Don’t kill innovation in Medicare drugs

A Senate committee’s plan to change Medicare Part D, the pharmaceutical benefit for seniors enacted in 2003, would be a disaster for the health of many Americans. It would kill innovation, making it less likely that new medicines to fight cancer or cure Alzheimer’s will ever be developed. But there is a solution. Think peanut butter.

Part D has largely been a major success. For the vast majority of seniors, costs are low, and the plan’s structure offers an incentive to bring patients scores of new specialty medicines for hard-to-treat diseases. Part D’s design is a big reason that, since 2010, some 27 percent of new-drug approvals have been for cancer medicines, compared with just 4 percent in the 1980s.

The average cost of developing one of these specialty drugs is more than $2 billion, but as patent protections expire, generics copy the innovations, and competition drives down prices. It’s a process that has made the U.S. home to the most productive pharmaceutical industry in the world and given us faster access to new medicines than citizens of other rich countries.

But Part D has a problem. Unlike other insurance plans, it has never had an upper limit on out-of-pocket spending, so some seniors can face annual bills of $10,000 or more. They forgo their medicines, making them even sicker.

A plan approved July 26 by the Senate Finance Committee caps what Medicare enrollees pay and smooths out their obligations across what is now a complicated series of payment phases. But the plan makes damaging changes in the proportions of drug costs for which others are responsible. This redesign and another offered by House Democrats create a new tax on innovation that threatens Americans’ health.

Drug companies would suddenly be faced with a major penalty — a mandatory 20 percent price discount — for developing specialty medicines, the ones that fall into Part D’s catastrophic category. Their response is easy to predict: They’ll invest in less sophisticated drugs instead.

In an Oct. 7 analysis of the Senate proposal, the research firm Avalere found that anti-neoplastic drugs, such as those used to treat colon cancer, would see a 469 percent increase in mandatory discounts over the current system. Antiviral drugs, which target hepatitis and severe influenza, would see a hike of 725 percent. Drugs to treat dementia, mental illness, and conditions such as multiple sclerosis would face a 293 percent increase.

Under the current design, manufacturers pay for 70 percent of brand drug costs in the coverage gap, but that obligation ends in the catastrophic phase — for good reason. When they set up Part D, Congress and the president wanted to encourage more sophisticated specialty drugs to be developed for seniors.

That strategy has worked. Since Part D began in 2006, wrote former FDA Commissioner Scott Gottlieb and Benedic Ippolito of the American Enterprise Institute recently, “there has been a significant shift in investment capital toward drugs that make it onto the specialty tier …This has resulted in many successful new drugs that deliver meaningful benefits to patients,” especially in fighting cancer.

In 2018 alone, the Food & Drug Administration approved 15 new drugs to treat cancer of the breast, thyroid, lung, digestive tract, blood, skin, prostate, and more. Many of these drugs would never have been developed if Part D penalized drug companies the way that some in Congress want — and, remarkably, the White House is encouraging.

Certainly, drug companies should pay their fair share of added costs to cap enrollee spending and reduce the federal burden. But we can accomplish those aims with a redesign that will maintain incentives to bring the world’s best medicines to market.

The answer is a manufacturer discount of no more than 10 percent spread smoothly, like peanut butter, across the board as soon as an enrollee meets the deductible (currently $415). Such spreading would apply as well to insurance plans, which would be responsible for about three-quarters of costs. The rest would also be spread like peanut butter, but with beneficiaries paying in the coverage phase and government in the catastrophic.

Some of the added costs for insurers could be mitigated through higher premiums. Between 2010 and 2019, the base Part D premium rose by only 25 cents, to $31.94 a month. Politicians are obsessed with holding down premium increases, but the victims of this misguided policy are the sickest seniors. Costs are currently shifted to them.

A redesign along these lines could easily be molded to match the government’s projected savings in the Senate bill. Enrollees would get a cap. Manufacturers would be required to share in costs immediately after the deductible ends, helping reduce payments for the 98 percent of Medicare beneficiaries whose spending never reaches the catastrophic phase. But the disincentive for researchers to develop new specialty drugs would be minimized.

Let’s not forget that the goal of federal health programs is to make people healthier. Without new specialty medicines, that won’t happen, and insurance will be just an empty gesture.