New Legislation Overhauls Medicare Drug Pricing and Benefits

Pharma loses battle to block price negotiations, but implementation faces many challenges.

Despite extensive opposition from biopharmaceutical manufacturers, Democrats in Congress pushed through legislation authorizing Medicare to reduce reimbursement for certain pricey medicines and to limit annual increases in drug prices. The $740 billion Inflation Reduction Act (IRA) of 2022 (HR 5376), moreover, will lead to significant changes in the design of drug benefits for seniors incurring high costs, shifting much of the liability to pharma companies.

The drug and health provisions are part of a broad package of reforms in energy and tax policy designed to combat global warming and to boost taxes on large corporations and wealthy individuals.1 Republicans unanimously rejected the entire package, painting the Democrats’ plan as inflationary and fiscally irresponsible. But with all Democrats backing the reforms, the Senate was able to approve the measure in early August, and the House followed suit a week later to seal this important political victory for the Biden administration.

The prescription drug provisions in the bill will largely affect adults over age 65, as Senate rules blocked the application of certain cost controls to individual pharmaceutical sales and to health insurance provided through the market or employment. Commercial plans will not gain from provisions that penalize pharma companies for raising prices each year higher than inflation or from a cap on patients’ insulin outlays at $35 a month.

One boon for health plans and consumers, though, is the provision in the legislation that extends subsidies for health insurance provided under the Affordable Care Act (ACA). This delays for an additional three years premium increases for some 13 million individuals who currently receive discounted coverage for health insurance provided through Obamacare state and federal exchanges. These subsidies were authorized during the COVID-19 pandemic and are set to expire this year without the added $64 billion authorized here to continue the cost reductions in premiums for three more years.

Medicare overhaul

The changes affecting Medicare drug benefits, however, are significant and calculated to have the government $100 billion over 10 years—but not the $460 billion calculated in earlier reform proposals. The legislation would cap out-of-pocket drug costs for Medicare beneficiaries at $2,000 a year beginning in 2025, a provision likely to benefit more than one million seniors, possibly up to three million as more costly therapies come to market. This measure is part of broader changes in the design of the Medicare Part D program, which also eliminate the coverage gap and require manufacturers to shoulder a much larger portion of the costs of drugs prescribed for high-use seniors. Pharma companies also would have to pay large “rebates” or fees to the government if prices on drugs and biologics increase each year beyond the rate of inflation. Insulin costs would be capped at $35 a month for seniors, and free vaccines provided for all.

Most notable is the provision authorizing Medicare price negotiations on certain costly medicines, the holy grail in health benefit reform for many Democrats for decades. Starting in 2026, this highly contentious provision will permit Medicare to negotiate prices on 10 expensive and widely used drugs near patent expiration date, expanding to 20 drugs annually by 2029. If the manufacturer rejects the Medicare price, it would pay a hefty fee to the program, a process that industry has challenged for being closer to price controls than to negotiations.

One thing for sure is that there will be considerable jockeying among biopharma companies over which drugs are put on the price negotiation list as the new program shakes out. The process will seek to establish a maximum fair price (MFP) for certain expensive single-source drugs seven years after approval and biologics 11 years on the market. And certain therapies from “small” firms and orphan drugs may be exempt, provisions sure to affect acquisitions and R&D programs.

Limiting cures?

The Pharmaceutical Research and Manufacturers of America (PhRMA) led a massive assault on the proposal, with non-stop TV and radio ads predicting long-term harm to patients and the healthcare system.2 Similarly, the Biotechnology Innovation Organization (BIO) has kept up a steady stream of warnings that Medicare drug regulation would limit access to many important drugs and result in fewer new cures for patients. PhRMA President Steven Ubl has suggested that industry may file suit to block negotiations and will challenge new rules as Medicare moves to implement the new policy.

Less visible was similar objections from the generic drug industry to the Medicare price negotiations. The Association for Accessible Medicines (AAM) pointed out that the likely brand candidates for spending limits will be widely used, expensive medicines just as they become eligible for generic competition. Consequently, negotiations that lower list prices will leave less room for generic makers to offer lower-priced alternatives that are profitable, and very little incentive for multiple copy cats to move into the market. In addition, Medicare drug plans may have little incentive to give favorable formulary placement to only slightly less expensive generics. Biosimilar makers have raised similar issues, as negotiations to lower prices on expensive biotech therapies could make it more difficult for competing follow-ons to gain market share and become profitable.

It’s not clear, moreover, how these new policies will affect state Medicaid programs and commercial plans. Curbs on annual drug price increases for Medicare could raise prices for other public and private plans. And new pricing policies may prompt higher launch prices for new therapies, change how formularies cover brand and generic products, and alter the design of both Medicare Part D drug plans and commercial coverage.

Another unknown is the impact of coverage and pricing policy changes on investment and innovation in the biopharma industry. Pharma and biotech manufacturers have loudly predicted that limits on prescription drug revenue from forced negotiations will curb incentives to invest in R&D, particularly development programs at new biotech firms, reducing jobs and the discovery of many life-saving medicines. Some health analysts reject such dire outcomes, maintaining that innovation will continue as the new program spurs competition and benefits Americans more broadly.

References

  1. https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf
  2. https://phrma.org/resource-center/Topics/Economic-Impact/PhRMAs-Ubl-Calls-Senate-Passage-of-Partisan-Drug-Pricing-Plan-a-Tragic-Loss-for-Patients