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If Medicare Part D Redesign Ever Happens, It Could Lead To Lower Prescription Drug Prices

On March 1st, during the State of the Union address, President Biden continued to push for some version of the Build Back Better Act to be passed. Specifically, the President mentioned capping diabetic patients’ the out-of-pocket costs for insulin, and allowing Medicare to negotiate the prices of certain prescription drugs.

But, Senator Manchin (D-West Virginia) apparently “poured cold water” on Biden’s attempts to revive Build Back Better. Undoubtedly, for the moment, Build Back Better Act is on ice. But, that doesn’t mean it’s totally dead. It could be slimmed down considerably, or perhaps broken up into smaller, bite-size pieces of normal (outside of the budget reconciliation process) legislation.

One such piece is the Affordable Insulin Now Act, introduced by Senators Warnock (D-Georgia) and Bennet (D-Colorado), which would cap monthly out-of-pocket costs of insulin for all diabetic patients at $35.

What wasn’t mentioned by the President during his speech was a possible redesign of the Medicare Part D (outpatient) drug benefit, which is one of the least controversial parts of Build Back Better, as it has bipartisan support. Perhaps it was too wonky to include in an address to the nation. Yet, of any of the drug pricing provisions in Build Back Better, an overhaul of Medicare Part D has the potential to have the most impact on drug prices across many therapeutic categories.

Reforming the structure of the Medicare Part D benefit featured prominently in the 2019 bipartisan bill called the Prescription Drug Pricing Reduction Act (S.2543), co-sponsored by Senators Grassley (R-Iowa) and Wyden (D-Oregon). An overhaul of Part D may exert downward pressure on prescription drug prices.

Current structure of Medicare Part D

To assess the implications of a redesign of Medicare Part D on different stakeholders, let’s first review how the Part D benefit is currently structured.

Medicare Part D plans - usually managed by pharmacy benefit managers (PBMs) - receive a fixed payment per enrollee from the federal government and bear some financial risk for part of enrollees’ drug expenditures. Accordingly, plan administrators have an incentive to control costs by managing drug utilization and negotiating lower prices. But, as it currently stands, plans’ incentives to contain prescription drug spending are limited in all phases of the Part D benefit.

The first phase of the Part D benefit is the deductible, in which Medicare beneficiaries are responsible for all drug costs up to $445. When spending exceeds this amount, the enrollee enters the initial coverage phase, in which he or she pays 25% of drug costs and the Part D plan pays 75%. This phase continues until the enrollee reaches the initial coverage limit, which was $4,130 in total costs in 2021.

When an enrollee’s total spending exceeds the initial coverage limit, he or she enters the coverage gap phase. In this phase, the enrollee also pays 25% of drug costs. For brand-name drugs, the manufacturer provides a mandatory discount of 70%, and the Part D plan pays 5%. For generic drugs, the plan pays 75%, which can disincentivize their use. The enrollee remains in the coverage gap phase until his or her out-of-pocket spending reaches the catastrophic threshold, which was $6,550 in 2021.

When an enrollee’s out-of-pocket costs exceed the catastrophic threshold of $6,550, he or she enters the catastrophic phase. Here, Part D plans pay 15% of all remaining drug costs in that year, the federal government pays 80%, and the enrollee is responsible for 5%. Note, there is no cap on beneficiary out-of-pocket spending in this phase of the benefit.

Medicare Part D beneficiaries with drug spending above the catastrophic phase at some point between 2015 and 2019 incurred $7.4 billion in out-of-pocket costs. Nearly three million enrollees in Medicare Part D spent above the catastrophic threshold at least once during the 2015-2019 period.

