Author: Vincent Ni

Introduction

In resuscitating the previously stalled Build Back Better Act, the Senate Democratic Caucus has reached a reconciliation passage consisting of investments in climate/energy, IRS enforcement, deficit reduction, and healthcare in the 725-page Inflation Reduction (IRA). While the $300 billion is far from the original agenda that President Joe Biden had envisioned when Democrats regained the federal trifecta, it will still institute substantial changes to the US healthcare landscape as we know it, primarily intending to lower prescription drug costs for Medicare and private insurance enrollees. According to a CBO report, the prescription drug provisions, set to begin implementation in 2023, are projected to reduce the federal deficit by $288 billion by 2031. Additionally, it’s aimed at reducing Medicare out-of-pocket spending and limiting drug price increases.

Medicare Drug Price Negotiation

One of the key provisions rescued from the Build Back Better legislation enables Medicare to negotiate prescription drug prices. Currently, retail prescription drug benefits covered under Medicare Part D are provided by private plan sponsors contracted and approved by Medicare. Since its enactment, Part D is governed by the “noninterference” clause, establishing that the Secretary of Health and Human Services “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP [prescription drug plan] sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.” Concurrently, for physician-prescribed drugs covered under Part B, Medicare reimburses providers 106% of the Average Sales Prices (ASP), the average price for all non-federal purchases, including rebates. 

Under the IRA, however, the Secretary of Health and Human Services will be required to negotiate prices for high-priced drugs covered under Medicare. This will apply to top-spending brands and biologic drugs without generic or biosimilar equivalents covered under Medicare Part B or Part D and are at least nine years (small-molecule drugs) or at least thirteen years (biologicals) from FDA approval. Beginning in 2026, the Secretary will be limited to negotiating 10 Part D drugs, 15 Part drugs in 2027, 15 Part B and Part D drugs in 2028, and 20 Part B and Part D drugs in 2029 going forward. 

Rather than simply allowing the Secretary to negotiate drug prices as in the previous House-passed BBBA, the IRA closes the “rogue Secretary” loophole by requiring the Secretary to negotiate the maximum number of drugs that year, to the extent that the number of drugs is eligible for negotiation. CBO predicts $99 billion in Medicare savings from IRA’s version of the drug price negotiation provision, as opposed to $76 billion for its BBBA counterpart.

Pros and Cons of the Medicare Drug Price Negotiation Provision

A recent Kaiser Family Foundation Tracking poll found that, after hearing arguments on both sides, 83% of respondents are in favor of the federal government negotiating the Medicare drug prices. 

Significant biomedical innovations, including vaccine development during the COVID pandemic, have come at a high cost. In 2019,  the US spent more than $1,126 per capita on prescription drugs, following a steep increase from $831 in 2013. Comparatively, countries like the United Kingdom, Australia, and Germany paid $285, $434, and $825 respectively in 2019. For example:

• Dulera, an asthma medication, has a US listing price 50 times more than that of its international average. 
• Januvia, a diabetes drug, and Combiga, for glaucoma, cost about 10 times more. 
• Insulin, costs $98.70 per vial in the US, versus $6.94 in Australia. 

This exacerbated the cost-related noncompliance situation in the US, with roughly 18% of adults, especially seniors, reporting that they skip their prescribed medications due to cost. In peer nations, this proportion of cost-related nonadherence is nearly unheard of. 

One of the biggest opponents of this provision is the pharmaceutical industry. They argue that by empowering the HHS Secretary to negotiate drug prices, long-term innovation in medical development will be stifled. To that point, the new CBO report estimates that 15 out of 1,300 potential drugs, or 1%, will not be commercially available in the next 30 years. A separate study from the University of Chicago analyzing the analogous Medicare negotiation provision from the BBBA paints a bleaker picture. It projects a $663 billion, or 18.5%, decline in research and development spending through 2039, resulting in R&D funding delayed by up to seven years and 135 fewer market-available drugs for consumers. 

Critics of the law also indicate several possible implementation challenges to the way the negotiation provision is designed. For instance, since the IRA gives Medicare the authority to regulate high-revenue drugs that have been FDA approved for at least nine years and do not have a competitor—generics are only allowed to enter the market to compete with their name-brand counterparts after the expiration of their patents. However, the market entry period, the interlude between a drug’s launch and first generic entry, for high-selling drugs is around 13 years. Therefore, critics argue Medicare’s regulatory negotiations may be delayed. Additionally, drug manufacturers can make agreements with generic drug producers that allow the generic to be available on the market to be sold in only a small quantity prior to the end of the patent protection period. In doing so, drug manufacturers can evade Medicare’s price-setting authority, rendering it essentially inept. 

