Insurers Should Pay More Medicare Rx Costs, Former HHS Official Says

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By Sara Hansard

Health insurers should have to pay a larger share of Medicare Part D costs and the government should negotiate prices for drugs that don’t face much competition.

A former Obama administration official May 2 proposed that plan to rein in high prescription prices at a Brookings Institution forum. Consumers pay only 5 percent of their drug costs while insurers pay only 15 percent of the cost, with the government picking up the remaining 80 percent, Richard Frank, former assistant secretary for planning and evaluation in the Department of Health and Human Services, said. That has contributed to rapid drug price increases in the program, he said.

Big drug price hikes are increasingly a problem for consumers, who face higher out-of-pocket costs, as well as for payers such as health insurers and the government. Health-care authorities have grappled with ways to rein in drug costs while providing enough incentives for the drug industry to continue to develop innovative drugs, such as Gilead Sciences Inc.'s Sovaldi, which has been hailed as a wonder drug in curing hepatitis C but can cost more than $90,000.

Part D Spending Up 75 Percent From 2007

Government spending on Part D of Medicare reached $80.1 billion in 2015, an increase of about 75 percent over 2007 levels, representing an annual growth rate of 7 percent, according to a paper by Frank, a professor of health economics in the Department of Health Care Policy at Harvard Medical School, and Richard Zeckhauser, a professor of political economy at the Harvard Kennedy School of Government.

Unique, branded drugs that don’t have much competition “are pulling up the whole price index” for all prescription drugs, offsetting lower costs for generic drugs, Frank said. In 2007 about 25 percent of all Part D spending was for reinsurance payments to insurers, compared with more than 56 percent in 2017, and about 65 percent of the reinsurance benefit in 2015 was for high-priced drugs that cost at least $1,000 a month, he said.

“We propose a very targeted and temporary approach to negotiated prices,” Frank said. “Our target is those high-cost drugs with market power selling in the reinsurance benefit,” he said. That would cover a limited number of drugs, which makes it practical to negotiate over them, he said.

Prices would have to guarantee economic profits for pharmaceutical companies, and a default price would be set by the government that would allow for bonuses for drugs that do a very good job, Frank said.

FDA Should Approve More Biosimilars

Biologic drugs, complex drugs grown from tissue, are the fastest growing segment of drug spending, experiencing price increases in the double digits for a decade and representing more than a third of total drug spending, according to a paper presented by Fiona Scott Morton, a professor of economics at Yale School of Management.

Regulatory delays have left the U.S. without competitive biosimilars, which could act like generic drugs to create price competition, Morton said. Biosimilars are highly similar and less expensive versions of biologic drugs. There are only two biosimilars in the U.S. market, compared with more than 20 on the market in the European Union, she said.

After the market entry in 2015 of the first biosimilar approved by the Food and Drug Administration, Sandoz’s cancer drug Zarxio, prices went down 12 percent in six months, Morton said. “That’s just a taste of what we could be getting if we had vigorous biosimilar competition in the United States,” she said. The FDA needs to approve biosimilars quickly, she said.

Dampening Demand With Regulations

Fully insuring patients results in their insensitivity to prices and susceptibility to marketing, Morton said. “We’re dampening the demand side with our regulations and with some actions by manufacturers,” she said.

In addition, the government requires Part D insurers to buy many drugs, which prevents insurers from getting price reductions, Morton said. Those requirements “could be relaxed, I think, in a productive way” to reduce prices, she said.

Manufacturers should be barred from providing financial aid to patients to cover coinsurance or copayments for high-cost drugs, which drives up costs to insurers and payers, in return for setting out-of-pocket exposure limits for consumers, Morton said. That would allow insurers to have a role in bargaining over prices and setting incentives that cause patients to be prudent in their drug choices, she said.

The government also needs to provide incentives to physicians to purchase the lowest-cost drug that’s suitable for the patient in Medicare’s Part B program, Morton said.

Drug Price Cycles

Drug prices run in cycles, Jennifer Bryant, senior vice president of policy and research for the Pharmaceutical Research and Manufacturers of America, said. The dollar value of drugs coming off of patents in the next five years is higher than over the last five years, she said.

“We’re just at the very beginning” of savings from biosimilars, Bryant said. “Biosimilars are going to be a huge force for savings going forward.”

In some parts of the market where insurers are making use of the first biosimilars for diabetes, the drugs have a 50 percent market share, Bryant said. “Don’t count the payers out,” she said. “We have a very creative payer sector that is anxious for savings.”

To contact the reporter on this story: Sara Hansard in Washington at

To contact the editor responsible for this story: Brian Broderick at

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