Visiting Fellow
Doug Badger is a Visiting Fellow in Domestic Policy Studies at the Heritage Foundation.
The House of Representatives is scheduled to vote this week on H.R. 3, the Lower Drug Costs Now Act, which would impose federal price controls on prescription medicines. The bill would limit Americans’ access to lifesaving therapies, impede the development of new treatments for deadly and debilitating diseases, and inflict harm that vastly exceeds the budgetary savings it promises.
Congress should reject the policies of H.R. 3 and pursue drug-pricing reforms that encourage innovation. Specifically, Congress should reform Medicare prescription drug payment programs and practices that prevent affordable generic medicines from coming to market. Such reforms include restructuring the Medicare Part D program to protect seniors from high out-of-pocket drug spending and refining federal laws that brand-name manufacturers are exploiting to prevent competition from generics.
These proposals enjoy overwhelming support among both parties in the House and Senate and could be signed into law by the President. All proposals are included in an alternative bill (H.R. 19) released by House Republicans on December 6.1
H.R. 19, The Lower Costs, More Cures Act, section-by-section summary released by House Republicans, December 6, 2019. H.R. 19, as outlined in this document, contains many proposals approved with bipartisan votes by the Senate HELP Committee (S. 1895, The Lower Health Care Costs Act) and the Senate Finance Committee (S. 2543, The Prescription Drug Pricing Reduction Act).
Acting on these reforms would provide relief from high prescription drug prices, while fostering continued medical innovation that will cure diseases, lengthen life expectancy, and improve quality of life.
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H.R. 3: The Wrong Path
The Lower Drug Costs Now Act would reduce drug prices by government fiat, jeopardizing the quality of health care that Americans deserve.
What is worse is that H.R. 3 will not reduce drug prices at all because it will not become law. The House vote on the measure is expected to split largely along party lines, the bill lacks support in the Senate, and it is expected to face a veto threat from President Donald Trump. If Congress cannot move beyond the flawed and divisive H.R. 3 and toward effective reforms, it will adjourn next year having done nothing about drug prices.
Drug-pricing reform need not fall victim to partisan squabbling. There is broad bipartisan support for proposals to reduce prescription drug prices. Democrats and Republicans have reached a rare consensus on this contentious issue, backing reforms to Medicare prescription drug coverage and supporting a ban on practices that impede the entry of affordable generic drugs into the marketplace.
By shunning these broad-based reforms in favor of a vote on H.R. 3, House leaders have chosen partisan posturing over bipartisan progress on drug prices.
A better path is needed.
Table 1 compares the proposals with the current law.
How Congress Can Make Real Progress
Making Medicines Affordable for Seniors: Reforms to Medicare Payment Practices. The federal government, through Medicare, helps seniors and people with disabilities to access prescription drugs via two programs: Medicare Part D and Medicare Part B. Both programs need reform in order to address policies that provide flawed financial incentives to drug makers and insurance companies that are driving up prescription drug costs.
Part D Restructuring. There is a broad consensus on the need to reform Medicare prescription drug coverage. Members of both parties agree that the Medicare Part D benefit, which was created in 2003, requires restructuring.
Under Medicare Part D, drug prices are set through negotiations between private pharmacy benefit managers and drug manufacturers without government involvement. Competing prescription drug plans sponsor insurance policies that cover drugs and set their premiums. The government subsidizes these premiums at fixed rates. Prescription drug plans compete for seniors’ business based on quality and price. Seniors can choose the plan that provides them the best value, covering the medicines they take at the most affordable prices.
Consumer choice and competition have made Part D the rarest of government programs: one in which spending has not spiraled out of control. In fact, government actuaries report that federal general revenue spending on the program was $67.8 billion in 2018. That is less than the amount that the government spent on Part D in 2015 ($68.4 billion).2
Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, The Boards of Trustees, Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, April 22, 2019, Table III.D3, p. 103.
Over that same period, government spending on Medicare Part A (hospital inpatient benefits) increased by 10.5 percent (from $279 billion to $308 billion),3
Ibid., Table III.B4, p. 52.
While general revenue spending on Part B (physician and other outpatient benefits) grew by 24.2 percent (from $203.9 billion to $253.2 billion).4
Ibid., Table III.C4, p. 85.
The Part D program has also resulted in reduced spending elsewhere in the Medicare program by making drug therapies broadly accessible to seniors. Multiple studies have found that these therapies help to keep beneficiaries out of hospital beds and emergency rooms, reducing Medicare spending on hospitals and doctors.
For example, the Congressional Budget Office (CBO) estimates that a 1 percent increase in prescriptions filled by Medicare beneficiaries reduces spending on medical services by 0.2 percent.5
Congressional Budget Office, “Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services,” November 2012, p. 1, https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/MedicalOffsets_One-col.pdf (accessed December 9, 2019).
Applying the CBO methodology, Chris Pope of the Manhattan Institute estimated that an extra $100 in prescription drug use by Medicare beneficiaries can be expected to reduce the program’s spending on other medical services by $95, while delivering better outcomes.6
Chris Pope, “Issues 2020: Drug Spending Is Reducing Health Care Costs,” Manhattan Institute, November 6, 2019, p. 3, https://www.manhattan-institute.org/issues-2020-drug-prices-account-for-minimal-healthcare-spending (accessed December 9, 2019).
Relying on different economic assumptions, a December 2016 study by economist Robert J. Shapiro found that the Part D program had produced net Medicare savings of $679.3 billion between 2006 and 2014.7
Robert J. Shapiro, “The Value of the Medicare Part D Program for its Beneficiaries and the Medicare System,” Progressive Policy Institute, December 2016, p. 5, https://www.progressivepolicy.org/wp-content/uploads/2016/12/The-Value-of-the-Medicare-Part-D-Program.pdf (accessed December 9, 2019).
The Part D program has achieved these results through competition among prescription drug plans and through a standard drug benefit that apportions costs among beneficiaries, plans, manufacturers, and the government.
The program’s complex benefit structure could nonetheless be improved. While drug plans and beneficiaries finance prescription drug spending for the vast majority of seniors, the taxpayers shoulder 80 percent of the burden of the small minority of seniors whose annual drug spending falls into the program’s catastrophic tier (annual spending that exceeds $8,140).
Although overall Part D spending growth has been quite modest, the Medicare Payment Advisory Commission (MedPAC), an advisory arm of Congress, has noted that spending in the catastrophic tier grew from 25 percent of Part D costs in 2007 to 54 percent in 2017.8
Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” March 2019, p. xxv, http://www.medpac.gov/docs/default-source/reports/mar19_medpac_entirereport_sec.pdf (accessed December 9, 2019).
MedPAC attributes this in part to the program’s benefit structure.
There is broad congressional support for restructuring the Part D benefit. Several proposals have emerged. While they differ in detail, they share two important features: They cap the amount that seniors spend annually on prescription drugs, and they shift financing in the catastrophic tier from taxpayers to Part D plans and drug manufacturers.9
For a detailed analysis of these various options, see Tara O’Neill Hayes, “Competing Proposals to Medicare Part D,” American Action Forum, September 23, 2019, https://www.americanactionforum.org/insight/competing-proposals-to-reform-medicare-part-d/
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