Inflationary Cap on Drug Manufacturers
Reining in prices for people with Medicare and private insurance is one of today’s biggest healthcare policy demands. The IRA will institute rebates on drug manufacturers that increase prices at a rate greater than that of inflation. This provision will be implemented starting in 2023, using 2021 as the base year of the inflation metric. Due to the disincentivization of list prices reducing spending and rebates as sources of new revenue, the CBO estimates a net federal deficit reduction of $100.7 billion over 10 years. 

The number of individuals, whether Medicare-covered or privately insured beneficiaries, who will have lower out-of-pocket drug costs in a given year under this provision is dependent on how many and which drugs will experience lower price increases and the extent of the price changes relative to 2021’s baseline.

Pros and Cons of the Inflationary Cap Provision

The status quo has prompted many to be in favor of an inflationary cap. In 2021, drug manufacturers of 900 brand-name drugs increased prices by a record average of 4.2%. Between 2018 and 2019, half of Part D covered drugs experienced a price increase beyond that of the 1.8% inflation, with some reaching as high as 19.7%. 

While the Medicare program has long existed without an inflationary cap, the Medicaid program has had one in place since 1993. In terms of holding down prescription drug spending, it’s largely successful as Medicaid now pays the lowest prices of all federal healthcare programs. A 2015 HHS report indicates that the provision is responsible for more than half of the existing price differential between the same products under Medicare and Medicaid. Consequently, the Medicare Payment Advisory Commission (MedPAC) and HHS have both advised that such a provision in Medicare can lead to significant savings.

A similar provision appeared in both the 2019 Prescription Drugs Pricing Reduction Act (S. 2543) and the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3), and the CBO projected up to $10 billion over 10 years in reduced cost-sharing and premiums. While the CBO anticipated that the inflation rebate will reduce the cost of prescription drug benefits in commercial insurance plans, it also anticipated that manufacturers would increase the launch prices of new drugs to balance out the rebate’s effects. Additionally, a Milliman report concluded that the provision would result in modest price increases for private insurance in the commercial market. 

In terms of the federal budget, the increased federal savings will eventually reduce Medicare program spending. It will also result in a moderate gain in tax revenues due to employers increasing taxable wages for their employers rather than having to pay insurance premiums. Furthermore, since state Medicaid programs already have instated inflationary rebates, smaller increases in drug list prices will reduce the states’ rebate amounts.

On March 23rd of 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act, a landmark U.S. statute that entails the largest regulatory overhaul and coverage expansion since the enactment of Medicare and Medicaid in the 1960s. Introduced at a time when over 45 million Americans were uninsured, the ACA constituted provisions that required most individuals to have health insurance at the cost of a penalty fee, combat abusive insurance practices, make coverage more easily accessible, and attempted to mitigate increasing healthcare costs. At the vantage point of over a decade since its passage, it’s worth taking a look back on its implications across Medicaid, private, and other sources of healthcare coverage.

Medicaid Expansion

In pre-ACA times, Medicaid was generally inaccessible to non-disabled adults under age 65 unless they had minor children. Henceforth, with the intention of attaining coverage for low-income Americans, the ACA called for all states to expand Medicaid coverage for adults up to age 64 with incomes at or below 138% of the federal poverty level (FPL). The federal government would cover 100% of the increased costs until 2016 and incrementally taper to 90% by 2020. 

Under the ACA, if states were to not participate in the Medicaid expansion, Congress was to invoke the Spending Clause to revoke all of their Medicaid funding. However, the Medicaid expansion was rendered optional after the 2012 Supreme Court ruling of NFIB vs. Sebelius, which deemed termination of all Medicaid funding to noncompliant states as unconstitutionally coercive. As of 2022, 38 states and the District of Columbia have implemented the Medicaid expansion. In the 12 states that have not enacted the initiative, there currently exists a coverage gap where 2.2 million people are eligible for neither premium subsidies in the Marketplace due to below-FPL income nor Medicaid. 

Marketplace Insurance Subsidies

Furthermore, for individuals without employer or government-funded insurance, the ACA provides subsidies in the private insurance marketplace. Before 2014, insurance companies practiced medical underwriting where they would evaluate whether to accept an applicant for coverage and at what premium rates if they do. Since individual insurance typically bares greater administrative costs than group policies, securing coverage used to be either too inaccessible or costly especially for patients with pre-existing conditions. 

