Blogs – Article 4 09/13/2023

More Medicare News — Part 2

The Future of Drug Costs in Part D??

In the previous newsletter, the article about the ten drugs selected for negotiation, you may have noticed a comment made about the out-of-pocket (OOP) cap on Part D costs beginning in 2025. The drafters of the Inflation Reduction Act, which contains this new limitation, figured that the cost savings for the federal government for this benefit would be achieved through the negotiated drug prices. But will it be enough, and what else will happen at the same time — there are always unintended consequences with government legislation?

Here is a bit of background. Statistically, only about 14-15% of Medicare members enter the Part D coverage gap each year, and a significantly smaller number move through the gap, or donut hole, into the catastrophic layer. Over the years since 20o6 when the Part D program went into full effect, there have been a significant number of high cost drugs introduced, which along with cost inflation on established meds, has increased the number of people entering the donut hole and, after that, the number of those entering catastrophic coverage.

In the original ACA legislation, beginning in 2010, drug manufacturers agreed to offer a 50% cost discount to Medicare members who entered the coverage gap, or donut hole. Along this timeline, beginning in 2013, the amount that a Medicare member who did enter the donut hole began to pay a decreasing proportion from 50%, until in 2019 the member share hit 25%. All of these OOP amounts, including the manufacturer discount, contributed to the OOP maximum that determined the threshold for the member to enter the catastrophic segment of Part D.

A couple of things are becoming more clear when looking at the 2025 requirement to cap the OOP on Part D to $2000 per year. The first, of course, is whether the drug negotiations will actually achieve the cost savings projected to pay for this cap. Consider that the federal government currently subsidizes somewhere in the neighborhood of $380 Billion in Part D costs, based on 2021 data, most of which is realized in the coverage gap and catastrophic areas of the program (a far cry from the original projection of $30 billion subsidy in 2006). This will be something to be watched, and more than a few analysts do not believe that this will be achieved. If CMS is faced with significantly higher subsidization to accomplish the $2000 goal for the OOP cap, future costs may well devolve to Medicare members.

The second element that is evident is that the coverage gap will disappear along with the manufacturer discount. As far as program stability is concerned, a large number of consumers currently “live” within the space of $0 cost Tier 1 generic drugs, but there is a noticeable movement to higher cost Tier 2 and 3 medications for many prescription drug users. There is no requirement that Tier 1 meds will continue to be offered at $0 copay, either. We already see a movement away from flat dollar copays for Tier 3 and higher tier medications to a structure that charges a percentage coinsurance (ie. 25-33% or 50%) of the drug’s “retail” instead.

A comment made by a retail pharmacist with over 40 years in the industry in the WSJ article referenced in the 10-drug newsletter, is a reminder just how financially complex the pharmaceutical business has become. He recalled that as late as the mid-‘70s, the average drug cost at a retail pharmacy was under $10 for a brand named drug and that nearly all drugs dispensed were considered  “brand name”. Fast forward to the late-‘90s, following the introduction of the Pharmacy Benefit Management concept, where the commenting pharmacist observed that in the space between the manufacturer and the retail pharmacy, over 20 “points of revenue” had developed, basically referring to what amounts to “middle men.” That is a lot of spoons in the stew pot.

Even if we want to consider the above referenced pharmacist slightly hyperbolical in his description, we  can all attest to the higher costs for medications we have been prescribed in the last 5-10 years. My observation for the short term is that we should be prepared for the imposition of higher OOP costs for prescription drugs. Rather than wait for the costs to “hit all at once” it seems obvious that the Medicare drug plan coverages will be incrementally be increased over the next few years.

While We’re On the Subject of Costs!!

Over the past 4-5 years, those of us that deal with and use Medicare Advantage and Prescription Drug plans, have kind of gotten used to seeing bigger and better, shinier and slicker new features each year. It reminds me of the new car model introductions when we were all kids. Every year we’ve come to expect newer benefits, more allowances, and lower copays. As we approach the 2024 plans, we will be looking at MA plans with a long list of $0 copay benefits, and I do believe, along the lines of the joke I told during 2023 about one particular Part D plan, we will indeed see a $0 premium plan for drugs, at least in some markets.

So….how can I offer up a caution that the lovely days for ever more tasty benefits be slowing? You may recall last year that CMS (Medicare) announced an investigation and possible court action against some of the largest insurers, asserting that over the past couple of decades the carriers have habitually submitted claims to Medicare asserting costs for more complex care and that CMS claims were purposely driven into higher cost categories. CMS also contends that while this practice was allowed by the agency, it was nonetheless improper, and now they seek to recoup billions of dollars. We haven’t heard much of anything about this investigation/process since the original announcement but it hasn’t gone away. In fact, Medicare, in putting forth their budget for this and subsequent years, is proposing cuts in outlays, particularly the Medicare Advantage program.

Medicare will continue down this path of expenditure cuts in future budget years. This will inevitably lead to a slowdown in benefit expansion, and honestly, I think, the demise of some of the less successful MA plans. This really is not such a bold prediction — in fact, in this last two years, we have seen multiple companies exit the Medicare space. In some cases (ie. Bright Health) plans have been liquidated; others (ie. Oscar) have consolidated and abandoned markets.

For consumers and brokers, this suggests that a new layer of care needs to be exercised in selecting plans with an eye toward the long term. While Medicare always permits the option for guaranteed enrollment in a new plan if a plan that a consumer has in place goes out of business, it is certainly disruptive to have to change plans due to a company failure.


R Allan Jensen