Part D Is Due For A Tune-Up

By John McManus, president and founder, The McManus Group

Dear reader, I had the Irish Luck of serving as staff director of the Ways and Means Health Subcommittee for then-Chairman Bill Thomas (R-CA), and I was tasked with developing, negotiating, and drafting the Medicare Modernization Act of 2003 (MMA), which added the Medicare Part D drug benefit.

It was a brutal process for members and staff alike. We passed different iterations of the bill three times in the House in as many years before the Senate finally took it up. Chairman Thomas then led an intense, five-month conference committee (often working 12-to-14 hour days) where we hammered out differences between the House and Senate bills and even added some new ideas, for example, means-testing in Medicare. (I remain convinced that abandonment of this deliberative process, requiring negotiation and consensus building, is a major reason for the current dysfunction in Washington.)

The bill passed with a center-right coalition, losing our right flank of archconservatives but picking up several dozen Democrats in both chambers despite firm Democratic leadership opposition. We reached out to the healthcare community, soliciting their input and ideas and integrated policies to strengthen rural hospitals, create tax-free health savings accounts, and crack down on fraud and abuse.

Of course the heart of the bill was the market-based Part D drug program, which looked nothing like traditional Medicare’s top-down approach and raft of regulations and fee schedules. At the time, the notion of a stand-alone prescription drug plan was totally alien, and we had substantial concern whether enough plans would show up to provide sufficient choice and competition. That problem never materialized in Part D – there are currently 746 plans across 34 regions. But a paucity of plans has plagued the exchanges established by the most consequential healthcare law since the MMA — the Affordable Care Act.

Most impressive has been Part D’s performance related to cost control. A few weeks ago Health and Human Services Secretary Tom Price announced that the average monthly premium will decline by over a dollar next year to $33.50 in 2018.

The remarkable thing about that figure is that during consideration of the MMA, Republicans defeated a Democratic amendment, which would have required a $35 monthly premium for 2006 — 12 years ago. That amendment attempted to lock in the CBO (Congressional Budget Office) projection for the average premium for all plans in 2006 because they preferred a government guarantee rather than the prospect that a competitive market could deliver a product at a cheaper price. Thank goodness, it was defeated: Seniors will be paying less in 2018 for their drug premiums than Democrats would have forced them to pay in 2006, more than a decade later.

Lost in the hubbub over drug pricing has been the flat and declining spending recently in Part D. The  CBO’s June 2017 Baseline Projections show that Part D spending stabilized at $95 billion annually for 2016 and 2017 and will decline to $92 billion in 2018. Costs have stabilized, in part, because $117 billion of products are going off patent and the volume of Hepatitis C prescriptions has declined as patients are cured and go off therapy.

Problems Brewing
The CBO projects renewed cost escalation in 2019 and thereafter and predicts costs will double within 10 years. The CBO has been wrong before — overestimating Part D costs by 45 percent in its initial estimate — yet industry experts know that the pipeline is brimming with promising specialty medicines that will cost a lot of money and a growing population of seniors who will demand access to these cures and innovative therapies.

Moreover, the Part D premium should not be the sole metric of success of the program. Patient access to therapy and their out-of-pocket cost sharing must also be examined.

Specialty tiers and cost sharing increasing
One key problem is the administrative creation of “specialty tiers,” which prohibit the appeal for coverage of drugs that cost more than $670 and require substantial cost sharing of between 25 and 33 percent. This policy has no basis in the statute but has been left unchanged since its creation in 2005. The result is that physicians and the beneficiary cannot appeal for lower cost sharing even if that product is the only medicine that works for the patient.

The use of specialty tiers has become more ubiquitous, and cost-sharing obligations in Part D have become more onerous recently. While specialty tiers have been utilized by a number of plans throughout the 12-year history of the program, all prescription drug plans started utilizing a specialty tier for the first time in 2015 and every year since then, resulting in substantial cost sharing for beneficiaries that utilize such drugs.

According to an Avalere analysis, 58 percent of covered drugs face coinsurance, up from 35 percent just a few years ago. Although coinsurance has historically been applied to only specialty-tier drugs, more PDPs (prescription drug plans) are applying coinsurance to drugs on lower tiers, including the nonpreferred brand tiers. The percent of beneficiaries enrolled in Part D plans with more than one tier requiring coinsurance has skyrocketed to 96 percent in 2016 from 39 percent in 2014. Coinsurance on expensive specialty drugs is much more onerous for patients than flat copays.

Growing DIR not benefitting patients
On the final day of the Obama administration, CMS issued a report on direct and indirect remuneration (DIR) — manufacturer rebates and pharmacy fees

collected retrospectively from PBMs (pharmacy benefit managers) and Part D plans after the patient has been dispensed the drug. It found that DIR nearly tripled between 2010 and 2015. But CMS appears to have substantially underestimated how much is provided retrospectively. Its report estimated $17.4 billion in DIR savings in 2014 but the PMBs’ own analysis by the Oliver Wyman consulting firm estimated $31.7 billion in “negotiated savings.” Where is the missing $14.3 billion? Either CMS does not know or the PBMs are overstating their savings.

In any case, patients are paying inflated copays on the list price of drugs that do not reflect the substantial price concessions manufacturers provide through rebates. This has the effect of pushing patients through the benefit faster, resulting in expedited access to the catastrophic benefit where Medicare pays 80 percent of the costs and the plans pay just 15 percent. This means any rebate that exceeds 15 percent is straight revenue to the plan once the catastrophic is hit, a real policy concern flagged by the Kaiser Family Foundation: “Medicare’s reinsurance payments (for spending in the catastrophic) to plans have represented a growing share of total Part D spending, increasing from 16 percent in 2007 to an estimated 42 percent in 2017.”  

The statute requires beneficiaries to have access to “negotiated prices” at the point of sale. However, current CMS regulatory interpretation permits price concessions that cannot reasonably be determined at point of sale to be made retrospectively. The question is how much can be reasonably determined at point of sale; CMS could take a more expansive view of that, for example, by requiring the preponderance of rebates to be provided at point of sale with an allowance for a squaring up of any discrepancy between estimated
and actual rebates at the end of the year.

What can be done to strengthen the Part D Benefit?

1. Permit manufacturers to provide copay assistance directly to patients rather than through cumbersome charitable foundations. This would require the creation of a safe harbor from the antikickback statute.
2. Reform specialty tiers to allow the appeal of high-cost drugs and eliminate the arbitrary cost-sharing obligations that require a high percentage coinsurance rather than flat copay.
3. Require the preponderance of DIR fees to be provided at the point of sale so beneficiaries can benefit from the price concessions provided for the drug they are prescribed at the pharmacy counter. Actuarial analysis shows this will have a modest impact on beneficiary premiums.

John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.