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Understanding The House Democrats’ Drug Pricing Package

Rachel Sachs | September 19, 2019

Earlier today, House of Representatives Speaker Nancy Pelosi (D CA) released the Democratic caucus’ long-awaited drug pricing package (summary here, text here). As released, the package would be the most far-reaching drug pricing reform in recent memory, although there are still numerous details to work out. It certainly reaches more broadly than any proposals released by the administration thus far, and it also does more to both protect patients from high out-of-pocket costs and to lower drug prices than does the recently marked-up Senate Finance Committee package.

The Speaker seemingly plans a speedy timeline for holding legislative hearings on the bill. The Health Subcommittee of the Energy & Commerce Committee plans a hearing on the bill next week, and at least some Democrats plan a floor vote by the end of October

In this post, I first summarize key provisions from the Democrats’ proposal, explaining how it aims to lower prescription drug prices. Then, I situate the Speaker’s package within the broader set of drug pricing reforms being considered by the federal government. Finally, I present a key objection the package is likely to face from the Republican caucus and consider questions that remain for the substance of the package.  

Key Pricing Provisions 

The House Democratic package (which, given the Democratic majority in the chamber, is likely to become the core of the House package) is built around two primary strategies to lower prescription drug prices.  First and most importantly, the package provides the Secretary of Health & Human Services (HHS) with broad authority to negotiate prescription drug prices not only for Medicare, but also for the private market.  Second, the package aims to control the rate of increase of prescription drug prices. The package also envisions a restructuring of the Medicare Part D benefit that would lower patients’ out-of-pocket costs in that program. Although no Congressional Budget Office (CBO) projections have been released publicly yet, the fact that the package is more far-reaching than is the Senate Finance Committee’s proposal suggests that it may save even more than that package. The CBO projected that the Finance Committee package could save taxpayers roughly $100 billion over the next decade, and could save Medicare beneficiaries $27 billion in out-of-pocket costs and $5 billion in premiums over the same period. 

Drug Price Negotiation 

The core of the House’s package is the authority it provides to the HHS Secretary to negotiate directly the prices of prescription drugs (Section 101). This authority is not unlimited. The Secretary is only empowered to negotiate prices on the 250 branded drugs “with the greatest cost to Medicare and the whole U.S. health system” that lack “a generic or biosimilar competitor.” Based on the information provided in the package, spending is highly concentrated in particular drugs. The top 125 drugs in Medicare Part B are responsible for a full 96 percent of all Part B spending, and 125 drugs are responsible for 45 percent of spending in Part D. (It is likely that not all of these Part D drugs will be eligible for negotiation, as some of them are generic products like statins where the per-patient spend is very low, but when combined with the very large numbers of beneficiaries receiving the product, the drug may be one of the top products overall. Presumably, the next eligible drug on the spending list would then become a candidate for negotiation.)

The package also sets out standards for the Secretary to follow in negotiating the prices of these drugs. Most importantly, the package creates an international price index as a price ceiling: the Secretary is not permitted to negotiate for a price that exceeds 1.2 times the volume-weighted average of the drug’s price in six countries: Australia, Canada, France, Germany, Japan, and the United Kingdom. The bill recognizes the complexities involved in implementing an international pricing index and contemplates a number of related contingencies. For instance, in the event that an international price cannot yet be calculated for a drug subject to negotiation, if the relevant United States price is more than 200% of the later-available international price, the manufacturer must then repay the difference to the Treasury (pp. 16-18 of bill text).

Below that ceiling, the Secretary is instructed to consider factors including the drug’s research and development (R&D) costs and production costs, information on alternative treatments and the therapeutic value of the drug as compared to those treatments, and domestic and international sales information. The package also aims to insulate much of this process from judicial review, including the selection of drugs for negotiation and the determination of the maximum fair price (p. 39).

These standards are not without precedent. Many other countries (perhaps most notably Canada, of the countries that make up the index) employ international reference pricing as an integral part of their strategy for negotiating prescription drug prices. Further, international reference pricing has been proposed here in the United States: the administration released a preliminary version of a proposal for reference pricing in Part B, and Senator Bernie Sanders (I-VT) and Representative Ro Khanna (D-CA) released a bill that would also use international prices in the Medicare negotiation context. Germany strongly considers alternative treatments in its drug pricing system, asking whether a new drug provides therapeutic benefits when compared to existing treatments for a particular condition, and, if not, referencing the price of the new drug to the price of the older products. The United Kingdom considers the value of new drugs, asking whether the health benefits they provide are justified by their price, in the context of a health care system aiming to do the most good with a particular budget.

