious use of regulation, genuine market competition, transparency and consumer choice.
Plans compete for enrollment based on the premiums and coverage design. Unlike ObamaCare, which has caused insurers to abandon individual health insurance markets and leave consumers with few choices, Part D offers seniors a broad array of options. As a result, plans have a big incentive to negotiate the lowest price they can get to make their premiums attractive.
That’s how it is supposed to work. But there are two dark clouds over this competitive model, both of which were unsurprisingly created by the ObamaCare statute. This Congress has ignored one of these problems and worsened the other. The first deals with catastrophic coverage. And the second distorts coverage of drugs in the so-called “donut hole.”
Part D’s most important feature is the protection it provides beneficiaries with very high drug spending. Once a senior’s total drug spending (including the medicines their insurance pays for and what they spend out of their own pockets) exceeds around $8,400, Part D covers 95 percent of the cost of their medicines. Under the ACA, that so-called “catastrophic threshold” will abruptly jump by $1,550 in 2020. An estimated one million seniors will have to pay an additional $1,550 out of their own pockets for their medicines before Part D will begin covering 95 percent of their costs.
Research shows that the higher the patient co-payment, the more likely consumers are to walk away from the pharmacy without the drugs their doctor has prescribed. The pharmaceutical industry has proposed that the original levels be phased in over 10 years rather than forcing seniors to hit the higher catastrophic cliff all at once in 2020. Congress did not act.
Instead, they exacerbated a related problem that ObamaCare created. Policy analyst Tara O’Neill Hayes explains in a paper for the American Action Forum that “The Bipartisan Budget Agreement (BBA) of 2018 made changes to the Medicare Part D” that “have the potential to weaken the very structure” of the program and incentives to control costs.
As originally created, Part D relied on drug companies and insurers to negotiate discounts on the price of medicines. ObamaCare altered that arrangement for brand name drugs in the so-called “coverage gap” or “donut hole.” Under pressure from the Obama administration and congressional Democrats, drug makers agreed to provide discounts of 50 percent on drugs in the coverage gap.
The Republican Congress, elected to repeal ObamaCare, doubled down on this provision in the BBA, requiring drug companies to discount their prices by 70 percent. Seniors will not benefit from this change. They still will be required to bear 25 percent of the cost of drugs in the coverage gap. So who wins? Insurance companies, who now will be responsible for just 5 percent of the drug costs in the coverage gap.
This creates perverse incentives. If insurers are exposed to only 5 percent of drug costs in the gap, rather than 25 peercent as under the previous law, they will have much weaker incentives to manage prescription drug costs.
The Centers for Medicare and Medicaid Services (CMS) acknowledged this risk last month, expressing “significant concerns about the impact these changes will have on drug costs under Part D in 2019 and future years, particularly as [insurer] liability in the gap significantly decreases.”
CMS’s concerns are well placed. Incentives for insurers to negotiate the best prices on behalf of consumers is why the Part D program has been so successful. Substituting government-mandated 70 percent discounts for private sector negotiations undermines the structure that has produced that success.
And while making this change, Congress did nothing to help those seniors who are facing the catastrophic cliff in 2020.
President Trump should call on Congress to address these issues. The Part D program has relied on market incentives that make medicines more affordable to seniors at a savings to taxpayers. Congress has distorted those incentives. It should undo the damage it inflicted on the Part D program in the BBA and protect seniors from the catastrophic cliff.
