What policymakers need to know about plan to rein in Medicare drug costs

Across Arizona and across the country, much attention is being paid to prescription drug costs – and with good reason. Patients are paying more out-of-pocket for health care while premiums continue to rise, often forcing them to make the difficult choice between paying for their medicines or putting those funds toward other necessities. According to a recent Kaiser Health Tracking Poll, almost one-quarter of the nation’s seniors report that they have difficulty affording their prescription drugs. As a result, many will split their pills, skip doses, or forgo the prescribed drug altogether.

Victor Riches

There is clearly enthusiasm to “do something” about prescription drug costs, but one of the current proposals on the federal level may cause further financial harm to many of the state’s seniors, possibly making it even more difficult for them to pay for their prescriptions. Arizona policymakers should know about and understand how these reforms will affect our state’s seniors, as well as the state’s taxpayers, who pay for retiree health benefits for the Arizona State Retirement System.

Today, about one in six Arizonans are retirees age 65 and older, most of whom rely on the federal Medicare program, the federal health insurance program for the nation’s elderly. The U.S. Department of Health and Human Services recently introduced a proposal, the so-called “Rebate Rule,” that would prevent pharmacy benefit managers (PBMs) from negotiating rebates with drug companies for the prescription drugs upon which Medicare recipients rely.

Another opinion recently published in the Arizona Capitol Times claimed that PBMs are a barrier that keeps beneficiaries from accessing affordable prescription drugs. But while this opinion referred to PBMs as the “middlemen” of the drug industry, in truth, they provide an important function in negotiating lower drug prices for Medicare recipients. It is true that PBMs receive rebates for brokering these deals, but it is also important to recognize that, because of negotiating with manufacturers for lower prices, Medicare recipients pay less for their drugs as a result.

Here’s how it works: PBMs negotiate with drug-makers on behalf of Medicare to get discounts for the 900,000 Arizonans who participate in the Medicare program’s Part D prescription drug program. Then the bulk of the savings negotiated are passed on to patients by reducing their out-of-pocket costs. PBMs save patients an average of over $2,000 annually for these patients.

Without PBMs working as negotiators in this process, pharmaceutical prices would be left almost solely to the discretion of drug manufacturers. So, PBMs provide a check on the pricing system – and patients benefit.

The government’s own studies reveal just how much of a burden this change will create. The Centers for Medicare and Medicaid Services, which operates the Medicare program, estimates that seniors’ Medicare Part D premiums will increase by 19 percent in 2020 alone and 25 percent overall if the Rebate Rule is enacted. That price hike isn’t affordable for most seniors – least of all for those already struggling to pay for their prescription drugs.

The state of Arizona’s retirement system could be hit particularly hard. That is because the current proposal doesn’t shield group Medicare plans, including state employee retirement programs around the country, from higher premiums for enrollees because, due to somewhat arcane rules, these plans cannot shift money (using risk corridor payments that will be available to other Medicare plans) to cushion the inevitable increase in premiums that recipients will face.

Unfortunately, the proposed Rebate Rule does nothing to require or even encourage drug companies to lower their prices. We need our elected representatives and the administration to refocus the discussion on prescription drug pricing reform toward market-based solutions that increase price transparency and boost competition. That is the only way to ensure both access to lower prescription costs for Arizona’s seniors and fidelity to taxpayers.
Victor Riches is president and CEO of the Goldwater Institute.