• A flaw in Medicare Part D

    Medicare’s prescription drug program, Part D, is touted or reviled for its market mechanisms. It’s run exclusively through private plans (no public option) that compete in the market for Medicare enrollees and the government subsidies that follow them. In many ways it encompasses sound competitive design elements.

    But within that design is a flaw, one upon which several papers by me and colleagues have pivoted (here’s one, here’s another). Richard Frank and others have written about this flaw too. He did so again in a NEJM Perspectives piece last week:

    [T]he program has made provisions for identifying “protected” drug classes — classes that are of clinical concern because restricting access to them may have life-threatening consequences and patients with a given condition need to have access to multiple drugs in the class. PDPs are required to provide all the Part D–covered drugs in such classes. Currently, the protected classes are anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosupressants — a list that includes three of the classes with the highest spending by dually eligible and subsidized beneficiaries; dual eligibles are also disproportionate users of the other protected classes.

    The designation of protected classes means that the use of formulary design to steer demand is limited by regulation — a fact that reduces PDPs’ bargaining power with manufacturers. And indeed, the evidence to date suggests that when drug coverage for dual eligibles switched from Medicaid to Medicare, the prices for their drugs increased significantly.

    There are two fundamental ways to obtain lower health care prices. One is for the purchaser, typically a large insurer, to use its market power to negotiate for them for consumers. The other is for the government to step in and impose them for beneficiaries of public programs and on behalf of taxpayers. In Medicare Part D, for the classes of drugs Frank listed, neither mechanism is fully applied. Insurers do not have the ability to fully exploit their market power because they cannot exclude certain drugs from their formulary. The government is forbidden from intervening.

    Thus, Part D is not taking complete advantage of either of the fundamental ways we know how to lower prices. This is a situation where you can run either toward the market or toward government and you’ll do better on price. Considering just price, you almost can’t go wrong except by standing still.

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    • Just to clarify that line about the government stepping in and imposing “them” for beneficiaries of public programs, what Austin’s talking about is the government having a mechanism to lower prices. Under Medicaid drug pricing, the government gets a mandatory discount that overall is supposed to create prices lower than what commercial payers pay on average. It’s interesting that even the lowest prices paid by private insurers typically don’t achieve Medicaid-like rebates. That said, the VA, which negotiates with drug companies and has no particular power other than where it’s purchases go, typically negotiates prices lower than the administratively-imposed ceiling price. I suppose it says something about what insurance markets can tolerate.