Can we really afford to change Medicare Part D?

One Build Back Better proposal that didn’t make it into President Biden’s reconciliation bill “framework” is to allow federal government negotiation for prescription drugs in the Medicare Part D program. A framework isn’t legislation, and this provision could still emerge as a compromise in the final bill.

Termed a “pay-for,” repealing the current structure of Medicare Part D price negotiation could pay for the massive expansion of other federal programs included in the Build Back Better agenda. One Congressional Budget Office estimate for Medicare Part D government price negotiation was at least $345 billion in savings from 2023 to 2029. Another estimate showed $581 billion in federal cost savings by 2030.

Since its implementation in 2006, Medicare Part D has been a successful and popular program among seniors. According to a 2014 study, obtaining prescription drug insurance through Part D was linked to an 8 percent reduction in hospital admissions, resulting in a 7 percent decrease in Medicare cost savings.

As it is currently structured, prescription drug prices in Part D are negotiated between pharmaceutical manufacturers and prescription drug plans, which have been successful at negotiating rebates while giving doctors more freedom to prescribe what they believe is best for their patients.

The program’s success is largely due to a provision called the noninterference clause, which specifically bars the secretary of Health and Human Services from interfering in prescription drug pricing and leaves negotiations for such pricing to insurers and pharmacy benefit managers. Lack of government intervention in Part D drug price negotiations has allowed market forces to deliver greater competition and choice for treatments available to Medicare beneficiaries.

Medicare Part D has also provided stability in monthly premiums and many plan options to choose from. A 2020 Kaiser Family Foundation analysis showed the average Medicare beneficiary had a choice of 28 stand-alone drug plans and 24 Medicare Advantage plans, with private sector discounts and rebates negotiated for all prescription drugs in each plan.

Repealing the noninterference clause would allow the secretary of Health and Human Services to negotiate the cost of prescription drugs and require a formulary that includes some drugs and excludes others. If drugs that are deemed unworthy of inclusion on the federally negotiated formulary are no longer covered by Medicare, some people will lose access to their preferred treatments.

Advocates of government negotiation have compared this proposal to the process used by the Department of Veterans Affairs (VA) as a way to justify it. However, this comparison falls short. For one, the VA health system uses a closed set of providers, with centralized management of coverage, drug acquisition and distribution. Its prices do not include retail distribution costs that the much larger number of patients in the general population have to pay. Those costs would have to be covered somehow if Medicare Part D adopted a similar approach.

A 2013 study indicated that more than half of veterans resort to supplemental benefits outside the VA in order to obtain the medicines they need. So, although the VA system does lead to price reductions, it also narrows options. If this type of system were scaled across Medicare Part D, many more people would be in a similar situation.

Limiting seniors’ access to medicines isn’t the only concerning aspect of this proposal; there are also the long-term implications on innovation in the pharmaceutical industry to consider.

Research and development spending by the pharmaceutical industry on new drugs is influenced by three main factors: the revenue they expect to earn from a new drug, the expected cost of developing it, and policies that influence the supply and demand for drugs.

If Medicare’s noninterference clause is repealed, a Congressional Budget Office analysis predicted expected return on investment for newly developed drugs would drop by 15 to 25 percent and, as a result, estimated it would lead to anywhere from eight to 15 fewer new drugs coming to market over the next 10 years. In other words, it would weaken the incentive to innovate, resulting in fewer pharmaceutical innovations coming to market.

Restructuring Medicare to cut corners in order to pay for increased spending on other federal programs is irresponsible. The bigger question and one that goes beyond budgets is, can we really afford the reduction in seniors’ access to the medicines they need and the development of fewer life-saving treatments over time? No, we really can’t.

Mia Heck is the vice president for External Affairs and Healthcare Fellow at the Joseph Rainey Center for Public Policy.