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The Medicare Part D prescription drug program has been rightly criticized for its benefit design. The framework includes problematic incentives that both raise costs to the federal government and leaves beneficiaries’ with potentially significant out-of-pocket spending. With this in mind, the Prescription Drug Pricing Reduction Act (PDPRA) that was recently reported out of the Senate Finance Committee includes a substantial reform of the Part D benefit design which would simplify the Part D structure and afford more financial protection to beneficiaries. The proposal would alter liabilities facing insurers, drug manufacturers, and beneficiaries alike. In this piece, we consider how the new benefit design could change the incentives facing drug manufacturers, and in turn, the direction of their investment decisions.
[For a more in-depth discussion of the benefit redesign proposed in the PDPRA, see our prior blog]
Incentives Facing Manufacturers Under Proposed Part D Redesign
The PDPRA seeks to modernize the framework governing Medicare’s part D drug benefit by shifting more risk from beneficiaries and taxpayers to health plans. This is part of an effort to drive plans to manage drug spending on higher cost, specialty medicines more carefully. In addition, it would place an upper limit on enrollee out-of-pocket spending, while instituting a new rebate from manufacturers in the form of a required discount.
Specifically, the PDPRA would
Change enrollee cost sharing in the initial coverage limit and the coverage gap.
Cap enrollee cost sharing above the catastrophic out-of-pocket threshold.
Change the amount of annual out-of-pocket spending needed to trigger catastrophic coverage (from $5,100 to $3,100).
In addition, the financing structure of the benefit would be modified as follows:
Lower federal reinsurance during the catastrophic coverage period to 20%.
Sunset the existing manufacturer discount program in the coverage gap.
Institute a new manufacturer rebate in the catastrophic coverage phase of the benefit (equal to a 20 percent discount off of net prices for branded drugs).
In large part, the new incentives facing manufacturers hinge on the interplay between three key changes offered by the new proposed Part D design: (1) the elimination of mandatory discounting in the donut hole, (2) elimination of enrollee cost sharing in the catastrophic phase, and (3) the imposition of a new 20 percent rebate once beneficiaries reach the catastrophic tier. This rebate will take the form of a mandatory discount offered by manufacturers off of “negotiated rates” for all enrollees taking a drug (including LIS beneficiaries) once beneficiaries reach the catastrophic tier.
To understand the major tradeoffs facing manufacturers, we consider the case of specialty branded drugs which are likely to push beneficiaries into the catastrophic spending phase. Under the current model, once beneficiaries enter the donut hole, manufacturers are required to cover 70 percent of costs until enrollees hit their out-of-pocket maximum. That is, between the initial coverage level ($3,820) and catastrophic ($8,140) these discounts must be provided. This amounts to roughly $3,000 under the assumption that the catastrophic level is triggered.
After paying the required discounts in the donut hole, enrollees enter the catastrophic phase where there is no more required rebating. However, manufacturers can implicitly offer some co-pay assistance by donating to independent Patient Assistance Programs (PAPs). These programs help increase adherence or utilization of medications.
We are not aware of estimated size of patient assistance for these drugs on a per-beneficiary level, but we can try to characterize their size under the current system. Recent research has shown that the vast majority (83%) of Part D specialty drugs costing above $30,000 did receive coupons from independent patient assistance programs and that the level of annual assistance available for all drugs was enough to cover the mean Medicare beneficiary’s out-of-pocket costs for 99.7 percent of drugs (though they did not have information on how often the maximum amount was provided).[1] Even if manufacturers could perfectly target implicit coupons in the catastrophic phase to entirely cover beneficiary out-of-pocket liability, this would amount to an indefinite 5 percent discount off of WAC prices (or about 6 percent off of net prices) for the 28 percent of beneficiaries with cost sharing in the catastrophic phase.[2]
Under the Senate proposal, manufacturers would no longer need to pay any discounts in the donut hole, but instead be required to give “20 percent discounts off negotiated prices during catastrophic coverage, including for LIS beneficiaries”[3] (emphasis ours). To compare the proposed incentives to the current system, the manufacturer has to weigh whether a 20 percent mandatory discount applied to all users of a drug outweighs an estimated 6 percent rebate (coupon) applied to about 30 percent of the population taking the drug plus a per-beneficiary fee of $3,024.
Under what conditions will this be true?
All else equal, we expect high priced medications will generally face larger discounting under the proposed benefit design. As prices increase, the 20 percent required rebate in the catastrophic phase will overwhelm the flat per-beneficiary donut hole spending and the relatively low patient assistance current offered to non-LIS beneficiaries (even if it was a complete coverage of the OOP liability).
It is worth considering what types of drugs are likely to fit into this scenario. All else being equal, high price drugs are likely to rebate more — especially those likely to trigger catastrophic phase by themselves, which we implicitly focus on.
Using data from SSR Health, we averaged WAC prices per unit across each quarter of 2017 and consolidated products into therapeutic areas. We then incorporated SSR Health’s unit pricing and dosing assumptions to determine how many units are typically consumed over a course of treatment.[4] Additionally, we cross-referenced products with the 2017 Medicare Part D Spending Dashboard to ensure they were represented in overall Medicare Part D spending. We estimated the net prices to the insurer from the average WAC per year using a 13 percent discount reported by CBO. (As noted above, CBO estimates that the largest selling fifty specialty tier drugs in Medicare average a net price to insurer of 13 percent lower than WAC.[5]) We calculated interquartile range of net price to the insurer based on therapeutic areas with at least three entries.
Among these drugs are oral drugs for the treatment of multiple sclerosis, various cancers, pulmonary arterial hypertension, and Hepatitis C.
