Impact of Medicare Part D Rebates on Multi-employer Plans

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Click here to view PILMA Chairman Walter Wise’s statement on the study.

Executive Summary

Medicare Part D is a successful program that has brought prescription drug coverage to millions of seniors, while keeping costs lower than expected with high levels of beneficiary satisfaction. Medicare Part D has also helped multi-employer plans provide benefits to employees at affordable costs. However, economic slowdown and other external factors and trends have created a challenging environment that threatens to destabilize a highly tuned system that unions have come to rely on in providing benefits to their members. Medicare Part D relies on robust competition to negotiate rebates – savings which are retained within the Medicare program and passed on to beneficiaries; implementing a Medicaid-style rebate for Low Income beneficiaries would redirect savings away from beneficiaries and shift costs from the government onto the backs of unionized workers and other privately insured individuals. A Medicaid-style rebate imposed on Medicare Part D plans is a classic example of cost-shifting, which could have severe consequences for multi-employer plans that are already under stress.

Multi-employer Plan Basics

Multi-employer plans were set up under the Taft-Hartley Act of 1947, and are a way of providing benefit security to a unionized workforce through risk pooling and economies of scale. They are particularly useful in trades or industries where the labor force may work for several employers during their career (e.g., construction, transportation, healthcare, mining, communication industries). As beneficiaries of multi-employer plans reach Medicare eligibility, plan Trustees have several options in coordinating prescription drug coverage and Medicare Part D. An overwhelming majority (72%) of multi-employer prescription drug plans rely on the Retiree Drug Subsidy (RDS) to offset costs associated with prescription drug coverage, while still allowing them to provide generous benefits at a reasonable cost to plan participants.

Multi-employer Plans Under Threat

Multi-employer plans have been faced with a number of challenges in recent years. As the annual rate of healthcare expenditures continues to outpace inflation, many plans find themselves digging deep into their plan reserves. This trend is exacerbated by declining fund contributions as a result of the economic slowdown and number of retirees slowly outnumbering active participants. The recent recession also limited the ability of funds to raise income through investment markets.

High Skill Manufacturing Jobs at Risk

“Imposing a mandatory rebate on Medicare Part D plans would have a negative impact on research and development (R&D). In 2009, the biopharmaceutical sector supported 4 million jobs, and is one of the few manufacturing sectors with projected job growth. Studies strongly suggest that price controls – such as mandatory rebates – will reduce R&D investment. Such erosion of investment in this sector puts high skill jobs at risk. Adding to the strain that multi-employer plans already face because of macroeconomic conditions, the federal government achieves cost savings in public health insurance programs at the expense of other payers. A recent report found that commercial health plans were already paying an extra $89 billion in healthcare costs due to federal government underpayments. Thus, there is already a significant amount of cost-shifting being unfairly borne by unionized workers. With multi-employer plans already under strain, the Affordable Care Act (ACA) of 2010 contained several provisions that create significant uncertainty for multi-employer plans. Starting in 2018, a 40 percent excise tax will be imposed for “excess benefits” beyond a $27,500 family threshold. While multi-employer plans generally provide robust benefits, the continuing trend of cost shifting to private payers puts multi-employer plans at further risk of driving premiums above threshold amounts. Additionally, instead of joining a multi-employer plan, smaller employers may encourage their employees to purchase individual insurance through newly created health insurance exchanges. This has the effect of both reducing employer contributions to multi-employer trusts as well as putting unionized workers at a competitive wage disadvantage as cost structures of employers that do not provide benefits may be lower.

Impact on Multi-employer Plans of Imposing a Mandatory Medicare Rebate

In an environment of deficit reduction, some policy makers have proposed imposing a Medicaid-style rebate on drug utilization of Medicare enrollees who receive Part D’s Low-Income Subsidy (LIS). While previously inconclusive, the existing literature base hints that imposing such a rebate on Part D plans will distort the prescription drug market and reduce rebates and discounts available to private payers. Further analysis outlined in a new model definitively shows how such proposals are a classic example of cost-shifting; any potential savings recouped by the government will result in cost shifting to private payers, including multi-employer plans.9 Previous models provided an incomplete picture of the prescription drug market; policy-makers who have proposed imposing a rebate on Part D plans mistakenly believe that the LIS and non-LIS markets function independently. However, more rigorous research shows that these markets are inextricably linked, and can only function independently when demand in the LIS market is perfectly inelastic – a highly unlikely condition. Additionally, economic modeling indicates that as the share of the market subject to a mandatory rebate grows, price distortions become more severe. As manufacturers are already subject to a mandatory rebate in the Medicaid program, dramatically increasing the size of the market that is subject to a rebate – such as imposing a rebate on LIS beneficiaries – will disproportionately squeeze remaining market segments. Because of their unique structure and generous benefits, multi-employer plans will be left with few choices other than to restrict access to medications, increase cost-sharing, and raise premiums in response to the cost-shift that is expected to occur in the face of a mandatory government rebate. Multi-employer plans are also more likely to respond to cost-shifting by increasing patient cost-sharing; this in turn is likely to result in a cascade of other effects, including reduced medication adherence, and ultimately, higher medical costs. Reduced medication adherence may also result in reduced productivity among active union workers, further disadvantaging this workforce. Alternatively, multi-employer plans may elect to offset benefit plan cost increases by reducing wages. In a time of stagnant wages, even a small decline in pay would be significant, particularly as union members have often accepted lower wages in exchange for more comprehensive benefits. New federal requirements for health plans under ACA combined with significant new funding targets for multiemployer defined benefit pension plans are already affecting employers’ ability to remain competitive, thereby reducing income to both the plans and individuals whose wages are already being reduced in response to rising competitive pressures. This proposal will only compound an already untenable situation. As the biopharmaceutical sector supports numerous unionized manufacturing jobs, a Medicare Part D rebate would potentially increase health insurance costs, drive down wages, and cause an already stressed sector to shed additional jobs. In sum, a more rigorous examination of the prescription drug market indicates that any proposal to impose a mandatory rebate on the Medicare Part D program is a classic example of cost shifting; the government will save money on prescription drug insurance for LIS enrollees, but the private sector will pick up much of the tab. In a challenging environment, additional cost shifting would put multi-employer plans at severe risk.

