Improving the Medicare Part D Drug Benefit and Rationalizing the Program’s Structure

2018-11-01T11:34:25+00:00November 1st, 2018|Medicare Policy Papers|

Congress recently rejected attempts by the pharmaceutical industry to change a bipartisan budget deal made in February 2018 requiring drug manufacturers to pay more toward the cost of closing the coverage gap known as the donut hole under the Medicare Part D prescription drug program. The National Committee agrees with the decision of Congress.

The Bipartisan Budget Act of 2018 (BBA) closed the donut hole in 2019 (one year earlier than under prior law).  The BBA also changed the allocation of responsibility for how closing the donut hole gets paid for.  Prior to enactment of the BBA, once the donut hole closed, manufacturers were scheduled to provide 50% discounts on their drugs when enrollees’ spending fell into the range of the coverage gap.  The remaining 50% of drug costs were split evenly between private Part D plans and beneficiaries.

The BBA changed the allocation of responsibility for paying for drug costs in the donut hole.  Under the BBA, drug manufacturers now must provide a 70% discount to beneficiaries when their spending on brand-name drugs falls within the coverage gap.  The BBA reduced plan responsibility from 25% to 5%.  Beneficiary cost sharing in the donut hole under BBA remains at 25% of costs.

The pharmaceutical industry tried, and failed, to get a provision in the opioid legislation passed in late September 2018 that would have reduced the drug manufacturer contribution from the BBA’s 70% down to 63%.  However, Pharma may try to advance their proposal again after the November 2018 midterm elections during the lame duck session.

Unlike plan contributions within the coverage gap, manufacturer discounts in the donut hole are included in the calculation of out-of-pocket costs that determine when a beneficiary crosses the threshold from the coverage gap into catastrophic coverage, where beneficiaries’ costs are much lower. As a result, the BBA deal allows beneficiaries to move through the donut hole more quickly and see lower out-of-pocket costs.  According to the Congressional Budget Office, this will save the federal government $11.8 billion over 10 years.

While the BBA deal will on balance reduce costs for seniors and the government, lowering plan contributions could also exacerbate perverse incentives for plans not to encourage generic drug use. According to MedPAC’s 2016 report, Medicare and the Health Care Delivery System, generic substitution rates drop substantially for many classes of drugs under catastrophic coverage (where government reinsurance picks up 80 percent of costs).  This suggests that plans don’t encourage the use of lower cost generics when they don’t have much financial incentive to do so.  Manufacturers often offer rebates that can offset the 15 percent required plan contribution toward drug costs in the catastrophic phase.  If plans don’t have to pay anything for a high-cost drug but have to pay 15% of the costs for a lower cost generic, they have a strong incentive to offer the higher cost brand drug. This in turn raises out-of-pocket costs for seniors and for the Medicare program. Reducing health plan liability further for drug costs in Part D would only exacerbate the problem of plans not having an incentive to manage costs in the Part D program.

NATIONAL COMMITTEE POSITION

The National Committee strongly supports retaining the BBA Medicare Part D provisions as they are.  While we believe the bill does exacerbate some existing perverse incentives for health plans, the benefits of keeping the existing Part D provisions far outweigh the costs.  However, Congress should rationalize the structure of the program and make plans responsible for encouraging the use of cost-effective therapies when they are available.