Is Medicare Poised to Negotiate Drug Prices?

A provision allowing CMS to negotiate with pharmaceutical companies survived the House version of President Biden’s Build Back Better Act that passed in November. Now the Senate is taking it up.  Even if the measure clears the Senate and is signed into law, does it have the teeth to make a substantive difference?

The Build Back Better Act, President Biden’s signature social spending legislative package, cleared a crucial hurdle on November 19, when it was passed by the US House of Representatives. It squeaked by almost exclusively along party lines with only one Democrat voting nay. Now, the bill advances for consideration in the Senate. It is anyone’s guess if and when it might come to a vote, though some believe there could be a vote in December.

If it is voted on, it is anticipated the Senate version
will differ in certain ways from the House’s. The question is, how different will the bill become, and which health-related provisions are likely to survive parliamentary rules and be voted on? A total of 11 health-related provisions are included in the version that passed the House. Among them are these drug-related measures:

• Medicare drug price negotiations: The federal government would be allowed to negotiate drug prices for certain medications that lack competition and represent the highest cost outlay for Medicare. All insulin medications would be subject to the negotiation process. Negotiating would begin in 2025 for 10 drugs, increasing to 15 medications beginning in 2026 and 20 starting in 2028. Brand drugs that are still in their exclusivity period would be exempt.
• Medicare Part D redesign: Out-of-pocket costs for Medicare beneficiaries would be capped at $2000 beginning in 2024, with the cap adjusting annually in accordance with changes in Part D costs. Individuals’ costs below the spending cap would also be reduced, as would Medicare’s portion of costs above the cap. However, the discount manufacturers would provide on brand name drugs in the initial coverage phase would be 10% vs 70% currently.
• Above-inflation rebates and penalties: Effective 2023, drug manufacturers would be required to pay a rebate to Medicare when a medicine’s price rises faster than the rate of inflation. The rebate would represent the difference between the price increase what the increase would have been if it matched the inflation rate. If the rebate is not paid, a penalty would be assessed that reflects the original rebate amount plus 25%.
• Insulin cost-sharing limits: For both Medicare beneficiaries and those covered commercially, out-of-pocket spending for an insulin prescription could not exceed $35. For Part D, this would apply to covered insulins in 2023 and 2024. In 2025, when Medicare drug price negotiation begins, it would apply to all insulin products. Commercial payers would be required to cover one of each dosage form and type beginning in 2023.

The Senate parliamentarian will have much to say about which of these provisions are allowed under Senate rules to be included in the budget reconciliation bill that is ultimately considered. The prevailing thought is that the Medicare-related provisions will likely pass muster, since they directly impact the federal budget. However, provisions outside Medicare might be considered “merely incidental” and thus would not be part of the reconciliation bill. Thus, it could be that the insulin provision impacting commercial payers would be taken out of the bill. Besides the parliamentary rules, moderate Democrats Joe Manchin and Kyrsten Sinema represent potential obstacles in a 50-50 Senate. Even with them, Vice President Kamala Harris will likely be needed to break a tie.

If the Medicare negotiation measure survives the parliamentarian, the bill passes, and is signed into law, it will have bucked the odds. Six years ago, then-presidential candidate Hillary Clinton raised the issue on the campaign trail and it became part of the health care package she planned to pursue if elected. Back then, we asked a panel of experts to evaluate the likelihood that, if elected, Clinton would be able to pass such legislation. The response was a nearly unanimous and resounding no. Not much has changed in the years since. We’ve asked on a handful of occasions (see article, “Will Biden Build Back Better With or Without Drug Measures?”) if the sentiment had changed, and each time it had not. So, what’s different now that that makes passage more likely?

Medicare Drug Price Negotiation Lite

The circumstances have not changed much as all, said David Marcus, director of employee benefits at the National Railway Labor Conference in Washington, DC. “The act is pharma industry friendly.  Most specialty medications will not be subject to price controls. Additionally, while the coverage gap for Medicare Part D has been eliminated, the 70% subsidy in the coverage gap for brand drugs has been reduced to 10% for the initial coverage limit, up to the individuals out-of-pocket maximum. And new subsidies have been introduced for generic drugs in both the initial coverage limit and at catastrophic levels, as well as for brand drugs at catastrophic levels. Finally, the continuing existence of rebate/pharmaceutical revenue will allow the industry to offset price controls with reductions in rebate payments to plan sponsors.”

Norm Smith, a principal payer market research consultant in Philadelphia, agreed that the pharmaceutical industry would come out fairly unscathed. The limits on the number of medications subject to negotiation “is something the industry is likely to accept, even if they moan about it.” In fact, Mr Smith said he doubts the estimate from the Congressional Budget Office (CBO) that allowing Medicare to negotiate as outlined in the bill would save Medicare close to $80 billion over 10 years. “Really?” he asked. “I don’t think so.”

