How a CBO Error Could Cost the Pharmaceutical Industry Billions

Government officials often attempt to bury bad news. Aaron Sorkin’s “The West Wing” even coined a term for it: “Take Out the Trash Day.” So it proved last week. A Congressional Budget Office (CBO) document released quietly on Thursday hinted at a major gaffe by the budget agency and its efforts to conceal that gaffe.

In a series of questions for the record submitted following Director Keith Hall’s April 11 hearing before the Senate Budget Committee, CBO admitted the following regarding a change to the Medicare Part D prescription drug program included in this past February’s budget agreement:

When the legislation was being considered, CBO estimated that provision would reduce net Medicare spending for Part D by $7.7 billion over the 2018-2027 period. CBO subsequently learned of a relevant analysis by the Centers for Medicare and Medicaid Services and incorporated that analysis in its projections for the April 2018 Medicare baseline. The current baseline incorporates an estimate that, compared with prior law, [the relevant provision] will reduce net Medicare spending for Part D by $11.8 billion over the 2018-2027 period.

As I wrote at the time, the provision attracted no small amount of controversy at its passage—or, for that matter, since. The provision accelerated the closing of the Part D “donut hole” faced by seniors with high prescription drug costs, but it did so by shifting costs away from the Part D program run by health insurers and on to drug companies.

The pharmaceutical industry was, and remains, livid at the change, which it did not expect, and tried to undo in the March omnibus spending bill. CBO didn’t just get its score wrong on a minor, non-controversial provision—it messed up on a major provision that will over the next decade affect both drug companies and health insurers.

Because the provision substitutes mandatory “discounts” by drug companies for government spending through the Part D program, it saves the government money through smaller Part D subsidies—at least on paper. (That said, the score doesn’t take into account whether drug manufacturers will raise prices in response to the change, which they could well do.) Because seniors actually spend more in the “donut hole” than CBO’s initial projections said, the provision will have a greater impact—i.e., cost the pharmaceutical industry billions more—than the February budget estimate says.

In its response last week, CBO tried to cover its tracks by claiming that “the $4 billion change…accounts for about 2 percent” of the total of $186 billion reduction in estimated Medicare spending over the coming decade due to technical changes incorporated into the revised baseline. But a $4.1 billion scoring error on a provision first projected to save $7.7 billion means CBO messed up its score by more than 53 percent of its original budgetary impact. That’s not exactly a small error.

Moreover, CBO didn’t come clean and publicly admit this error of its own volition. It did so only because Senate Budget Committee Chairman Mike Enzi (R-WY) forced the budget office to do so.

Enzi submitted a question noting that “CBO realized its estimate of a provision [in the budget agreement] was incorrect. Where is the correction featured in the new report?” CBO didn’t “feature” the correction in its April Budget and Economic Outlook report at all—it incorporated the change into the revised baseline without disclosing it, hoping to sneak it by without anyone calling the budget office out on its error.

Since that time, the purportedly “nonpartisan” organization realized it published an incorrect score—off by more than 50 percent—on a high-profile and controversial issue, changed its baseline to account for the scoring error, and said exactly nothing in a 166-page report on the federal budget about the change. If CBO won’t disclose this kind of major mistake on its own, then its “transparency efforts” seem like so much noise—a distraction designed to keep people preoccupied from focusing on errors like the Part D debacle.

To view it from another perspective: Any head of a private company whose analysis of a multi-billion-dollar transaction proved off by more than 50 percent, because his staff did not access relevant information available to them at the time of the analysis, would face major questions about his leadership, and could well lose his job. But judging from his desire to conceal this scoring mistake, the CBO director apparently feels no such sense of accountability.

Thankfully, however, members of Congress have tools available to fix the rot at CBO, up to and including replacing the director. Given the way CBO attempted to conceal the Part D scoring fiasco, they should start using them.

This post was originally published at The Federalist.

The Insurer Bailout Inside the Senate Budget “Deal”

I noted in my prior summary of the Senate budget “deal” that, as with Obamacare itself, Senate leaders wanted to pass the bill so that we can find out what’s in it. And so it proved.

My summary noted that the bill includes a giveaway to seniors, by accelerating the process Obamacare started to close the Part D prescription drug “donut hole.” I also pointed out that this attempt to buy seniors’ votes in the November elections by promising them an extra benefit in 2019 might backfire, because encouraging seniors to choose more expensive brand-name pharmaceuticals over cheaper generics will raise overall Medicare spending and increase premiums.

How the ‘Donut Hole’ Currently Works

The Part D prescription drug benefit Republicans and the George W. Bush administration created in 2003 included a “donut hole” to reduce the bill’s overall costs. During his 2000 presidential campaign, Bush proposed creating a limited drug benefit that provided only catastrophic protection for seniors with very high costs.

