What’s the Latest on Medicare Drug Price Negotiations?
Prescription drug costs are a major concern for consumers and a fiscal challenge for public and private payers, representing 10% of national health spending and nearly 20% of health benefit costs for large employers and Medicare. In response, lawmakers are considering a broad range of policy options, including one that would allow the federal government to negotiate prescription drug prices on behalf of Medicare beneficiaries and people enrolled in private plans, a proposal that has strong bipartisan public support. This brief describes the current status of drug price negotiation proposals, looks back at the history of proposals to give the federal government the authority to negotiate drug prices in Medicare, describes the negotiation provisions in key legislation (H.R. 3), and discusses the potential spending effects for the federal government and individuals.
What’s the status of Medicare drug price negotiation proposals?
President Biden supports a change in law that would allow Medicare to negotiate drug prices, according to a July 2021 executive order and the FY2022 budget proposal, although the Administration has not outlined a specific process for drug price negotiation and estimated savings from this proposal were not reflected in the budget. The executive order, which also endorsed other proposals to lower drug prices, such as inflation caps, called for HHS to develop more specific proposals to lower drug prices within 45 days of the order’s issue date.
In Congress, proposals to authorize the federal government to negotiate drug prices for Medicare and other payers appear to have some momentum in the both the House and Senate. In the House, this proposal is a key feature of H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act, which was reintroduced in the 117th Congress in April 2021 after passing the House in the previous session. H.R. 3 would require the Secretary of the Department of Health and Human Services (HHS) to negotiate the price of at least 50 brand-name drugs without generic competitors starting in 2025 and would make the negotiated price available to both Medicare and private payers. Other legislation has been introduced in the House that would also allow government negotiation of drug prices.
In the Senate, Democrats are reportedly planning to include a provision to allow Medicare drug price negotiation provision in a budget reconciliation package, although specific details have not yet been released. The chairman of the Senate Finance Committee, Senator Ron Wyden (D-OR), released a set of principles for drug pricing reform in June 2021 that endorsed Medicare drug price negotiation, among other approaches, but has not yet released drug price legislation in the 117th Congress. According to Senator Wyden’s principles document, allowing Medicare to negotiate drug prices could address circumstances of market failure around drug prices, such as when there is inadequate or no competition or when drugs launch at high prices that may not be justified based on their clinical value. The principles call for a policy that establishes clear criteria for which drugs to include in price negotiation, gives the HHS Secretary the requisite tools to negotiate a “fair” price, and creates incentives for manufacturers to participate in the negotiation process.
What’s the history of Medicare drug price negotiations?
Under the Medicare Part D program, which covers retail prescription drugs, Medicare contracts with private plan sponsors to provide a prescription drug benefit and gives plan sponsors authority to negotiate drug prices with pharmaceutical companies. The law that established the Medicare Part D benefit, which covers retail prescription drugs, includes a provision known as the “noninterference” clause, which stipulates that the HHS Secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP [prescription drug plan] sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.” In effect, this provision means that the government can have no direct role in negotiating or setting the price of drugs in Medicare Part D. This approach contrasts with how drug prices are determined in some other federal programs, such as mandatory drug price rebates in Medicaid, and the use of ceiling prices and minimum discounts, in conjunction with a national formulary, in the Department of Veterans Affairs (VA).
For drugs administered by physicians that are covered under Medicare Part B, Medicare reimburses providers 106% of the Average Sales Price (ASP), which is the average price to all non-federal purchasers in the U.S, inclusive of rebates. When no ASP is available, Medicare pays 103% of the wholesale acquisition cost (WAC) until ASP data are available. The WAC is equivalent to a list price and typically higher than ASP. In other words, Medicare does not set its own rates for drugs covered under Part B, in contrast to how traditional Medicare sets payment rates for hospitals, physicians, and other providers.
