Drug Price Increases That Exceed Inflation Are Costing Medicare Part D Billions

AARP PUBLIC POLICY INSTITUTE

JUNE 2021

Spotlight Drug Price Increases That Exceed Inflation Are Costing Medicare Part D Billions

Leigh Purvis AARP Public Policy Institute

Background It has been 15 years since the creation of the Medicare Part D prescription drug benefit. Research This AARP Public Policy Institute indicates that the program has been largely Spotlight finds that total successful: beneficiaries report improved access Medicare Part D spending on to prescription drugs and the vast majority are 50 top brand-name drugs was satisfied with their coverage.1 However, there is $38 billion higher between 2015 growing concern about trends in Medicare Part D and 2019 than it would have spending, which has accelerated considerably over been if drug manufacturers had the past decade.2 not increased their prices faster One factor helping to drive these trends is brand- than the corresponding rate of name drug price growth.3 Brand-name drug prices inflation. have been growing faster than general inflation for more than a decade,4,5 and drug companies are increasingly relying on such price increases for revenue growth.6,7 Meanwhile, Medicare inflationary rebate is already required under Part D remains prohibited from negotiating with Medicaid and is responsible for roughly half of the pharmaceutical companies, leaving it exposed to the possibility of paying ever-higher prices for the rebates that state Medicaid programs receive from 10 exact same drug products.8 brand-name drug manufacturers. In response to this challenge, Congress recently This Spotlight provides additional context for considered bipartisan legislation that would require inflation-based rebates, by examining excess drug manufacturers to pay a rebate to the federal Medicare Part D spending due to annual drug price government if their prices increased faster than changes that exceeded the rate of general inflation the rate of general inflation.9 Notably, a similar between 2015 and 2019. AARP PUBLIC POLICY INSTITUTE

JUNE 2021

Analysis rebates) for the top 50 drugs would have totaled The analysis is based on the 50 sole-source brand- $250.8 billion—instead of $289.1 billion—over the name drugs with the highest total Medicare Part D study period if price changes had been limited spending in 2019 (“top 50 drugs”), as reported in the to the rate of general inflation. In other words, Medicare Part D Drug Spending Dashboard.11 between 2015 and 2019, Medicare Part D spent a Our analysis found that, prior to the application total of $38.3 billion on the top 50 drugs that was of any drug company rebates,12 Medicare Part D solely attributable to drug price increases that spent nearly $77 billion on the top 50 drugs in exceeded inflation. 2019 (figure 1). Meanwhile, spending on these Our analysis also found that the vast majority same drugs would have been more than $16 billion of the top 50 sole-source brand-name drugs lower ($60.5 billion vs. $77.0 billion) had their experienced annual price increases over the study price changes been limited to the rate of general period. On average, nearly 90 percent of the top 50 inflation13 after 2015. drugs had annual price increases that exceeded the We also found that excess spending on drug price corresponding rate of general inflation from the end increases accumulates quickly over time. Total of 2015 through 2019 (figure 2). Medicare Part D spending (i.e., spending by the These trends indicate that annual price increases Medicare program, Part D plans, and enrollees that exceed inflation are a regular occurrence for a prior to the application of any drug company wide variety of sole-source brand-name drugs.

FIGURE 1 Medicare Part D Spent an Extra $38 Billion on the Top 50 Drugs between 2015 and 2019 because Drug Price Increases Exceeded Inflation

Total annual spending Adjusted total annual spending

$77.0 billion $66.7 billion $56.2 billion $47.8 billion $60.5 billion $54.4 billion $49.4 billion $41.5 billion $45.0 billion

2015 2016 2017 2018 2019

Total Part D spending on top 50 drugs 2015–19 (actual): $289.1 billion Total Part D spending on top 50 drugs 2015–19 (adjusted): $250.8 billion

Note: Totals may not sum due to rounding. Source: AARP Public Policy Institute analysis of 2015–19 data from the Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard.

