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Medicare Part D, Part IV: Budget Neutrality and Congressional Scoring

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Summary

Tune into the fourth episode of the Avalere Health Essential Voice miniseries focused on Medicare Part D. In this segment, our experts discuss key elements of the legislative process, including pay-fors, budget neutrality, and congressional scoring.
“Between now and the release of the Senate’s package, I think there's a real opportunity for industry stakeholders like manufacturers to model out the budgetary effects of alternative options and to consider playing with the implementation and effective dates of the bill’s existing proposals. All of those changes could affect the congressional score in different ways.” Ryan Urgo, Managing Director, Policy

Panelists

Moderator
Sarah Butler , Head, Client Solutions, Marketing & Operations

Sarah Butler specializes in evidence-based medicine, value-based contracting, and strategy development.

Speaker
Ryan Urgo , Managing Director, Policy

Ryan Urgo provides strategic advice to drug manufacturers, health plans, and advocacy groups to help navigate the complex health policy environment and the impact of legislative and regulatory policies on their respective business goals.

Guest Speaker
Neil Lund , Senior Advisor, Avalere Health
Neil Lund brings more than 30 years’ worth of actuarial and formulary management experience to the firm; he works with a range of life sciences and health plan clients on issues tied to market access, patient access, and product positioning.

Transcription:

Sarah: Hello, and welcome back to another episode in our Avalere Health Essential Voice series focused on Medicare Part D. My name is Sarah Butler, and I’m the head of Client Solutions, Marketing, and Operations here at Avalere Health. Today I’m joined by two of my colleagues—Ryan Urgo, who’s a Managing Director on our Policy team, and Neil Lund, who’s a Senior Advisor in Market Access. You may know Neil from his prior days as Chief Actuary at CVS health.

Today’s discussion is going to focus on some key elements of the legislative process. We’ll also talk about budget neutrality and congressional scoring. With that, I’m going to dive right in.

Ryan, let’s start with you. We hear terms like PAYGO and “pay-fors” whenever there is a legislative debate. What do these terms actually mean?

Ryan: With most pieces of legislation, the House and the Senate each develop and follow their own rules related to “pay as you go,” which means that any new spending above the baseline, in any piece of legislation, has to be offset with an equivalent amount of new revenue. The legislation has to be budget neutral or fully paid for.

In healthcare, we’ve seen manufacturers, providers, and health plans often targeted as pay-fors to offset any new spending, and the higher the spending the greater the pay-for is.

Sarah: That’s very helpful, and a good foundation. So Ryan, how is this playing out in the current legislative debate in Congress around reconciliation?

Ryan: We’ve seen this concept of pay-fors play out on quite a large scale with the budget reconciliation effort that is wending its way through Congress, which does require budget neutrality. However, the top-line spending total of $3.5 trillion on the House side is higher than anything we’ve seen in recent history.

The reconciliation instructions in the Senate require the finance committee to offset $1.75 trillion in new spending, plus another $1.75 trillion in new spending from the other committees of jurisdiction, which gets you to the total of $3.5 trillion over a 10-year period.

Sarah: That’s a very large amount of money. So, let’s take a look at some of the key components of the proposed legislation. One item that’s been getting a lot of press and attention is the addition of hearing, vision, and dental coverage to Medicare fee-for-service. This would clearly be a really big enhancement, but how would something like this be paid for?

Ryan: Right. So first off, I think an important consideration is that it would be unrealistic not to assume that the Senate’s version shrinks the $3.5 trillion total to something in the neighborhood of $2 trillion. That feels like a potential compromise point where the administration is going to need to work with senators, given that there are such narrow margins. There is no room for losing any members that might be apprehensive with the high total.

So, how does it get paid for? Typically, healthcare pays for healthcare. If you look at the top-line $2 trillion and tease out the largest healthcare-related provisions in there, you’ve got an expansion of Medicare to include hearing, vision, and dental. That’s roughly about $375 billion in new spending over 10 years. Then there’s extending and making permanent the ACA coverage provisions from earlier this year. That costs about an additional $250 billion. All-in, you’re looking at $625 billion.

Now, the House tried to pay for that $625 billion almost entirely from manufacturers through policies like Medicare negotiation, inflation penalties, and Part D redesign. If you add all those policies up, back of the envelope, it comes in just under $500 billion. So even looking at all of those policies and thinking about them being passed into law, you still wouldn’t get to that total of $625 billion, but that’s at least what they have in mind right now—having a substantial component of those healthcare provisions paid for by life sciences manufacturers.

Sarah: Yeah, very helpful. I would definitely like to see that back of the envelope and what assumptions go into that.