Jobs Today: Cures Tomorrow—Innovation and the Biopharmaceutical Industry

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Executive Summary

Our nation’s biopharmaceutical industry is vital to the personal health of our people and the economic health of our country. At the current time, and in the current political and regulatory environment, we are at the edge of a precipice: We can either adjust our policies and remain the international leader in biopharmaceutical development and manufacturing, or we can watch the industry move overseas, like so many before it. It is a harsh reality, but one that is simultaneously rife with opportunity.

The unions and companies of the Pharmaceutical Industry Labor-Management Association (PILMA) recognize that, especially in the current economy, America needs a sustainable and growing biopharmaceutical industry. Directly and indirectly, our industry supports jobs for 3.2 million people in all 50 states. But, without changes to our national industry-related policies, these jobs may ultimately leave the U.S. to relocate in other countries, where environments are friendlier.

To be sure, there is no easy fix — a wide variety of policies has contributed to where we are today, and a wide variety of reforms will be required to ensure the American biopharmaceutical industry’s continued preeminence. Policies include tax regulations, intellectual property rights, economic and trade policies, patent laws and data exclusivity, importation laws, and education programs, to name a few.

Challenges & Opportunities

America’s position in the world market has slowly eroded over many years, and other countries, like China and India, are standing by to pick up the slack by making significant investments in talent, infrastructure and research. But, as we know, our nation never fights harder or wins more than when it’s facing a second-place finish. That’s why, in many ways, this is an opportunity.

First and foremost, we must prevent other countries from using their friendlier economic and tax policies to entice American biopharmaceutical companies to their shores. Because we are in an environment where tax revenues are a central focus of policymakers, we must, at least, guard against tax policies that would diminish our already fragile competitive position. We believe America’s global leadership position will be in danger unless we establish policies that encourage sustained innovation and growth.

Medical innovations in general and biopharmaceutical advancements in particular, have traditionally been drivers in the knowledge-based economy. The U.S. remains the global leader in biopharmaceutical development, in part because of the American biopharmaceutical industry’s research and development achievements, but also because American biotechnology employment represents more than half of all such jobs worldwide. Indeed, the vast majority of global biopharmaceutical R&D investment is domestic. Clearly, if steps aren’t taken to maintain this leadership position, however, good jobs and the health of the American people are at stake.

Economics & Trade

While the biopharmaceutical research industry is firmly positioned to continue its contribution to America’s economic growth and health, other countries are offering strong challenges to America’s preeminence. Other countries’ dramatic growth can be inferred from their domestic research and development expenditures, their share of new U.S. patents, and the number of new doctorates in science and engineering being awarded to their citizens. A recent study found that the U.S. ranked last among 40 countries and regions when it comes to progress made over the last decade toward the “new knowledge-based innovation economy.” In terms of overall competitiveness, the study ranks America sixth, behind Singapore, Sweden, Luxemburg, Denmark and South Korea.

Our laws and regulations must be updated to match the complex nature of new products being developed. Traditional patent and data exclusivity protections, for example, are no longer sufficient to protect the intellectual property of innovators. At the same time, ongoing threats to intellectual property protection – in the form of legislation, court decisions, and more – could potentially undermine the value of patents in the future. In order to foster continued development and ensure the right incentives for innovation, manufacturers in the research-intensive biopharmaceutical sector must be able to rely on the certainty afforded to them through strong and enforced legal protections.

Next, we must fight even harder to prevent illegally imported medicines from entering our national drug supply. There are serious, well-documented concerns related to the quality, safety and efficacy of these unregulated, often counterfeit biopharmaceuticals. We must protect our drug supply just as vigilantly as we do our water supply, because contamination of either could mean a major national health problem. Additionally, the counterfeit drug industry is estimated to cost hundreds of thousands of legitimate jobs annually.

