A new Avalere analysis estimates the potential impact on beneficiary out-of-pocket spending of the Medicare Payment Advisory Commission’s (MedPAC) recent proposal to remove the manufacturer discounts from the determination of a beneficiary’s True Out-of-Pocket (TrOOP) costs. This proposal was discussed by MedPAC as part of several policy recommendations to modify the Part D program at a meeting held on March 3, 2016. The analysis projects that excluding manufacturer discounts from the TrOOP calculation would increase beneficiary out-of-pocket costs by $4.1 billion between 2017 and 2020. In total, an average of 715,000 fewer beneficiaries would receive coverage under the catastrophic portion of the Part D benefit each year. This amounts to an average 64 percent reduction in the number of beneficiaries reaching the catastrophic phase each year.¹ MedPAC is expected to vote on the proposed policy at an upcoming meeting on April 7-8, 2016.

Current Policy

The Medicare Part D benefit includes a coverage gap, during which beneficiaries are responsible for paying for a greater share of the cost of drugs than during other portions of the benefit. Prior to the Affordable Care Act (ACA), beneficiaries were responsible for the full cost of prescription drugs while in the coverage gap. The ACA implemented changes to the Part D program that will reduce beneficiary cost sharing in the coverage gap to 25 percent by 2020 (Figure 1). One component of these changes requires manufacturers to contribute a 50 percent discount for brand drugs in the coverage gap. In addition, plans are required to contribute a growing share of costs for both brand and generic drugs each year (Figure 1).

When beneficiary spending reaches a certain level, the beneficiary exits the coverage gap and enters the “catastrophic” portion of the benefit where beneficiary cost sharing is currently capped at five percent of the cost of a drug. The threshold for reaching the catastrophic phase of the Part D benefit is based on the TrOOP cost metric. Currently, both the beneficiaries’ cost sharing amounts and the manufacturer discount are counted towards the TrOOP. Inclusion of the manufacturer discount in the TrOOP calculation accelerates the rate at which beneficiaries reach the catastrophic phase and results in lower out-of-pocket spending.

Estimated Impact of MedPAC Proposal to Modify the TrOOP Calculation

In recent months, MedPAC has expressed concern regarding the rate of cost growth in the Part D program and the growth in federal reinsurance payments for costs incurred in the catastrophic phase of coverage, where the government takes on financial risk for 80 percent of costs. To address these concerns, MedPAC is considering three different packages of proposed recommendations. One package focuses specifically on catastrophic drug costs and proposes three changes: (1) reducing the Medicare reinsurance amount from 80 percent to 20 percent, (2) eliminating the manufacturer discount from the TrOOP calculation, and (3) implementing a beneficiary out-of-pocket cap in the catastrophic phase of coverage. Our focus is solely on the impact of the second proposal regarding TrOOP calculation.

Under MedPAC’s proposal, only beneficiary out-of-pocket spending would count toward TrOOP. This would mean that some beneficiaries would accumulate TrOOP more slowly and either reach catastrophic coverage later than they would otherwise or fail to reach it at all. Avalere estimates that under this proposal, Part D beneficiary spending would increase by $4.1 billion over the four years. This would amount to a per capita annual increase of between $880 and $1,080 in each of the four years of the analysis for affected beneficiaries. Avalere defines affected beneficiaries as any that would have reached the catastrophic phase under existing policy.² On average, there are 1.1 million individuals affected by the policy change in each year of the analysis.

In addition to the increased beneficiary costs, the number of people who receive coverage under the catastrophic benefit would decline significantly. Avalere estimates the number of non low-income subsidy (LIS) beneficiaries who receive coverage from the catastrophic benefit would decline by 610,000 to 800,000 for each year between 2017 and 2020. On average, 64 percent fewer non-LIS beneficiaries would reach the catastrophic phase each year. As mentioned above, MedPAC is also considering recommending an out-of-pocket cap once beneficiaries reach catastrophic coverage. At this time, it is unclear what impact these two proposals would have on total beneficiary out-of-pocket costs if taken together. However, if both of these proposals are implemented simultaneously, fewer beneficiaries will experience the benefit of the out-of-pocket cap due to the TrOOP calculation change.

This analysis was conducted on behalf of Medicare Access for Patients Rx (MAPRx) with funding provided by the Lupus Foundation of America. Avalere maintained full editorial control.

Methodology

Avalere conducted this analysis using prescription drug data from the Medicare Current Beneficiary Survey, information about the Medicare Part D population from MedPAC, plan design information from its proprietary DataFrame database, and other data sources to simulate the effect of the benefit change on a projected Medicare Part D population. The analysis does not include beneficiaries receiving the Low Income Subsidy, enrolled in an Employer Group Waiver Plan, or in a plan receiving the Retiree Drug Subsidy. Avalere included an elasticity assumption to model that some beneficiaries may use fewer drugs when cost sharing increases, similar to the Congressional Budget Office’s assumptions.