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How Medicare may encourage higher drug costs

Data: CMS; Chart: Harry Stevens/Axios

Taxpayers are picking up more and more of the tab for Medicare's prescription drug coverage, because more seniors are racking up bills big enough to enter the program's "catastrophic phase," where government subsides are the highest.

Between the lines: Some experts say the program's basic structure encourages this spending growth, and needs to be reformed.

How it works: Medicare Part D has a ridiculously complicated financing structure, with different parties responsible for varying portions of each patient's bill throughout the year.

  • Insurers pay a large portion of seniors' initial drug costs.
  • But once patients spend a certain amount, they enter the catastrophic phase. Then the government pays 80% of the costs, through a reinsurance program. The insurer pays 15% and the enrollee pays 5%.
  • Higher reinsurance spending is driven by the number of enrollees who reach the catastrophic phase, and the costs they each incur.

Why it matters: As drug prices rise, patients and taxpayers are both paying more.

What they're saying: "The insurer is basically off the hook" once patients reach the catastrophic phase, said Doug Holtz-Eakin of the American Action Forum.

  • “The insurance guys don’t have strong incentives to negotiate too hard and pharma has every incentive to have high prices," Holtz-Eakin added.
  • "For products with exceptionally high prices, ...[insurers] are largely shielded from the costs of most price increases — effectively limiting the ability of the market to lower these drug prices," Northwestern's Craig Garthwaite said in a recent congressional testimony.

Yes, but: There's no government-funded safety net in private insurance, but even in that market, insurers aren't always able to negotiate lower prices.

  • Even in a restructured Part D program, insurers still might struggle to get lower prices for drugs that have no competition, or that Medicare requires them to cover.
  • "We should increase their incentive to negotiate, but we also need to be realistic about how much they can negotiate for those products," Vanderbilt's Stacie Dusetzina said.