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Outlining the steps to a payment approach for Medicare Part D drugs that provides savings for patients.
As we move into 2021 with significant challenges to U.S. health and prosperity, it is time to take stock of the myriad proposals related to making prescription drugs more affordable for patients. Both political parties have ambitious agendas for reducing patient prescription drug costs including elimination of drug rebates in favor of direct-to-patient discounts, re-importation of brand-name prescription drugs, international price referencing, limitations on price increases, limits on patient out-of-pocket costs, and changes to intellectual property law.
We propose a simpler way for patients to realize savings on Medicare Part D drugs. Here, we outline the steps to a payment approach that sets patient cost sharing while taking manufacturer rebates into account and preserving the competitive negotiations between pharmacy benefit managers (PBMs) and biopharma companies. We describe some of the benefits and issues in implementing such a system where coinsurance is based on the average sales price (ASP) net of rebates rather than the list price.
Drug rebates are provided by biopharma manufacturers to PBMs or insurance companies to negotiate a favorable position on a drug formulary and are used to offset premiums.1 A long-standing criticism of manufacturer drug rebates is that they were retained by PBMs to enhance their profit, rather than used to lower patient out-of-pocket costs. In reality, most of the rebates are passed through to patients in the form of lower premiums.2 Elimination of rebates in favor of direct-to-patient discounts could reduce patient out-of-pocket costs for branded drugs but would likely increase premiums. Therefore, this type of policy would shift the benefit of the biopharma manufacturer price discount from beneficiaries who are less sick (pay a premium but do not utilize many medications) to beneficiaries who are sicker (pay a premium and utilize many medications).
One of the fundamental issues driving increases in patient costs for Medicare Part D prescription drugs is that patient cost sharing has been shifting from fixed patient copayments to percentage-based coinsurance payments, and more people are taking drugs with high point-of-sale prices. Patient copayments are fixed dollar amounts, typically in the order of $10 to $125 per monthly prescription, depending on the formulary tier the PBM assigns to the product, and are not otherwise related to the list price of the drug.3 Coinsurance payments are based on a fixed percentage of the price of the drug and typically range from 18% to 34% of the drug price, again depending on the formulary tier the PBM assigns to the product.4 Patient coinsurance payments are commonly based on list prices and not on the "net" cost to the PBM after rebates. There is a relatively straightforward way to address the inequity of patient cost sharing resulting from coinsurance that is based on list prices.
One option to calculating patient cost sharing would be to simply base the patient coinsurance on the price of the drug after the manufacturer rebate, or the net price to each insurance plan. For example, under the current system, a patient with 20% coinsurance would be charged $48 for a drug with a $240 list price. Under this new system, if that same drug had a $40 rebate to the plan, the patient’s copay would now be 20% of a $200 net price, or only $40. However, that would reveal that the branded drug manufacturer was offering a rebate of $40, when rebate agreements are typically confidential contracts between biopharma manufacturers and PBMs or health insurers. Furthermore, these competitive confidential negotiations have been a significant contributor to reducing cost growth in Medicare Part D.5
In order to reduce the payments made by patients, we propose that patient coinsurance levels be set based on the average price of the drug after rebates in Medicare Part D, which we will call “ASP-D.” The ASP is the utilization-weighted average net price across all eligible sales—the price after considering most rebates and discounts—and is currently used as the basis for paying physicians for drugs in Medicare Part B. This approach provides more transparency to patients and other stakeholders about the actual costs of their prescription drugs but does not reveal the discount to a particular plan.
The ASP-D, or average price after rebates, could be calculated quarterly, in the exact manner that ASP is currently calculated for Medicare Part B. This ASP-D would be shared with health insurers so they could calculate the appropriate amount of coinsurance and transmit that information to the pharmacy to collect from their Medicare Part D patients.
Basing coinsurance on net prices, or ASP-D, could result in savings for patients taking medicines with coinsurance in competitive therapeutic areas with large rebates. However, it would have a minimal impact on patients taking drugs with little competition where rebates are typically not needed to secure formulary access. As an illustration, the average rebate for branded drugs in Medicare Part D in 2014 was 17.5%; however, between classes the average rebate ranged from 9% to 26%.6 Furthermore, since 2014, there have been a significant number of first-in-class therapeutics with limited rebates. As a result, an ASP-D policy would tend to provide greater savings to patients taking older drugs, not yet facing generic entry.
Furthermore, not all beneficiaries take drugs that have coinsurance. Cost sharing for low-income groups is subsidized and they would experience no change. Most drugs in a non-preferred formulary position in a stand-alone drug plan have coinsurance, while only 22% of preferred brands have coinsurance, with 78% having a fixed co-pay;7 allowable coinsurance payments range from 10% to 50% for non-preferred drugs.8
It is important to note that passing average savings from rebates on to patients in this way may impact other copayments and premiums. The federal government establishes standards for Part D plan subsidies and core elements of the Medicare Part D benefit design, such as the allowable cost sharing and the amount patients must spend to reach different thresholds of the Part D benefit. To keep the same actuarial value in a system where ASP-D is used to calculate coinsurance, the plan would need to adjust the coinsurance percentage, raise premiums, or change other cost-sharing. Smaller insurers with limited negotiating leverage may find it challenging to increase their premiums sufficiently to offset the impact of the policy.
One alternative that has been proposed to reduce patient cost sharing is to impose an out-of-pocket cap where the beneficiary would not be liable for any costs over that cap. This has been of particular interest for those Part D patients who fall into the “catastrophic coverage” portion of their benefit, where they are currently paying an uncapped 5% of all drug costs. However, one concern with out-of-pocket cost caps is that biopharma manufacturers could increase prices significantly with no impact on patient cost sharing, and the government/insurers would bear these costs, or premiums would increase. A policy that sets coinsurance based on ASP would limit that incentive, but it might provide less benefit to patients than an out-of-pocket cap because it only reduces prescription drug costs for those taking a “rebated” drug. To achieve the benefit of both, an out-of-pocket cap could be paired with ASP-D-based coinsurance leading up to that cap.
There are many policy options proposed for reducing prescription drug costs for patients. Among these, setting coinsurance based on ASP for Medicare Part D, potentially paired with out-of-pocket caps, is a practical solution that can achieve short-term savings in prescription drug costs, simply and efficiently.
Andrew Parece and Matthew Majewski are vice presidents in the Life Sciences Practice at Charles River Associates, a global consulting firm. Kirsten Axelsen is senior policy advisor to the Life Sciences Practice. The views expressed here are the authors’ and not those of their employer or other organizations they are affiliated with.