Rapidly Rising Prescription Drug Costs Could Put Medicare on Life Support

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The importance of Medicare can't be overstated for the 56 million people currently enrolled in the program, a majority of whom are seniors aged 65 and up.

According to recently updated estimates from the Urban Institute, a single male turning 65 in 2015 is expected to receive an average of $195,000 in lifetime Medicare benefits. By 2035, this figure is expected to pass $300,000, and by 2055 it'll top $500,000, surpassing the lifetime benefits an average 65-year-old would receive from Social Security over their lifetime. Rising surgical and treatment costs, and especially rising prescription drug costs, are to blame for seniors' growing reliance on Medicare.

But Medicare itself isn't on the most solid footing. The Medicare Board of Trustees 2016 report forecasts that the Hospital Insurance Trust could deplete its spare cash by the year 2028 -- a full two years earlier than estimated in the 2015 report. Should this happen, Medicare would become a budget-neutral program, and benefits paid to physicians and hospitals could drop 13%. This could be enough to cause doctors and hospitals around the country to stop accepting Medicare, which would be bad news for a program that clearly saves seniors money over private insurance.

However, this may be just the tip of the iceberg.

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Medicare's catastrophic drug coverage could sink the program

According to the Centers for Medicare and Medicaid Services, spending on prescription drugs tied to Medicare's catastrophic drug coverage under Part D has ballooned 85% over the past three years. In 2015, catastrophic prescription coverage totaled $51.3 billion, up from $27.7 billion in 2013.

Catastrophic coverage kicks in when a beneficiary's annual out-of-pocket prescription drug spending has reached $4,850. Once a Medicare beneficiary reaches this level of spending, they become responsible for approximately 5% of their prescription drug costs, with the remainder covered by a combination of Medicare, insurers, and taxpayers. Although only 9% of people reached this spending level in 2015, catastrophic coverage accounted for 37% of the nearly $137 billion spent on Medicare prescription drug costs. These unfortunate 9% also saw their average spending skyrocket from $9,666 in 2013 to $14,100 by 2015. There is no annual out-of-pocket limit on Part D spending.

The clear concern is that rising drug prices could further strain the Medicare program and taxpayers. Medicare and insurers typically combine to cover about 80% of catastrophic costs, with taxpayers picking up the remainder of the tab, per The New York Times. If prescription drug costs continue to climb at the precipitous pace they've been setting -- essentially doubling every seven years, according to an AARP study -- then Medicare may be forced to abandon its highly beneficial catastrophic benefit coverage, passing higher costs along to individual patients who can ill afford the extra expenses during retirement.

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These four drugs account for more than $10 billion in catastrophic drug spending

Of the roughly 2,750 drugs covered by Medicare Part D plans, just four accounted for more than $10 billion of the $51.3 billion in catastrophic coverage spending in 2015.

Gilead Sciences (GILD -2.70%) has two of these drugs: Sovaldi and Harvoni, which effectively cure various genotypes of hepatitis C. These once-daily drugs are priced at $1,000 and $1,125 per pill, respectively. Even with substantial gross-to-net discounting, these prices -- at even 5% of average selling prices -- can drain seniors' savings and put serious strain on Medicare and the taxpayers who help bear the burden of these catastrophic costs. Sovaldi and Harvoni accounted for almost $7.5 billion in catastrophic drug spending under Part D in 2015, up from $3.5 billion in 2013.

Celgene's (CELG) multiple myeloma blockbuster Revlimid, one of the top-selling cancer drugs on the planet, accounted for more than $1.7 billion in catastrophic spending in 2015, an increase of about 50% from 2013. Revlimid continues to gain new label indications, multiple myeloma diagnoses are on the rise, and duration of treatment with Revlimid has been increasing. This all bodes well for Celgene, but it's terrible news for payers.

Even Novartis' (NVS 0.72%) leukemia treatment, Gleevec, has been cited as a culprit behind Part D's soaring catastrophic drug coverage. Although Gleevec was introduced all the way back in 2001, steady price increases between 2013 and 2015 pushed catastrophic spending on the drug 54% higher to more than $1 billion. A separate study published by Stacie Dusetzina, an assistant professor at the University of North Carolina's Eshelman School of Pharmacy, showed that Novartis hiked Gleevec's wholesale price by an average of 7.5% per year between 2001 and 2014. 

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Could this proposed solution gather steam?

With prescription drug costs soaring and drugmakers holding firm to their stance that they're providing a valuable improvement to patients' quality of life, the smartest alternative might be for Congress to consider negotiating drug prices on behalf of Medicare.

Currently, the federal government is not allowed to go to bat for Medicare. However, if it were allowed to, then the might of the federal government -- representing some 56 million enrollees -- should be enough to squeeze the best possible gross-to-net discounts out of drugmakers. With a few exceptions where alternative medications may not exist, the federal government should be able to dramatically reduce catastrophic drug spending under Part D, along with prescription drug spending overall.

However, there are a couple of obstacles that could stand in the way of this proposal.

For starters, the Republican-led Congress very much disagrees with the idea of intervening in free-market economics and believes the federal government has no right to control or cap prescription drug prices. Unless we see pretty substantial changes on Capitol Hill during the next election cycle, the prospect of government intervention on Medicare's behalf may remain nothing more than a pipe dream.

The other major issue is what the drugmakers could do in response to the federal government stepping up to the plate for Medicare. If the federal government found a way to coerce bigger discounts out of drugmakers, then pharmaceutical and biotech companies might respond by cutting back on their research and development costs to maintain margins. That would be bad news for patients with rare diseases for which research may prove economically unviable. Drugmakers could also cut jobs in the U.S. and move their operations to cheaper overseas markets in order reduce their expenses and thereby offset drug price rebates.

It's unclear at this time what sort of middle ground may exist or what the future holds. What is pretty clear is that prescription drug inflation can't continue at this pace forever without some sort of negative consequences for Medicare and/or taxpayers. For workers, retirees, and investors, this bears close monitoring.