AARP PUBLIC POLICY INSTITUTE JUNE 2021 Spotlight Drug Price Increases That Exceed Inflation Are Costing Medicare Part D Billions Leigh Purvis AARP Public Policy Institute Background It has been 15 years since the creation of the Medicare Part D prescription drug benefit. Research indicates that the program has been largely successful: beneficiaries report improved access to prescription drugs and the vast majority are satisfied with their coverage.: However, there is growing concern about trends in Medicare Part D spending, which has accelerated considerably over the past decade.’ One factor helping to drive these trends is brand- name drug price growth.3 Brand-name drug prices have been growing faster than general inflation for more than a decade,*> and drug companies are increasingly relying on such price increases for revenue growth.” Meanwhile, Medicare Part D remains prohibited from negotiating with pharmaceutical companies, leaving it exposed to the possibility of paying ever-higher prices for the exact same drug products.® In response to this challenge, Congress recently considered bipartisan legislation that would require drug manufacturers to pay a rebate to the federal government if their prices increased faster than the rate of general inflation.* Notably, a similar ~AARP This AARP Public Policy Institute Spotlight finds that total Medicare Part D spending on 50 top brand-name drugs was $38 billion higher between 2015 and 2019 than it would have been if drug manufacturers had not increased their prices faster than the corresponding rate of inflation. inflationary rebate is already required under Medicaid and is responsible for roughly half of the rebates that state Medicaid programs receive from brand-name drug manufacturers.” This Spotlight provides additional context for inflation-based rebates, by examining excess Medicare Part D spending due to annual drug price changes that exceeded the rate of general inflation between 2015 and 2019. AARP PUBLIC POLICY INSTITUTE JUNE 2021 Analysis rebates) for the top 50 drugs would have totaled The analysis is based on the 50 sole-source brand- $250.8 billion—instead of $289.1 billion—over the name drugs with the highest total Medicare Part D __ study period if price changes had been limited spending in 2019 (“top 50 drugs”), as reported in the __ to the rate of general inflation. In other words, Medicare Part D Drug Spending Dashboard.” between 2015 and 2019, Medicare Part D spent a total of $38.3 billion on the top 50 drugs that was solely attributable to drug price increases that exceeded inflation. Our analysis found that, prior to the application of any drug company rebates,” Medicare Part D spent nearly $77 billion on the top 50 drugs in 2019 (figure 1). Meanwhile, spending on these Our analysis also found that the vast majority same drugs would have been more than $16 billion —_ of the top 50 sole-source brand-name drugs lower ($60.5 billion vs. $77.0 billion) had their experienced annual price increases over the study price changes been limited to the rate of general period. On average, nearly 90 percent of the top 50 inflation® after 2015. drugs had annual price increases that exceeded the corresponding rate of general inflation from the end We also found that excess spending on drug price of 2015 through 2019 (figure 2). increases accumulates quickly over time. Total Medicare Part D spending (i.e., spending by the These trends indicate that annual price increases Medicare program, Part D plans, and enrollees that exceed inflation are a regular occurrence for a prior to the application of any drug company wide variety of sole-source brand-name drugs. FIGURE 1 Medicare Part D Spent an Extra $38 Billion on the Top 50 Drugs between 2015 and 2019 because Drug Price Increases Exceeded Inflation =Total annual spending = Adjusted total annual spending $77.0 billion $66.7 billion $56.2 billion $47.8 billion & a —-_— — $60.5 billion 41.5 billion . 