Yesterday, the text of the Democratic deal on prescription drug pricing reform was released. These drug pricing reforms are intended to move forward as part of a broader reconciliation package in support of President Biden’s Build Back Better agenda. This deal comes just days after it was reported that the reconciliation package would not include any drug pricing reform elements, despite their popularity, due to reported opposition from a small number of members of Congress.
In this post, I summarize the main provisions from the new drug pricing reform deal, with a focus on the differences between the new proposal and the version of H.R. 3 passed by the House Democratic caucus in 2019 (summarized here) and the implications of those differences for the policy’s ultimate impact. I close by situating the deal within the broader drug pricing reform context and consider future developments.
This negotiated agreement is somewhat narrower in scope than H.R. 3. Nevertheless, it retains two of H.R. 3’s key elements nearly intact: restructuring the Medicare Part D benefit to cap patients’ out-of-pocket costs and establishing penalties for price increases outpacing inflation in Medicare—and still includes significant elements of H.R. 3’s third pillar, Medicare drug price negotiation. Due to the multifaceted nature of the problems within our drug pricing system, the inclusion of each of these elements is important to the package’s ultimate policy impact.
Capping Medicare Part D Out-Of-Pocket Costs And Restructuring Part D
These elements of the negotiated agreement are highly similar to those included in earlier versions of H.R. 3. Essentially, this portion of the package accomplishes two goals. First, it creates an out-of-pocket cap for Medicare Part D beneficiaries at $2,000 per year. Currently, Part D contains no out-of-pocket cap, and even in the “catastrophic” phase of the Part D benefit, beneficiaries remain responsible for 5 percent of the cost of their medicines, without limit. The Kaiser Family Foundation (KFF) has noted that the average out-of-pocket spending for Part D enrollees is over $3,200, meaning that a large number of Medicare enrollees would benefit significantly from the new $2,000 cap. KFF has estimated that more than 3.6 million Part D enrollees had out-of-pocket spending above the catastrophic threshold in at least one year over a ten-year period, with a large proportion of them experiencing this level of spending in more than one year.
The negotiated deal also provides two additional benefits for enrollees. It provides them with the option to smooth cost-sharing over the calendar year (a slightly stronger version of a provision which originally appeared in H.R. 3), and it broadly expands a voluntary model begun by CMS that permitted enrollees in particular Part D plans to obtain insulin with a capped $35 copay. This financial benefit will now be available to all Part D enrollees, rather than those enrolled within specific plans, and could lower annual out-of-pocket costs for beneficiaries by 28 percent.
The second goal of this portion of the package is to change the financial responsibilities of stakeholders within the benefit structure to provide Part D plans with stronger incentives to control costs and negotiate prices. Policy experts have argued that the existing benefit design, which makes plans responsible for just 15 percent of costs in the catastrophic phase (compared to Medicare’s own 80 percent responsibility), does not create sufficient incentives for plans to negotiate for lower drug prices. Increasing plans’ responsibility significantly (and adding additional responsibility for manufacturers themselves) is likely to change these dynamics.
These proposals are important for millions of beneficiaries who struggle to afford their high-priced medications. But capping patient out-of-pocket costs alone would likely increase, not decrease, prices and spending, because it does not directly address the high prices of drugs themselves. As such, the negotiated proposal, like H.R. 3, pairs these Part D structural reforms with additional initiatives designed to do just that.
Penalties For Price Increases Beyond Inflation In Medicare
This element of the negotiated agreement is also highly similar to the version previously contained within H.R. 3. The goal is to control the rate of price increases in both Medicare Part B and Part D. Manufacturers of drugs sold to either program that raise the relevant prices of their drugs more rapidly than inflation must pay the above-inflation amount back to the government. This provision takes inspiration from the Medicaid program, which has long included a similar inflationary clawback. Analyses suggest that more than half of the price differential between prescription drugs in Medicaid and in Medicare Part D is attributable to Medicaid’s existing inflationary clawback, suggesting that significant price savings may be available here as well.
One key change between the H.R. 3 version of these inflationary rebates and the negotiated agreement’s version is that H.R. 3 would have benchmarked its inflationary rebate system to 2016 prices, creating retroactive financial responsibilities for many companies. The negotiated agreement instead sets the fourth quarter of 2021 as its benchmark, more closely resembling the Senate Finance Committee’s package and putting companies on notice of these requirements going forward.
Medicare Drug Price Negotiation
The third element of the negotiated agreement involves providing authority to the Secretary of Health & Human Services (HHS) to negotiate directly for the prices of certain prescription drugs. The basic structure of the envisioned negotiation under the newly negotiated agreement is similar to the structure laid out in H.R. 3: a process for the exchange of information and offers between HHS and the relevant pharmaceutical company, coupled with an escalating excise tax as an enforcement mechanism for companies that refuse to negotiate with HHS.
