Medicare Drug Benefit’s Catastrophic Spending Up Sharply

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By Mindy Yochelson and James Swann

High-priced outpatient drugs are causing a sharp rise in the “catastrophic” coverage of Medicare’s Part D drug benefit, where the government picks up most of the tab, according to a government watchdog agency report released Jan. 5.

Federal payments for Medicare’s catastrophic coverage more than tripled, growing from $10.8 billion to $33.2 billion between 2010 and 2015, the Department of Health and Human Services Office of Inspector General found.

Ten drugs accounted for a third of spending in the catastrophic phase of the Part D benefit, which beneficiaries enter when their spending reaches a threshold. The 10 include two drugs used to treat hepatitis C, Harvoni and Sovaldi, manufactured by Gilead Sciences.

High Drug Prices in Focus

Members of Congress and others have raised concerns about the high prices of certain drugs and the impact these have on Medicare beneficiaries, the study said. “Understanding the effect that high drug prices have on spending in catastrophic coverage is crucial,” the report said.

The Part D benefit has an initial coverage limit for beneficiaries, followed by a coverage gap. Enrollees remain in the gap—or doughnut hole—until their out-of-pocket spending reaches the catastrophic coverage limit, at which point Medicare picks up most of the tab.

Congress’s Medicare advisers recommended last year that some of the responsibility for spending in the catastrophic phase be shifted from taxpayers to drug plans.

Those advisers, the Medicare Payment Advisory Commission, in April 2016 urged Congress to lower Medicare’s reinsurance subsidy from 80 percent to 20 percent as part of a slate of policy recommendations to update the Part D benefit, which was launched in 2006.

The current design was intended to protect plans from catastrophic losses. But the MedPAC commissioners said that having the government pay for the growing cost of reinsurance is a disincentive for plans to take a more aggressive role in managing drug spending.

No Congressional Action

However, the recommendations haven’t been acted upon by Congress.

The HHS inspector general report “reiterates what MedPAC put out” in 2016, Kelly Brantley, a vice president at Avalere Health, a Washington-based consultancy, told Bloomberg BNA.

For the past decade, Part D has “flown under the radar” as noncontroversial in part because of low premiums and enrollee satisfaction, she said.

However, with the new administration and Republican Congress, “entitlement reform is something that could be on the table,” Brantley said. When that option is combined with pressure from the public to do something on rising drug costs, “some element of Part D could be at risk for change,” she said.

The report is a reminder that “there may be trade-offs necessary in the Part D construct and benefit design” to address the escalating costs of reinsurance, Larry Kocot of consulting firm KPMG said. Kocot is principal and national leader, Center for Healthcare Regulatory Insight, at KPMG.

He told Bloomberg BNA that “Congress will have to make the decision as to what tools they will provide to CMS or plans to increase competition to address high costs.”

Praise for CMS

The HHS OIG praised the Centers for Medicare & Medicaid Services for publishing information about drug prices, as a push toward transparency, and for asking the pharmaceutical industry to find solutions toward affordability.

“Moving forward, CMS will likely need additional tools to address these issues,” the OIG said.

Potential tools include restructuring the Part D benefit so that sponsors have more incentives and opportunities to lower costs, creating more transparency about drug pricing, promoting value-based options and revising the law to allow the federal government to negotiate prices for certain drugs.

‘Grain of Salt.’

The report’s finding should be “taken with a grain of salt,” Ellyn Sternfield, a health-care attorney with Mintz Levin in Washington, told Bloomberg BNA.

For example, the OIG uses total spending numbers, which don’t take into account any rebates or other price concessions that may have been offered by the drug manufacturers, Sternfield said.

The association representing pharmaceutical manufacturers also objected to the findings as misleading.

“It is unfortunate that the report continues to showcase misleading, un-rebated spending figures for ten innovative products that have brought significant advances to the treatment of serious health conditions,” Allyson Funk, senior director, communications, with the Pharmaceutical Research and Manufacturers of America, told Bloomberg BNA.

Saving Money

Sternfield also said many of the drugs highlighted in the report, such as those designed to treat hepatitis C, are curative.

“There is no mention of the money saved in terms of a lifetime of treatment costs, in exchange for a few months of coverage of drug costs,” she said.

However, Sternfield said she does think there will be ongoing pressure on Congress and the incoming Trump administration to address drug costs.

Insurers and drug manufacturers are aware of the issues arising from higher drug costs, but the existing enforcement structure blocks any attempts to come up with new drug pricing methodologies, Sternfield said.

“For example, the OIG recommends exploring value-based options for drug coverage, but creating a reimbursement methodology that incentivizes the value of treatment to the patient runs the risk of someone being accused in a qui tam [whistle-blower case] of unlawful beneficiary inducements or kickbacks,” she said.

To contact the reporters on this story: Mindy Yochelson in Washington at; James Swann in Washington at

To contact the editor responsible for this story: Kendra Casey Plank at

For More Information

The inspector general's report on Part D spending is at

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