What happened?

The Senate’s bipartisan 2-year budget proposal includes a provision raising the manufacturer discount to 70% in the Medicare Part Dcoverage gap in 2019. Previously, manufacturers were required to provide a 50% discount on prescription drugs purchased in coverage gap (or “donut hole”).

Key Takeaway

This is a very substantial policy change that would result in much higher manufacturer costs without a significant reduction to beneficiary spending. Avalere’s estimates find that from 2020-2027 average beneficiary spending would decrease by only 1.3% ($6.7B), as a result of lower premiums and out-of-pocket costs. Medicare Part D plan spending would decrease by an estimated 4.2% ($43.6B), driving a reduction in premiums and federal spending.

“This policy change shifts cost liability in the Part D program to pharmaceutical manufacturers, but doesn’t return meaningful savings to beneficiaries,” said Dan Mendelson, president of Avalere.

“This change reduces the amount of insurance risk that health plans bear in Part D,” said Caroline Pearson, senior vice president at Avalere. “Once a beneficiary reaches the coverage gap, most costs are paid for by manufacturers and the federal government.”

What does this change mean for key stakeholders?

• Manufacturers: Manufacturers of branded medications will face much higher liabilities in the Medicare Part D coverage gap beginning in 2019. This represents a significant increase in industry costs, and we estimate this change could have a multi-billion dollar impact on some large companies.
• Health Plans: In the long term, health plans will see their costs in the coverage gap decline from 25% to 5%, as manufacturer discounts replace health plan contributions. This will likely lead to lower somewhat premiums in Medicare Part D.
• Beneficiaries: Beneficiaries are expected to see slightly lower premiums, starting in 2019, from this change. Additionally, manufacturer and patient contributions in the coverage gap count towards TrOOP (True Out-of-Pocket Costs), which means that beneficiaries who spend into the coverage gap will now move through the benefit faster, reducing their OOP costs.
• Federal Government: Lower premiums will lead to lower federal subsidy spending in Medicare Part D. While this will be somewhat balanced out by higher spending as patients move through the coverage gap faster and enter reinsurance (the federal government pays 80% of the costs of prescription drugs after the coverage gap), on balance the federal government will save money with this change.