Funding infrastructure on the backs of vulnerable elderly makes little policy sense

House Democrats are trying to advance the legislative process for a human infrastructure bill. Details are scant, but investments in human capital generally can return substantial social dividends. This investment comes on the heels of a $1 trillion bipartisan infrastructure bill that will invest in roads, bridges, and broadband. 

This is a lot of capital investment. The question, of course, is how to pay for it. Erin Trish and I point out in MarketWatch that the current proposal -- to finance a significant portion of the spending increases with Medicare Part D reform -- will do so by penalizing the elderly with serious chronic illness.

(Please also see my other piece where I point out that CBO is scoring these proposals incorrectly by underestimating the negative impact on innovation. Lost innovation also harms the sick, but that is the focus of another piece.)

In the current discussions, the infrastucture funding is being harvested from a suspended administrative rule that would have helped millions of Americans pay for critically needed medications. The rule would have reformed how Medicare Part D treats branded drugs. Right now, after paying a $445 deductible, Medicare beneficiaries are billed 25% coinsurance until they pay $6,550 in total out-of-pocket spending. At that point they reach what is known as “catastrophic coverage,” where they pay 5% for the remainder of the year. 

The nasty wrinkle is that those percentages are based on drug company list prices – which keep rising for branded products. Yet net prices that drug companies receive after paying rebates to insurers and middlemen are falling. As a result, Part D beneficiaries in 2018 paid 64% of the actual cost in the initial coverage phase and 13% in the catastrophic phase.

Patients taking branded drugs where rebates tend to be largest face the highest costs, with no out-of-pocket maximum. For the sickest patients it can be a crushing burden. Overall, the financial protection offered by the Part D benefit has deteriorated for all beneficiaries in recent years.

HHS released a rule at the end of the Trump administration ending these rebates. The goal was to lower prices at the pharmacy counter by making the money that had been rebated to middlemen flow instead to patients.

But insurers use rebated funds to keep beneficiaries’ Part D insurance premiums in check. That in turn helps Medicare, which subsidizes the premiums. The Congressional Budget Office estimated that if the rebates to insurers and middlemen were eliminated, Medicare would have to pay an extra $177 billion over 10 years in subsidies.

When the Senate started work on the infrastructure bill, that $177 billion proved to be the rebate rule’s undoing. Even though the rule had not been implemented yet and no money set aside to cover the subsidies, the Senate “captured” the estimate as if it were real money that could be used to pay for infrastructure. Implementation of the rebate rule was postponed indefinitely, and in the world of congressional accounting, that enabled the infrastructure bill to get closer to being paid for.

It will be of little solace to the vulnerable elderly that their co-payments are helping to finance bridges and electrical vehicle charging stations. Congress should find another funding source.