To that point, Neil, I’d love your perspective on this. Can you share a little bit more about how negotiation, inflation penalties, and Part D redesign would save that roughly $500 billion that Ryan mentioned?

Neil: Gladly, Sarah. To piggyback off some things that Ryan has mentioned, it’s important to realize that there are realistically three sources of funding. There’s the federal government through their subsidies, the members through their premiums and copays, and there’s the manufacturers who were swept into this as part of the ACA. On the spending side, you have the health plans charged with trying to control and cut back on spending.

These are the levers that budget reconciliation, budget neutrality, will try to pull to keep the cost in line. With that said, it’s important to note that a significant portion of this will undoubtedly fall to the manufacturers.

Sarah: Thank you for that overview, Neil. You mentioned budget neutrality. Can you explain this in a bit more detail?

Neil: I will try to, but budget neutrality and the scoring that comes with budget neutrality are confusing and arcane. Let me give a quick example. The rebate safe harbor rule will be permanently repealed, but the rule was never implemented. So, the act of repealing will generate “savings” of about $105 billion dollars for something that never happened. It’s quite bizarre when you think about that.

Another important point to consider is that while scoring looks at the cost to the government, it also brings into consideration the cost to and impact on all of the other constituents—the member, manufacturers, and health plans. So, it’s very important to look at what’s underneath the covers when the Congressional Budget Office (CBO) scores this and understand the impact of all of the components and how they view those components.

Sarah: Ryan, if you can put on your life sciences hat, why does all of this matter? And if you are a life sciences company, what would you be doing to prepare?

Ryan: If you’re thinking about preparation, the most important thing is trying to understand the individual components of a score and thinking about the likely behavioral responses to the policy in the marketplace and how it could ultimately impact your strategy. When it comes to modeling the impact of a piece of legislation, and when industry stakeholders try to come up with a policy alternative that might generate comparable savings but not be as detrimental to day-to-day business, you really need to understand how an entity like CBO would look at their ideas and model those budget effects in similar ways. That means not just understanding CBO’s methods, but also some of those intricacies of how they would evaluate a particular policy, not unlike the example that Neil just gave with the rebate safe harbor rule, which would not be intuitive to anybody that wasn’t deeply familiar with the arcana of budget scoring.

If we take this full circle and bring it back to the reconciliation bill, we can assume that the Senate is going to be targeting a compromise package around $2 trillion. You don’t know exactly what’s going to be in the rule, but like I said, a good rule of thumb is that healthcare generally pays for healthcare. So, keeping that life sciences hat on for a moment, if the Medicare expansion and the ACA expansions remain intact in the Senate, but let’s say the lower spending comes from either less tax revenue collected or a less ambitious set of climate change policies, the pay-for risk to manufacturers is probably still going to remain high.

Changes in the healthcare provisions themselves or lower spending on the healthcare side could alleviate some of the pressure on the pay-for side, but again, we’re talking about spending totals that are so high to begin with, risks that are so large, that they’re not they’re not going to go away.

One thing that I would say that’s a benefit to the Senate effort being a bit delayed right now is that a space has opened up. Between now and the release of the Senate’s package, I think there’s a real opportunity for industry stakeholders like manufacturers to model out the budgetary effects of alternative options and to also consider playing with the implementation and effective dates of the existing proposals because those changes could also affect the congressional score in different ways. This debate can really be shaped during this space before the Senate proposal comes out.

So, the idea of finding viable alternatives requires not just a deep understanding of what workable revisions could be from a policy standpoint, but also that technical knowledge of how CBO would evaluate those policies.

A large legislative package like this creates an opportunity to advance certain policies that might slightly raise the deficit, but when paired with enough other revenue-generating policies, you’re keeping the overall total cost of the bill neutral. That’s a way you could potentially advance certain policy goals in the context of a larger bill. So, while there is quite a bit of risk, and certainly that’s not lost on all of the stakeholders who have been following this process, there are some opportunities as well.

Sarah: Thank you, Ryan. That was a really comprehensive overview. We’re about out of time, but Neil, I’m curious if you have any closing thoughts for us.

Neil: Yes, I have several. First of all, something will happen, so it’s important that all of the constituents maintain engagement in what’s happening here. By engagement I mean monitoring what’s going on, commenting, and providing feedback, but that feedback needs to be given in a positive way. Finally, we need to recognize that at the end of the day, we will end up with a compromise.

Sarah: Well, thank you, Neil and Ryan, for joining me today. And thank you all for tuning in to Avalere Health Essential Voice. Please stay tuned for more episodes. If you’d like to learn more, please visit us at www.avalere.com. Thank you.

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