Of the 64 million Americans on Medicare, over 75% are enrolled in Medicare Part D, the part of the program that covers most prescription drugs. As drug prices rise, Dr. Erin Taylor told Free the Facts, a more significant portion of Americans have relied on Part D to cover the costs of their medications.

Taylor is a senior health policy researcher at the RAND Corporation whose research covers health insurance, prescription drugs, quality of care, and patient out-of-pocket costs. She joined Free the Facts for the final event of the organization’s Fall Virtual Series, where she discussed Medicare Part D, prescription drug pricing, and the potential effects of the Build Back Better Act currently being debated in the Senate.

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Taylor opened the event with a primer on drug pricing. “U.S. prescription drug prices are high, and have been for a long time. And they’re rising rapidly,” she noted, citing a recent AARP study which found that prices for 260 brand-name drugs rose by 2.9% between 2019 and 2020. That’s more than twice the rate of inflation that occurred during the same period.

Individuals who rely on these medications are feeling the pressure from these price increases. That’s why Medicare Part D works with private insurance companies to provide prescription drug coverage to 48 million elderly and disabled Americans. 

On paper, these insurance plans provide comprehensive coverage. A Part D plan ensures that, after a certain point, a beneficiary only has to pay 5% of their drug costs out of their own pocket. But in practice, rising drug costs, a complicated benefit calculation, and high deductibles put major financial strains on beneficiaries. Taylor walked the audience through an example:

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A Medicare Part D beneficiary in 2021 has a deductible of $445, meaning their benefits only kick in after they’ve paid $445 out-of-pocket for their prescription drugs.

After spending $445, they move into the “initial coverage phase,” where they only pay 25% of their drug costs out-of-pocket. Their insurance provider pays the remaining 75 percent.

This 25% rate applies until their out-of-pocket spending reaches $6,500. Only then do they reach the third, so-called “catastrophic phase” and reap the benefit of only paying 5% of their drug costs.

$6,500 is a lot of money to pay out-of-pocket, especially for the vulnerable populations that Medicare Part D serves. And as drug prices rise each year, even that remaining 5% creates a significant financial burden.

That’s why, Taylor said, Congress’s attention is currently on two key issues: drug prices and financial protections.

The Build Back Better Act, a sweeping piece of legislation that recently passed in the House and is currently with the Senate, includes provisions to address both. Of particular importance for Medicare Part D? The government’s ability to negotiate drug prices.

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Drug prices aren’t set in stone from the moment the drug is produced, Taylor explained. In order to get the drug from the manufacturer to the beneficiary, many different payments must be made along the way. The manufacturer sells the drug to a wholesaler at a “list price.” The wholesaler then sells it to a pharmacy at a different price point. And the pharmacy sells it to the beneficiary at yet another price.

The Build Back Better Act would allow the federal government to negotiate the list price. If enacted, this change would phase in gradually—only ten major brand-name drugs would be up for negotiation in the first few years.

On this front, Taylor had some advice for policymakers. “The list price is pretty far removed from the Medicare program. So it’s going to be important for policymakers, if this becomes law, to think about how best to implement a negotiation where this list price is what’s being negotiated... [because] there are so many other prices that occur on the way to getting to that final price [for beneficiaries].”

There are many other provisions in the Build Back Better Act. Among them are a $2000 cap on out-of-pocket drug costs, a copay reduction, and a cap on insulin prices for diabetics. But Taylor noted that these proposals are not a panacea for our health care system.

“As with almost any policy change,” she said, “there’s a complex set of tradeoffs that are at play here. One important consideration is whether government price negotiation is really the right approach.”  

For example, capping insulin prices may lead to higher out-of-pocket costs for other drugs. Or Medicare benefit changes, which would reduce costs to enrollees, could place additional burdens on taxpayers.

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Taylor was then joined by Free the Facts’ Policy Advisor Dr. Julius Chen, who fielded questions from the audience. One attendee asked if there were other, more market-based approaches to combat rising drug prices.

Taylor said that, although a market-based approach would be complicated, competition could be quite useful in this regard. For example, if more generic-brand drugs are encouraged to enter the market at a lower price point, private insurers would choose to cover them over their brand-name counterparts. This would force brand-name manufacturers to lower their prices to remain competitive.

Another attendee asked for Taylor’s prediction for how drug companies might respond to the policy changes in the Build Back Better Act. Taylor answered that—while there is a possibility that fewer drugs are developed as a result—the most likely scenario is that manufacturers will absorb these changes, adapt, and move forward. “The provisions are not as strong as they originally were. This is not as painful for them as it could be.”

Taylor wrapped up the Q&A with some “homework” for the audience: keeping an eye on the Build Back Better Act’s path through the Senate. “It’ll be interesting to see. Especially the government’s price negotiations over time,” she said.

Chen agreed that there is a lot to watch for in the coming months. “It’s a very impactful piece of legislation that’s being considered in the Senate,” he concluded.

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This was the final event of Free the Facts’ Fall Virtual Series. A special thank you goes out to our guest speakers, moderators, and attendees. If you’re interested in more Q&A-style events with policy experts this spring, keep an eye on our event calendar here.