Intending to remedy this phenomenon, the ACA provided premium subsidies for individuals with incomes at or below 400% of the FPL, where buyers would spend no more than a predetermined percentage of their income, ranging from 2.06% to 9.78% correlating to their income, on insurance. The cost of a plan that covered approximately 70% of the expected expenses for an insuree in a local insurance marketplace establishes the amount of the provided subsidy. Additionally, the ACA also mandated insurers to reduce copayment of deductible in the form of cost-sharing assistance for individuals making less than 250% of the FPL. Under this provision, a “moderately generous” plan can cover 94% of an insuree’s expected costs. 

Marketplace Reforms

Additionally, the ACA transformed the insurance market via a series of reforms targeted at specific existing problems. In establishing “guaranteed issue” and “guaranteed renewal”, the ACA ensured that insurers must accept all applicants at equal premiums regardless of a patient’s pre-existing conditions. Now, the only factors impacting a person’s premium are age, family size, geographical location, and smoking habits. In addition, the law required health plans in the individual and small group markets to cover ten essential health benefits (EHB) that include ambulatory services, emergency services, maternity, and newborn care, hospitalization, and more. 

Moreover, in foreseeing the potential of sicker individuals entering the insurance Marketplace due to installment of the guaranteed issue and driving up premiums, the ACA sought to incentivize the healthy population of purchasing insurance to balance out the risk pools. For that reason, the ACA imposed the controversial and now-repealed individual mandate, requiring all Americans to have purchased health insurance by 2014 or pay a financial penalty.

In perhaps its most popular provision known as the dependent-coverage policy, the ACA required all 

private insurers to offer coverage to dependent children to up 26 years of age on their parents’ plans. Effectuation of this provision concurred with the beginning of a steep decrease in the uninsured rate among the 19-25 years old demographic. At the highest uninsured rate of any group, 33.9% of adults younger than 26 years of age lacked coverage in 2010. By 2013, this percentage had fallen to 26.5% and eventually to a sub-15% in 2016 in the aftermath of the Medicaid expansion and Marketplace creation.

Basic Health Program (BHP)

Section 1331 of the ACA enables states to create a Basic Health Program (BHP), a health benefits coverage program that serves as an alternative to the Health Insurance Marketplace for low-income residents whose income fluctuates above and below Medicaid and Children’s Health Insurance (CHIP) levels. Since then, the program has been implemented in New York and Minnesota. Under this plan which will include at least the ten essential health benefits mandated by the ACA, monthly premium and cost-sharing charged to enrollees will not be greater than a qualified health plan (QHP) Marketplace alternative. 

Effects on Coverage Expansion

In the metric of expanding coverage in the US, the ACA was largely successful. According to a 2019 US Department of Health and Human Services (HHS) report, enrollment data from late 2020 and early 2021 indicates that approximately 31 million persons gained coverage related to ACA provisions. 

The breakdown is as follows:

• 11.3 million Marketplace plan enrollees as of February 2021
• 14.8 million new Medicaid enrollees due to eligibility expansion as of December 2020
• 1 million persons enrolled in ACA’s Basic Health Program
• Close to 4 million persons, known as the “woodwork group”, who had been eligible but previously weren’t covered, are now incentivized to take up Medicaid due to heightened awareness of ACA’s coverage options, reduced administrative barriers to applying, and the individual mandate.

Acting in tandem with cost-sharing reductions, premium subsidies have substantially decreased premiums and deductibles for those in the lower-income range. In 2019, 87% of the 10.6 million Marketplace plan enrollees benefited from such premium subsidies. Furthermore, in a 2017 study published in the Journal of Health Economics, researchers accredited 40% of the coverage gains to these exchange premium subsidies. However, enrollments, on an annualized basis, since 2015 have been consistently hovering around 10 million persons, which is 60% below previous Congressional Budget Office (CBO) projections. Moreover, in guaranteeing lower- and middle-income employees access to individual market plans with premium tax credits, the ACA had inadvertently prompted 2 million workers to be dropped from their existing employer-sponsored insurance by 2017.

Deviations from ACA’s Design

However, the full effects of the Medicaid expansion couldn’t be realized partially due to the coverage gap previously discussed, but also due to Section 1115 waivers issued by President Trump’s administration. Section 1115 of the Social Security Act allows states to impose premiums and increase cost-sharing among new requirements on Medicaid expansion enrollees. In 2018, based on benefiting state governments “in their efforts to improve Medicaid enrollee health and well-being through incentivizing work and community engagement”, the Trump administration approved work requirements of between 80 and 120 hours a month in 13 states. Limited data is available on the coverage loss of these Section 1115 waivers. However, in the case of Arkansas where the waiver was active from June 2018 to March 2019, over 18,000 people, or roughly 25% of those subjected to the work requirement, many of whom were working but were unaware of how to report to Medicaid authorities, were disenrolled from Medicaid after failing to comply. Henceforth, though not a direct intention by the ACA’s crafters, opponents of the ACA have criticized it for being subject to turbulences of the “big government”. 

