Et Tu, Drug Price Reform?


Drug Prices:  Is Ceding Political Victory No Longer a Showstopper? 

Tuesday, the Congressional Budget Office (CBO) scored the Elijah Cummings Lower Drug Costs Now Act (H.R. 3).  This is the U.S. House of Representatives’ current best effort to provide drug cost relief.  The Senate has its own drug cost bill known as the Prescription Drug Pricing Reduction Act of 2019 (S. 2543); it too has received a preliminary CBO score.  While many are skeptical we will witness the passage of drug pricing legislation in an election year and in light of the vituperative discourse between Democrats and Republicans, I am struck by two observations.  First, it appears legislation can get done, if both sides can claim victory.  On the day that Democrats in the House introduced articles of impeachment, they also announced an agreement with the White House on a revised U.S.-Mexico-Canada Agreement on trade.  Second, the guts of drug price reform don’t appear to be radically different from the House to the Senate to the White House.  Below, I describe some of the key elements of the two lead bills, as well as what the White House has proposed: 

According to the CBO, the Elijah Cummings Act: 

  • Would require the Secretary of Health and Human Services to negotiate prices of selected drugs such that these prices didn’t exceed 120% those paid in a reference group of developed countries.  These prices would be required to be used for Medicare Part D plans, and available to commercial plans.  Manufacturers that failed to comply would be subject to an excise tax that would not be deductible for income tax purposes. 
    • Medicare would spend about $448bn less from 2023 through 2029 as a result.  This is a huge amount of money relative to what is spent today.  For reference, CMS estimates that the Medicare Part D program spent about $155bn on drugs (gross) in 2017.  In 2027 alone, the CBO projects the program would spend $94bn less than if we kept the status quo.  
  • Would limit annual price increases to the rate of inflation in the Consumer Price Index – Urban (CPI-U), with manufacturers rebating back any increases in excess of this rate. 
    • As a result of this change, Medicare would save $37bn over the planning period, according to the CBO. 
  • Would upgrade the benefit Part D beneficiaries receive.  Specifically, the Act would eliminate the coverage gap commonly known as the doughnut hole, introduce an out of pocket maximum at the point at which catastrophic coverage kicks in today, and modify other elements of the benefit. 
    • These changes would increase direct spending by $9bn over the planning period, according to the CBO. 
  • Would require higher levels of cost and price transparency from manufacturers, increase the number of seniors eligible for low-income subsidies, add dental, vision and hearing care benefits to Medicare, and increase government funded research. 

At this time, the CBO has not yet issued an updated cost estimate for S. 2543, which the Senate Finance Committee (SFC) introduced on September 25.  However, the CBO has provided a preliminary estimate for the bill, based on the Description of the Chairman’s Mark provided to the CBO on July 25.   

According to the CBO, S. 2543: 

  • Would require that manufacturers include coupons in their estimate of Average Selling Price for their drugs. 
  • Would modify Medicare Part B reimbursement with a goal of increasing the adoption of biosimilars. 
  • Would require that Part B drug price increases above CPI-U be rebated back to Medicare. 
  • Would upgrade the benefit Part D beneficiaries receive.  Primarily, the Act would introduce an out of pocket maximum at the point at which catastrophic coverage kicks in today. 
  • Would require that manufacturers provide drug payment information to Medicare and Medicaid advisory groups, including certain rebate information.  The Act would also require that HHS publish less sensitive information on pricing and discounts on its website. 
  • Would require that Part D drug price increases above CPI-U be rebated back to Medicare. 
  • Would make modifications to Medicaid requirements, including the use of Pharmacy and Therapeutics committees and Drug Use Review boards, rebate oversight and price calculations. 

The White House: 

While it doesn’t appear that Alex Azar and Seema Verma are likely to sip hot cocoa by the fire together this holiday season, the one thing they have in common is a desire to impress the President with their loyalty.  Thus, I think it’s reasonable to expect that HHS and CMS will tout the President’s initiatives publicly, while working cooperatively with those working to reduce prescription drug prices.   

Specifically, I would remind readers that the President’s Blueprint to Lower Drug Prices: 

  • Was the first to introduce the notion of a reference pricing mechanism. 
  • Promotes the idea of improving transparency through the Medicare pricing dashboard. 
  • Contemplates measures to limit drug price increases, including inflation caps. 
  • Promotes the idea of introducing an out-of-pocket maximum for seniors. 

The President is also in favor of drug importation from countries like Canada and HHS is currently working with several states to establish guidelines for how this might be accomplished more broadly. 

