By Matthew Kandrach
February 26, 2018 at 5:00 am ET
The recently passed 600-page Bipartisan Budget Act of 2018 will impact almost every sector of the American economy. But one provision has the potential to do real damage. The BBA fundamentally alters the popular and successful Medicare Part D prescription drug benefit and puts our nation further down a path towards socialized medicine.
Part D, created in 2006, expanded Medicare to include prescription drug coverage. The program allows for private negotiation between drug manufacturers and insurance companies to help secure the best prices for Medicare patients. While no government program is perfect, there were strong market forces at work in Part D, which is why even conservative Republicans voted for the program.
Despite Part D’s popular support, it has frequently become a pawn in budget debates in which lawmakers offer cuts to Part D to support another pet project. That’s exactly what happened this month when a provision was slipped into the must-pass Budget Act that closes the coverage gap — known as the “donut hole” — in 2019 instead of 2020.
There are four stages of Part D coverage: the deductible, initial coverage, donut hole and catastrophic coverage – which determine the breakdown of how much different parties pay. The donut hole is a gap in coverage occurring after an individual has reached their yearly spending limit in the initial coverage stage, but before they reach the final catastrophic stage when a patient’s liability drops and Medicare and insurance kicks in to cover the large majority of costs. Patients in the donut hole absorb a larger share of their prescription drug expenses, sometimes paying up to 44 percent of the cost of their prescriptions instead of the smaller co-pay in the initial coverage stage, or the mere 5 percent in the catastrophic stage.
With the passage of the Affordable Care Act in 2010, Congress worked to close the donut hole in an effort to give patients even more financial relief. Beginning in 2020, the pharmaceutical industry would provide 50 percent discounts on branded drugs for individuals and Medicare and insurers would each cover 25 percent of the remaining costs – a real benefit for Medicare recipients.
But Congress’s recent budget deal undoes this arrangement. In fact, the BBA’s Part D provision is a handout to insurers, the same powerful special interest that notoriously dominated negotiations over Obamacare. Rather than injecting greater competition into the marketplace, the new law picks winners and losers, absolving insurers of risk by transferring their responsibility to pharmaceutical manufacturers instead – a change that will require drug companies to shoulder 70 percent of the costs.
On its face, this deal looks to benefit seniors by closing the donut hole a year early. Unfortunately, the cover of this policy book is grossly misleading.
By removing insurers’ liability, the BBA incentivizes insurance companies to accelerate patient spending in the initial coverage stage – approving payments where they otherwise may have objected – so they reach the catastrophic coverage stage more quickly. Under the previous cost-sharing arrangement, all parties had an incentive to minimize costs. By transferring the burden to drug manufacturers, insurers will now have little incentive to negotiate price deals or institute cost saving measures, ultimately driving up the cost of Medicare across the board, further burdening taxpayers.
But the implications of this budget deal are much greater than just the price tag. When government gets into the business of health care, it distorts the market, limits competition and increases costs. And that’s exactly what the BBA has done. As the financial burden on government expands, the easier it becomes for Washington to justify making critical decisions about quality and rationing of care.
Worse yet, the budget deal undermines the risk-based value of plans, meaning some plans may no longer qualify to participate in Part D, further limiting competition and consumer choice. Ultimately, if too few plans qualify, a public option — a government run plan — could be triggered in Part D, moving the nation even closer to a single-payer health care system.
The change to Part D took place without a hearing or debate — and Congress failed to invite even a single health care stakeholder to weigh in on a policy change that will have enormous, negative repercussions on the Part D program, our health care system, and the patients it serves. Washington must stop this continual creep towards government-run health care that will only serve to hurt patients and undermine incentives for lower costs and better care.
Matthew Kandrach is president of Consumer Action for a Strong Economy, a free-market oriented consumer advocacy organization.
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