Two years ago, soon after the Food & Drug Administration (FDA) approved the first breakthrough treatment for hepatitis C, we wrote about the potential cost of a cure to Medicare Part D and its beneficiaries. For that piece, we used the best available data to estimate the number of people on Medicare who might seek treatment and the impact on Medicare spending. Here we revisit our earlier analysis using new data released by CMS, and consider both the ongoing impact of hepatitis C drugs for Part D and the broader implications for Medicare of new high-priced drugs entering the market.

Hepatitis C Drugs Have Driven Drug Spending Upward

In November and December 2013, the FDA approved Olysio and Sovaldi, the first drugs in a new class of drugs to treat hepatitis C. Two other combination drugs (Harvoni and Viekira Pak) gained approval in 2014, and more hepatitis C drugs entered the market in 2015 and 2016.

These drugs have been remarkable for two reasons. First, they represent treatments that are more effective and have fewer side effects than older drugs used to treat hepatitis C. They are generally viewed as a cure to a disease that affects an estimated 3 million Americans. Second, they come with high price tags. Sovaldi got attention for its list price of $1,000 per pill, or $84,000 for a full 12-week regimen. Competing drugs have also entered the market with high list prices, although the most recent drugs have somewhat lower list prices than Sovaldi. As described below, some payers obtain lower prices through discounts from manufacturers.

Hepatitis C drugs have been a significant factor driving the upward trend in drug spending in 2014 and 2015. In the most recent accounting of national health expenditures, analysts at the Centers for Medicare and Medicaid Services (CMS) found that national spending on drugs rose 12.4 percent in 2014, well above the 2.4 percent level in 2013 and noted that the increase “was in part due to the introduction of new drug treatments for hepatitis C.” Hepatitis C drugs accounted for $18 billion in new spending in 2014 and 2015 combined.

The high price of hepatitis C drugs has presented financial challenges for patients and payers in all segments of the insurance market, and Medicare is no exception. CMS estimated that total drug spending in 2014 was up 11.3 percent for private health insurance, 16.9 percent in Medicare, and 24.3 percent in Medicaid, citing hepatitis C drugs as a factor in each sector. Spending on hepatitis C drugs also contributed to the rise in Medicare Part D spending per beneficiary, which increased by only about 2 percent in 2013, but by more than 8 percent in both 2014 and 2015, according to the 2016 Medicare trustees report.

Use of Hepatitis C Drugs by Medicare Part D Enrollees and Medicare Spending

Two years ago, we analyzed data from the National Health and Nutrition Survey to estimate that 350,000 Medicare beneficiaries have hepatitis C, with fewer than half of them aware they had the viral infection. Using that baseline, we presented two scenarios. In our first scenario, we showed how even modest use of the drug (25,000 beneficiaries in one year) would lead to a 3 percent increase ($2 billion) in federal Part D outlays in a single year. In our second scenario, assuming a higher rate of drug use (75,000 beneficiaries), we projected an 8 percent increase ($6.5 billion).

A CMS data release in August 2016 allows us to revisit those estimates. According to these data, 57,400 Medicare beneficiaries received prescriptions for one of the three available hepatitis C drugs in 2014 — which is less than 20 percent of the Medicare population with hepatitis C, and about one third of population who are aware that they have hepatitis C. (Another 600 filled prescriptions at the end of 2013, but most are probably counted in 2014 when receiving their next month’s supply). Total spending on these three drugs in 2014 (including the amounts at the end of 2013) was about $4.7 billion or 4 percent of Medicare Part D spending. These amounts fall roughly midway between the estimates presented in our two scenarios above.

Exhibit 1. Medicare Part D Costs and Utilization for Drugs Used to Treat Hepatitis C

DrugCost per claim 2014People treated, 2014Total cost, 2014 (millions)

NOTE: Includes spending from the end of 2013

SOURCE: CMS releases new prescription drug cost data, August 18, 2016.

Preliminary estimates, based on data obtained from CMS by the Associated Press, suggest that 2015 spending on the new hepatitis C drugs was $9.2 billion or roughly double the 2014 levels. This level of spending projects to about 100,000 new individual users, allowing for some duplication of people who continued the treatment they started in 2014. The combined total suggests that nearly half the estimated 350,000 Medicare beneficiaries with hepatitis C have received treatment. Even accounting for the addition each year of people with hepatitis C who turn 65 and gain Medicare eligibility, the demand for hepatitis C drugs should soon start to decline. According to an analysis for the country as a whole, new therapy starts slowed beginning about March 2015 as the majority of patients most in need have been treated. This is good news from both a health and fiscal perspective.

An important caveat about these Part D spending totals is that they are calculated by CMS from claims data and thus reflect amounts that appear on invoices at the point of purchase, which are not adjusted to reflect manufacturer price discounts (rebates) negotiated between the drug manufacturers and the Part D plans. The only exception is any discount that is applied at the point of sale, which tends to be minimal. It is not possible to determine actual net spending for hepatitis C drugs because data are not available on rebates, which are proprietary.