But political pressure (to give “benefits” to more seniors) and actuarial concerns (if the federal government covered only catastrophic costs, only very sick people who would incur those costs would enroll, creating an unstable risk pool) prompted Republicans to expand the Part D program. The “donut hole” resulted from these twin goals of providing basic coverage to seniors and catastrophic coverage for those with high medical costs, with the coverage gap or “donut hole” occurring between the end of the former and the start of the latter.

As part of their “rock-solid deal” with the Obama administration, the pharmaceutical industry and Democrats agreed to close the “donut hole” as part of Obamacare. The law required branded drug manufacturers to provide 50 percent discounts for seniors in the “donut hole,” with the federal government gradually increasing its subsidy (provided through Part D insurers) and beneficiaries’ co-insurance gradually declining to 25 percent (the same percentage of costs that beneficiaries pay before reaching the “donut hole”).

The budget “deal” changes the prior law in several ways. First, it reduces the beneficiary co-insurance from 30 percent to 25 percent in 2019, thus filling in the “donut hole.” But in so doing, it also increases the manufacturer’s “discount” from 50 percent to 70 percent, beginning next year.

That second change effectively shifts 20 percent of the cost of filling in the “donut hole” from Medicare, and insurers that offer Medicare drug plans, to drug manufacturers. In other words, it bails out health insurers, who in the future will have to bear very little risk (only 5 percent) of the cost of their beneficiaries’ drug spending.

No Crocodile Tears

That said, drug companies don’t have much reason to cry about the budget “deal” overall. The industry saw the repeal of Obamacare’s Independent Payment Advisory Board (IPAB), an important, albeit flawed, way to control skyrocketing Medicare costs. While Republicans in prior Congresses insisted on paying for legislation repealing IPAB, the party changed its tune at the beginning of this Congress—reportedly at the behest of Big Pharma.

The enacted legislation repeals the IPAB spending controls without a replacement mechanism to contain Medicare costs. This is total derogation of conservatives’ belief in reforming entitlements, and one enacted at the behest of drug company lobbyists.

Moreover, the budget “deal” included another huge win for pharma, by excluding legislation supported on both sides of the aisle to accelerate the approval of lower-cost generic drugs. Pharmaceutical lobbyists claimed the measure would lead to more lawsuits, and those objections meant the provision got left on the proverbial cutting room floor.

More Bailouts Ahead

Given that Kentucky-based health insurer Humana holds a large market share in the Medicare arena—with 5.3 million of the roughly 25 million seniors enrolled in stand-alone drug plans, and more enrollment in Medicare Advantage besides—and that Sen. Mitch McConnell (R-KY) has fought hard, and publicly, on behalf of Humana’s interests in the past, it doesn’t take a rocket scientist to ask whether the Senate majority leader proposed a backroom deal to help his insurer constituents.

Moreover, as we’ve previously reported, Republican leaders want to pass an even bigger bailout, this one for Obamacare, in next month’s omnibus spending agreement. One news outlet reported earlier this week that Republicans’ desire to bail out Obamacare—to “lower” premiums by throwing more of taxpayers’ money at the problem—has risen to such a level “that Democrats don’t feel like they have to push very hard” to ensure its enactment.

Insurer bailouts, measures to raise rather than lower health costs, and an abdication of any pretense of fiscal responsibility or restraint towards our looming entitlement crisis. The Republican Party circa 2018 is truly a pathetic spectacle to behold.

This post was originally published at The Federalist.

Lowlights of Senate “Budget” Deal

In the budget agreement announced Wednesday between Republican Sen. Mitch McConnell and Democrat Chuck Schumer, McConnell’s negotiating position can be summed up thusly: “Give us the money we want for defense spending, and you can run the rest of the country.”

The result was a spending bonanza, with giveaways to just about every conceivable lobbying group, trade association, and special interest possible. The unseemly spectacle resembles “Oprah’s Favorite Things:” “You get a car! You get a car! You get a car! EVERYONE GETS A CAR!!!”

Even reporters expressed frank astonishment at the bipartisan profligacy. Axios admitted that “there’s a ton of health care money in the Senate budget deal,” while Kaiser Health News noted that the agreement “appear[s] to include just about every other health priority Democrats have been pushing the past several months.”

Of course, McConnell and Schumer want to ram it through Congress and into law by Thursday evening—because we have to pass the bill to find out what’s in it.

Lowlights of the Health Legislation

Repeal of Medicare Spending Restraints: The bill would repeal Obamacare’s Independent Payment Advisory Board (IPAB), a board of unelected bureaucrats empowered to make rulings on Medicare spending. I noted last year that conservatives could support repealing the power given to unelected bureaucrats while keeping the restraints on Medicare spending—restraints which, once repealed, will be difficult to reinstitute.

