Why Prescription Drugs Aren’t Part of Obamacare

Pelosi celebrates Obamacare's 6th anniversary. (Rob Kunzig/Morning Consult)

After six years, the Affordable Care Act has extended health care coverage to millions of people. But affordability problems remain, most prominently in the area of prescription drugs. Obamacare left the pharmaceutical industry largely unregulated while requiring it to pay for some of the law’s increased drug coverage.

“That is probably my single greatest regret, is we didn’t have the chance to get negotiating power for Medicare for drugs. That would have made a profound difference,” said former Sen. Kent Conrad (D-N.D.), a member of the Finance Committee when the health care law was being negotiated and passed throughout 2009 and into 2010.

Another former lawmaker, Rep. Henry Waxman (D-Calif.), who was the House Energy and Commerce Committee Chairman at the time, said there is a simple explanation for why the law doesn’t do more to rein in drugmakers. “The Obama administration decided to make a deal with the PhRMA to get them to support the legislation,” he told Morning Consult. “PhRMA got a number of favorable provisions in the legislation.”

These reflections come amid this week’s ACA anniversary celebration among Democrats. “We have lowered the cost to individuals and families, to small businesses, to corporate America, to the federal government,” said House Minority Leader Nancy Pelosi (D-Calif.) at a Wednesday rally.

But lawmakers and the public alike are in an uproar over prescription drug prices. Drug costs poll at the top of voters’ health care concerns, and the issue has been reflected both on the campaign trail and in congressional hearings.

Drug spending spiked recently, hitting $457 billion in 2015. In 2014, the cost was up 12.6 percent from the year before. Growth in 2015 was largely attributable to higher drug prices and an increase in the number of prescriptions per person, according to a report released earlier this month by the Department of Health and Human Services’ Office of the Assistant Secretary for Planning and Evaluation.

Obamacare did little, if anything, to rein in the price of prescriptions. That’s partly because the issue wasn’t nearly as prominent six years ago as it is today. Another reason is that the ACA passed by a thread, and lawmakers who worked to pass it said they did the best they could at the time.

“I think there was a realization that we probably couldn’t do everything at once, and that the ACA was indeed such a major, major breakthrough, and it’s turned out to be that way,” said Rep. Sander Levin (D-Mich.), who was chairman of the House Ways and Means Committee when Obamacare passed.

“I think those of us who worked hard for ACA never thought it was the last word. It was something that we had to build on. And prescription medicine is now one of the building blocks that isn’t in place yet,” he added.

But now drug prices are on the health care industry’s radar, although a solution to the high cost is elusive.

Drugmakers say the fault lies with insurers that shift costs to consumers more for drugs than they do for hospital and medical care. Insurers say that’s because drugs are expensive and everyone feels the brunt of it. The truth is that both are right. The Affordable Care Act helped create this tension.

The law took big steps to extend drug coverage. Prescription drugs are one of 10 essential benefits that insurers are required to cover. It also closed the “donut hole,” or the coverage gap in Medicare Part D plans. It did so partly on the shoulders of drug companies, which are required to offer seniors a discount on their drugs. There is also a tax on drug manufacturers and importers.

But other than that, drug companies are largely unregulated. They can set their own prices. There are no restrictions on profit margins. And there is very little transparency into the pricing process.

By contrast, Obamacare is full of new rules governing insurance and is a radical departure from the way the market used to operate. It requires insurers to cover a wider array of benefits while it prohibits them from denying coverage based on preexisting conditions. It institutes new rules regarding how insurers set premiums. It limits insurers’ revenues and creates new standards of premium rate reviews. It also creates significant rules about plans’ benefit design, limiting cost-sharing, and setting up a system of tiers based on the share of costs covered by a particular plan.

These changes upended the health insurance market, and insurers’ have been forced to adapt. The catch is that insurers reflect the costs of health care in general, even more so now that there are caps on how much of a plan’s revenue can be used for marketing, administration and profits.

“The debate around health reform was one that became a debate about health insurance reform. So we never really tackled at the level that we needed to the issues that drive up costs to begin with,” said Clare Krusing, a spokeswoman for America’s Health Insurance Plans. “Unless you address those underlying factors, then you’re sort of missing the ying and yang of reform, which is access and affordability together.”

“Specifically on prescription drug costs, those prices have continued to skyrocket. We have access to prescription drugs as part of the essential health benefits. But that does not mean drug makers get a blank check to charge whatever they want,” Krusing added.

Insurers have had a difficult time adjusting to Obamacare’s exchanges, new marketplaces set up under the law. More than half of the nonprofit health insurers on the exchanges have failed, and other private plans have threatened to pull out of the market.

“The business of insurance is shifting. They’re bidding low margin, and they have to have more predictability,” said Dan Mendelson, the CEO of Avalere Health, an independent consulting firm. “The exchanges are also very low margin business.”

As insurers have adjusted, consumers are paying more out of their own wallets for prescriptions. This is particularly true on exchanges, where 46 percent of plans combine medical and pharmaceutical deductibles, while only 12 percent of employer plans do so, according to a Milliman analysis sponsored by the Pharmaceutical Research and Manufacturers Association.

Several independent studies have found that insurers shift more of the cost of drugs to patients than they do the cost of hospital or medical care. This could have important ramifications, because this means patients feel the cost of their drugs more than their other health care services. Thus, it becomes a more prominent political issue.

“The more costs you shift onto patients, the more sensitive they are going to be to costs, the more political issues arise from it,” Mendelson said. “That chain — if I increase your copay, you think the cost of drugs are rising even faster than they are. You become even more sensitive to it.”

With the health care dialogue so focused on prescription costs, it’s easy to forget that insurers were not required to cover prescription drugs prior to the Affordable Care Act. It’s also a safe assumption that many of the previously uninsured were sick and are now using a lot of health care, including drugs. That creates an added cost that insurers must adjust to. For pharmaceutical companies, the increased coverage also created a greater market for new drugs.

“People who use very expensive drugs now have to be covered. So that increased the market for specialty drugs and other pharmaceuticals those people would be using,” said Timothy Jost, a law professor at Washington and Lee University and a supporter of the ACA.

But, he added, “it seems to me drug prices have more to do with opportunism by the drug companies.”

The ACA contains none of the policies currently being floated as ways to contain drug prices, but it easily could have. An earlier version of the bill would have allowed the government to negotiate drug prices under Medicare Part D, for example. That could have produced downward pressure on drugmakers from the government.

But Obamacare didn’t pass the way most bills do. It went through a series of legislative cartwheels to become law after Sen. Ted Kennedy (D-Mass.) unexpectedly died, leaving Democrats in the Senate without the necessary 60 votes. Thus, the House and the Senate never went to conference to merge their two versions.

Had things played out differently, Conrad said, perhaps the prescription drug issue wouldn’t be in the same state today.

“I can’t overstate how harmful it was to not have a chance to go through the normal process,” he said. “When you only have half of a process, when you only have half of a bite at the apple, you don’t get the best result.”

“If we could have had the chance to get in place negotiation, which Republicans fought tooth and nail, that would have made a major difference.”

Meanwhile, Democrats still in Congress haven’t given up on one day being able to reopen the law to improve it. Republicans still say the whole thing must be repealed and replaced, although they have yet to consolidate behind a different plan six years after the passage of Obamacare.

“I think the prescription medicine issue has become more and more prominent and almost dominant. It’s clear that as we build on ACA, that’s one of the areas that has to be considered,” Levin said. “It was always a major, major work in major progress, but not complete.”