A pharmacist collects drugs for prescriptions in a pharmacy.
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Medicare is poised to renegotiate the prices of some of its most expensive drugs in a historic expansion of its authority that could lower costs for many seniors as well as federal spending on its prescription drug plan.
The changes are included in a massive spending and tax bill in Congress that includes $433 billion in investments in health care and clean energy. House Democrats passed the Inflation Relief Act on Friday by a party-line vote of 220-207, ending a torturous legislative process that has dragged on for more than a year.
The bill gives the Secretary of Health and Human Services the power to negotiate prices for certain drugs covered by two different parts of Medicare and to penalize drug companies that don’t follow the rules. The legislation also caps out-of-pocket costs at $2,000 starting in 2025 for people who participate in Medicare Part D, the prescription drug plan for seniors.
Democrats have fought for decades to give Medicare the power to persuade drugmakers to lower prices. But the powerful pharmaceutical lobby and Republican opposition scuttled previous efforts. Medicare Part D currently prohibits HHS from negotiating prices with industry.
But HHS is now on the verge of getting the power to negotiate. President Joe Biden is expected to sign the bill into law soon.
The American Association of Retired Persons, which represents 38 million people, described the legislation as a historic victory for seniors. AARP Executive Director Jo Ann Jenkins said the group has fought for nearly two decades to allow Medicare to negotiate drug prices. Millions of older people are now “one step closer to real relief from out-of-control prescription drug prices,” Jenkins said earlier this week.
Although the legislation is historic, the negotiation provisions are “very narrow” by design, according to Andrew Mulcahy, an expert on prescription drug pricing at the RAND Corporation. And negotiations won’t provide relief until 2026, when renegotiated prices for ten of the program’s most expensive drugs take effect.
Lawmakers on the left, such as Sen. Bernie Sanders, I-VT, criticized the legislation for not including the vast majority of Americans not enrolled in Medicare. For the pharmaceutical industry, on the other hand, even the bill’s limited scope is a bridge too far.
Schedule for negotiations
Under the legislation, HHS can negotiate prices for some of the most expensive drugs covered by Medicare Part B and Medicare Part D. The former covers specialty drugs administered by health care providers, while the latter covers drugs filled at retail pharmacies.
The program was developed in four stages over several years. Here’s how it works:
- Phase 1: HHS contracts 10 Medicare Part D drugs. Prices go into effect in 2026.
- Phase 2: HHS contracts 15 Part D drugs. Prices go into effect in 2027.
- Phase 3: HHS can contract 15 Medicare Part B or D drugs. Prices take effect in 2028.
- Phase 4: HHS contracts 20 Part B or D drugs. Prices go into effect in 2029. The Secretary can contract 20 drugs in all subsequent years.
Possible drug candidates
How many seniors will benefit from the negotiations depends largely on which drugs the HHS secretary will target. More than 63 million Americans are insured through Medicare overall, and about 49 million are enrolled in Medicare Part D.
Before the Inflation Reduction Act took effect, Medicare Part D was estimated to cost just over $1.6 trillion over the next decade, according to the nonpartisan Congressional Budget Office. Medicare Part B had an estimated cost of $6.5 trillion over the next decade. CBO projects that drug price negotiations alone will save taxpayers about $102 billion by 2031.
HHS can negotiate prices only for drugs that Medicare Parts B and D spend the most money on and have been on the market for years without any generic or other competitors, according to Mulcahy. “The focus is on these older drugs that for one reason or another have no competition,” he said.
There is no official, publicly available list of drugs that HHS plans to target for negotiation. But Bank of America highlighted some potential candidates for Medicare D based on how much Medicare spent on them in 2020:
- Bristol-Myers’ Eliquis, $9.9 billion. It is an anticoagulant to prevent blood clotting to reduce the risk of stroke.
- J&J’s Xarelto, $4.7 billion. This is another blood thinner.
- Merck’s Januvia, $3.8 billion. This is a blood sugar lowering pill for people with type 2 diabetes.
- Abbvie’s Imbruvica, $2.9 billion. It is a pill for various types of blood cancer.
And Bank of America views these Medicare B drugs as likely affected by the negotiations. Here are their Medicare costs in 2020:
- Merck’s Keytruda, $3.5 billion. It is an immune therapy for certain types of cancer.
- Regeneron’s Eylea, $3 billion. This is an injection for macular degeneration.
- Amgen’s Prolia, $1.6 billion. This is an injection for osteoporosis.
- Bristol Myers’ Opdivo, $1.5 billion. This is an immune therapy to treat certain types of cancer.
- Roche’s Rituxan, $1.3 billion. It is an immune therapy for certain types of cancer and inflammatory diseases.
But it’s difficult to determine which drugs HHS will actually target. The list of drugs that would qualify for negotiations will change significantly by the time the bill’s provisions take effect, as many lose patent protection by then, according to a Bank of America research note.
Still, negotiations through Medicare could reduce prices by 25 percent for the 25 drugs the program spends the most on in 2026 and beyond, according to Bank of America.
How much the prices will be reduced ultimately depends on whether HHS actually leans into negotiations with drug companies, Mulcahy said. Bill Sweeney, head of government affairs at AARP, said getting the bill right is critical. AARP wants to make sure that HHS is fighting hard for the best price for seniors and that there are no loopholes that industry can exploit, Sweeney said.
The industry can game the system by allowing limited competition for their drugs to avoid price controls, according to an analyst note from SVB Securities.
HHS will have enforcement. The companies face heavy financial penalties for not meeting agreed prices, fines of $1 million for breaching the terms of the agreement, and fines of $100 million for providing false information.
Inflation discount
Although seniors won’t see the lower prices until 2026, the legislation would penalize drug companies for raising Medicare drug prices faster than the rate of inflation later this year. If the price of a drug increases more than inflation, the company must pay the government the difference between the price charged and the rate of inflation for all Medicare sales of that drug, according to AARP.
Prices rose faster than inflation in 2020 for the vast majority of the 25 drugs for which Medicare Parts B and D spent the most money, according to the Kaiser Family Foundation.
The US spent more than $1,000 per capita on prescription drugs in 2019, double the $552 that other high-income nations spent per capita on average, according to KFF and the Peterson Institute on Healthcare. US spending on prescription drugs increased 69% from 2004 to 2019, compared to a 41% increase in comparable countries.
“Baby step forward”
Sanders called the negotiating authority given to the HHS secretary a “baby step forward.” The senator pointed out that the first round of price cuts won’t take effect for four years, and people not on Medicare — the vast majority of people under the age of 65 — are completely excluded.
“If anyone thinks that as a result of this bill we’re going to suddenly see lower prices for Medicare, they’re wrong,” Sanders said during a speech on the Senate floor earlier this week. “If you’re under 65, this bill won’t affect you at all and the drug companies will be able to go on merrily and raise prices to whatever level they want.”
The pharmaceutical industry, on the other hand, argues that the bill goes too far. Stephen Uble, CEO of the Pharmaceutical Research and Manufacturers of America, said the legislation would slow innovation and lead to fewer new drugs and treatments for diseases.
Bank of America does not see the bill as a major negative for industry growth, according to an August research note. Analysts at UBS said Medicare’s negotiated provisions, which are limited in scope, are far from the worst-case scenario for the industry. The legislation would provide clarity for the market and remove the threat of even tighter drug prices, according to UBS.
“We believe the final passage of current drug pricing reforms represents a clarifying event regarding future industry earnings, removing the risk of more severe drug pricing that has weighed on biopharma valuations since the drug pricing issue first became politically significant in 2015,” UBS analysts wrote in a research note earlier this week.
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