Arthur Shinn, PharmD, president of Managed Pharmacy Consultants in Lake Worth, FL, said he thinks that the pharmaceutical industry is picking its battles, and letting this one go. “The drug companies are going to negotiate prices for medications they are not making a high margin on anyway. It would be a totally different story if specialty medications were in the mix, but they are not. Still, I thought they would push back harder and it would not have been part of the package that passed the House. That surprised me.”

Mr Marcus said he wonders if passage sets the tone for the future. “Build Back Better will probably not decrease net cost, but it does provide a framework for expansion of price controls.”

The fact that the slope might get slippery is leading some to question whether Senate passage will indeed occur. “I think it’s very possible things will get hung up in the Senate,” offered Dr Shinn. Added F Randy Vogenberg, PhD, RPh, principal at the Institute for Integrated Healthcare in Greenville, SC: Passage “creates more of an opening to a more widespread approach to Medicare negotiation in the future should Democrats remain in control of legislation and regulation.” Thus, he said, it is not unreasonable to think it will stall in the Senate.

Even if Medicare negotiation is passed and signed into law, Dr Vogenberg said its impact would be questionable. “Cost reduction that is meaningful and sustainable remains very limited. Exclusions will be allowed, and in some cases expanded.” He added that it’s next to impossible to assess how much will be saved—or spent—over a “lengthy 10-year assessment period,” especially because the potential for reduced drug research and innovation is likely not part of the CBO’s analysis. “This illustrates the challenge of trying to estimate the financial impact and whether or not you are really creating sustainable savings.”

Another big unknown, said Mr Marcus, is how the Centers for Medicare and Medicaid Services will implement health-related rule making for the Build Back Better Act if it is passed. “It’s vitally important to the process and I suspect that is where additional effects will be driven.”

Real Savings or Cost-Shifting?

As for the rebate/inflation penalties and out-of-pocket spending caps, Mr Smith said it is instructive to view the effect of these measures through three prisms. “For patients, changing the benefit design to a cap of $2000 would be very impactful.” He hearkened back to the original design of Medicare Part D that was implemented in 2006, “[It] was a political settlement, not a patient-centered decision. In my view it was an ill-conceived benefit design.” Under the iteration that is in Build Back Better, Mr Smith said he thinks “There would be less pill-splitting and fewer unfilled prescriptions, especially for individuals with type 2 diabetes.” Payers, meanwhile, would be able to predict price stability.

But for the pharmaceutical industry, Mr Smith noted “list prices are not the real prices—net prices are.” Which brings the issue back to innovation. “Some classes of therapy have greater than 50% rebates. Considering the risks involved in developing new innovative products, how can the industry take on such risk” under the new provision?

Mr Marcus said he believes pharmaceutical companies “will adjust their rebate contracts to maintain margins,” minimizing the benefit to payers. “But individuals will benefit, especially those in high deductible plan designs.” According to Dr Vogenberg, “plan sponsors will take the financial hit through increased premiums and other claim costs that they are responsible for paying.” Individuals could see some benefit, but he warned that this does not solve the overall out-of-pocket expense challenges many individuals experience in the current marketplace.

In the end, some wondered if these provisions will simply result in cost shifting. “The $2000 out-of-pocket spending limit may have a positive effect on medical costs if medication compliance increases due to lower cost sharing, explained Mr Marcus. “But ultimately it could have a negative impact on plan sponsors and payers, since this feature is a component of subsidy reductions for both the pharmaceutical industry and the federal government.” Moreover, though the impact in the short-term would be positive for individuals, over time “increased premiums will reflect the decreased subsidies, neutralizing the positive effects.”

Dr Vogenberg said the reality is no one really knows the precise financial impact limiting Medicare out-of-pocket spending and the price individuals pay for insulin will have. “How many would benefit based on their insulin therapy and selected Medicare benefit coverage? There are still many variables in play that can impact whether savings are realized or not—and, if so, how much can be saved?”

Missed Opportunities

Dr Shinn said he thinks the Biden administration and Congress would be wise to spend its time on other health-related cost centers. “Think about the cost of one or two days in the hospital. That is where the opportunity for cost savings exists. Provider-related costs represent a much high proportion of spending than drugs. Getting a drug to the right person at the right time and the right dose offers the best bang for the buck. When that formula is altered, higher overall costs downstream are likely.”

Mr Marcus also suggested that Washington might be missing the mark.  “Recent investor reports for the larger PBMs [pharmaceutical benefit manufacturers] note that specialty drugs make up 30% to 50% of the total drug spend – and this proportion is growing.” Such increases, he said, are not sustainable for employer-sponsored plans. Yet specialty drugs are not addressed in Build Back Better.

A Christmas-Eve Redux?

As for when exactly Build Back Better might come to a vote in the Senate, some suggest looking back to late 2009 and the path taken by the Affordable Care Act (ACA). Similar to the Build Back Better Act, the ACA passed the House in November and lingered in the Senate throughout December. It finally passed on Christmas Eve 2009, delivering the ultimate present to President Obama and ACA proponents.

Whether President Biden and Build Back Better supporters are similarly gifted remains to be seen.