Promulgated in August 2022, the Inflation Reduction Act capped annual payouts for Medicare Part D beneficiaries at $2,000. When the cap comes into force in 2025, it will be a significant benefit for a estimated at 1.4 million beneficiaries per year whose annual Medicare Part D disbursements exceed the $2,000 threshold. But politics can have unintended consequences that need to be considered.
Assuming 20% coinsurance, the cap means that a $10,000 drug and a $100,000 drug will have the same direct cost to Medicare Part D beneficiaries, who will then have less incentive to use cheaper drugs. . It will also increase manufacturers’ incentives to raise the introductory prices of their drugs. Proposals to eliminate cost sharing altogether would further reduce the incentive to withhold drugs prices. This is in addition to the incentives to have higher drug introductory prices in response to inflation caps.
Changes to Cost Sharing Arrangements
Currently, the Medicare Part D program requires beneficiaries to pay up to 25% of the cost of a drug until the beneficiary reaches the catastrophic coverage phase, which is when out-of-pocket expenses exceeds $7,050. After that, beneficiaries must pay a 5% coinsurance for the drugs they need. In addition to lowering the threshold needed to reach the catastrophic coverage phase, the Inflation Reduction Act eliminates the requirement to continue paying a coinsurance percentage once the beneficiary reaches it. This is important because beneficiaries who are required to pay co-insurance generally pay a percentage of list drug pricewhich is generally higher than the net prices negotiated by Medicare Part D prescription drug plans. Coinsurance requirements, especially for high-cost specialty drugs, may be one reason why about one-third of Medicare beneficiaries with serious illnesses report problems getting the medications they need.
Benefits for patients
Beneficiaries with the highest prescription drug costs may have multiple comorbidities and require varied drug regimen. Generally, they use one or more very expensive drugs. Chronic diseases such as cancer, rheumatoid arthritis and multiple sclerosis are often treated with specialty drugs whose disbursement could exceed the ceiling set by the beneficiary first filling. For example, the drug Xtandi, which treats advanced prostate cancer, costs around $13,000 per month treatment. With a 20% coinsurance, Medicare beneficiaries would reach the $2,000 out-of-pocket cap in the first month.
For patients taking multiple drugs or expensive drugs, the benefits of the new law are not limited to cost savings – it has been well established that reducing drug expenditure helps improve treatment adherence, which in turn is associated with better health outcomes. By improving affordability, the Reducing Inflation Act’s out-of-pocket cap will increase access to pharmaceutical treatments and help improve outcomes for Medicare Part D beneficiaries, helping to reduce disparities. Of those who reach the cap, the annual savings disbursed were estimated at $1,301 for fee-for-service beneficiaries and $1,363 for Medicare Advantage beneficiaries, with greater savings expected for disabled beneficiaries and black beneficiaries. Despite these savings for patients, an out-of-pocket cap raises concerns about removing demand controls.
skin in game
Once beneficiaries reach the $2,000 threshold, any incentive to use lower cost drugs is minimized. The Medicare Part D program already spends an excess of $3 billion per year on brand name drugs that have cheaper generics available. One of the challenges of the new policy is how to ensure Medicare Part D beneficiaries maintain “skin in play” under the new rules while ensuring drug affordability. This is of particular concern for expensive specialty drugs, which represent more than 20% of Part D expenses.
If a beneficiary has no cost sharing once they exceed the cap, they are likely to require more and more expensive drugs than if some cost sharing were still needed. The Urban Institute estimated that Part D expenses would be increase by 22.3% if traditional Medicare beneficiaries were faced with a cap of $5,000 to pay for all Medicare services. The increase would likely be greater with a cap of $2,000. Although the benefit may reflect increased use among recipients who previously could not afford the care they need, an unintended consequence is that drug manufacturers may raise drug prices, particular for expensive drugs such as Xtandi, since recipients are no longer in the game. This could happen despite the new provisions requiring that manufacturers offer up to 20% off their drugs once beneficiaries reach the cap and would increase spending beyond what would be expected from increased usage alone. While the Inflation Reduction Act has provisions penalizing drug price increases beyond the rate of inflation, drugmakers may focus on increasing the price of newly launched products or new versions of older products – a process sometimes called product skip.
The example of Xtandi and similar high-priced drugs that treat cancer and chronic diseases – Imbruvica, Revlimid, Keytruda and others— also highlights the concern that, after reaching the cap, the financial incentive for a beneficiary to take lower-cost drugs disappears. Drug cost sharing is often used to steer patients towards lower cost drugs or higher value drugs through preferential placement on the formulary, i.e. sharing levels lower costs, fewer usage controls, or both. Formulary-level placement is one of the levers drug plans use to negotiate prices with drug manufacturers. The ability to negotiate prices with drug manufacturers, in exchange for favorable placement on the formulary, is expected to lead to lower drug spending.
For expensive new drugs, the ability of drug plan negotiators to obtain lower prices in exchange for favorable formulary placement may be reduced. Prescription drug plans can respond by increasing the frequency with which prior authorization and step therapy are required to access expensive drugs, a phenomenon that is already on the rise in the Medicare Part D program. By 2022, about 31 % of drugs covered by Medicare Part D had a prior authorization requirement. In 2017, more than a third of Medicare Part D pre-authorization requests were initially denied, but nearly 75% were ultimately denied. approvedreflecting increasing burden on providers and delays in access for patients.
Implementing the Personal Spending Cap: A Potential Policy Alternative
There is a potential policy alternative that could be part of the implementation of the out-of-pocket expense cap: forgoing the use of coinsurance as a requirement in all phases of coverage, relying instead on fixed co-payments for all medications. Fixed and relatively low co-payments would maintain the formulary’s cost-sharing incentives throughout the coverage phases and could allow beneficiaries to realize greater savings, as fewer beneficiaries are likely to reach the 2,000 threshold. $. This is important because $2,000 a year still represents more than 10 percent of the average annual social security benefit.
However, it is different from having a monthly cap for smooth paying the $2,000 cap during the year, as this would allow drug plans to maintain some level of cost-sharing requirements while helping to delay beneficiaries’ progress toward the cap. Maintaining some level of tiered structure of the cost-sharing formulary would help preserve the leverage of prescription drug plans with drug manufacturers and their ability to direct patients to low-cost drugs. cost and high value, which would help reduce expenses. Patients would be more aware of the cost of the drug and would be encouraged to choose less expensive treatments, even if the co-pay was $50 or $100. In addition, fixed copayments would keep Medicare Part D beneficiaries “skin in the game” while ensuring drug affordability.
All authors receive research grants from Arnold Ventures. Arnold Ventures had no role in the writing, preparation, review or approval of the article and the decision to submit the article for publication.