Mariana P. Socal, Matthew A. Crane, Jeromie Ballreich, Gerard F. Anderson
October 6, 2022 - Health Affairs
Signed into law in August 2022, the Inflation Reduction Act capped yearly out-of-pocket costs for Medicare Part D beneficiaries at $2,000. When the cap takes effect in 2025, it will be a significant benefit to an estimated 1.4 million beneficiaries per year who have annual Medicare Part D out-of-pocket costs exceeding the $2,000 threshold. But the policy may have unintended consequences that should be considered.
Assuming 20 percent coinsurance, the cap means that both a $10,000 drug and a $100,000 drug will have the same out-of-pocket cost for Medicare Part D beneficiaries, who will then have fewer incentives to use lower-cost drugs. It will also increase manufacturers’ incentives to raise their drugs’ launch prices. Proposals to completely eliminate cost sharing would further reduce the incentive to hold down drug prices. This is in addition to the incentives to have higher drug launch prices in response to the inflation caps.
Currently, the Medicare Part D Program requires beneficiaries to pay up to 25 percent of a drug’s cost until the beneficiary reaches the catastrophic coverage phase, that is, when out-of-pocket spending exceeds $7,050. After that, beneficiaries are required to pay a 5 percent coinsurance for the drugs they need. In addition to lowering the threshold necessary to reach the catastrophic coverage phase, the Inflation Reduction Act eliminates the requirement to continue paying a percentage coinsurance once the beneficiary reaches it. This is important because beneficiaries who are required to pay coinsurance usually pay a percentage of the drug’s list price, which is typically higher than the net prices negotiated by Medicare Part D prescription drug plans. Coinsurance requirements, especially for high-cost specialty drugs, may be one of the reasons why about a third of Medicare beneficiaries with serious illnesses report problems affording the drugs they need.
Beneficiaries with the highest prescription drug costs may have multiple comorbidities and need a varied drug regimen. Commonly, they are using one or more very expensive drugs. Chronic conditions such as cancer, rheumatoid arthritis, and multiple sclerosis are often treated with specialty drugs whose out-of-pocket cost could exceed the cap in the beneficiary’s first fill. For example, the drug Xtandi, which treats advanced prostate cancer, costs approximately $13,000 per month of treatment. With a 20 percent 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 new law’s benefits aren’t limited to cost savings—it has been well established that lowering drug expenses helps improve adherence to treatment, which is in turn associated with better health outcomes. By improving affordability, the Inflation Reduction Act’s out-of-pocket cap will increase access to pharmaceutical treatments and help improve outcomes for Medicare Part D beneficiaries, helping mitigate disparities. Among those reaching the cap, annual out-of-pocket savings have been 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 does carry concerns about the removal of demand controls.
Once beneficiaries meet 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 branded drugs that have lower-cost generics available. One of the challenges of the new policy is how to have Medicare Part D beneficiaries maintain “skin in the game” under the new rules while ensuring medication affordability. This is especially concerning for expensive specialty drugs, which represent more than 20 percent of Part D spending.
If a beneficiary has zero cost sharing once they exceed the cap, then it is likely the beneficiary will demand more and higher-cost drugs than if some cost sharing was still required. The Urban Institute estimated that Part D spending would rise by 22.3 percent if beneficiaries in traditional Medicare faced a $5,000 out-of-pocket cap across all Medicare services. The increase would likely be larger with a $2,000 cap. While the benefit may reflect an increase in use among beneficiaries that had previously been unable to afford the care they need, an unintended consequence is that drug manufacturers may raise drug prices, particularly on high-cost drugs such as Xtandi, since beneficiaries no longer have skin in the game. This could occur in spite of the new provisions requiring that manufacturers provide up to 20 percent discount on their drugs once beneficiaries reach the cap and would increase spending beyond what would be expected from an increase in use only. While the Inflation Reduction Act has provisions penalizing drug price increases above the rate of inflation, it is possible that drug manufacturers may focus on increasing the price of newly launched products or of new versions of older products—a process sometimes referred to as product hopping.
The example of Xtandi and similarly high-price drugs that treat cancer and chronic conditions—Imbruvica, Revlimid, Keytruda, and others—also highlights the concern that, after reaching the cap, the financial incentive for a beneficiary to take any lower-cost medications disappears. Cost sharing for drugs is often used to steer patients to lower-cost drugs or to higher-value drugs through preferred formulary placement, that is, lower-cost-sharing tiers, fewer usage controls, or both. Formulary tier placement is one of the levers that prescription drug plans use to negotiate prices with drug manufacturers. The ability to negotiate prices with drug manufacturers, in exchange for favorable formulary placement, is understood to result in lower drug spending.
For new expensive drugs, the ability for prescription drug plan negotiators to obtain lower prices in exchange for favorable formulary placement may be reduced. Prescription drug plans may respond by increasing the frequency with which prior authorization and step therapy are required to access high-cost drugs, a phenomenon that is already on the rise in the Medicare Part D program. In 2022, approximately 31 percent of drugs covered in Medicare Part D had a prior authorization requirement. In 2017, more than one-third of Medicare Part D prior authorization requests were initially denied but nearly 75 percent were eventually approved, reflecting an increasing burden on providers and access delays for patients.
There is a potential policy alternative that could be part of the implementation of the out-of-pocket cap: Forgo the use of coinsurance as a requirement in all coverage phases, instead relying on fixed copayments for all drugs. Fixed and relatively low copayments would maintain formulary cost-sharing incentives throughout the coverage phases and could provide greater savings to beneficiaries, as it is likely that fewer beneficiaries would reach the $2,000 threshold. This is important because $2,000 per year still represents more than 10 percent of the average annual Social Security benefit.
However, it is different than having a monthly cap to smoothen the payment of the $2,000 cap over the course of the year because it would allow prescription drug plans to maintain some level of cost-sharing requirements while helping delay beneficiaries’ progression toward the cap. Maintaining some level of cost-sharing formulary tiering structure would help preserve prescription drug plans’ leverage with drug manufacturers and their ability to steer patients to low-cost drugs and high-value drugs, helping reduce spending. Patients would be more aware of the cost of the drug and would have an incentive to select lower-cost treatments, even if the copay were $50 or $100 dollars. In addition, fixed copays would maintain Medicare Part D beneficiaries’ “skin in the game” while ensuring medication affordability.
All authors receive research grants from Arnold Ventures. Arnold Ventures had no role in the drafting, preparation, review, or approval of the article and decision to submit the article for publication.