How Medicare Beneficiaries Were Duped by Rx Reform
Thanks to the recently passed Inflation Reduction Act (IRA), premiums for Medicare Part D outpatient drug plans will begin to increase over the next few years. The increase will be 6 percent per year, according to the Congressional Budget Office (OBC) and private forecasts.
To make matters worse, in a few more years the vast majority of Part D enrollees will start paying more for the drugs they get from their local pharmacies than they would have paid under a permanent executive order. . How much more? More than several hundred dollars per year on average, and much more than that for seniors, particularly dependent on expensive drugs.
This contrasts sharply with the claim that President Biden and congressional Democrats have championed special interests on behalf of the elderly and people with disabilities.
One good thing in the legislation is a $2,000 limit on personal expenses under Part D coverage. But that’s only good news for big guys. 1.7% beneficiaries whose annual disbursements exceed $2,000. The cost of this change is equivalent at $4.35 per month in premiums.
However, the additional cost of the $2,000 cap is not the primary reason Part D premiums will increase. The real culprit is the reduced government support for the program.
Who pays for drug costs that members do not pay out of pocket? Currently, the federal government pays 80% of catastrophic costs. Going forward, the government will reduce its contribution to 20% for all disbursements over $2,000. This reduced government support shifts costs to the private sector. This will almost certainly mean higher premiums.
What will happen to all the money the government will save by paying less? It will be used to subsidize green energy projects and pay premiums for high-income people who purchase their own health insurance through ObamaCare scholarships. By the way, premium subsidies do not go to individuals. They go directly to the insurance companies.
In other words, the IRA takes money from the pockets of Medicare beneficiaries and puts it into the pockets of the vested interests of green energy and the health insurance company.
To understand why the IRA will cause drug prices to rise, we need to look at the Part D reimbursement system. Suppose a diabetic goes to a pharmacy where the list price of Januvia (which lowers blood sugar for diabetics type 2) is $620. A 25% co-pay would be $155. But as part of the reimbursement system, drug plans routinely negotiate rebates from drug manufacturers that reduce their actual drug costs. If the drug plan gets a 27% discount off the list price of Januvia from its manufacturer, for example, the actual cost of Januvia to the plan is only $453. A fair out-of-pocket expense of 25% to the patient would then be approximately $114, not $155. Thus, the insurance plan derives a “benefit” of $41 from the artificially high co-payment.
What happens to the $41? The plan uses it to lower premiums in the competition for Part D purchasers. In this way, perverse Medicare incentives lead insurance plans to overcharge the sick in order to underpay the majority of people relatively in good health who pay drug insurance premiums.
In 2019, the Trump administration sought to end this series of perverse deals with a Executive Decree requiring Part D rebate payments from manufacturers to be applied to drug prices at the cash register – passing the rebates directly to patients. According to the consulting firm millimanthe net savings for Part D members would have been nearly $15 billion over the next 10 years.
What about the provision that keeps drug prices for Part D members at the rate of inflation? Here is another example of false advertising. Suppose the inflation rate is 5% and a manufacturer increases the price of one of its drugs by 10%. Under the IRA, the manufacturer must pay the government an additional 5% each time a Medicare enrollee purchases the drug.
However, this money does not go to the enrollee who needs the drug and buys it. He goes to the government. On paper, the money goes into a Medicare trust fund. But because government trust funds hold no real assets, refund checks will go to the Treasury, where they will be used to fund green energy projects and higher payouts to health insurance companies.
Virtually every serious analysis has concluded that pharmaceutical companies will raise introductory prices for new drugs to mitigate the effect of price controls on inflation. They can also reduce manufacturer rebates to drug plans. If that happens, enrollees will likely face leaner formularies, more controls on use, and reduced access to new drugs.
What about the government’s “negotiations” on drug prices? The CBO and private sector economists predict that negotiated drug price controls, together with increased administrative costs, will reduce incentives to produce new drugs for the Part D market.
Additionally, the law limits the cost of insulin to $35 per month for Part D members. The issue here is that insulins come in short-acting, intermediate-acting, and long-acting formulations dispensed in vials and pre-filled pens. Insulin-dependent Part D diabetics can fill a variety of prescriptions with costs (as of 2020) ranging from $20 to around $100 for a monthly dose. If insurers lose money on more expensive formulations, enrollees may find that their plan won’t cover the treatment that’s best for them.
There are a lot of problems with the design of Medicare, especially when it comes to prescription drugs. Unfortunately, instead of improving this design, the latest set of laws threatens to make matters worse.
John C. Goodman is president of the Goodman Institute for Public Policy Research. Linda Gorman is director of the Health Care Policy Center at the Independence Institute.