Reducing Prescription Drug Prices: Options and Tradeoffs

The Medicare Modernization Act of 2003 (MMA), which established Medicare Part D, included a ban on Medicare Part D from negotiating directly with drug companies to set prescription drug prices. In theory, if the Centers for Medicare and Medicaid Services (CMS) could negotiate with pharmaceutical companies, the agency could leverage its purchasing power to pay less for drugs.  H.R.2000 - Medicare-X Choice Act of 2019, (known as the “Medicare for all that want it”, introduced on April 1, 2019 and co-sponsored by Representative Craig contains a clause deleting the current ban.

 

But, would lifting the ban actually save any money?

• “Allowing the Secretary only to negotiate prices - without providing another tool to reduce prices - would not save a meaningful amount.
• The Congressional Budget Office (CBO) estimates that giving the Secretary authority only to negotiate prices will not generate significant savings unless the Secretary can also remove certain drugs from coverage or otherwise legally require reductions in prices. . . .
• If the Secretary were allowed to require brand-name drug manufacturers to lower the price of their drugs, Medicare Part D could save on average $11 billion per year, according to CBO.” Fact Sheet: How much money could Medicare save by negotiating prescription drug prices? from the Committee for a Responsible Federal Budget, April 2016.

Note that the federal government can already negotiate for drug prices for Medicaid and for the Veterans Administration.

With the desire to have more than “a negligible effect” on drug prices, H.R. 3, the Lower Drug Costs Now Act of 2019, was introduced on September 19, 2019. The bill allows the secretary of Health and Human Services to negotiate lower prices for at least 35 drugs, up to a maximum of 250 drugs. The bill does not fully repeal the ban on Medicare negotiating drug prices. Rather, the bill creates an exception to the ban for those 250 or fewer drugs.

 

“Title I of H.R. 3 would require manufacturers of certain prescription drugs to negotiate prices with the Secretary of Health and Human Services (HHS). Prices for those drugs could not exceed 120 percent of the average price in certain other countries. Other provisions also would affect prices for drugs, including limits on prices of drugs for which international prices are not available. If manufacturers did not enter into negotiations or agree to prices by specified dates or if they did not meet other conditions, they would be subject to an excise tax of up to 95 percent of the sales of those drugs.

 

CBO estimates that applying the provisions in title I to prescription drugs covered under Part D of Medicare would reduce federal direct spending for Medicare by $345 billion over the 2023-2029 period (see Table 1). . . .

 

In addition to the effects on the federal budget, CBO anticipates, the bill would affect the use and availability of drugs over time. In the short term, lower prices would increase use of drugs and improve people’s health. In the longer term, CBO estimates that the reduction in manufacturers’ revenues from title I would result in lower spending on research and development and thus reduce the introduction of new drugs. CBO’s analysis of the bill is not complete; its preliminary estimate is that a reduction in revenues of $0.5 trillion to $1 trillion would lead to a reduction of approximately 8 to 15 new drugs coming to market over the next 10 years."

Some progressives in the House are pushing for amendments to the Pelosi bill as they don't believe it goes far enough. They would like all drugs to be subject to the change, not just 250. They would also like the ban on Medicare negotiating for drug prices to be completely repealed, rather than carving out an exception for the 250 or fewer drugs.

An alternative proposed by Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Sen. Ron Wyden (D-Ore.) (and supported by President Trump) is the Prescription Drug Pricing Reduction Act (PDPRA), S. 2543. The bill would require drug companies to pay money back to Medicare if their prices rise faster than inflation. The CBO has estimated the bill would save taxpayers and beneficiaries over $100 billion over the 2019 – 2029 period.”  Effects of Drug Price Negotiation Stemming From Title 1 of H.R. 3, the Lower Drug Costs Now Act of 2019, on Spending and Revenues Related to Part D of Medicare, CBO, October 11, 2019. Some Republicans are pushing back against this bill because they view this as too close to "price control". 

Another alternative is the Creates Act, S. 340, a smaller bipartisan measure aimed at lowering drug prices by cracking down on delay tactics that drug companies use to fend off competition from cheaper generic drugs. This clearly would be a step in the right direction, as pharmaceutical company employ several anti-competitive tactics using patent law to keep prescription drug prices high. But, would this change be enough to make much difference on the whole range of drugs? Likely not.

Tradeoffs, tradeoffs, tradeoffs. My free market orientation leads me to resist all but the last proposal. However, in "An American Sickness" by Elizabeth Rosenthal, it becomes apparent that there are significant and numerous "market failures" in the prescription drug market. On balance, it appears that we should try the combination of lifting the ban on Medicare negotiating for drug prices and amending the patent law. $11 billion savings per year over 10 years is nothing to sneeze at.