On closer scrutiny, it turns out that many of today's problems are a result of yesterday's solutions. ~ Thomas Sowell
Other than perhaps the dialysis industry, there are few places that demonstrate how well the federal government can defeat its own policy objectives through its policy choices quite like the pharmaceutical manufacturing. Part D was created so Medicare beneficiaries would have access to important medications. In defining the benefit, Congress first made it inflexible. Its scope it almost entirely codified. Next, and as a new benefit with little precedent we should be charitable, Congress failed to recognize the incentives created to aggravate drug inflation. Those include the 75% liability for plan sponsors in the coverage gap and the 80% liability for Medicare in the catastrophic phase. Both things conspire to encourage high cost brand drugs that hurry a beneficiary into the catastrophic phase where the federal taxpayer picks up the tab.
The biggest policy failure was the creation of the coverage gap. Necessitated by deficit politics (remember those?!) the coverage gap means beneficiaries have very lumpy cost-sharing throughout the year. In the deductible phase they pay 100% of the cost, then 25% in the coverage phase, 25% in the coverage gap and nothing in the catastrophic phase. Enrollees, like health plans and drug manufacturers, have every reason to shift the cost burden to Medicare as quickly as they can.
The public's resistance to higher cost-sharing, particularly in brand name drugs - the very drugs that pave the way to the catastrophic phase - created a political problem that was supposedly solved by last week's passage of the Inflation Reduction Act.
The fact is that PPI for Pharmaceuticals and Medicine Manufacturing has been declining for years, largely due to the introduction of generics and biosimilars. It is a trend, notably, that has reversed the last couple of months. We will see if it holds.
Into slower and lower drug inflation, Congress is introducing new incentives through a negotiation program (a first for government!) and a redesign of Medicare Part D. The timeline is aggressive, HHS must have much of the price setting for 2026 done in late 2023 and early 2024. The recipe for unintended consequences never tasted so good. We doubt it will be less innovation, drug companies are in the invention business. It will no doubt include pricing and patent strategies and margin pressure on non-essential participants of the drug channel. Any other ideas? Thoughts welcome.
Emily Evans
Managing Director – Health Policy
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