The package also includes an enforcement mechanism for companies that are reluctant to negotiate with HHS. Previously, the CBO had contended that “[b]y itself, giving the Secretary broad authority to negotiate drug prices … would have a negligible effect on Medicare drug spending” unless it were “accompanied by some source of pressure on drug manufacturers to secure price concessions.” Because Medicare specifies particular coverage requirements in both law and regulation, giving HHS nominal negotiating authority may be relatively meaningless if no other enforcement mechanism is present, as Medicare cannot walk away from the table if a pharmaceutical company refuses to negotiate. As a result, the package envisions that drug manufacturers who refuse to negotiate or fail to reach an agreement with HHS will be assessed a high Non-Compliance Fee, starting at 65 percent of the gross sales of the drug in question in the previous year and increasing by 10 percent every quarter, to a maximum of 95 percent (Section 102).

The package also requires manufacturers to offer the price resulting from the HHS negotiating process not only to Medicare, but also to other payers, including the private market.  As a result, the House package would have significant ramifications not only for the tens of millions of Americans with Medicare (with more beneficiaries having Part B than Part D) but also for the more than 150 million Americans with employer coverage. These negotiations would presumably also result in lower prices for the Medicaid program and the more than 70 million Americans enrolled therein, as Medicaid is entitled to large statutory discounts off of the (now presumably lower) Average Manufacturer Price of branded drug products.

Penalties For Price Increases Outpacing Inflation In Medicare

The package also intends to control and potentially reverse price increases for drugs in both Medicare Part B (Section 201) and Part D (Section 202).  At present, because Medicare often cannot refuse to provide coverage for a drug, companies are typically able to hike their list prices with relative freedom. The package would require manufacturers of all drugs sold to either program (not only the 250 subject to negotiation) who raised the relevant prices of their drugs since 2016 more rapidly than inflation to either lower the price of the drug or pay the entire amount above inflation back to the Treasury as a rebate. The goal is to discourage pharmaceutical companies from taking these large percentage price increases on a regular basis.

Unlike the negotiation provisions of the package, there is precedent for the inflationary clawback in the Medicaid program. Medicaid includes a similar inflationary clawback that serves to insulate the program from price increases that outpace inflation. The HHS Office of Inspector General has determined that more than half of the difference between prices in Medicaid and prices in Part D is traceable to Medicaid’s inflationary clawback. The House package can be understood as extending this pricing protection from Medicaid into Medicare. 

The Senate Finance Committee’s ;s%20Mark%20for%20the%20Prescription%20Drug%20Pricing%20Reduction%20Act%20of%202019.pdf">package contains similar rebate requirements for pharmaceutical companies taking list price increases that outpace inflation. These requirements were a source of great division within the committee, with Senator Pat Toomey (R-PA) proposing an amendment that would strike these inflationary rebates from the Committee’s package, arguing that the rebates simply “import[] a price control mechanism from Medicaid.” His amendment failed on a tie vote, with nearly all Republican senators on the committee voting to strike the rebates. The House’s package goes even farther than the Finance Committee package, largely due to the retroactive (to 2016) nature of the House’s proposal, and likely achieves greater savings as a result. The CBO projected that taxpayers would save $10.7 billion from the Senate’s Part B clawback and $57.5 billion from their Part D reform, with an additional $10 billion in savings for beneficiaries due to the Part D reform ($5 million each in cost-sharing and premium reductions), since beneficiaries’ out-of-pocket costs in Part D are often based on a drug’s list price.

Some have expressed concern that inflationary rebate provisions may only encourage companies to launch at higher prices in the future, if they know that their ability to take list price increases will be limited going forward. The inclusion of the negotiation provisions as described above may modulate that concern in the context of the House package (but not for the Finance Committee’s package, which contains no such provision). 

