The pharmaceutical industry is in a frenzy over the recently released list of the drugs subject to price negotiation under the Inflation Reduction Act of 2023 (IRA) and the Act’s potential impact on profits. But an even bigger force has been slowly transforming Medicare in a way that will, directly and indirectly, hurt Pharma just as much: privatization of Medicare through the growth of Medicare Advantage (MA).
As of this year, 51% of seniors are enrolled in MA plans (also called Medicare managed care, or Medicare Part C), meaning their insurance is provided by private companies like Humana and UnitedHealthcare. And MA plans are predicted to cover nearly two-thirds of seniors in the next decade.
The percentage of Medicare beneficiaries enrolled in an MA program has increased from 8M to 31M since 2007. Source: KFF
The IRA concerns Pharma because it partially lifts the 20-year-old prohibition on price negotiation by fee-for-service Medicare, and the Congressional Budget Office expects negotiations to yield more than $200 billion in savings over the next decade. MA plans already aggressively limit access and negotiate prices, so rapid growth of MA could be an even bigger problem for Pharma than the IRA. UnitedHealth and Humana control the majority of the MA market—and the discounts they will be able to extract are only going to get bigger as their market grows. Medicare privatization will also reduce Pharma profits indirectly by increasing overall Medicare costs, which will eventually lead Congress to search for savings wherever they can be found.
Although privatization was originally positioned as a way to save money, MA plans get paid about $2000 more per person compared to traditional Medicare. Private insurers are less efficient than the Federal government at providing healthcare, with overhead of close to 15%, vs. under 2% for traditional Medicare. Traditional Medicare doesn’t have to support marketing efforts, scores of middle managers, or highly paid executives like Andrew Witty, CEO of UnitedHealth, who made $20 million last year, or Bruce Broussard, CEO of Humana, who made $17 million. (In comparison, the top CMS administrator made less than $200,000 in 2022.) MA plans also game the system to make their beneficiaries look sicker and garner even higher reimbursement. As a result, insurance executives love Medicare privatization. CEO Broussard recently said Humana was no longer interested in providing employer-sponsored insurance, once its primary source of business, in favor of focusing entirely on Medicare and Medicaid.
The Medicare Trust Fund is currently projected to run out of money in 2031. Rapid adoption of MA will only speed up the process, increasing costs by $200 billion over the next decade. When it becomes clear that Medicare bankruptcy won’t be held off by the negotiations allowable under the IRA, calls for more aggressive price controls will only get louder.
Yes, the IRA is the most dramatic policy change to affect Pharma in the last decade, but don’t mistake drama for consequences. By 2033, two-thirds of beneficiaries will be in MA plans. What will drug prices look like when it’s UnitedHealth and Humana on the other side of the table, rather than the Federal government?
Dr. Michael Broder, a board-certified obstetrician and gynecologist, has 30 years’ experience in health economic and outcomes research. He received his research training in the Robert Wood Johnson Clinical Scholars Program at UCLA and RAND, attended medical school at Case Western Reserve University, and received his undergraduate degree from Harvard University.
In 2004, Dr. Broder founded PHAR, a clinically-focused health economics and outcomes research consultancy. PHAR is a team of dedicated, highly trained researchers —individuals who are singularly focused on delivering high-quality health economics and outcomes research insights to the life science industry. PHAR has successfully conducted hundreds of studies resulting in more than 800 publications on a wide variety of therapeutic areas, and maintains an expansive network of collaborators, including 8 of the top 10 academic institutions in the US, as measured by NIH funding. Download our bibliography here.
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