Association for Public Policy Analysis & Management

Recent policy proposals – such as the President’s FY2019 budget and MedPAC recommendations – would reform the Medicare Part D program to address growing concern about the role of high cost drugs and their impact on both patient out-of-pocket burden and fiscal sustainability. One important component of these proposals is modifying the Part D benefit to include an out-of-pocket spending cap, providing important financial protection by limiting the total financial liability that a beneficiary may face in a given year. While the ACA expanded the pervasiveness of out-of-pocket caps in the commercial market, no such provisions exist in traditional Medicare, and beneficiaries (especially those who do not receive low-income cost-sharing subsidies – non-LIS beneficiaries) are particularly vulnerable for their prescription drug spending.

We evaluate the impact of implementing an out-of-pocket cap in Part D on beneficiaries, plans, and federal spending by analyzing a 100% sample of Medicare Part D enrollees from 2007 through 2015. We find that non-LIS beneficiaries who reach catastrophic coverage – the population most susceptible to the lack of an out-of-pocket cap in Part D – have grown considerably in terms of both enrollment and spending. Non-LIS beneficiaries represented a growing share of those reaching catastrophic coverage, increasing from 18% in 2007 to 28% in 2015. Additionally, average total spending per person grew much more rapidly for non-LIS beneficiaries who reach catastrophic coverage compared to LIS beneficiaries who do so over the study period (163% for non-LIS vs. 85% for LIS), primarily due to differences in the price and utilization trends of cancer and mental health drugs, which represent disproportionately large shares of spending among non-LIS and LIS beneficiaries, respectively.

We believe that these findings highlight the need for an out-of-pocket cap in Part D to provide financial protection for beneficiaries. We estimate that, in 2015, capping out-of-pocket spending at the catastrophic coverage threshold and transferring that liability to plans would have resulted in a premium increase of $0.40 to $1.31 per member per month (depending on specific policy details), or about a 1% to 4% increase over the $30 monthly average beneficiary-paid premium for a basic Part D plan, and a $485 million increase in federal spending. Moreover, we evaluate the interaction of capping out-of-pocket spending with other proposed reforms, including revamping the federal reinsurance program, not counting manufacturer discounts toward beneficiaries’ true-out-of-pocket accumulation, and passing rebates through to beneficiaries at the point of sale.

Despite recent legislative efforts to expand the presence of out-of-pocket caps in the commercial insurance market, Medicare beneficiaries have no way to limit their financial liability for their prescription drug spending. Policymakers should consider implementing an out-of-pocket cap in Part D to provide true insurance protection for beneficiaries. However, while imposing such a cap would protect beneficiaries, it would not address the broader concerns about increasing federal spending on the Part D reinsurance program, nor the underlying concerns about increasing drug prices, and additional reforms may be necessary to ensure the sustainability of federal financing for the Part D program.