2015 2016 2017 2018 2019 Total Part D spending on top 50 drugs 2015-19 (actual): $289.1 billion Total Part D spending on top 50 drugs 2015-19 (adjusted): $250.8 billion Note: Totals may not sum due to rounding. Source: AARP Public Policy Institute analysis of 2015-19 data from the Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard. AARP PUBLIC POLICY INSTITUTE JUNE 2021 FIGURE 2 Vast Majority of Top 50 Sole-Source Brand- Name Drugs Consistently Experienced Annual Price Changes that Exceeded Corresponding Rate of Inflation & Top 50 drugs with annual price change above inflation = Top 50 drugs with annual price change below inflation 39 7 2016 2017 2018 2019 Note: Medicare Part D spending data were not available for all top 50 drugs in 2016-18. Source: AARP Public Policy Institute analysis of 2015-19 data from the Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard. Conclusion Our analysis found that between 2015 and 2019, Medicare Part D spent billions of dollars as a result of brand-name drug price increases. These findings are not surprising: the Medicare Payment Advisory Commission (MedPAC) has noted that drug price increases are a major factor driving Medicare Part D spending growth. Notably, this analysis includes a relatively small subset of brand-name drugs and focuses on a brief time period. Further, many of the top 50 drugs entered the market prior to 2015, making it highly likely that the baseline prices used in this study were already elevated due to price increases that occurred before the study period.* In addition, Medicare, which is currently prohibited from negotiating drug prices for Part D drugs, pays considerably higher brand-name drug prices than other federal programs." Thus, the excess spending identified in this report is almost certainly an underestimate. Another limitation of this analysis is our inability to fully account for proprietary drug company rebates and other price concessions. Research indicates that only about one-third of brand-name drugs have more than nominal rebates” and that there is substantial drug-to-drug variability, with some brand-name drugs having no rebates and others believed to have rebates of over 60 percent."® However, even if we assume that all top 50 drugs received a rebate of 35 percent,” excess Medicare Part D spending due to price increases that exceeded inflation would still be $25 billion between 2015 and 2019. Medicare Part D is a taxpayer-funded program. Higher government spending driven by drug price increases will affect all Americans in the form of higher taxes and/or cuts to public programs. Equally important, increased drug costs—if left unchecked— will prompt more older Americans to stop taking necessary medications, leading to poorer health outcomes and higher health care costs in the future.” It is unclear whether the inflation-based rebates under consideration in Congress would lead to widespread changes in drug company pricing behavior; however, given the current prevalence and magnitude of annual brand-name drug price changes, it is clear that even a small movement in the right direction will result in substantial savings over the status quo. Methodology This report is based on an AARP Public Policy Institute analysis of 2015-19 data from the Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard.” Annual price changes were limited to the corresponding annual rate of general inflation (Consumer Price Index-All Urban Consumers for All Items; CPI-U)” for the top 50 sole-source brand-name drugs by total Medicare Part D spending in 2019. AARP PUBLIC POLICY INSTITUTE JUNE 2021 Price changes were measured using annual changes unit amount to calculate adjusted Medicare Part D in unweighted average spending per dosage unit spending over that time period. (i.e., total spending divided by total dosage units). Any annual drug price changes that exceeded the corresponding rate of general inflation were adjusted to match inflation. The adjusted prices were then multiplied by the corresponding dosage The prices used in this analysis do not reflect rebates and other price concessions offered by certain drug companies, which are not publicly available. 1 Medicare Today, “Nearly 9 in 10 Seniors Are Satisfied with Medicare Part D,” 2019, http://medicaretoday.org/wp-content uploads/2019/08/8.5.2019-Senior-Satisfaction-Survey-Fact-Sheet.pdf. 2 Medicare Payment Advisory Commission (MedPAC), March 2020 Report to the Congress: Medicare Payment Policy (Washington, DC: MedPAC, March 2020). 3 Ibid. 4 David H. Kreling et al., Prescription Drug Trends: A Chartbook Update (Washington, DC: Kaiser Family Foundation, November 2001). 