The Part D non-interference clause has been a longstanding target for some policymakers since even before the Part D drug benefit took effect in 2006. And with the rise in the number of high-priced drugs coming to market, including the recently-approved Alzheimer’s drug, and with drug prices rising faster than the rate of inflation, there is renewed interest in proposals to lower drug spending, including allowing the federal government to negotiate drug prices for Medicare beneficiaries and people with private insurance. Proponents of this approach believe that giving the HHS Secretary the authority to negotiate drug prices would provide the leverage needed to lower drug costs, particularly for high-priced drugs for which there are no competitors, where private plans may be less able to negotiate lower prices. Opponents counter that the current system of private plan negotiation is working well, and that government involvement in price negotiations could dampen incentives for pharmaceutical companies to invest in research and development.
How would Medicare negotiate drug prices under H.R. 3?
H.R. 3 amends the non-interference clause under current law by adding an exception that allows for the price negotiation process established by the legislation. The negotiation process applies to at least 25 (in 2024) and 50 (in 2025 and subsequent years) single-source brand-name drugs lacking generic or biosimilar competitors, selected from among the 125 drugs with the highest net Medicare Part D spending and the 125 drugs with the highest net spending in the U.S., which could include physician-administered drugs covered under Medicare Part B, along with all insulin products. Drugs that are new to market could also be subject to negotiation if their list price is greater than median household income and their projected spending would place them among the list of drugs with the highest spending under Medicare or the U.S. overall.
From these lists, the Secretary selects specific drugs for negotiation based on projections of the greatest savings to the federal government or to individuals eligible for the negotiated price. The Secretary would then negotiate with pharmaceutical manufacturers to determine a “maximum fair price” for each of the selected drugs. H.R. 3 defines 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. The bill also establishes 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). The AMP is defined as the average price charged by drug companies to wholesalers and pharmacists, net of discounts.
In determining the maximum fair price, H.R. 3 requires the Secretary to consider research and development costs, market data, production and distribution costs, and existing therapeutic alternatives, including comparative effectiveness data. If a manufacturer offers a price that is no more than the target price, the proposal requires the Secretary to accept this as the maximum fair price for the drug. The agreed-upon negotiated price would be made available to private plan sponsors in Medicare Part D and commercial payers in group and individual markets, and to providers that administer physician-administered drugs.
H.R. 3 imposes financial penalties on drug companies that do not comply with the negotiating process as well as if negotiations fail. Manufacturers that fail to negotiate successfully with the Secretary would face an escalating excise tax on the previous year’s gross sales of the drug in question, starting at 65% and increasing by 10% every quarter to a maximum of 95%. In addition, manufacturers that refuse to offer an agreed-upon negotiated price to any payer would pay a civil monetary penalty equal to 10 times the difference between the price charged and the maximum fair price (based on AIM, as explained above).
The timeline for the negotiation process spans a roughly two-year period. To make negotiated prices available in 2024, the list of selected drugs for negotiation would be published on April 15, 2022. The period of negotiation between the Secretary and manufacturers would occur between June 15, 2022 and March 31, 2023, and the negotiated “maximum fair prices” would be published no later than April 1, 2023.
What has CBO said about the potential for savings from Medicare drug price negotiation under H.R. 3?
CBO estimated over $450 billion in 10-year (2020-2029) savings from the Medicare drug price negotiation provision in the version of H.R. 3 in the 116th Congress, including $448 billion in savings to Medicare and $12 billion in savings for subsidized plans in the ACA marketplace and the Federal Employees Health Benefits Program. CBO also estimated an increase in revenues of about $45 billion over 10 years resulting from lower drug prices available to employers, which would reduce premiums for employer-sponsored insurance, leading to higher compensation in the form of taxable wages.
A separate CBO estimate of the same Medicare drug price negotiation provision included in another House bill in the 116th Congress (H.R. 1425, the Patient Protection and Affordable Care Enhancement Act) estimated higher 10-year (2021-2030) savings of nearly $530 billion, mainly because the Secretary would negotiate prices for a somewhat larger set of drugs in year 2 of the negotiation program under H.R. 1425 than under the version of H.R. 3 that CBO scored (50 vs. 25 drugs; this change is incorporated in the current version of H.R. 3).
In prior analyses of drug price negotiation, CBO said that providing the Secretary with broad authority to negotiate drug prices without also exerting some form of pressure on drug manufacturers to lower their prices would likely produce negligible savings. However, in its analysis of H.R 3, CBO indicates that the excise tax provision provides the Secretary with needed leverage to achieve lower drug prices and federal savings by creating a strong incentive for drug companies to engage in the negotiation process.
