Curbing Medicare Drug Costs
Prescription drug spend in the U.S. is the highest in the world. Americans pay up to three times the amount per capita of other countries. This is problematic for our growing aging population since their income becomes limited. While Medicare covers prescription drug costs, there are policy gaps that make it unaffordable. One major barrier to price controls is part D of title XVIII of the Social Security Act, in which explicitly prohibits the federal government “from negotiating directly with pharmaceutical companies to lower drug prices”. President Donald Trump proposed several policies to reduce the cost burden of prescription drugs on consumers through free-market competition approach, focusing mainly on cost transparency and promoting use of biosimilar or generic drugs. The policies are praised as a “small step in the right direction”. Yet, many Americans are dissatisfied since the proposals do not include direct Medicare negotiations with drug manufacturers. Pharmaceuticals argue that price controls would strain their investments in research and development (R&D) of new drugs. After taking a closer look, that is not fully the case. Greater price control measures can be taken, but there must be political will to support it. For now, the President’s policies are a small victory for seniors across America.
Medicare Coverage Today
Prescription drugs are covered under Medicare Part A, B, and C plans, but to a limited capacity. Part A is hospital insurance, part B is traditional medical insurance, and part C (Medicare Advantage) is like a health maintenance organization (HMO) or preferred provider organization (PPO) plan type. Only drugs administered within these respective settings are covered. Because of these limitations, the Medicare Modernization Act of 2003 was enacted, creating Medicare part D drug benefit.
Part D is an “optional” supplemental insurance that can be purchased with any of the other Medicare plans. It, however, is severely flawed. First, Congress did not commit any financing for part D, leaving costs falling on the recipient. Second, and most notoriously, is the “donut hole” coverage gap between initial enrollment and a “catastrophic coverage threshold”. The entry-point coverage limit is currently $3,750. Once this amount is reached, the patient is then responsible for fully paying for their medication until the maximum amount of the out-of-pocket (OOP) costs have been paid, or the annual time period lapsed. The OOP threshold now is $5,100, unaffordable for many seniors that suffer multiple chronic conditions.
Additionally, the plan disincentivizes patients from purchasing brand name drugs by increasing patient coinsurance payments. Provisions of the Affordable Care Act attempted to close this gap by 2020 by limiting patient payments to 25% of the gap. Under the Trump Administration, the Bipartisan Budget Act of 2018 advanced that date to 2019. Another caveat to Part D is that it is not really “optional”. If an individual fails to sign up once qualified and decides to enroll later, they will pay penalty fees for as long as they are on part D, with the exception of a few circumstances, such as having drug coverage from an employer.
The President’s Policies
To mitigate the Medicare drug coverage issues, the Trump Administration released his “blueprint” rules and policies, supplemental to the Bipartisan Budget Act. Provisions that went into effect include:
- “Step therapy” rule within the Medicare Advantage plans- clinicians are to prescribe cheaper drugs and monitor patient progress closely. If the drug is found to be ineffective, then a clinician can prescribe the next expensive drug. Clinicians in the Advantage plan get commission for the drugs they provide. The rationale is to curb physicians from “gaming” for greater profits. This rule is now in effect.
- Taking harder action, the President recently signed legislation to ban “gag clauses” that prevented pharmacists from disclosing the best drug prices with customers. This is helpful for those who may be in the coverage gap of part D and would have to pay full price of the drug.
Other policies proposed and will likely be revisited for the upcoming session include:
- Limiting doctor’s offices to charge consumer price index (CPI) of drugs administered in their office.
- Shifting drugs from part B to D to promote greater market competition among drug makers to lower prices.
- Allowing drug rebates to go to the consumer rather than the healthcare provider or health plan.
- Promoting the use of biosimilars and generic biotechnology drugs.
- Closing loopholes, such as the 180-day exclusivity that allow brand-name drug companies to “game” Food and Drug Administration (FDA) rules in ways that hinder generic competition.
- Requiring drug manufacturers to disclose list prices in their advertisements.
These policies are a great step towards drug price controls. Yet, many argue that true price controls could only be achieved by allowing Medicare to directly negotiate drug prices. Perhaps that may be the case, as demonstrated by many other rich democracies. Pharmaceuticals, however, dispute this on the grounds that it would limit R&D investments.
In a recent study, Yu et al. evaluated the “top 15 drug companies in 2015” and found that the inflated prices are not justified by the R&D costs. Securities and Exchange Commission (SEC) laws and regulations require all public holding companies to publically disclose their financial statements. Knowing this, I reviewed the 2017 financial report of the largest pharmaceutical company in the world, Pfizer. Their R&D costs were $7.7 billion and accounted for 14.7% of their reported revenue of $52.5 billion. After discounting other expenses, their net income was $21.4 billion, allowing them to maintain 40.6% in profits. These figures are not uncommon. According to the International Trade Association, 15-20% of gross revenues is how much U.S. pharmaceutical companies spend on average on R&D (with the exception of the few that price gouged). In other countries, the R&D investments are much less, but drug costs are also lower.
Given these figures, it is of no surprise that advocates for better price controls are not convinced that R&Ds should be the main reason to maintain the inflated drug costs. Cost-effectiveness analysis (CEAs) may help determine the value of the drug, however it would likely, by default, favor biosimilars and generic drugs. In that case, the promotion of these drugs employed by the Federal government serve as a cost-effectiveness measure to some extent. For drugs that treat severe progressive conditions, such as Alzheimer’s disease or multiple sclerosis, it may be difficult to ascertain a value on new treatments since outcomes are unique to a patient’s condition. Moreover, measures involved in formal CEAs are derived from nationally administered quality/disability-adjusted life-year (Q/D-ALY) surveys of healthy people, thus not capturing the value of the treatment for those who are ill.
The President’s policies may not be perfect, but it is an experiment worth trying. Prior policies that attempted to “assist” our elderly population have failed, leaving those with chronic conditions and limited incomes forgoing treatment due to the high cost. For advocates of government price-fixing, it is important to keep in mind how much will prices be limited to, and it would likely require government to subsidize a portion of R&Ds. It is difficult to imagine that government would be willing to make such an investment if they are barely subsidizing part D costs.
Sarah Zahakos, MPH is working toward a PhD in Health Law, Policy & Management at the Boston University School of Public Health.
AHRQ T32 Research Fellow
Training in Health Services Research for Vulnerable Populations
Grant # 2T32HS022242
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