Association for Public Policy Analysis & Management

Rising prescription drug expenditures are a growing concern for Medicare. In 2015, Medicare spent $137 billion on prescription drugs through Part D. Over time, an increasing portion of this spending is occurring in the catastrophic coverage benefit phase of Part D; indeed, recent evidence has shown that this spending has increased three times faster than overall Part D spending in the past decade with catastrophic spending exceeding $33 billion in 2015. Spending on high-priced specialty drugs is responsible for most of the increase and now makes up two-thirds of Part D catastrophic spending, compared to one-third in 2010. For many Medicare beneficiaries who enter Part D catastrophic coverage, out-of-pocket spending can be a substantial burden, representing up to 40% of their social security income. The spending burden is also high for Medicare, which pays 80% of costs in the catastrophic coverage phase.

In this paper, we sought to understand (1) the characteristics of drugs contributing to high spending in the catastrophic coverage phase of Part D, (2) the characteristics of beneficiaries who enter catastrophic coverage, and (3) how Part D plans are responding to high-price drugs, for example by altering formularies. In 2015, ten high-price drugs accounted for 30% of drug spending in catastrophic coverage. We found that these drugs were a mix of biologic and conventional drugs and included several drugs for cancer and Multiple Sclerosis as well as Harvoni and Sovaldi, the two new drugs for Hepatitis C. These high-price drugs typically had at least one Orphan Drug designation and several benefited from expedited FDA review.

Beneficiaries who entered catastrophic coverage took almost double the number of drugs as those who did not enter this benefit phase; a smaller proportion of their drugs were dispensed as generics (68% vs. 88%) and many more of these beneficiaries (13% vs. <1%) took one of the ten most expensive drugs in Part D. Out-of-pocket costs were much higher for those who entered catastrophic coverage than those who did not; beneficiaries who did not receive the low-income subsidy and entered catastrophic coverage paid an average of over $3,500 in 2015 compared to $480 among beneficiaries who did not enter this benefit phase. Out-of-pocket costs remained relatively stable over the 2013-15 period.

Our results suggest that it will be important for policymakers to consider strategies to improve the affordability of drugs under Part D. In addition to threatening consumer access to necessary medicines, high Federal spending in the catastrophic phase is a growing fiscal challenge for the Medicare program, especially since the government has no ability to negotiate drug prices. Going forward, there are concerns that spending will continue to rise, given new biopharmaceutical products that are under development and are likely to have higher prices. Based on our results, we discuss a range of strategies to reduce spending in the catastrophic phase, including shifting the cost-sharing burden to Part D plans, creating transparency around drug pricing, promoting value-based benefit design options, and allowing Medicare to negotiate certain drug prices.