Possible changes to Part D alter cost control incentives

Currently Part D plans have weak incentives to control drug costs for high-cost enrollees. The Build Back Better Act, as passed by the House in 2021, aims to redesign the Medicare Part D drug benefit. First, it eliminates the coverage gap by extending the initial coverage phase to the catastrophic threshold. Second, it substantially increases plans’ liability for drug spending that exceeds the initial coverage limit. Third, it redistributes a large portion of government liability in the catastrophic phase to plans as well as to manufacturers via a new manufacturer discount program. Government reinsurance in the catastrophic phase would shift from 80% of costs to 20%, while plans’ cost liability goes from 15% to 60%.

Manufacturer discounts would drop from 70% in the coverage gap phase to 10% in the initial coverage phase and 20% in the catastrophic phase. Fourth, it caps Medicare beneficiaries’ annual out-of-pocket costs at $2,000.

The Build Back Better Act and the Grassley/Wyden bill - S.2543 - are mostly aligned, with a few exceptions, like a difference in the annual cap on beneficiary out-of-pocket costs; $2,000 rather than $3,000.

In keeping with the most recent updates to the proposed Grassley/Wyden legislation, a truncated Build Back Better Act, or alternatively a separate stand-alone bill could:

  • Reduce the amount of spending that beneficiaries are responsible for during the initial phase of the benefit from 25% to 20%.

  • Require drug companies to provide a discount of 7% on brand-name drugs in the initial phase of the benefit and adjust the brand catastrophic discount to 14%.

  • Require Part D plans/PBMs to include concessions and fees they negotiate with a pharmacy in the price beneficiaries pay for drugs at the pharmacy counter.

Given the steady growth in reinsurance costs in recent years, lawmakers on both sides of the aisle have been interested in policies that increase financial liability among manufacturers and plans/PBMs, particularly within the catastrophic phase, to create incentives for lower overall Part D spending.

The redistribution of liability across all phases of coverage would lead to greater increases in mandatory manufacturer discounts among products with spending that tends to be higher in the catastrophic phase.

At the same time, the shifting of most of the drug manufacturer discount to the catastrophic phase of coverage, where they would be liable for 14% of expenditures, could reduce manufacturers’ incentives to charge high prices for specialty drugs.

Presently, in the catastrophic phase, drug manufacturers don’t face a mandatory discount, and plans are only responsible for 15% of the costs. In fact, the current structure of the Part D benefit establishes perverse incentivizes for beneficiaries to move through the coverage gap and minimize the share of total spending subject to the branded discount. 46brooklyn Research calls this the “race to catastrophic.”

A recently released Avalere analysis finds that the redesign of the Part D benefit would lead to larger increases in mandatory manufacturer discounts, especially branded drugs that belong to the six protected classes. These include, among others, HIV medicines, cancer drugs, and immunosuppressants.

Build Back Better probably isn’t completely dead. Parts of it may be resurrected. Alternatively, smaller pieces of normal (outside of the budget reconciliation process) legislation could be proposed in Congress. Given its bipartisan support, it’s likely that Medicare Part D restructuring would constitute an integral component of any passable legislation, whether in the form of a Build Back Better Act that’s reduced in size or a smaller, regular bill. An overhaul of Part D would likely exert downward pressure on prescription drug prices.

About the Author: Joshua Cohen I'm an independent healthcare analyst with over 22 years of experience analyzing healthcare and pharmaceuticals. Specifically, I analyze the value (costs and benefits) of biologics and pharmaceuticals, patient access to prescription drugs, the regulatory framework for drug development and reimbursement, and ethics with respect to the distribution of healthcare resources. I have over 110 publications in peer-reviewed and trade journals, in addition to newspapers and periodicals. I have also presented my work at numerous trade, industry, and academic conferences. From 1999 to 2017 I was a research associate professor at the Tufts Center for the Study of Drug Development. Prior to my Tufts appointment, I was a post-doctoral fellow at the University of Pennsylvania, and I completed my PhD in economics at the University of Amsterdam. Before pursuing my PhD I was a management consultant at Accenture in The Hague, Netherlands. Currently, I work on freelance basis on a variety of research, teaching, and writing projects.


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