As Members of the Senate Finance Committee consider a sweeping package to reform Medicare Part D and rein in drug spending, NTU wrote to lawmakers urging them to avoid an inflation cap on drug price increases in Medicare Part D. We noted that an inflation cap “would amount to an ineffective and potentially counterproductive government price control” that would undermine Part D’s success.
Our post caught the attention of Avik Roy, the President of the Foundation for Research on Equal Opportunity (FREOPP). You can read Roy’s Twitter thread about our letter here. NTU and Roy have agreed on health policy many times before, and both signed a recent letter of concern on using “open-ended arbitration” to solve the issue of surprise medical bills. However, while we have a great deal of respect for Roy, some of his points regarding NTU and our opposition to an inflation cap are not accurate, and merit further discussion.
Roy claimed NTU “has come out for unlimited taxpayer subsidies for drug companies.” This is untrue. He correctly identifies a major problem in the Part D program right now, and that is the federal government’s rising costs under the catastrophic phase of Part D drug coverage. While drug spending in Part D is mostly covered by a) an enrollee, b) their plan sponsor, or c) drug manufacturer rebates, up to a catastrophic threshold; Medicare pays 80 percent of drug plan costs beyond the catastrophic threshold. These costs for the government, called “reinsurance,” increased from $6 billion in 2006 to $37.4 billion in 2017. More importantly, they have gone from 14.7 percent of Medicare Part D spending in 2006 to 46.8 percent in 2017 (a plurality). Roy correctly noted in a recent Forbes piece that “insurers don’t have a strong incentive to worry about drug costs once an enrollee reaches the catastrophic threshold because, as noted above, most of the costs are paid by the government, not the insurer.” Reforming how and where this “reinsurance” attaches is therefore a shared priority.
NTU supports changes to how Medicare covers Part D’s catastrophic phase, and we noted in our letter that we are eager to see the Committee’s proposals for the catastrophic phase. While each and every proposed solution involves tradeoffs, both the American Action Forum (AAF) and the Medicare Payment Advisory Commission (MedPAC) have identified more market-oriented fixes. Their proposals would lower or eliminate Medicare’s reinsurance subsidies in the catastrophic phase, make plan sponsors liable for a majority of the costs, and move the manufacturer rebate from the “donut hole” phase to the catastrophic phase.
This, MedPAC notes, would: 1) “Provide stronger incentives to use generics,” 2) “Increase affordability for enrollees and Medicare (taxpayers),” 3) “Provide stronger incentives for plans to manage spending,” and 4) “May provide [a] disincentive for manufacturers to set high launch prices and/or increase prices rapidly.” Roy, too, acknowledges the incentives such a proposal would create for insurers: “this approach would give insurers a stronger incentive to manage seniors’ drug costs, because if they fail at doing so, they will have to charge higher premiums and risk losing market share to more efficient competitors.” The approach would also give insurers an incentive to negotiate better drug prices with manufacturers, or to instruct their pharmacy benefit managers to do so, since insurers would be on the hook for costs above the catastrophic phase (instead of taxpayers). The end result would certainly not be “unlimited taxpayer subsidies for drug companies.”
The AAF and MedPAC proposals, while not perfect, maintain the free-market structure that has helped Medicare Part D succeed. NTU noted in our letter:
Medicare Part D’s free-market structure has made it much more successful than public health programs that feature a heavy government hand. Average monthly premiums for Part D plans have risen less than $7 since 2006, and actually decreased by eight percent from 2018 to 2019. Enrollment has more than doubled since 2006, from 22 million to 44.9 million. Despite declining premiums and rising enrollment, Medicare Part D cost 36 percent less from 2004-2013 than the Congressional Budget Office (CBO) originally projected. Spending per enrollee in 2013 ($1,772) was 47 percent less than originally projected by the Medicare Trustees ($3,367).
An inflation cap, on the other hand, would effectively put the federal government in charge of drug prices, rather than a competitive free market. Roy notes that “[s]ubsidies are not prices.” He’s correct. Subsidies, though, have a significant impact on prices, especially when the subsidy is worth 80 percent of drug costs after a certain point. Roy suggests that “Part D drugmakers can charge whatever they want” under an inflation cap. He fails to note, though, that the larger the difference between this government-imposed cap (on a program with 45 million enrollees) and the market price for a drug, the more plan sponsors and drugmakers will seek to recoup those costs elsewhere. Through the market mechanisms above, all actors can reach an equilibrium whose long-run impacts would be less disruptive than a cap.
Roy correctly identifies several issues with Medicare Part D. He offers thoughtful proposals -- some NTU supports and others not. We may not agree with his characterization of our position, but we share the goal of reducing taxpayer costs for the Medicare Part D program.