But the details of this element of the package, unlike the other two elements, have changed significantly from H.R. 3. In response to the concerns of some members of Congress about the impact drug price negotiation could have on the pharmaceutical industry, the new agreement’s negotiation provisions are narrower in ways that will decrease the potential impact of the negotiated agreement. For instance, the agreement limits how frequently HHS will be permitted to engage in Medicare drug price negotiation. While H.R. 3 instructed HHS to negotiate for the prices of “at least 25” eligible drugs in the program’s first year and “at least 50” per year thereafter, the recent agreement limits negotiation to “not more than 10” eligible drugs in the program’s first year, rising to a maximum of 20 drugs over time.
The negotiated agreement also provides protections to manufacturers during their initial period of time on the market. Negotiated prices cannot become operative for negotiation-eligible drugs until a small-molecule drug has been approved for nine years, and a biologic drug for twelve. Although this limitation is formally more restrictive than H.R. 3, which focused simply on the top-spending drugs within Medicare or in the health care system as a whole, many high-priced drugs will still be eligible for negotiation with these time limits. Of the ten top-selling drugs in Medicare Part B, eight were approved a decade or more ago. Of these, two fall into the newly described category of “post-exclusivity” drugs, which have been on the market for twelve to sixteen years without facing competition, and four fall into the category of “long monopoly” drugs, which have been on the market for over sixteen years without competition. Key Part D products, including Humira and Revlimid, would also fall into this “long monopoly” category.
The negotiated agreement ties these categories of products to the discounts HHS expects to achieve. For post-exclusivity drugs, HHS intends to receive at least a 35 percent discount off of the non-Federal average manufacturer price. For long-monopoly drugs, HHS intends to receive a larger 60 percent discount off of this price. In exchange for providing these discounts, though, the negotiated agreement also requires Part D plans to cover all such negotiated drugs. This approach may make intuitive sense to those who argue that “fair prices should lead to fair access,” as it aims to drive utilization toward companies engaging in the negotiation process in good faith.
Finally, unlike H.R. 3, the negotiated agreement includes explicit carve-outs for certain products or pharmaceutical companies. For instance, the bill text explicitly excludes 1) products which make up less than 1 percent of total Part D expenditures but 80 percent or more of the manufacturer’s revenue, 2) certain orphan drugs—those that have been designated and approved for use “for only one rare disease or condition” and for no other use, and 3) drugs whose total expenditures under Medicare are less than $200 million. It is unlikely that these exclusions would apply to the highest-cost drugs in the program, however.
The Congressional Budget Office (CBO) had estimated that the negotiation provisions of H.R. 3 alone would lower spending by approximately $456 billion over a decade. This number will be reduced as it relates to the negotiated package, given the limitations on the number of drugs eligible for negotiation under this agreement, the time period before negotiation can begin, and how significant the discounts can be. But many of the highest-spend drugs in the Medicare program will still be eligible for negotiation under this modified package, and the precedent set by its creation will be important going forward for further reforms in this area.
The Role Of Innovation Incentives
Serious drug pricing reform efforts have been opposed by both industry and most Republican politicians on the grounds that they will harm innovation going forward and lead to fewer new drugs being brought to market than would otherwise occur. These arguments are not groundless—CBO estimated that a pricing reform on the scale of H.R. 3 would be expected to lead to two fewer drugs in the first ten years after the proposal’s passage, increasing to 23 fewer in the second decade and an additional 34 fewer drugs in the third decade. But at the same time, it is also not the case that “if one penny disappears from pharma profit margins, American innovation will grind to a halt,” as President Trump’s HHS Secretary Alex Azar, himself a former pharmaceutical company executive, previously said. It is also important to note that CBO’s analysis and others like it focus purely on the number of new drugs likely to be affected by a policy change, not on the clinical value of those drugs or how they might impact patients’ health.
But opponents of drug pricing reform have not calibrated their arguments with the scale of the policy in question. PhRMA concluded that H.R. 3 “could have devastating impacts on American patients, jobs and medical innovation.” But PhRMA continues to criticize the scaled-down negotiated agreement on the grounds that “it will upend the same innovative ecosystem that brought us lifesaving vaccines” for COVID-19, threatening that it will leave “many patients facing a future with less access to medicines and fewer new treatments.” The Biotechnology Innovation Organization (BIO) argued that one potential tax change in the reconciliation bill, scored at costing manufacturers $2 billion over the next decade—less than half a percent of the impact of H.R. 3—would “destroy research into cures for vulnerable populations.” Members of Congress may be unwilling to accept the veracity of these arguments any longer, particularly in an environment in which the largest pharmaceutical companies are spending tens of billions of dollars more on stock buybacks and dividends than they are on research and development.
It is possible that additional changes may be made to this package, whether due to ongoing negotiations or to Byrd rule requirements. And it is also possible that the Biden administration may seek to use tools available to the executive branch to achieve additional drug pricing goals. But even standing alone, this scaled-down version of H.R. 3 would be a significant advance for millions of patients struggling to afford their prescription drugs.