Simon Dawson | Bloomberg | Getty Images Medicare is poised to renegotiate the prices of some of its most expensive drugs in a historic expansion that could lower costs for many seniors as well as federal spending on its prescription drug plan. The changes are hidden 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 220-207 vote along party lines, ending a tortured legislative process that has lasted more than a year. The bill authorizes the Secretary of Health and Human Services 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 enrolled in Medicare Part D, the prescription drug program for seniors. Democrats have fought for decades to give Medicare the power to trick pharmacists into lowering prices. But the powerful pharmaceutical lobby and Republican opposition scuttled previous efforts. Currently, Medicare Part D prohibits HHS from negotiating prices with industry. But HHS is now on the verge of gaining the power to negotiate. President Joe Biden is expected to soon sign the bill into law. The American Association of Retired Persons, which represents 38 million people, described the legislation as a historic victory for seniors. AARP CEO Jo Ann Jenkins said the group has fought for nearly two decades to allow Medicare to negotiate drug prices. Millions of seniors 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” in design, according to Andrew Mulcahy, an expert on prescription drug pricing at the RAND Corporation. And negotiations won’t offer relief until 2026, when renegotiated prices for ten of the program’s most expensive drugs take effect. Left-leaning lawmakers such as Sen. Bernie Sanders, I-VT, criticized the legislation for leaving out 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.
Negotiation schedule
Under the law, HHS can negotiate prices for some of the more expensive drugs covered by Medicare Part B and Medicare Part D. The former covers specialty drugs dispensed by healthcare providers, while the latter covers drugs paid for at retail pharmacies. The program is being phased out in four stages over several years. This is how it works:
Phase 1: HHS negotiates 10 Medicare Part D drugs. The rates take effect in 2026. Phase 2: HHS negotiates 15 Part D drugs. Prices effective in 2027. Phase 3: HHS can negotiate 15 Medicare Part B or D drugs. Prices valid in 2028. Phase 4: HHS negotiates 20 Part B or D drugs. Prices go into effect in 2029. The secretary can negotiate 20 drugs in all subsequent years.
Potential drug candidates
How many seniors will benefit from the negotiations depends largely on which drugs the HHS secretary decides to 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 only negotiate prices for drugs that Medicare Parts B and D spend the most money on and that have been on the market for years without generics or other competitors, according to Mulcahy. “The focus is on these older drugs that for one reason or another don’t have competition,” he said. There is no official, publicly available list of drugs that HHS plans to target for negotiations. However, Bank of America highlighted some potential Medicare D candidates 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; It is another blood thinner. Merck’s Januvia, $3.8 billion; It is a blood sugar lowering pill for people with type 2 diabetes. Abbvie’s Imbruvica, $2.9 billion. It is a pill for different types of blood cancer.
And Bank of America views these Medicare B drugs as potentially affected by the negotiations. Here are their costs for Medicare in 2020:
Merck’s Keytruda, $3.5 billion; It is an immunotherapy for certain cancers. Regeneron’s Eylea, $3 billion. It is an injection for macular degeneration. Amgen’s Prolia, $1.6 billion. It is an injection for osteoporosis. Bristol Myers’ Opdivo, $1.5 billion; It is an immunotherapy treatment for certain cancers. Roche’s Rituxan, $1.3 billion. It is an immunotherapy for certain cancers and inflammatory disorders.
But it’s difficult to determine which drugs HHS will actually target. The list of drugs that will qualify for negotiations will change substantially once the bill’s provisions take effect because many lose patent protection by then, according to a Bank of America research note. But negotiations through Medicare could lower prices by 25 percent for the 25 drugs on which the program spends the most from 2026 onward, according to Bank of America. How much the prices go down ultimately depends on whether HHS actually bends in negotiations with drug companies, Mulcahy said. Bill Sweeney, head of government affairs at AARP, said getting the bill right is crucial. AARP wants to make sure HHS is fighting hard for the best price for seniors and there are no loopholes that industry can exploit, Sweeney said. The industry could game the system by allowing limited competition for its drugs to avoid price controls, according to a note from analysts at SVB Securities. HHS will have enforcement authority. The companies face heavy financial penalties for not meeting their negotiated prices, $1 million in fines for violating the terms of the agreement, and $100 million in fines for providing false information.
Inflation discount
Although seniors won’t see the lower prices until 2026, the legislation will punish drug companies for raising Medicare drug prices faster than the rate of inflation later this year. If the price of a drug rises more than inflation, the company must pay the government the difference between the price charged and the inflation rate for all Medicare sales of the drug, according to AARP. Prices rose faster than inflation in 2020 for the vast majority of the 25 drugs that Medicare Parts B and D spent the most money on, according to the Kaiser Family Foundation. The US spent more than $1,000 per capita on prescription drugs in 2019, twice the $552 average spent by other high-income countries, 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 powers given to the HHS secretary a “small step forward.” The senator pointed out that the first round of price cuts won’t take effect for four years, and that people who aren’t on Medicare – the vast majority of people are under 65 – are being left out entirely. “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 drug companies will be able to go on their merry way and raise prices to whatever level they want.” The pharmaceutical industry, on the other hand, argued that the bill goes too far. Stephen Ubl, CEO of Pharmaceutical Research and Manufacturers of America, said the legislation would slow innovation and lead to fewer new treatments and cures for disease. Bank of America does not see the bill as a significant negative for industry growth, according to an August research note. Analysts at UBS said Medicare’s bargaining provisions, which have limited scope, are far from a worst-case scenario for the industry. According to UBS, the legislation will provide clarity to the market and take the threat of even tighter drug pricing off the table. “We believe the final completion of ongoing drug pricing reforms represents a clarion call to the industry’s future earnings, removing the risk of more burdensome drug pricing that has weighed on biopharma valuations since the drug pricing issue emerged for first time in political projection in 2015,” UBS analysts wrote in a research note earlier this week.
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