Congressional leaders did nothing of the sort. Instead the “deal” would repeal the IPAB without a replacement, raising the deficit by $17.5 billion. Moreover, because seniors pay for a portion of Medicare physician payment spending through their Part B premium, repealing this provision without an offset would raise seniors’ out-of-pocket costs. While a Congressional Budget Office (CBO) score of the bill as a whole was not available as of press time Wednesday evening, this provision, on its own, would raise Medicare premiums by billions of dollars.

Big Pharma Giveaway: In a further giveaway to the pharmaceutical industry, the bill would close the Medicare Part D prescription drug “donut hole” a year earlier—that is, beginning in 2019 rather than 2020. Having failed to repeal Obamacare, Republicans apparently want to expand this portion of the law, in the hopes of attracting seniors’ votes in November’s mid-term elections.

Extension of an Unreformed SCHIP Program: The bill would extend for another four years the State Children’s Health Insurance Program—a mandatory spending program that Republicans extended for six years just last month. I previously explained in detail that last month’s reauthorization failed to include at least ten different conservative reforms that Republicans previously supported. By extending the program for another four years, the “deal” would prevent conservatives from enacting any reforms for a decade.

Back in 2015, Republican aides pledged that “Republicans would like to reform and improve this program, and the next opportunity will be in two years when we have a new President.” Not only have Republicans done nothing of the sort, the additional extension will prevent this president—and potentially the next one as well—from reforming the program.

Mandatory Funding for Community Health Centers: The bill provides for $7.8 billion in mandatory spending for community health centers over the next two years, once again extending a mandatory program created by Obamacare.

While many conservatives may support funding for community health centers, they may also support funding them through the discretionary appropriations process, rather than by replenishing a pot of mandatory spending created by Obamacare to subvert the normal spending cycle. The normal appropriations process consists of setting priorities among various programs; this special carve-out for community health centers subverts that process.

Mandatory Opioid Funding: The bill also provides $6 billion in mandatory spending over the next two years to address the opioid crisis. As with the community health center funding, some conservatives may support increasing grants related to the opioid crisis—through the normal spending process.

The Schumer-McConnell “deal” would bust through the Budget Control Act spending caps, increasing the amount of funds available for the normal appropriations bills. (Most of this spending increase would not be paid for.) Additional mandatory health care spending on top of the increase in discretionary funding represents a spendthrift Congress attempting to have its cake and eat it too, while sticking future generations with the bill in the form of more debt and deficits.

But Wait—There’s More!

Surprisingly, the bill does not include an Obamacare “stabilization” (i.e., bailout) package. But other reports on Wednesday suggest that will arrive in short order too. One report noted that Democrats want to increase Obamacare premium subsidies. They not only want to restore unconstitutional payments that President Trump cancelled last fall, “but to expand it—and to bolster the separate subsidy that helps people pay their premiums.”

Republican leaders want to pass a massive Obamacare bailout in the next appropriations measure, an omnibus spending bill likely to come to the House and Senate floors before the Easter break. In a sign of Republicans’ desperation to pass a bailout, Wednesday’s report quoted a Democratic aide as saying that corporate welfare to insurers in the form of a reinsurance package “has become so popular among Republicans that Democrats don’t feel like they have to push very hard.”

There are two ways to solve the problem of rising premiums in Obamacare. One way would fix the underlying problems, by repealing regulations that have led to skyrocketing premiums. The other would merely throw money at the problem by giving more corporate welfare to insurers, providing a short-term “fix” at taxpayers’ ultimate cost. Naturally, most Republicans wish to choose the latter course.

Moreover, in bailing out Obamacare, Republicans will be forced to provide additional taxpayer funding of abortion coverage. There is no way—zero—that Democrats will provide any votes for a bill that provides meaningful pro-life protections for the Obamacare exchanges. Republicans’ desperation to bail out Obamacare will compel them to abandon any pretense of pro-life funding as well.

Most Expensive Parade Ever?

Press reports this week highlighted Pentagon plans to, at President Trump’s request, put on a military spectacle in the form of a massive parade. Trump tweeted his support for the Schumer-McConnell deal on Wednesday, calling it “so important for our great Military.”

It’s an ironic statement, on several levels. First, the hundreds of billions in new deficit spending coming from the military buildup included in the agreement would make the parade the most expensive ever, by far. Second, Michael Mullen, the former chairman of the Joint Chiefs of Staff, called our rising debt levels our biggest national security threat, because it makes us dependent on other countries to buy our bonds. Given that statement, one can credibly argue that this deficit-driven spending binge will harm our national security much more than the defense funds will help it.

Time will tell whether or not the legislation passes. But if it does, at some point future generations will look back and wonder why the self-proclaimed “king of debt” imposed a financial burden on them that they will not be able to bear easily—if at all.

This post was originally published at The Federalist.