While CBO expects that the lower drug prices resulting from allowing the federal government to negotiate drug prices would lead to lower Medicare beneficiary premiums and cost sharing under Part D, CBO also expects that this policy would lower revenues for drug manufacturers, lead to higher drug prices in other countries and a lag in the introduction of new drugs in the six reference countries, and lead to a modest reduction in the number of drugs coming to market in the future, due to the loss in revenue for drug manufacturers. CBO estimates eight fewer drugs coming to market over the next 10 years, of the approximately 300 drugs expected to be approved during this period, and 30 fewer drugs in the subsequent decade.
How would drug price negotiations affect out-of-pocket drug spending and premiums?
Allowing the federal government to negotiate drug prices on behalf of Medicare beneficiaries and private plan enrollees would reduce out-of-pocket drug spending and premiums, according to an analysis by Medicare’s actuaries of the version of H.R. 3 that passed the House of Representatives in the 116th Congress. (CBO has not conducted a similar analysis for H.R. 3.) The actuaries estimated that the negotiation provisions of H.R. 3 would reduce spending by Medicare Part D enrollees by $117 billion between 2020 and 2029, including a reduction of nearly $103 billion in cost sharing for people who use drugs covered under Part D that are subject to negotiation, and another $14 billion reduction in Part D premiums. In addition, the actuaries estimated that the negotiation authority in H.R. 3 would reduce beneficiary spending under Part B by an additional $18 billion during this time period by reducing cost sharing for Part B drugs by more than $6 billion and by reducing Part B premiums by nearly $12 billion. These estimates do not reflect the interactive effects of other provisions in H.R. 3, such as the Part B and Part D inflation caps or Part D benefit redesign, which would also affect beneficiary premiums and cost sharing.
Because the lower negotiated prices would also apply to private health insurers under H.R. 3, people with private insurance would also face lower cost sharing for prescription drugs and premiums, according to the actuaries. Overall, people with private health insurance would save an estimated $54 billion between 2020 and 2029, including $25 billion in lower cost sharing for enrollees who use drugs subject to negotiation and $29 billion in savings due to lower premiums.
These estimates may understate savings for Medicare beneficiaries and private plan enrollees that could be achieved under the current version of H.R. 3, which requires the Secretary to negotiate prices for a larger number of drugs in year 2 than the version of H.R. 3 that the actuaries analyzed.
What are the prospects for Medicare drug price negotiation?
With President Biden in the White House and Democrats now controlling both chambers of Congress, the prospects for a change in law that would allow the federal government to negotiate drug prices appear to be more favorable than under the previous Administration, although the path forward for this proposal remains uncertain. Congressional Democrats are generally supportive of government negotiations on drug prices, as is the public, based on concerns about high and rising drug prices, particularly for new drugs with little or no competition. Many supporters would also like to apply budgetary savings from this proposal to pay for other health care priorities. But even among Democrats, support for this proposal is not universal, and it is not clear that current legislative proposals have sufficient votes to pass the House this Congressional session, given a narrower majority, and concerns about preserving incentives for innovation raised by some centrist Democratic lawmakers.
Congressional Republicans have generally been opposed to allowing the Secretary to negotiate drug prices under Medicare and did not include this proposal in their drug price legislation, H.R. 19. The pharmaceutical industry continues to express strong opposition to government involvement in drug price negotiations based on concerns that it could lower revenue for drug companies, have a dampening effect on research and development, and limit access to new drugs. H.R. 3 includes $7.5 billion in additional funding over 10 years (2022-2031) for the National Institutes of Health (NIH) to support innovative biomedical research through the NIH Innovation Projects, which would supplement the $5 billion in funding allocated for such research in the 21st Century Cures Act.
While the immediate prospects for legislation to allow the federal government to negotiate drug prices for Medicare and private payers are unclear, the proposal may have greater momentum in the current session of Congress given support among the leadership in the House and Senate, the strength of public support among both Democrats and Republicans, and the potential to achieve meaningful savings for patients, employers, and Medicare.
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