Estimated hepatitis C drug discounts (rebates) for some private commercial payers in 2016 are about 45 percent. But in 2014, 80 percent of Medicare’s spending on drugs used to treat hepatitis C was for Sovaldi and Harvoni, both sold by Gilead. As a result, it is likely that discounts were more modest in 2014 than in 2015 and 2016 when hepatitis C drugs made by other companies entered the market. Further, Medicare Part D plans may achieve less discounting than some other payers, especially for higher-priced drugs, since plans may have a weaker incentive to negotiate deep discounts due to the large share of costs above the catastrophic threshold that are picked up by Medicare through reinsurance (as described below) and because of regulatory limitations on modifying formularies in midyear.

The Medicare trustees report an average 14.3 percent rebate for all Part D drugs in 2014, but this estimate includes both generic drugs (which typically do not have rebates) and single-source brand drugs (where rebates may be minimal). If we assume a rebate of 20 percent in 2014 (higher than the overall average for all drugs in Part D but still potentially generous in a year when competition was minimal), total spending for Part D enrollees taking hepatitis C drugs in 2014 would be $3.7 billion, rather than $4.7 billion. But even this lower amount represents a significant share of total Medicare Part D spending on all drugs in 2014 and a sizeable increase in Part D spending from the previous year.

Who Pays the Bill for Medicare’s Spending on Hepatitis C Drugs?

Medicare Part D spending on hepatitis C drugs at the point of service is divided among plans, taxpayers, and beneficiaries, with shares varying according to the beneficiary’s spending level for the year to date. For example, in the phase between the deductible and the benefit’s initial coverage limit, beneficiary cost sharing for specialty drugs, such as those to treat hepatitis C, varies by plan from 25 percent to 33 percent, with the plan liable for the rest. After beneficiaries’ spending exceeds the benefit’s annual catastrophic threshold, their cost sharing is reduced to a statutorily required 5 percent. Out-of-pocket costs are an estimated $6,608 (Sovaldi) and $7,153 (Harvoni) per person at the point of sale for a full regimen, mostly as cost sharing in the catastrophic phase at 5 percent of the retail price of the drug, not the net (post-rebate) price. Above the catastrophic threshold, the plan is liable for 15 percent of the costs, and Medicare pays 80 percent of costs in the catastrophic phase in the form of reinsurance payments.

Plan spending for specific drugs at the point of service is a major component of the bids plans submit to offer Part D coverage. In turn, the bids are financed by a combination of beneficiary premiums (25.5 percent) and a federal subsidy (74.5 percent). Although plans are responsible for any aggregate difference between bids and actual costs, the bid amounts are paid by beneficiaries and the government. Medicare also pays most of the cost sharing and premiums for low-income Part D enrollees.

It is difficult to break out spending across beneficiaries and taxpayers precisely without more complete data, but a rough accounting suggests that taxpayers are responsible for about three-fourths of total costs for hepatitis C drugs, with the remaining one-fourth paid by the beneficiaries who take the drugs and by all Part D enrollees in the form of plan premiums.

Policy Implications

The good news for Medicare and beneficiaries is that hepatitis C can now be cured, with relatively few side effects and with a drug regimen that is needed for a short period of time. In the span of about three years, from late 2013 to the end of 2016, about half of the Medicare population with hepatitis C will have been treated, which means that the spending surge for these drugs should abate in the near future. Furthermore, the market entry of competitor products has likely led to higher rebates and lower net prices for Medicare in 2016, though we lack the data to know how much lower.

The bad news for Medicare and Medicare beneficiaries is that hepatitis C drugs have driven up spending for Medicare Part D at an unprecedented rate and have required large cost-sharing payments by the beneficiaries who take these drugs (some of whom are prescribed more than one drug for hepatitis C).

A broader implication relates to the impact of high-priced drugs on the Medicare program, Medicare beneficiaries, and the taxpayer. Beneficiaries who take any high-priced drugs can face monthly costs in the thousands of dollars, because their costs continue after they reach the catastrophic phase, with required 5 percent coinsurance for the remainder of the year. The prospect of new breakthrough drugs to treat different types of cancer, Parkinson’s disease, or Alzheimer’s disease offers great promise to patients – but only if the treatments are affordable.

To address affordability from the beneficiary’s perspective, policymakers have proposed creating an absolute out-of-pocket limit on cost sharing under Part D, a measure recommended by MedPAC and introduced in a bill by Senator Ron Wyden. MedPAC also recommended that the program should shift more financial risk to Part D plans and give them more incentives and stronger tools to manage high drug costs. President Obama has proposed giving Medicare authority to negotiate lower costs for unique, high-priced drugs. Several states have considered legislation or ballot initiatives to increase transparency around drug pricing.

The pharmaceutical industry has argued that discounts (rebates) mean that drug prices are less than they appear. In the case of hepatitis C drugs, there is some truth to this argument because the competing products of multiple manufacturers have allowed health plans and pharmacy benefit managers to leverage the competition for discounts. But even with these discounts, the cost to Medicare and beneficiaries is substantial, and this competitive environment does not exist for many other expensive drugs.

The cost of a cure—in this case for hepatitis C—has served as an important wake-up call after several years of low spending growth for prescription drugs. Although spending for hepatitis C drugs is expected to decline over the next few years, the cost of new specialty drugs will likely be a major driver of Medicare spending in the coming years, raising tough questions for policymakers as they explore how best to balance the need for medicines that improve our health with the need to keep spending under control.