Americans must also insist on free trade that is fair trade. Trade policies are major determinants of the competitiveness of America’s biopharmaceutical industry. We cannot allow the continuation of the trade policies that have hampered, and ultimately destroyed, other industries, such as steel, automobiles, and textiles.

We have the opportunity to create jobs and strengthen U.S. global competitiveness by both promoting and expanding biopharmaceutical industry investment in research and development and manufacturing in America. To do that, we need to ensure that we institute tax policies that improve incentives for companies to undertake the unpredictable and expensive process that leads to the creation of tomorrow’s therapeutic breakthroughs. And, simultaneously, we must renew efforts to make sure America has fostered the talent to research, discover and manufacture biopharmaceutical innovations well into the future. This can be achieved by addressing the full formal education pipeline in science, technology, engineering and mathematics from kindergarten through 12th grade, in vocational/technical schools, labor/management training, college, and graduate university programs.

The Obama Administration has already launched many of the starting initiatives to accomplish these long-term aims. The administration has set a goal of doubling America’s exports over the next five years, and called for boosting investments in R&D, increasing funding for biomedical research, investing in the next generation of scientists and engineers, and creating a national infrastructure-innovation and -finance fund.

JOBS RIGHT NOW: Hope for Tomorrow

While we have these opportunities to strengthen our international leadership position, fight off our competitors, and create new jobs for thousands of people, we cannot forget that our country’s biopharmaceutical industry exists with one person in mind: the patient. As referenced by the Congressional Budget Office (CBO), “Many examples exist of major therapeutic gains achieved by the industry in recent years … anecdotal and statistical evidence suggests that the rapid increases that have been observed in drug‐related R&D spending have been accompanied by major therapeutic gains in available drug treatments.” This research and these jobs translate into better patient outcomes.

We work every day to develop treatments that reduce the need for hospitalizations, lessen the length and intensity of rehabilitations, and potentially even save lives. But, perhaps most importantly, we — as an industry — provide hope for patients whose lives depend upon our discovering breakthrough treatments, and we must remain mindful of preserving, and even improving, patients’ access to them. Imagine a world where smart anti-cancer therapeutics will kill cancer cells and leave their normal neighbors untouched, or where nanotechnology will deliver drugs precisely to the desired tissue. That world is not too far in the distant future. Surely our nation can move on from today’s economic challenges, but we cannot forget the importance of protecting Americans’ health care and quality of life.

Health Care Reform for Workers and Working Families

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Introduction by Chairman, Michael J. Sullivan General President SMWIA & Vice Chairman, Richard H. Bagger Senior Vice President, Pfizer Inc.:

Each day, hundreds of thousands of workers in the United States start their day researching, developing and manufacturing biopharmaceutical products, and building the facilities where those medicines are discovered or produced. The resulting health care innovations are vital to the American people and the nation.The global leader in scientific research, innovation and manufacturing, the U.S. biopharmaceutical industry provides hundreds of thousands of high-paying jobs, and contributes more than $200 billion to the gross domestic product.

The unions and companies of the Pharmaceutical Industry Labor Management Association recognize that a strong domestic biopharmaceutical industry that provides innovative medicines is vital to the American people and to the nation as a whole. At the same time, the association recognizes the need to address issues of mutual interest and concern to the industry, its workers and all Americans, including: accessibility and affordability of health care; funding of innovative research and future cures; and, maintaining a strong biopharmaceutical industry in the United States. As an association of labor and industry, we recognize fully that not only do our employees research, discover and produce the medicines that enhance and sustain lives, they are also patients.

To that end, the trustees of PILMA tasked a working group to study and discuss thoroughly the issues surrounding health care reform so that they could answer this question: How can we, as a nation, make health care reform work for workers and their families?

What follows is a consensus-driven document that embraces our founding principles. We believe by working together, industry and labor can forge common-sense approaches and provide solutions to some of the biggest problems facing workers who are dealing with their health care and that of their loved ones.

As an organization deeply involved in health care, we wanted to do more than just state the problems — we wanted to come together and suggest solutions. We recognize that, despite achieving our goal of reaching consensus among ourselves, not everyone else will agree with our suggestions. And while we know that our solutions don’t address all of the challenges facing the American health care system, this document represents our best efforts to address key reform issues and join a dialogue about solutions.

With an economy facing challenges of historic proportions, we understand we must work even harder to find real solutions. We believe fully that significant reform of the health care system today is a requirement of economic recovery, not something we can afford to put off until another day. Today’s economic crisis compels us to come together now and help forge health care solutions that expand coverage, improve quality and provide value. By acting now, we can make meaningful change that will benefit America’s workers and their families at the time when they need help most.

We welcome the opportunity to participate in this important dialogue.

Chairman, Michael J. Sullivan
General President Sheet Metal Workers’ International Association

Vice Chairman, Richard H. Bagger
Senior Vice President, Pfizer Inc.