Medicare Spent $800 Billion Last Year. Is a New Alzheimer’s Drug Worth an Extra $400 Billion?

Medicare Spent $800 Billion Last Year. Is a New Alzheimer’s Drug Worth an Extra $400 Billion?

June 14, 2021  The Food and Drug Administration’s decision to approve Biogen’s Alzheimer’s drug Aducanumab will accelerate difficult and unavoidable questions for lawmakers and the Centers for Medicare and Medicaid Services (CMS) over Medicare spending and program cost controls.

The agency’s decision pits desperate patient groups against those tasked with running the Medicare program. And it sharpens the conflicts between the often high cost and uncertainty of pharmaceutical research and development, which frequently comes with exorbitant price tags and uncertain outcomes, and officials trying to hold the line against large and rising Medicare expenditures. Biogen’s drug, marketed under the name Aduhelm, will force CMS to make a choice about whether a shockingly expensive, yet potentially life-changing medication should be available for broad use. Public reaction to this choice may then force members of Congress to make some difficult choices of their own—especially if CMS opts not to restrict access.

Aduhelm will hit the market at an annual cost of $56,000 per patient. It will require costly pre-screenings and follow-up care and is only purported to slow the cognitive impairment caused by Alzheimer’s, not cure the disease. With a potential market of 6 million Americans over the age of 65 living with the disease, Medicare could end up paying nearly $400 billion a year for the drug every year. To put that in perspective, that is half of last year’s spending for the entire program. Over a 10-year horizon, it is nearly as much as President Biden’s entire social and physical infrastructure proposal.

Were there no opportunities to restrict the drug’s distribution, the federal government would be forced to spend that $400 billion each year because, at least in the Medicare Part B program, it is a price taker, paying healthcare providers 6% over the average sales price of a given drug. But CMS does have a choice. It can restrict coverage by calling for a National Coverage Determination (NCD). The process can lead to limited coverage or delay full coverage by asking for more evidence about the drug to guide coverage decisions. Looking dispassionately at Aduhelm, with its astronomical cost and suspect efficacy, an NCD seems like a prudent step.

Still, Aduhelm’s approval presents difficult choices for CMS and lawmakers. Restricting the drug to control Medicare spending would deny many vulnerable, desperate patients any hope when facing a debilitating disease that leads to dementia during the course of many years. Allowing unrestricted access would cost roughly the same as sending every American household a check each year for $3,000. Eventually, one expects, competitors will enter the market and drive down costs, but the use of similar medications and generics in other therapeutic areas shows that should not always be an easy assumption. Given Aduhelm’s potential price tag and suspect efficacy, evidenced by the nearly unanimous vote by an FDA advisory committee to reject approval, we think CMS will act prudently and restrict access. However, given the Biden administration’s reluctance to take politically unpopular positions when they aren’t necessary, especially on an issue, such as Alzheimer’s, that the president is personally interested in, we believe there remains a slim chance that CMS will not meaningfully limit access to the drug, punting the issue to Congress.

That decision will not be made in a vacuum. The latest Medicare Trustees report highlights the importance of Medicare holistically. The Trustees note our aging population and growing per capita healthcare spending will make Medicare an even greater part of the US economy in the future. By 2030, roughly 78 million Americans will be enrolled in Medicare, 28% more than today, and spending on the program will represent more than five percent of US GDP. Such growth doesn’t come without problems: the Congressional Budget Office estimates that one of Medicare’s trust funds will become insolvent in 2026.

All this means Congress must consider Medicare’s future, and the role of drug spending within it. Though drug costs contribute less to the program’s spending than do hospitals, a single, life-changing drug could rapidly expand program costs and change that equation. Though we are skeptical Congressional Democrats will be able to pass their most ambitious drug pricing reform proposal this year, it will continue to be tempting to slash drug prices, save the government money, and use that money to pay for other priorities. As Medicare spending on drugs increases, the potential savings from congressional action will grow in tandem, and even smaller, more moderate reforms will generate significant savings that can be used for other programs. The Democrats’ current bill (H.R.3) would save roughly $500 billion over ten years, and they are having trouble finding support for it among their slight majorities in both chambers. What if the savings were multiples more?

Regardless of whether Congress acts this year, drug costs, Medicare spending, and program solvency will surely remain priorities for members of both parties. We look forward to covering this issue along with the many other healthcare topics we are focused on.

— Hunter Hammond, Capstone healthcare analyst

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