In theory, patients should benefit from drug price discounts negotiated between drug companies and insurers. In reality, they don’t, and a potential solution is stalled in Congress.

Kenneth E. Thorpe, PhD
_{© Rollins School of Public Health, Emory University}

A simple reform to Medicare's prescription drug program could put billions of dollars back into seniors' pockets over the next decade. That would help them better manage their chronic conditions and significantly lower overall health spending. Concerningly, that reform is gathering dust. That's a huge problem for seniors – and one we need to fix sooner rather than later.

More than two-thirds of Medicare beneficiaries have multiple chronic illnesses. They face health care costs five times higher than their peers without any chronic conditions. And right now, because of the way Medicare is structured, they overpay for the medicines they need.

How the system works

Currently, drug companies give the insurers that sponsor Medicare drug plans hefty discounts off the nominal "list" price of medicines. In return, those insurers agree to provide better access to those companies' brand-name medicines, rather than similar medications from other drug companies.

These discounts reduce actual drug costs by 30%, on average, compared to list prices. For certain classes of medication, like insulin, discounts are much higher – over 70% in many cases.

In theory, those discounts should help patients. But they typically don't – because the negotiated discounts remain secret. And that secrecy leads to inflated out-of-pocket payments for seniors.

Most Medicare plans require beneficiaries to pay a certain fraction of a drug's cost – an obligation known as "co-insurance." When pharmacists calculate what seniors owe in co-insurance, they use the publicly disclosed list price of a drug – not the secret, substantially lower discounted price.

For instance, let's say a senior needs a medication that nominally costs $100 per month, and her Medicare plan requires her to pay 25% of a drug's cost in co-insurance. That'd put her on the hook for $25 in out-of-pocket payments.

But imagine that the drug was actually secretly discounted by 75% to $25. The insurer would collect $25 from the woman, pass it along to the drug company, and pay absolutely nothing itself, despite collecting a considerable monthly premium.

A better way

In an alternate world, one in which insurance plans had to disclose the discounted prices they negotiate, that woman's co-insurance would instead be just 25% of $25 – or $8.25 a month. Over the course of a year, she'd save hundreds of dollars just on that one medicine. And many seniors with chronic conditions rely on multiple treatments to stay healthy.

Thankfully, some lawmakers are trying to make that better world a reality. In 2023, a bipartisan group of lawmakers introduced a bill, the Share the Savings with Seniors Act, to reduce Medicare beneficiaries' out-of-pocket costs. It would allow seniors with Part D prescription drug plans to pay cost-sharing based on the real, discounted price of medicines, instead of the list prices.

That wouldn't merely improve seniors' financial health. It'd improve public health as a whole – and likely reduce total health care spending – by making it easier for seniors to manage their chronic conditions, adhere to their medication regimens, and avoid expensive complications. In Medicare, 99% of spending goes toward treating chronic diseases.

Yet, the bill is stuck in a House committee and isn't moving forward. That's terrible news for America's aging population.

The toll is staggering

Many seniors currently struggle to afford necessary medications, leading to skipped prescriptions and costly health complications. Research indicates that an increase in out-of-pocket prescription drug costs can escalate health care spending due to increased hospitalizations and ambulatory care. For each additional dollar patients pay out-of-pocket, total Medicare spending rises by $1.80.

The cumulative financial and personal toll is staggering. Medicare is projected to spend $18 billion annually by 2030 on avoidable health complications linked to medication non-adherence, which contributes to the premature deaths of 112,000 seniors each year.

The Share the Savings with Seniors Act would ensure that patients who face the highest out-of-pocket costs – those with chronic illnesses – would benefit from drug discounts. This straightforward adjustment not only promises immediate relief for seniors, but also supports better health outcomes by improving access to vital medications.

Kenneth E. Thorpe is Robert W. Woodruff Professor of Health Policy and the chairman of the Partnership to Fight Chronic Disease.