Additionally, the repeal of the individual mandate in December of 2017 is expected to disincentivize healthier people from acquiring coverage in the Marketplace and drive up premium prices. In a comparison of pre- and post-repeal insurance levels, research has found a 24% increase in the likelihood of becoming newly uninsured in states with no federal or state mandate.

What’s Next?

Under the American Rescue Plan of 2021 (ARP), households above the 400 percent FBL received premium tax credits to improve affordability in the Marketplace. The ARP had increased access to zero-premium plans on the federal healthcare marketplace from 43 percent to 62 percent of uninsured non-elderly adults, as well as access to low-cost plans (under $50 monthly premium) from 57 percent to 73 percent. By the end of the 2022 Open Enrollment Period, Marketplace enrollment had reached an all-time high of 14.5 million people. However, if not extended, the expansion provision is set to expire in 2023. A recent HHS report projects that 3 million current insurees, 15% of the individual market population, will become uninsured in that scenario. 

Introduction

When the Medicare program was first implemented in 1965 to provide subsidized health coverage for the elderly and disabled, it encompassed inpatient hospital stays and outpatient physician office visits via Medicare’s Part A and Part B, respectively. However, the program didn’t cover self-administered retail prescription drugs, which have long consisted of the largest share of prescription drug use. The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, signed into law in 2003 and effectuating in 2006, created an optional outpatient prescription drug benefit program called Medicare Part D or Medicare Rx to help pay for drugs at retail, mail order, home infusion, and long-term care pharmacies. By 2021, 48 million out of the over 62 million Medicare beneficiaries are enrolled in Part D plans.

In 2018, Part D’s program expenditures reached $95.4 billion, or nearly 13% of total Medicare spending. Part D constitutes more than one-third of retail prescription drug spending in the US. It’s financed primarily by general revenues (71%), beneficiary premiums (17%), and state payments for beneficiaries eligible for both Medicare and Medicaid (12%). 

Types of Medicare Part D Plans

Differing from Parts A and B, which are publicly administered by Medicare, Part D is provided by authorized Medicare-contracted private insurers. These companies are subject to Medicare regulations and subsidization, pursuant to one-year, annually renewed terms. There are two main types of plans beneficiaries can enroll in for Part D benefits. 

1. Prescription Drug Plan (PDP): a standalone plan that covers solely prescription drugs. 
2. Medicare Advantage Prescription Drug Plan (MA-PD): combines a beneficiary’s doctor, hospital, and prescription drug coverages under one policy. Additionally, employers and unions can extend the Part D coverage from their own MA-PD plans to Medicare-eligible employees and retirees in what’s known as Employer or Union Sponsored Part D Retiree Plans.

Generally, an individual must have either Part A OR Part B coverage to enroll in a PDP, while he/she would need both Part A AND Part B to enroll in an MA-PD. PDPs tend to be nationwide plans, while MA-PDs have more restricted regions, whether by state or by counties within states. Therefore, MA-PDs aren’t recommended for those who travel extensively or reside in various areas of the country throughout the year. 

PDP plans also differ from MA-PDs because with PDP plans, beneficiaries’ costs are directly related to the anticipated prescription drug spending of the population. Additionally, PDPs are dictated by costs within the retail drug sector, therefore fluctuations in healthcare costs in other respects such as hospitalization don’t impact PDPs. 

Costs of Medicare Part D

Part D operates on an insurance model where enrollees are charged costs typically associated with standard insurance plans, such as monthly premiums, annual deductibles, and copays. In 2022, Medicare Part D coverage costs on average $33 per month, while Medicare Advantage plans will cost $19 per month. 

Covered Drugs

Part D plans aren’t required to cover all Part D drugs. Instead they establish their own formularies, with varying tiers associated with accordingly set copay amounts across the categories of drugs. Lower tiers tend to have lower copays. A formulary must follow the model formulary in the US Pharmacopeia, include at least 2 drugs in each of the 148 drug categories, and covers all or “substantially all” drugs under the categories of anti-cancer; antipsychotic; anti-convulsant, antidepressants, immuno-suppressant, and antiretroviral drugs.

The Standard Benefit

The law mandates companies to offer a “standard benefit” package at the minimum, including an annual deductible and a coverage gap, known as the “Donut Hole”. While some plans may deviate from the standard benefit in terms of structure, they must be actuarially equivalent. Occasionally, “enhanced” plans may provide more benefits than the baseline set by the “standard benefit”, including more coverage during the Donut Hole period. The section below outlines the Part D standard benefit phases for 2022.

