Magazine Article | March 1, 2017

Pharmaceuticals Escape The Knife As GOP Mulls Medicaid Reform

Source: Life Science Leader

By John McManus, president and founder, The McManus Group

After bracing for the worst, pharmaceutical executives emerged from a White House meeting with newly installed President Donald J. Trump relatively unscathed. But they soon concluded that his ever-roving spotlight would be back on them in a matter of time and it was on them to develop proposals that would reduce the cost of drugs when patients show up at a pharmacy.

Eli Lilly CEO David Ricks later commented that the discussion focused on consumer out-of-pocket costs, and drug companies need to do a better job “getting discounts through to consumers.”

Ricks’ point was affirmed when the Centers for Medicare and Medicaid Services (CMS) issued a report revealing PBMs (Pharmacy Business Managers) in Medicare were reaping billions of fees in so-called direct and indirect remuneration (DIR) arrangements from pharmacies and drug manufacturers that did not assist patients at the time they filled their prescriptions.

The CMS report described how these fees were collected, often months after care was already delivered, and that they had skyrocketed in recent years — rising from $8.7 billion in 2010 to $23.6 billion in 2016, constituting about 17.2 percent of total spend in that year. CMS observed that because beneficiaries were not accessing the price concessions at the point of sale, they were moving through the benefit far quicker and hitting the catastrophic point where 95 percent of costs are covered.

Of course, retrospective rebates and pharmacy DIR fees are not peculiar to Medicare. In the commercial market, patients in high-deductible plans are charged list prices and do not realize the substantial rebates that manufacturers provide PBMs on their behalf. In Medicare, those rebates have helped keep the Part D premium stable, rising just $2 a month over the last six years. But policymakers are just starting to appreciate the complexity of the drug distribution system.

Meanwhile, Republicans are grappling with the reality that they will effectively own any replacement to Obamacare, so they must tread carefully. This realization has slowed action on “Repeal and Replace.” Republican members are now appreciating that they are no longer shooting blanks but must deliver a real plan that stabilizes the disintegrating individual marketplace and provides a bridge to the millions of poor who were enrolled in the Medicaid expansion.

Central to the Republican replace bill will be how it addresses the Medicaid program, which now covers more than 70 million beneficiaries. Thirty-one states took the massive federal cash infusion from the Affordable Care Act to expand Medicaid, which resulted in coverage of 11 million poor, non-elderly adults. Many of those states have Republican governors and senators who are concerned that their people may lose coverage and the federal funds making it possible.

"Policymakers are just starting to appreciate the complexity of the drug distribution system."

Michigan, Indiana, and Ohio are emblematic of the complicated politics Republicans now confront. Michigan Governor Rick Snyder, a Republican, said, “We have over 600,000 Michiganders covered in Healthy Michigan, and we have lots of data showing good things going on in our state with this program.”

Vice President Pence’s home state of Indiana also undertook a creative approach to expanding Medicaid whose architect, Seema Verma, is Trump’s nominee to run CMS. In return for choice of their health coverage, the Indiana plan required enrollees to contribute some money to health savings accounts, then purchase their own insurance with help from the state. The idea was to make sure that the newly covered patients had some skin in the game when they made their healthcare decisions.

Ohio Governor John Kasich, a well-known and highly regarded Republican veteran who once chaired the House Budget Committee, commented, “We strongly recommend states be granted the flexibility to retain the adult Medicaid expansion.” Senator Rob Portman (R-OH), a senior member of the Finance Committee, emerged from a closed door Republican Member meeting and said, “I want to keep those people in the system, covered in some way… whatever net savings there are from repeal [we need] to help people get coverage in transition.”

But the 40-member House conservative “Freedom Caucus” issued a proclamation in mid-February that any Obamacare repeal bill must be at least as aggressive as the bill the House and Senate voted on in 2015, which provided no transition for newly covered Medicaid beneficiaries.

Republicans are now considering advancing a proposal known as Per Capita Caps, under which states would receive a lump sum per enrollee, and they would be provided with increased flexibility to provide coverage. The 1990s Medicaid reform proposal authored by then Rep. Kasich (R-OH) would have block granted Medicaid to the states, leaving the states on the hook if Medicaid rolls swelled because of a recession. The Per Capita Caps proposal represents a more refined approach that provides a fixed amount per beneficiary that can increase or decrease depending on the number of enrolled individuals.

However, it caps federal exposure on Medicaid spending based on a predetermined formula and leaves states at risk if costs exceed the cap because of increases in health costs or changes in technology that increase per-enrollee spending. The caps would be based on four different Medicaid populations:

  • Children and mothers
  • Disabled
  • Elderly
  • Non-elderly and non-disabled adults.

Potential savings to the federal government depend on how the caps are allowed to grow over time. The Congressional Budget Office (CBO) estimates that a cap that grows by the consumer price index (CPI) would save an astounding $583 billion over 10 years, a cap at CPI plus 1 percent would save $374 billion over 10 years, and congressional staff report that a cap established at a relatively generous medical CPI index would still save the program over $100 billion over 10 years. These substantial savings can be achieved because the Medicaid baseline has been growing at an unsustainable, compound rate of 7 percent over the past 20 years.

The proponents of a Per Capita Cap believe that states will have greater incentive to manage their programs if their own dollars are at stake, unlike the current system where more state spending results in more federal resources. States are eager to wield the increased authority the Per Capita Caps proposal would provide, including shifting resources to more needy populations, charging beneficiaries modest copays or premiums, and requiring work for certain able-bodies beneficiaries — without having to ask the federal government for a waiver.

While still in debate, the Republican plan would reportedly gradually reduce the federal matching funds from 90 percent to the underlying matching rate (generally between 50 percent and 80 percent, depending on the state) over a four- to five-year period.

CBO warns that nearly three-quarters of those who lose Medicaid coverage if states scale back the eligibility parameters could become uninsured. But Republicans like Governor Kasich argue that these individuals could be provided better coverage under a reformed and invigorated subsidized individual market. The Republican plan would replace means-tested subsidies with refundable and advanceable tax credits that would vary by age. They argue that insurance would be cheaper when they repeal costly insurance mandates and flex up the rating bands that have made insurance unaffordable to many young people.

But as the committees continue to draft the complicated legislation, Democrats feel increasingly emboldened to oppose any plan the Republicans develop. In an unprecedented move, Democrats boycotted even attending the confirmation hearing of the affable and studious Representative Tom Price, who was being considered for Secretary of Health and Human Services. And Republicans are becoming increasingly anxious to move the healthcare legislation so they can move on to items more in their wheelhouse, such as tax and immigration reform.