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JUNE 2021

FIGURE 2 negotiating drug prices for Part D drugs, pays Vast Majority of Top 50 Sole-Source Brand- considerably higher brand-name drug prices than Name Drugs Consistently Experienced Annual other federal programs.16 Thus, the excess spending Price Changes that Exceeded Corresponding identified in this report is almost certainly an Rate of Inflation underestimate. Top 50 drugs with annual price change Another limitation of this analysis is our inability above inﬂation to fully account for proprietary drug company Top 50 drugs with annual price change rebates and other price concessions. Research below inﬂation indicates that only about one-third of brand-name drugs have more than nominal rebates17 and that there is substantial drug-to-drug variability, with some brand-name drugs having no rebates and others believed to have rebates of over 60 percent.18 However, even if we assume that all top 44 19 38 39 45 50 drugs received a rebate of 35 percent, excess Medicare Part D spending due to price increases that exceeded inflation would still be $25 billion between 2015 and 2019. Medicare Part D is a taxpayer-funded program. 77 3 6 Higher government spending driven by drug price 2016 2017 2018 2019 increases will affect all Americans in the form of higher taxes and/or cuts to public programs. Equally Note: Medicare Part D spending data were not available important, increased drug costs—if left unchecked— for all top 50 drugs in 2016–18. will prompt more older Americans to stop taking Source: AARP Public Policy Institute analysis of 2015–19 necessary medications, leading to poorer health data from the Centers for Medicare & Medicaid Services, outcomes and higher health care costs in the future.20 Medicare Part D Drug Spending Dashboard. It is unclear whether the inflation-based rebates under consideration in Congress would lead to widespread changes in drug company pricing Conclusion behavior; however, given the current prevalence Our analysis found that between 2015 and 2019, and magnitude of annual brand-name drug price Medicare Part D spent billions of dollars as a result changes, it is clear that even a small movement in of brand-name drug price increases. These findings the right direction will result in substantial savings are not surprising: the Medicare Payment Advisory over the status quo. Commission (MedPAC) has noted that drug price increases are a major factor driving Medicare Part Methodology 14 D spending growth. This report is based on an AARP Public Policy Notably, this analysis includes a relatively small Institute analysis of 2015–19 data from the Centers subset of brand-name drugs and focuses on a brief for Medicare & Medicaid Services, Medicare Part D time period. Further, many of the top 50 drugs Drug Spending Dashboard.21 Annual price changes entered the market prior to 2015, making it highly were limited to the corresponding annual rate of likely that the baseline prices used in this study general inflation (Consumer Price Index-All Urban were already elevated due to price increases that Consumers for All Items; CPI-U)22 for the top 50 occurred before the study period.15 In addition, sole-source brand-name drugs by total Medicare Medicare, which is currently prohibited from Part D spending in 2019.

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Price changes were measured using annual changes unit amount to calculate adjusted Medicare Part D in unweighted average spending per dosage unit spending over that time period. (i.e., total spending divided by total dosage units). The prices used in this analysis do not reflect Any annual drug price changes that exceeded rebates and other price concessions offered by the corresponding rate of general inflation were certain drug companies, which are not publicly adjusted to match inflation. The adjusted prices available. were then multiplied by the corresponding dosage