With these various facts in place, I think it’s natural to ask — can legislation be passed, what will it look like, and what are the implications? 

As far as I can tell, reducing the cost of drugs is a bi-partisan issue.  The Republicans certainly view it as a winner for the upcoming elections, and the initial spark for reform actually came from Hillary Clinton in the fall of 2015.  According to a recent Kaiser Family Foundation poll, lowering prescription drug costs is the top health care priority amongst voters.  Obviously, we now have a Democrat-led bill in the House and a bi-partisan bill in the Senate that 1) don’t look to be at odds with one another, and 2) incorporate many of the changes the President would like to see implemented.  The trick, as is customary, is to keep fringe elements from blowing up the final bill while positioning the passage of such a bill as a victory for both political parties and the president. 

Kaiser Family Foundation Tracking Poll (September 12):

I believe that the Senate’s bill will form the corpus of anything that’s likely to get done.  First, it focuses more narrowly on the drug benefit and delivery system.  Second, it contemplates reforms that are limited to government programs, rather than both government and private plans.  Third, it focuses on pragmatic solutions with moderate financial impact and modest operational impact.  Fourth, it arises from the legislative body where consensus matters to a greater degree (i.e., notwithstanding the occasional fringe caucus revolt, the Speaker can usually get her way in the House). 

I think that it should be relatively easy both to implement a price inflation cap and establish an out-of-pocket maximum for Part D beneficiaries (seniors).  Both sides of the aisle generally agree that these wouldn’t be disruptive operationally and would like to see industry pay for a greater percentage of the benefit.  However, both worry that insurers will raise premiums if the government shifts to much of the bill onto their collective backs.  Thus, I envision the government picking on the drug manufacturers when it comes to determining how much of the doughnut hole and catastrophic benefit reforms each entity picks up.  I also think that we should expect the government to demand greater levels of price transparency from insurers, pharmacy benefits managers and manufacturers. 

On the other hand, I don’t think we’ll witness the passage of anything that includes a reference pricing mechanism, direct negotiations between CMS and industry, or the addition of new entitlements (e.g. dental benefits).  These are very disruptive from an operational point of view and are likely to invite much more vociferous and widespread opposition. 

According an article by The Hill1, Mitch McConnell and selected republicans aren’t in favor of certain elements of the Senate bill, including the inflation cap.  While the article goes on to say that opponents equate such a cap to price setting, I think it’s important to note that such a cap already exists under Medicaid.  Thus, this argument represents little more than a straw man, in my opinion.  For now, it doesn’t appear that President Trump is twisting any arms in front of the election cycle (perhaps he’s sensitive to the fact that the impeachment trial is about to begin?).  However, I expect that as the groundswell of support grows amongst voters, we’ll see more jawboning and increasing Congressional support for a simplified proposal, and that we may truly be talking about passage in the Spring. 

If we do get a new drug price reduction act, I don’t think we’ll see a big impact on productivity and access, broadly speaking.  Nor do I think we’ll see a big impact on access one way or another.  However, there could be pockets of pharmaceutical business that become less attractive as a result.  If a bill were to pass along the lines I’ve described above, high priced medicines for the elderly population become less attractive, all else equal.  Let’s take a simple example – a person being treated with a cancer medication beginning January 1st under the standard Part D benefit design.  Here’s the current construct: 

If this medicine costs $10,000 per month and is used for 10 months, the drug company receives $95,680.46 — $3,820 up to the doughnut hole (from the enrollee and plan), 30% of the gross costs up to $8,139.54 (split 25% enrollee and 5% plan), and 100% of everything thereafter (via enrollee, plan and Medicare). 

Under the Senate proposal, which still may change, this same medicine would provide the drug manufacturer only $80,620 – 100% of payments up to $3,100, then 80% of any payments made above this threshold.   

A lot obviously still depends on the final agreed-to split between manufacturers, plans and Medicare above the catastrophic threshold, as does the practical matter of whether a beneficiary is on other medications that count towards the out-of-pocket max.  Still, I think that the companies most affected by these changes would be those already selling oral cancer medications (pills), since those companies would be unable to change prices meaningfully in order to respond.  Injected/infused cancer medications are typically covered under Part B, which is a separate benefit.  Amongst multi-national branded biopharma companies, Pfizer probably has the most to lose, although there are some biotechnology companies that sell only oral cancer medicines.  In addition, any other drugs disproportionately used amongst the elderly would theoretically be affected, subject to pricing and the catastrophic threshold (e.g. certain antiviral medications and anticoagulants).  

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