1. Deductible Phase: Enrollees pay for the full cost of his/her prescription drug until he/she reaches the initial Annual Deductible of $480.
2. Initial Coverage: The beneficiary would go on to pay 25% of a covered Part D prescription drug, either a copayment (a set amount) or coinsurance (a percentage of the drug’s cost). This amount will depend on the drug’s designated tier. This stage ends when a beneficiary and his/her insurer reach the initial coverage limit of $4,430, or when the beneficiary has paid $1107.50.
3. Coverage Gap: Prior to 2019, upon the plan and enrollee collectively reaching the initial coverage limit, the enrollee enters the “Donut Hole” phase, where the enrollee would be required to pay a higher percentage of the drug’s full cost than the 25% of the previous phase. The Health Care and Education Reconciliation Act of 2010 (HCERA) established a gradual phase-out of the coverage gap by 2020. With the Bipartisan Budget Act of 2018 (BBA), the Donut Hole for brand-name drugs closed one year ahead. In 2022, enrollees on the standard drug plan will pay 25% coinsurance for both brand name and generic drugs until their true out-of-pocket cost (TrOOP) reaches the catastrophic coverage minimum. The 75% discount on brand-name drugs is 70% paid by the drug manufacturer and 5% by the Part D plan. The TrOOP is calculated by adding together the yearly deductible, coinsurance, and copayments from the entire plan year, and beneficiary contributions during the coverage gap including the 70% Donut Hole manufacturer discount.
4. Catastrophic Coverage: Once a beneficiary’s TrOOP amounts to $7,050, he/she will pay the greater amount between either 5% of drug costs or $3.70 for generics and $9.20 for brand names. For the remaining costs, roughly 95% of the total, 80% will be covered by Medicare and 15% by the plan. The enrollee will remain in this phase until the end of the plan year before it resets in the new year. 

Pros of Medicare Part D

By design, different coverage costs for according “tiers” of drugs are meant to protect consumers from high-cost prescription drugs. At low premiums and a plethora of options, consumers have a wide range of choices depending on their needs and how Part D works alongside their other concurrent coverage plans. 

Studies have observed the percentage of Medicare beneficiaries forgoing medications due to cost dropped from 15.2% in 2004 to 11.5% in 2006 post-enactment of Part D. A 2020 study also found that Part D led to a sharp reduction in the number of full-time workers older than 65.

Cons of Medicare Part D

Medicare enables Part D coverage enrollment around the time of a person’s 65th birthday. However, if a Medicare enrollee goes without Part D or other creditable prescription drug coverage for any continuous interlude of 63 days or more after the end of their Part D Initial Enrollment Period, they are subjected to a late enrollment penalty. The penalty is typically added to the person’s monthly premium amount and its amount increases with how long he/she has gone uninsured. For each full, uncovered month that the enrollee didn’t have Medicare drug coverage or other creditable coverage, 1% of the “national base beneficiary premium” (or the base beneficiary premium) will be added to his/her monthly premium. 

Given Part D’s formulary structure, a potential enrollee would need to anticipate his/her drug needs for the upcoming plan year and have to shop between various plans on the market. Further, due to plans differing from insurer to insurer other than a Medicare-mandated minimum amount of coverage, this gives enrollees another reason to ensure a particular plan satisfies all drug needs.

Another key criticism regarding Part D is the “Noninterference Clause”, which prevents Medicare from negotiating Part D prices with drug companies in hopes that private insurers are incentivized to negotiate the lowest possible drug prices. However, since not even the largest insurers have enough enrollee base as leverage, Part D drug prices are largely not negotiated, leading to spending $50 billion a year in the “most conservative high-cost scenario” that otherwise could have been saved between 2006 and 2013. 

Medicare Part D in the News

At a time when reining in drug prices has overwhelming public support in the US, the current Senate’s Democratic majority recently reached a deal allowing Medicare to negotiate and place caps on drug price inflation. The crux of the legislation is the negotiation provisions. If passed, Medicare could start the Drug Price Negotiation Program (DPNP) in 2023, with the secretary of the Department of Health and Human Services selecting up to 10 drugs to negotiate prices on, with the negotiated prices effectuating in 2026. In 2029, the number of drugs subjected to bargaining will increase to 20. Furthermore, the legislation will create a $2,000 out-of-pocket spending cap for Part D beneficiaries, prohibiting brand-name manufacturers from hindering competition from generic-drug producing counterparts and requiring companies to pay a rebate for hiking drug prices beyond the rate of inflation. Over the next decade, this plan is projected to save $288 billion.