Restructuring The Medicare Part D Benefit

The House package would also restructure the Part D benefit design to provide critical financial relief for many Part D beneficiaries, and also to help address problematic incentives within the Part D benefit (Section 301). The existing Part D benefit structure has four separate phases, each of which attributes different amounts of responsibility to the patient, the plan, Medicare, and pharmaceutical manufacturers. Unlike plans in the private market, Medicare places no cap on patients’ cost-sharing for Part D benefits. Even in the “catastrophic phase” of Part D coverage, beneficiaries remain exposed to 5 percent of the cost of their medications, which can amount to many thousands of dollars each year. The Kaiser Family Foundation estimates that more than one million Medicare beneficiaries have out-of-pocket costs at this level.

Policy analysts have also argued that the existing benefit design provides plan sponsors with weak incentives to negotiate for lower drug prices. Since plans are only currently responsible for 15 percent of costs in the catastrophic phase, while Medicare itself handles 80 percent of costs, plans are shielded from some of these high expenses.

Much like the Senate Finance Committee’s proposal, the House package would both cap patients’ out-of-pocket costs in Part D and redesign stakeholders’ financial responsibilities within the benefit structure to provide stronger incentives for plans to negotiate prices. However, the House package goes farther in protecting patients and in holding the pharmaceutical industry responsible for drug coverage in the catastrophic phase. Patients’ costs would be capped starting at $2,000, as compared to $3,100 in the Senate package. And within the catastrophic phase of the Part D benefit, plans and pharmaceutical companies would assume far greater financial responsibility (50 percent and 30 percent, respectively) than they do at present, reducing Medicare’s financial responsibility accordingly to just 20 percent. The Senate package also reduces Medicare’s responsibility to 20 percent, but it places somewhat more responsibility on plans as compared to pharmaceutical companies (60 percent and 20 percent, respectively).In either case, increasing plans’ responsibility in the catastrophic phase should encourage them to negotiate harder when faced with high-priced drugs.

Depending on the results of the negotiation and inflationary rebate strategies described above, the package also envisions the possibility of using the savings from those strategies to provide additional benefits such as vision, hearing, or dental coverage. 

Together, these three aspects of the package – direct drug price negotiations, efforts to limit or reverse drug price increases, and benefit design restructuring – provide solutions to many different aspects of our drug pricing problems. Medicare patients with difficulty affording their out-of-pocket costs should see relief from the benefit design restructuring. Some of the problematic incentives for pharmaceutical companies to continue raising their list prices should be mitigated by the inflationary clawback provision. And the problem of high launch prices that are disconnected from a drug’s value would be considered in the process of direct negotiations. 

Importantly, there is no one way to lower prescription drug prices. The countries named in the international pricing index portion of the proposal have each adopted a different but effective strategy for doing so. They have adopted strategies that fit with their particular health care system, political constrains, and policy goals. The fragmented nature of our health care system requires proposals that address multiple aspects of the issue, as the House package does, but each of the above elements could be altered and achieve a similar result.

The House Package In Context

The House package should be understood within the context of the broader set of drug pricing reforms being considered by the federal government. Both the administration and the Senate Finance Committee (as referenced above) have made progress on efforts to address particular drug pricing problems. In short, the House package goes much further even on the three issues that the sets of proposals have in common, and it also includes provisions that neither the administration nor the Senate has considered. (Although I recognize that the administration, Senate, and other House Democrats have introduced or considered many drug pricing provisions in addition to those I mention here, several of which I’ve written about previously, I consider only the most relevant here in the interest of space.)

One relevant area of commonality between the House package and the administration’s proposals is their use of international reference pricing (referred to by the administration as the International Pricing Index) to lower drug spending. The administration’s early-stage proposal to use international reference pricing would only apply to drugs reimbursed through Medicare Part B, though, and that proposal envisions using reference pricing as just one element of an overhaul of the Part B reimbursement system. That proposal also contains no enforcement mechanism in the event that pharmaceutical companies reject the internationally indexed price. The Medicare Payment Advisory Commission (MedPAC) has argued that the structure of the administration’s reference pricing proposal raises questions about its feasibility, but the House package may be more likely to succeed both because it lacks the added complication of the vendor model and contains an enforcement mechanism.

A second relevant area of commonality between the House package and the Senate Finance Committee’s package is the use of inflationary clawbacks in the Medicare program. These two packages structure the clawbacks in highly similar ways, but the House package’s retroactivity to 2016 may allow it to have a much greater financial impact than the Finance package.