5 AARP Public Policy Institute Rx Price Watch reports are available on the AARP website at http://www.aarp.org/health/ medicare-insurance/info-04-2009/rx_watchdog.html and hitp://www.aarp.org/rxpricewatch; Nathan E. Wineinger, Yunyue Zhang, and Eric J. Topol, “Trends in Prices of Popular Brand-Name Prescription Drugs in the United States,” Journal of the American Medical Association 2, no. 5 (2019): e194791; Immaculada Hernandez et al., “The Contribution of New Product Entry Versus Existing Product Inflation in the Rising Costs of Drugs,” Health Affairs 38, no. 1 (2019): 76-83. 6 Credit Suisse, “Global Pharma and Biotech: Sector Review,” April 2017, https://plus.credit-suisse.com/rpc4/ravDocView? docid=V60S7V2AF-YtmW. 7 There is no clear rationale for prescription drug price increases given that launch prices ostensibly reflect the costs associated with developing the drug and future research cosis. A. Kesselheim, J. Avorn, and A. Sarpatwari, “The High Cost of Prescription Drugs in the United States: Origins and Prospects for Reform,” Journal of the American Medical Association 316, no. 8 (2016): 858-71. 8 Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Public Law 108-173, December 8, 2003, https://www.govinfo.gov/content/pkg /PLAW-108publ173/pdf/PLAW-108publ173.pdf. 9 Prescription Drug Pricing Reduction Act of 2019 (S. 2543), https://www.congress.gov/bill/116th-congress/senate-bill/2543/ text; and Lower Drug Costs Now Act of 2019 (H.R. 3), https://www.congress.gov/bill/116th-congress/house-bill/3. 10 Medicaid and CHIP Payment and Access Commission (MACPAC), Improving Operations of the Medicaid Drug Rebate Program (Washington, DC: MACPAC, June 2018). 11 Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard & Data, https: aT ams. gou/ Trends-and-R Inf P 12 The data reported in the Medicare Part D Drug Spending Dashboard do not include rebates and other price concessions, which are considered proprietary and are typically offered by drug companies to help ensure that their products receive preferred placement on the list of drug products that a health insurer covers. Such payments are not offered by all drug companies and vary depending on a number of factors, including the amount of competition that the drug faces. E. Seeley and A.S. Kesselheim, “Pharmacy Benefit Managers: Practices, Controversies, and What Lies Ahead,” Issue Brief, The Commonwealth Fund (Washington, D.C.) March 2019, https://www.commonwealthfund.org/publications/issue-briefs/2019/mar/pharmacy-benefit- managers-practices-controversies-what-lies-ahead. 13 Based on CPI-U (see Consumer Price Index-All Urban Consumers for All Items [seasonally adjusted] [CPI-U], Bureau of Labor Statistics series CUSROOOO0SA0O). 14 Medicare Payment Advisory Commission (MedPAC), March 2021 Report to the Congress: Medicare Payment Policy (Washington, DC: MedPAC, March 2021). 15 AARP Public Policy Institute Rx Price Watch reports are available on the AARP website at http://www.aarp.org/health medicare-insurance/info-04-2009/rx_watchdog.himl and http://www.aarp.org /rxpricewatch. 16 Congressional Budget Office (CBO), A Comparison of Brand-Name Drug Prices Among Selected Federal Programs (Washington, DC: CBO, February 2021). AARP PUBLIC POLICY INSTITUTE JUNE 2021 17 N. J. Johnson, C. M. Mills, and M. Kridgen, “Prescription Drug Rebates and Part D Drug Costs,” Milliman Report, July 2018, https://www.ahip.org/wp-content/uploads/2018/07/AHIP-Part-D-Rebates-201807 16.pdf. 18 M. Alston, G. Dieguez, and S. Tomicki, “A Primer on Prescription Drug Rebates: Insights Into Why Rebates are a Target for Reducing Prices,” Milliman White Paper (Washington, D.C.), May 2018, https://www.milliman.com/en/insight/a-primer-on- prescription-drug-rebates-insights-into-why-rebates-are-a-target-for-reducing 19 Congressional Budget Office (CBO), A Comparison of Brand-Name Drug Prices Among Selected Federal Programs, (Washington, DC: CBO, February 2021). https://www.cbo.gov/system/files/2021-02/56978-Drug-Prices.pdf. 20 R.L. Cutler, F. Fernandez-Llimos, M. Frommer, C. Benrimoj, and V. Garcia-Cardenas, “Economic Impact of Medication Non- Adherence by Disease Groups: A Systematic Review,” BM/ Open 8, no. e1 (2018): E016982. 21 Centers for Medicare & Medicaid Services, Medicare Part D Drug Spending Dashboard & Data. 22 See Consumer Price Index-All Urban Consumers for All Items [seasonally adjusted], Bureau of Labor Statistics series CUSROOOOSAO. ES Spotlight 54, June 2021 © AARP PUBLIC POLICY INSTITUTE 601 E Street, NW Washington DC 20049 Follow us on Twitter @AARPpolicy On facebook.com/AARPpolicy www.aarp.org/ppi For more reports from the Public Policy Institute, visit http://www.aarp.org /ppi/. https://doi.org/10.26419/ppi.00140.001 AARP