The Budget Blindside: Did Pharma Fight The Wrong Battle?

The bigger 'Donut Hole' discount is a rare loss for pharma on Capitol Hill – one that may in part be because industry did too good a job fighting off a different drug pricing measure.

Ah, the perils of the last-minute bipartisan budget deal.

For the pharmaceutical industry, the two-year budget agreement struck by the Senate leadership was no cause for celebration. Seemingly from out of nowhere, it included a provision to increase the mandatory discount in the Medicare Part D coverage gap (better known as the “donut hole”) from 50% to 70%.

That is a big, unexpected hit to pharma – one that the industry is scrambling to reverse.  (Also see "Fight Brewing In Congress Over Part D Coverage Gap Discounts" - Pink Sheet, 15 Feb, 2018.)

Of course, nothing ever comes out of nowhere. On the contrary, budget deals are built from old ideas that happen to fit as part of the horse-trading to make a deal. And the connection between what suddenly appears in a must-pass bill and the current political debate is often remote at best. It all depends who is in the room, and what they happen to think might make sense in the moment.

In this case, the idea was an old Obama Administration budget proposal to “accelerate the closing of the donut hole.” The brand name industry has opposed that idea since it was first offered in 2013 for the very good reason that it had already made a deal to close the donut hole with the Obama Administration. The donut hole discount was, in fact, the centerpiece of the industry’s contribution to support the Affordable Care Act. As part of the deal, industry was obliged to give a 50% discount on brands in the donut hole, while the treasury would kick in incrementally more over time to close the donut hole completely by 2020.

A Quick Close, But Perpetual Discounts

You can understand why the industry may not have been focused on the proposal in 2018: the donut hole is virtually closed already. While the enactment of the budget deal means the final bit of the donut hole is filled in a year early (2020 instead of 2019), most beneficiaries won’t notice. (Technically, beneficiary cost-sharing was supposed to be 30% in 2019 and then 25% in 2020 and thereafter. Now it will move to 25% in 2019).

Beneficiaries may not notice, but the companies paying the discount sure will.

Industry will be paying 40% more (a 70% discount rather than a 50% discount) in perpetuity. According to CMS data, the total amount of donut hole discount payments in 2016 was $5.6 billion. That suggests a step up of at least $2.2 billion when the higher rate kicks in in 2019.

That, incidentally, is significantly more than the Congressional Budget Office score of the provisions, which totals $10.5 billion over 10 years (and includes a presumably modest amount from applying the discount to biosimilars for the first time). The donut hole discount instead will serve to lower costs to Part D beneficiaries (directly at the point of sale and/or indirectly via lower premiums). And it may also boost the profitability of Part D plans.

Those savings may make plenty of people happy – but they aren’t why this item fit into the budget deal. All indications are that the legislative staff involved saw closing the donut hole early as the goal – apparently without really considering how minimal the change is. Coupling that with $10 billion in savings from pharma made it a good item for Democrats to push into the deal.

That is what makes the provision so painful for industry: if the goal was to close the donut hole a year early, pharma could have kicked in a deeper discount for one year before reverting to the existing formula. Alternatively, if pharma was going to have to contribute $10 billion to a budget deal, there are far better ways to do it from the industry’s perspective.

For example, the budget deal includes revised language intended to clarify the “line extension rebate” provision of the Affordable Care Act; that scores at a savings of almost $6 billion over 10 years. Companies subject to the higher rebate won’t like it – but at least every dollar they lose “counts” in the score.

CREATing Another Problem

Here’s the kicker: the donut hole discount provision apparently only made it into the final deal because the industry had been so effective in lobbying against a different threat – one that is much more closely tied with the current debate over drug pricing.

Negotiators appeared to have opted for the donut hole provision after Republicans objected to including the “CREATES Act” – a bill intended to curb the perceived abuse of risk management programs by brand sponsors to complicate generic drug development.  (Also see "Generics, Budgeting, And The Stubborn Persistence Of Cost Savings" - Pink Sheet, 14 Feb, 2018.)

CREATES has its flaws for sure – and the industry appears to have won over Republicans largely based on the premise that bill would produce a flood of litigation by creating a right of action for generic companies denied sales of samples for use in bioequivalence studies. There is nothing like painting a bill as a victory for trial lawyers to rally GOP opposition.

But, given the choice, surely the industry would be better working out a solution that prohibits the types of shenanigans CREATES is supposed to end. After all, the industry’s preferred solution to the drug price debate is enhanced competition. At the same time, industry is pushing for review of rebates and discounts that get lost in the middlemen.

Instead, Congress just chose enhanced donut hole discounts over setting clearer timelines for generic entry. That doesn’t seem like a move in industry’s preferred direction.

From the editors of the RPM Report