Earlier this week, the New York Times reported, with the headline, “Democrats Add Drug Cost Curbs to Social Policy Plan, Pushing for Vote,” that House Democrats “agree[d] to allow the government for the first time to negotiate prices for medications covered by Medicare.”

The article explains,

“Starting in 2023, negotiations could begin on what Senator Ron Wyden of Oregon called the most expensive drugs — treatments for cancer and rheumatoid arthritis, as well as anticoagulants. Most drugs would still be granted patent exclusivity for nine years before negotiations could start, and more complex drugs, called biologics, would be protected for 12 years.”

But, to be perfectly clear, what is planned to happen is not negotiation. It is simply a matter of the federal government mandating price reductions for the selected drugs, for all Medicare Part B and Part D participants. And as regular readers know, twisting the plain meaning of words to achieve one’s objective frustrates me to no end.

Here’s how the system would work, if enacted into law as-is, based on the November 3 version of the bill (summary description here, and top menu here):

The Department of Health and Human Service would, beginning in 2025, select the 100 targeted drugs based on the total expenditure by Medicare for these drugs, as potential targets for “negotiation”/mandatory discounts. One hundred drugs may not seem like much, but a 2019 Kaiser analysis found that for Part D drugs (pills, injectables, etc.), the top 50 drugs account for 37% of all spending, and for Part B (drugs administered at the doctor’s office, such as infusions, such as cancer drugs), the top 50 drugs account for 80% of all Part B drug spending. Only drugs which had been approved more recently than 7 years ago (or 10 years ago for biologics) would be exempt (per the legislative text; the summary claims it’s a protected period of 9 and 12 years).

Upon being selected, the manufacturer would be required to produce all requested information, and would be penalized for a failure to comply at a rate of $1 million per day. Information which is deemed to be false would be penalized at a rate of $100 million per false information item. And in the end, a manufacturer which refuses to participate in the process and sign a “negotiation” agreement by a specified deadline would be deemed noncompliant, with penalties in the form of an excise tax ranging from 65% to 95% of the drug’s sales, for the time periods immediately upon being deemed noncompliant, to the 270th day of noncompliance and later.

After information has been submitted, the HHS Secretary would make an offer, the manufacturer would make a counter offer, and so on, but in the end, there are prescribed ceilings: the “non-Federal average manufacturer price” (something like a drug’s MSRP, but not the “retail price” you might see elsewhere; this is kept secret from the public but used to set government prices for Medicaid, VA healthcare and other programs) would be multiplied by

  • 75%, for drugs approved no more than 12 years prior (or a 25% mandatory discount);
  • 65%, for drugs approved between 12 & 16 years prior (a 35% discount); or
  • 40%, for drugs approved more than 16 years prior (a 60% discount).

In addition, the baseline price for these drugs would be fixed at the price in 2020, adjusted each year by no more than the general inflation rate.

The law provides a list of factors that the HHS would use in determining their offer, including the R&D costs for the drug (but not the R&D costs for other drugs whose trials fail to prove effectiveness) as well as the actual production costs, alongside considerations of how much better it is (or isn’t) than other drugs for the same condition. Third parties would also be able to submit information for consideration. If a new use is found for the drug or for other unspecified reasons, HHS could also declare a renegotiation.

What’s more, the “most favored nation” price reduction process that was initiated under the Trump administration had been wholly abandoned by the Biden administration during the summer. Likewise, a bill introduced into Congress in April, H.R. 3, would have set its target price not with reference to US pricing but instead, according to Kaiser, would have

“define[d] a target price for a selected drug equal to the lowest average price in one of six countries (Australia, Canada, France, Germany, Japan, and the United Kingdom), or 80% of the average manufacturer price in cases where there is no international price, as might be the case for relatively new drugs.”

and would have

“establishe[d] an upper limit for the negotiated price equal to 120% of the Average International Market (AIM) price paid by at least one of the six applicable countries. For selected drugs where there is no AIM price available, the proposal establishes a maximum price equal to 85% of the average manufacturer price (AMP).”

What does it mean that the Build Back Better version of this legislation abandoned the use of reference prices from other wealthy countries? That version of price reduction would have essentially forced those other countries to share the burden of R&D that they currently, more or less, escape. The new version instead may mean that it will be privately-insured Americans who will bear the cost, for drugs where the elderly comprise a relatively small fraction of the overall market. What happens with drugs where virtually the entire market is the elderly, and, in particular, drugs which are still in the process of being researched or tested? Will drugmakers find new ways to game the system, setting their AMP high in anticipation of taking a reduction?

When private sector insurance companies negotiate drug prices, there is true give-and-take; if drug companies won’t agree to a low enough rebate, the insurer will place them in a non-preferred status. The same is true for Medicare Part D insurers, except that there are restrictions placed on insurer’s ability to do so for significant numbers of drugs.

The “negotiation” envisioned in this bill is nothing of the sort, and, once again, Americans deserve some honesty about the government’s plans.

As always, you’re invited to comment at JaneTheActuary.com!

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