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Fixing Medicare Benefit Cliff Shouldn’t Give Cover for Drug Company Giveaway

Beneficiaries in Medicare’s prescription drug program (Medicare Part D) with high drug spending will have to pay much more out of pocket starting in 2020 under a scheduled sharp increase in the spending threshold at which catastrophic coverage kicks in. Policymakers may soon eliminate that looming benefit “cliff.” But they shouldn’t also reduce the discount that drug companies must pay when beneficiaries are in the program’s coverage gap — a separate issue (as explained below) that drug companies are trying to link to eliminating the cliff.

The coming cliff in the Medicare drug benefit stems from the expiration of a temporary provision in the Affordable Care Act (ACA). Under the standard drug benefit, after paying an annual deductible, beneficiaries pay 25 percent of drug costs until their costs reach $3,750; they then enter a coverage gap in which they are responsible for a larger share of costs, until they reach the threshold for catastrophic coverage, in which they pay no more than 5 percent of costs. An ACA provision slowing the growth of the catastrophic coverage threshold expires after 2019, and the threshold reverts to its pre-ACA scheduled level. As a result, the threshold will jump from $5,100 in 2019 to $6,350 in 2020. Reps. Frank Pallone and Richard Neal, ranking Democratic members of the House Energy and Commerce and Ways and Means committees, respectively, have introduced a bill that would eliminate the cliff by making the slower growth rate permanent.

The ACA and the 2018 Bipartisan Budget Act (BBA) also improved the Medicare drug benefit by gradually closing the coverage gap. Before the ACA, beneficiaries had to pay the entire cost of drugs in the coverage gap. The ACA phased out the coverage gap by 2020 and required manufacturers to provide a 50 percent discount on brand-name drugs in the gap. The BBA eliminated the coverage gap one year earlier and increased the manufacturers’ discount to 70 percent. Starting in 2019, beneficiaries in the coverage gap will pay 25 percent of drug costs (the same as in the initial coverage period) and prescription drug plans will pay 5 percent.

The brand-name pharmaceutical industry is now trying to reduce the discount that companies must provide on drugs in the coverage gap, which would give them a windfall at the expense of beneficiaries and taxpayers. Beneficiaries’ cost sharing and premiums would rise, as would federal spending.

Drug companies would gain a significant amount by forestalling the cliff, since they pay 70 percent of the increase in the catastrophic coverage threshold, and they are trying to gain support for an even greater payoff by linking the discount reduction to eliminating the cliff. The two proposals are distinct, however, and there’s no reason to tie one to the other. Helping Medicare beneficiaries by fixing the benefit cliff shouldn’t be a cover for a giveaway to manufacturers of brand-name drugs.