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Rising drug costs the real stumbling block for defense measure

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(Bloomberg) — Congressional debate over the annual defense policy measure often centers on hot-button issues such as the future of the military prison at Guantanamo Bay, the fate of huge weapons systems and whether to lift budget caps.

This year, a dispute over a bread-and-butter matter — how to pay for the rising cost of prescription drugs — may be most vexing of all for lawmakers who are trying to close a deal on the bill, H.R. 1735, that would authorize more than $620 billion in defense-related spending.

At issue are benefits for the estimated 9.6 million users of the Pentagon’s Tricare health system and resulting profits for retail drugstores including those run by CVS Health Corp. (NYSE:CVS), Walgreens Boots Alliance Inc. (NYSE:WAB) and Rite Aid Corp. (NYSE:RAC).

Senate negotiators are supporting an Obama administration plan to increase co-payments for military retirees and families over 10 years, while House conferees oppose passing on so much of that cost to veterans.

Military health benefit costs are “eating us alive,” said Senate Armed Services Committee Chairman John McCain. The Arizona Republican supports increasing co-pays to address additional costs, which he said isn’t the most popular stand.

“Whenever you try to address them you are subjected to attacks,” McCain said at a Chamber of Commerce event in July.

Resistance to increasing the cost to military personnel has been led by Rep. Randy Forbes, the chairman of the House Armed Services Seapower and Projection Forces Subcommittee.

‘Nickel-and-diming’ families

“Our troops and their families are facing a great deal uncertainty right now with reductions in force and major changes to the military retirement system,” Forbes said in an e-mail on Wednesday. “We need to get our fiscal house in order and free up the resources we need for national defense, but we are not going to do that by nickel-and-diming our military families on things like pharmacy co-pays.”

The Republican lawmaker’s southeastern Virginia district is home to a large number of military personnel.

Supporters of increasing co-payments say the need was underscored when the Defense Health Agency, which administers Tricare, wrote Congress on July 16 asking lawmakers to shift $900 million in funds to help fill a $2 billion shortfall this year.

Amid continuing increases in the cost of prescription drugs, the budget hole was created in part by a surge in the use of compound medicines. Reimbursements for the specially formulated drugs rose to $1.7 billion in the first half of this year from $23 million in 2010, according the health agency. In May, the Pentagon issued new pre-approval requirements meant to slow the use of compound drugs, such as pain creams sold by small companies outside military bases.

Veto threat

Not that medical benefits are the only hurdle as House and Senate conferees seek to negotiate a final version of the bill. The White House has threatened a veto because it would circumvent spending caps under the Budget Control Act, Public Law 112-25, by dipping into war funds that don’t count against the limit. President Barack Obama is trying to pressure congressional Republicans to lift both domestic and defense budget caps.

But lawmakers won’t be able even to send a bill to the president unless they resolve disagreements over health benefits.

Active-duty troops don’t have to make co-payments regardless of how they order prescription drugs.

Otherwise, members of the military, their families and military retirees can obtain drugs through Tricare for free by going to military-run pharmacies including those on bases and at military hospitals. Co-pays apply when they use retail drugstores or when they order brand-name drugs, rather than generic versions, through a national mail-order program run for the military by Express Scripts Holding Co. (Nasdaq:ESRX).

Family, retirees

Until this year, family members and retirees, who make up more than half of all Tricare users, were charged co-pays of $5 when buying generic drugs at retail pharmacies and $17 when buying brand-name drugs there.

A deal on Tricare drug co-payments was one of the final compromises lawmakers made in the fiscal 2015 defense authorization. Under that agreement, the existing co-pays rose by $3 and after Oct. 1 of this year, all brand-name prescription maintenance medications must be filled through military-run pharmacies or the national mail-order pharmacy program.

A report by the Military Compensation and Retirement Modernization Commission in January helped set the stage for potentially wider changes to Tricare. The commission recommended privatizing the system by giving military members a choice of commercially run plans.

Obama’s plan

The White House rejected the commission’s plan. In its fiscal 2016 budget, the administration instead recommended an increase in Tricare drug co-pays over the next 10 years. The steepest increases would be for brand-name drugs and compound medicines.

Under the proposal, co-payments for generics at retail pharmacies would rise over a decade to $14 from $8, co-pays for brand-name drugs would increase to $46 from $20, mail-order generics would rise to $14 from free, mail-order brand-name drugs would increase to $46 from $16, and co-pays on nonformulary drugs, including compound medicines, would rise to $92 from $46.

McCain’s Senate version of the defense bill included the recommendation. The Congressional Budget Office estimated that the changes as applied to military family members and retirees not yet eligible for Medicare would save $900 million in discretionary funds over 10 years. The increases would save an additional $1.4 billion when applied to retirees eligible for Medicare.

The Senate version also would tap this funding to help pay for an overhaul of the military retirement system, providing for the first time a 401(k)-style benefit with matching contributions while reducing some pension benefits.

Political calculations

The dispute between the chambers over Tricare stems partly from the different natures of the House and Senate, according to John Isaacs of the Council for a Livable World.

“Senators sometimes have a broader view and the House members are more focused on districts,” said Isaacs of the watchdog group. “Ironically most House members are in safe districts thanks to redistricting.”

Ryan Alexander, president of Taxpayers for Common Sense, a nonpartisan budget watchdog group, said the House is more inclined to be generous with military spending, citing the House Armed Services Committee’s decision to try to authorize $2.2 billion more in procurement than the Pentagon says it needs.

“There is a more cynical political calculation in the House in particular which says I will not take a dollar away from military service members or veterans because that is what I am here to do, I take care of them,” she said.

House Armed Services Committee spokesman Claude Chafin declined to comment on the negotiations.

One possible compromise being floated would be to phase in the co-payment increases more gradually.

Resolution of the defense policy measure could be pushed back until the end of the year as Congress seeks a compromise on budget caps for fiscal 2016. Some co-payment increase may occur even if there’s no longer pressure from the budget cap, Alexander said.

“It is driven by the caps and also by a realization in the Pentagon that these costs are eating up more and more of the budget,” she said.

Isaacs said he was confident that, given “McCain’s stubbornness, that there will be some changes.”

“It will be a partial step, a baby step, far less than McCain wants,” he said.


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