Therapeutic Categories with High Annual Net Prices
It is worth noting, however, that the average Part D beneficiary has four prescriptions per month.[6] Any combination of medications that precipitates catastrophic spending would incur the proposed 20 percent rebate. For classes where this is common, particularly among chronic disease states such as diabetes, high blood pressure, or heart failure requiring long-term treatment with medication, lower net priced drugs may discount more under the proposed system.[7]
As our above discussion emphasizes, the share of a drug’s utilization attributable to LIS and non-LIS beneficiaries is also important for understanding whether discounting is likely to be higher under the proposed system. Under the current system, patient assistance programs are particularly important for those non-LIS beneficiaries — those that face cost sharing in the catastrophic phase.
Again, turning to SSR data we can estimate the yearly spending on drugs MedPAC identified as having high LIS utilization.[8] All else being equal, these classes would see a relatively large increase in the number of people for whom they provide discounts. For this reason, drug classes with high net prices and large numbers of LIS beneficiaries, like Hepatitis C treatments, face particularly stark incentive changes. Even lower net priced drugs that are disproportionately taken by LIS beneficiaries, primarily medications for mental health, diabetes, HIV, and pain, are liable for greater rebating if used in conjunction with other therapies that trigger catastrophic spending.
Therapeutic Categories Commonly Utilized by Low Income Subsidy Beneficiaries[9]
Conclusion
The Prescription Drug Pricing Reduction Act proposes significant overhauls to the current Medicare Part D benefit structure — changes that have the potential to meaningfully alter incentives facing manufacturers. Critically, some drugs are likely to face substantially higher or lower required discounts under the proposed system relative to the status quo. We argue that drugs with high net prices and/or those disproportionately taken by LIS beneficiaries have the potential to be disincentivized. This is particularly true for therapeutic areas, like Hepatitis C, where both criteria are met.
Just as the introduction of Medicare Part D shifted drug investment,[10] these incentive changes are likely to do so again. In part, the initial catastrophic benefit design was aimed at ensuring fewer “me too” drugs and more novel innovation. To that end it was likely successful — Part D spending for drugs on specialty tiers has grown from $3.4 billion in 2007 to $37.1 billion in 2017.[11] We expect the concentration of spending in this area to likely moderate under the new proposal. Should these predictions prove true, however, the welfare effects of this change are not a priori obvious. If the PDRPA, or similar proposal, is enacted into law, the investment behavior of drug manufacturers will be a central outcome for future research to analyze.
We conclude by acknowledging a few limitations to our analysis. First, the PDPRA will alter the incentives for manufacturers to offer implicit coupons through independent charity payment assistance programs. However, we are unaware of any estimates of the level of these coupons at the per beneficiary level and, thus, we make simplifying assumptions in our discussion. Relatedly, there is some uncertainty about how the elimination of enrollee cost sharing in the catastrophic phase, juxtaposed with greater incentives for insurers to manage spending, will alter utilization. All else equal, greater increases in utilization will offset the potential disincentive to pursue specialty tier drugs. Finally, specialty drug development depends on a host of considerations — many of which are independent of proposed changes to the Medicare Part D program. The redesign envisioned by the PDPRA will tend to reduce incentives to pursue such medications on the margin, but we recognize this is only one piece of a broader investment framework.
[1] Kang S, Sen A, Bai G, Anderson GF. Financial Eligibility Criteria and Medication Coverage for Independent Charity Patient Assistance Programs. JAMA. 2019; 322(5):422–429.
[2] Cubanski, Juliette, Tricia Neuman, and Anthony Damico. “How Many Medicare Part D Enrollees Had High Out-of-Pocket Drug Costs in 2017?” June 21, 2018. https://www.kff.org/medicare/issue-brief/how-many-medicare-part-d-enrollees-had-high-out-of-pocket-drug-costs-in-2017/
[3] Chairman’s Mark of the Prescription Drug Pricing Reduction Act.
[4] We imposed average dosing assumptions to convert between aggregate product data to product data
[5] Anderson-Cook, Anna, Jared Maeda, and Lyle Nelson. “Prices for and Spending on Specialty Drugs in Medicare Part D and Medicaid: An In-Depth Analysis.” Congressional Budget Office Working Paper 2019-02. No. 55011. 2019.
[6] Medicare Payment Advisory Commission. “Polypharmacy and opioid use among Medicare Part D enrollees.” June 2015. http://www.medpac.gov/docs/default-source/reports/chapter-5-polypharmacy-and-opioid-use-among-medicare-part-d-enrollees-june-2015-report-.pdf?sfvrsn=0
[7] Onder G, Marengoni A. Polypharmacy. JAMA. 2017;318(17):1728.
[8] Medicare Payment Advisory Commission. “Report to Congress: The Medicare prescription drug program (Part D): Status report.” March 2019. http://medpac.gov/docs/default-source/reports/mar19_medpac_ch14_sec.pdf?sfvrsn=0
[9] Medicare Payment Advisory Commission. “Report to Congress: The Medicare prescription drug program (Part D): Status report.” March 2019. http://medpac.gov/docs/default-source/reports/mar19_medpac_ch14_sec.pdf?sfvrsn=0
[10] Blume-Kohout ME, Sood N. Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development. J Public Econ. 2013;97:327–336.
[11] Medicare Payment Advisory Commission. “Report to Congress: Medicare and the Health Care Delivery System.” June 2019. http://www.medpac.gov/docs/default-source/reports/jun19_medpac_reporttocongress_sec.pdf?sfvrsn=0
Changes to the structure of Medicare’s Part D drug benefit may shift incentives away from specialty drug areas and toward primary care indications, but potential changes to adherence will be important.
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