Congressional Democrats are on the verge of achieving their long-standing goal of empowering Medicare to essentially fix the prices of certain drugs. While the political significance is undeniable, the ultimate implications for drug users and markets are far more uncertain than many proponents (and detractors) would suggest.
It will be years before we realize exactly how much the legislation has changed the landscape of American health care.
The Cut Inflation Act, passed by the House on Friday before being sent to the president’s office, includes a host of changes to health care coverage, climate policy and tax policy. Among the health provisions is a crown jewel – a provision allowing Medicare to regulate the prices of certain drugs. His inclusion represents a political victory for Democrats, who have pushed for some version of this policy since the Clinton era.
Unsurprisingly, this provision has been controversial. For some drugmakers, Medicare pricing represents “a tragic loss for patients” as they warn it will disrupt drug innovation. Democrats and advocacy groups, on the other hand, argue that it is low-risk and necessary to combat pharmaceutical industry greed. It’s easy to suggest that the truth lies somewhere in between, but it’s much harder to say where.
Legal, political and economic uncertainties make it very difficult to predict what this new authority will ultimately mean for drug prices and for consumers. This is why Americans should be wary of promises from politicians about how this will affect our wallets and our health.
Under the new law, Medicare will have the power to regulate high-income drugs that have been on the market for at least nine years and have no competitors. Currently, drug manufacturers can set their own prices for drugs. It is only after their patents expire that generics are allowed to enter the market to compete with the brand name drug through lower prices. For top-selling drugs, it takes about 13 years on average for this to happen. Proponents argue that this new authority will bring prices down much sooner. Blockbuster drugs such as Eliquis, Trulicity and certain types of insulin are likely to be initially targeted.
If selected by Medicare, drugmakers will face federal regulators who will determine a price based on factors such as the drug’s effectiveness and research and development costs. In practice, companies will then have to accept this price because they will expose themselves to very high financial penalties if they do not do so.
However, drugmakers will likely do what they can to minimize lost revenue. For starters, they will almost certainly work to avoid being selected for rate regulation. They could do this, for example, by making agreements with generic drug producers that allow the generic to enter the market before the end of the patent protection period provided that only a small quantity of the generic is sold. This would exempt the drug from Medicare’s pricing authority while minimizing the pharmaceutical company’s financial loss. If successful, this type of behavior could render the new Medicare authority relatively toothless.
Beyond policy responses, the political environment presents its own uncertainty. This is especially true since the legislation gives federal regulators considerable flexibility in how they set the price of a drug, allowing future decision makers to play an important role in the process.
To begin with, regulators are asked to consider a number of factors about the drug, but are given far less guidance on how to ultimately decide on a final dollar amount. While Congress requires drugmakers to give Medicare a minimum discount on a particular price (for example, Medicare’s price must be 25% lower than the price paid by wholesalers), drugmakers can artificially inflate the price. price. So, in the long run, it probably won’t limit Medicare prices much.
Within this vague framework, one can easily imagine that the “medicare negotiation” looks quite different under successive presidential administrations. Someone like Sen. Elizabeth Warren, D-Mass., who has been very critical of the pharmaceutical industry, could use that authority much more aggressively than an administration led by one of the Republicans who voted against the provision.
Beyond that, politicians are already busy changing the law itself. Some Democrats think the current bill doesn’t go far enough and should simply be the starting point for Medicare’s ability to regulate drug prices. If they extended that authority to more drugs or applied those prices to the 50% of the population with private insurance, it would increase cost savings and help pay for other legislative priorities. Meanwhile, Republicans have expressed concerns that this authority would reduce incentives to develop new drugs and are likely to seek ways to limit the bill’s provisions.
To make matters worse, the pharmaceutical industry is expected to mount legal challenges in response to the legislation. Key provisions such as penalties for companies that fail to comply with federal rate regulators will almost certainly be under attack. The bill as written allows companies to be fined up to 95% of drug revenue if they fail to comply with the so-called negotiation process. The industry argues that this is so serious that it violates the Constitution’s excessive fines clause. If these penalties are mitigated or waived, Medicare’s ability to compel drugmakers to accept price reductions would be reduced.
The passage of this bill undoubtedly marks a political victory for congressional Democrats who will sell it as a major achievement heading into the November midterms. But, in fact, it will be years before we understand exactly how much the legislation has changed the landscape of American health care — and whether that change is for the better.