1 Medicare Today, “Nearly 9 in 10 Seniors Are Satisfied with Medicare Part D,” 2019,http://medicaretoday.org/wp-content/ uploads/2019/08/8.5.2019-Senior-Satisfaction-Survey-Fact-Sheet.pdf. 2 Medicare Payment Advisory Commission (MedPAC), March 2020 Report to the Congress: Medicare Payment Policy (Washington, DC: MedPAC, March 2020). 3 Ibid. 4 David H. Kreling et al., Prescription Drug Trends: A Chartbook Update (Washington, DC: Kaiser Family Foundation, November 2001). 5 AARP Public Policy Institute Rx Price Watch reports are available on the AARP website at http://www.aarp.org/health/ medicare-insurance/info-04-2009/rx_watchdog.html and http://www.aarp.org/rxpricewatch; Nathan E. Wineinger, Yunyue Zhang, and Eric J. Topol, “Trends in Prices of Popular Brand-Name Prescription Drugs in the United States,” Journal of the American Medical Association 2, no. 5 (2019): e194791; Immaculada Hernandez et al., “The Contribution of New Product Entry Versus Existing Product Inflation in the Rising Costs of Drugs,”Health Affairs 38, no. 1 (2019): 76–83. 6 Credit Suisse, “Global Pharma and Biotech: Sector Review,” April 2017, https://plus.credit-suisse.com/rpc4/ravDocView? docid=V60S7V2AF-YtmW. 7 There is no clear rationale for prescription drug price increases given that launch prices ostensibly reflect the costs associated with developing the drug and future research costs. A. Kesselheim, J. Avorn, and A. Sarpatwari, “The High Cost of Prescription Drugs in the United States: Origins and Prospects for Reform,” Journal of the American Medical Association 316, no. 8 (2016): 858–71. 8 Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Public Law 108–173, December 8, 2003, https://www.govinfo.gov/content/pkg/PLAW-108publ173/pdf/PLAW-108publ173.pdf. 9 Prescription Drug Pricing Reduction Act of 2019 (S. 2543), https://www.congress.gov/bill/116th-congress/senate-bill/2543/ text; and Lower Drug Costs Now Act of 2019 (H.R. 3), https://www.congress.gov/bill/116th-congress/house-bill/3. 10 Medicaid and CHIP Payment and Access Commission (MACPAC), Improving Operations of the Medicaid Drug Rebate Program (Washington, DC: MACPAC, June 2018). 11 Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard & Data, https://www.cms.gov/ Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Information-on-Prescription-Drugs/MedicarePartD. 12 The data reported in the Medicare Part D Drug Spending Dashboard do not include rebates and other price concessions, which are considered proprietary and are typically offered by drug companies to help ensure that their products receive preferred placement on the list of drug products that a health insurer covers. Such payments are not offered by all drug companies and vary depending on a number of factors, including the amount of competition that the drug faces. E. Seeley and A.S. Kesselheim, “Pharmacy Benefit Managers: Practices, Controversies, and What Lies Ahead,” Issue Brief, The Commonwealth Fund (Washington, D.C.) March 2019, https://www.commonwealthfund.org/publications/issue-briefs/2019/mar/pharmacy-benefit- managers-practices-controversies-what-lies-ahead. 13 Based on CPI-U (see Consumer Price Index-All Urban Consumers for All Items [seasonally adjusted] [CPI-U], Bureau of Labor Statistics series CUSR0000SA0). 14 Medicare Payment Advisory Commission (MedPAC), March 2021 Report to the Congress: Medicare Payment Policy (Washington, DC: MedPAC, March 2021). 15 AARP Public Policy Institute Rx Price Watch reports are available on the AARP website at http://www.aarp.org/health/ medicare-insurance/info-04-2009/rx_watchdog.html and http://www.aarp.org/rxpricewatch. 16 Congressional Budget Office (CBO),A Comparison of Brand-Name Drug Prices Among Selected Federal Programs (Washington, DC: CBO, February 2021).

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17 N. J. Johnson, C. M. Mills, and M. Kridgen, “Prescription Drug Rebates and Part D Drug Costs,” Milliman Report, July 2018, https://www.ahip.org/wp-content/uploads/2018/07/AHIP-Part-D-Rebates-20180716.pdf. 18 M. Alston, G. Dieguez, and S. Tomicki, “A Primer on Prescription Drug Rebates: Insights Into Why Rebates are a Target for Reducing Prices,” Milliman White Paper (Washington, D.C.), May 2018, https://www.milliman.com/en/insight/a-primer-on- prescription-drug-rebates-insights-into-why-rebates-are-a-target-for-reducing 19 Congressional Budget Office (CBO), A Comparison of Brand-Name Drug Prices Among Selected Federal Programs, (Washington, DC: CBO, February 2021). https://www.cbo.gov/system/files/2021-02/56978-Drug-Prices.pdf. 20 R.L. Cutler, F. Fernandez-Llimos, M. Frommer, C. Benrimoj, and V. Garcia-Cardenas, “Economic Impact of Medication Non- Adherence by Disease Groups: A Systematic Review,” BMJ Open 8, no. e1 (2018): E016982. 21 Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard & Data. 22 See Consumer Price Index-All Urban Consumers for All Items [seasonally adjusted], Bureau of Labor Statistics series CUSR0000SA0.

Spotlight 54, June 2021

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https://doi.org/10.26419/ppi.00140.001