A third and final area of commonality is the set of proposals to restructure the Part D benefit to both assist patients with out-of-pocket costs and alter the incentives of stakeholders throughout the reimbursement process. The administration has included proposed Part D redesigns in its budget and drug-pricing blueprint, and the Senate Finance Committee has advanced this as part of its package as well. A recent article comparing these proposed redesigns concludes that the Finance Committee package, with its out-of-pocket limit of $3,100, would provide the most financial relief for patients. The House package goes even further, capping out-of-pocket costs at $2,000, but it also importantly couples this reform with the above-discussed price negotiation strategies to lower prices overall. 

On its face, it seems as if the administration should be receptive to backing the House’s plan. Its incorporation of international reference pricing and Part D redesign mirror administration proposals. The president has repeatedly rebuked pharmaceutical companies who raise their prices over time, suggesting that he might be supportive of the inflationary clawbacks (which already garner at least tepid Republican support in the Senate). And as a candidate, the president argued for drug price negotiations in Medicare (though he has dropped this request since the election). However, the plan is likely to face opposition at least from Congressional Republicans.

The Role Of Innovation

Republicans are likely to oppose the House package on several grounds, but their primary argument is likely to be that the House package’s provisions regarding negotiation and inflationary clawbacks would impede pharmaceutical innovation going forward. Because these provisions would save the government money (and thus result in lower profits for the pharmaceutical industry), the argument is that the industry would have less incentive to invest in innovation going forward. 

An earlier, leaked draft of the Democrats’ package anticipated this argument by framing the above proposals against the industry’s own behavior. That draft argued that industry sets high prices for new drugs and raises the prices of existing drugs not to fund new research and development, but “to pad their profits.” Noting that nine out of ten large pharmaceutical companies “spend more on marketing, sales, and overhead than on research” and that pharmaceutical companies largely used their gains from the Republican tax cut of 2017 for stock buybacks instead of for new R&D investment, the Democrats made the case that industry is more concerned with its own bottom line than with finding new treatments for patients.

However, the released package of course recognizes the importance of not just innovation, but innovation that provides value for patients. First, R&D costs and the therapeutic value of a drug are key elements of the negotiation provisions of the package. As such, Democrats can argue that their proposal ensures that industry can recoup its R&D costs while also negotiating for fair prices that provide greater returns for significant innovation. The question for Democrats is not just whether innovation is occurring -- it is also about the nature of that innovation and its value to patients. The package aims to pay more for breakthrough products that truly benefit patients, and less for drugs that don’t. Second, the package aims to reinvest some of its savings into additional biomedical research, presumably through the National Institutes of Health, aiming to more directly support innovation.

Next Steps

At this point, a number of questions still remain about the package. For instance, the Secretary of HHS likely does not currently have an infrastructure to conduct the kinds of negotiations envisioned in this package. It is not clear whether the package envisions HHS conducting these negotiations internally, or whether they might be assisted by other organizations within the executive branch or by external organizations such as the Institute for Clinical and Economic Review.

As another example, the international pricing index portion of the proposal may prove challenging to implement, particularly from a data collection perspective. Although the bill currently requires manufacturers to report their prices to the Secretary, HHS may wish to consult with other nations who use this type of strategy to learn more about ways in which this process can be conducted more easily. The many contingencies explicitly contemplated in the bill text suggest that the Democrats appreciate this complexity, and more details may be forthcoming.

In general, the House package represents a far more ambitious vision for drug pricing reform than has been advanced by either the administration or the Senate thus far. It remains to be seen whether the administration will support it, however, or whether this may galvanize Republicans to support the seemingly more moderate Senate package. In any case, the administration is running out of time to achieve progress on drug pricing reform on its own and may seek to back one or both Congressional reform packages. 

Author’s note:

 The author sits on the Midwest Comparative Effectiveness Public Advisory Council of the Institute for Clinical and Economic Review (ICER).

Read more: https://www.healthaffairs.org/do/10.1377/hblog20190919.459441/full/?utm_source=Newsletter&utm_medium=email&utm_content=House+Democrats++Drug+Pricing+Package%3B+Section+1557+Litigation%3B+Medicaid+s+Income+Eligibility+Requirements%3B+Cultural+Competence%3B+Physicians++Reactions+To+ACA&utm_campaign=HAT+9-19-19

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