President Biden recently announced the first 10 drugs that will be subject to price negotiations with Medicare. They include drugs to treat diabetes, heart disease, blood cancer, blood clots and rheumatoid arthritis — diseases that affect millions of Americans.
While government-negotiated prices will not take effect until 2026, the list of specific drugs makes this legislative centerpiece of the Inflation Reduction Act more tangible. Drug price negotiation has been prohibited since Medicare coverage of prescription drugs was first authorized. The law that created the benefit — signed by President George W. Bush in 2003 — explicitly prohibited the government from directly negotiating prices, a testament to the historical political power of the pharmaceutical industry. Things have changed.
Although more limited in scope than advocates had originally hoped for — among other things, they wanted drug price reductions to apply to everyone, not just those in Medicare, and to apply to far more drugs — the passage of the I.R.A. was a momentous political victory by Democrats over Big Pharma. (No Republicans voted for it.) And it’s a victory President Biden and other Democrats are expected to trumpet on the campaign trail.
While the drug companies that make the 10 drugs subject to negotiation are expected to start engaging with the government, the industry is publicly attacking the program and has filed a slew of lawsuits to block the government from implementing it.
The issues raised by critics can be complex and nuanced, involving trade-offs not always easily condensed into sound bites. Here are some of the arguments you’re likely to hear against drug price negotiation and the context necessary to evaluate them.
Argument 1: Government-negotiated drug prices will harm innovation and result in fewer lifesaving drugs.
The idea that curbs on drug pricing will stifle innovation has long been the pharmaceutical industry’s go-to argument. At some level, the drugmakers might be right: Lower prices mean lower profits, and that will be less attractive to investors. Drug development is a risky business, and the appeal for investors is the big potential payoff fueled by higher prices.
But it’s reasonable to ask how many fewer drugs might get developed and which drugs those might be.
The Congressional Budget Office, the economic referee in legislative debates, estimated that the drug pricing provisions of the I.R.A. would result in 13 fewer drugs coming to market in the United States over the next three decades. That’s a very small share of the 1,300 new drugs expected over that period. Some of those forgone drugs might be potential lifesaving treatments, but some might be drugs that offer only marginal health benefits. It’s impossible to know for sure.
One of the big reasons any effects on innovation may be muted is that drugs are shielded from government negotiation for quite a while: until nine years after Food and Drug Administration approval for small-molecule drugs like pills and 13 years for injectable biological products. Drugmakers can continue to set their own prices and reap substantial profits before having to submit to negotiation.
It’s also important to remember that scientific breakthroughs resulting in new drugs are not only the result of private industry research and development. Basic science funded by the National Institutes of Health using taxpayer dollars plays a significant role in drug development and will continue to irrespective of curbs on prices.
Argument 2: Government drug price negotiation is tantamount to price controls.
Price controls for health care that exist in other wealthy countries are a big reason those countries spend on average less than half per person on care compared with the United States.
However, price controls are controversial and in the current era can be painted as big government. “Negotiation” sounds less harsh.
Unlike what typically happens in other countries, the I.R.A. will not control the prices at which drugs are sold in the United States. There are no limits on what drugmakers can charge private insurers and employers, or on the “sticker” prices uninsured patients pay at the pharmacy.
The I.R.A. instead sets in motion a negotiation process between the federal government and pharmaceutical companies to determine only what Medicare will pay for a subset of drugs. The government is acting here as a smart purchaser — like a business, not a regulator.
To be sure, the I.R.A. includes a substantial inducement to bring drugmakers to the negotiating table: a tax of up to 95 percent of a selected drug’s U.S. sales if a company does not comply with the negotiating process. Alternatively, a company can choose not to have its drugs covered by Medicare and Medicaid, though few if any would give up the business.
So, this is a negotiation, but one in which the government is carrying a big stick.
Argument 3: Negotiated drug prices help the government, not patients.
The government — that is, taxpayers — will be the primary beneficiary of lower drug prices paid by Medicare, with the Congressional Budget Office projecting $98.5 billion in reduced spending over a decade.
Patients with Medicare will also save. Up to nine million Medicare enrollees spent $3.4 billion out of their own pockets in 2022 on the 10 drugs that will initially be subject to negotiation. For some of these drugs, especially the highest-priced drugs on the list, patients typically pay coinsurance for their prescriptions, meaning they owe a percentage of the price. With lower negotiated prices, those payments will decrease.
The number of Medicare beneficiaries who benefit from the negotiation provision will increase over time, as the number of drugs newly selected for negotiations grows to 15 in 2027 and 2028, and to 20 each year after that.
The I.R.A. also includes other provisions that will help Medicare beneficiaries with their drug costs. Starting this year, co-pays for insulin are capped at $35 per month, and starting next year, catastrophic drug expenses will be capped.
Argument 4: Having the government negotiate drug prices is unconstitutional.
The pharmaceutical industry has filed several lawsuits across the country arguing that drug price negotiation is unconstitutional — that the process violates freedom of speech, takes private property without just compensation and imposes excessive fines.
Some legal analysts endorse the claims, while others argue they’re specious. It seems likely these cases will end up before the Supreme Court, with an outcome that is hard to predict.
Beyond the specific legal issues at play here, some additional context is important.
In Medicare’s role as a purchaser of health care, drugs have been the exception, with no government leverage over prices. For decades, Medicare has set prices for hospital and physician services. In fact, it was President Ronald Reagan who imposed constraints on Medicare’s hospital rates.
Medicare is a big purchaser of health care, but it is only one of many purchasers. For retail prescription drugs, Medicare represents 32 percent of the market while private insurers make up 40 percent. Drugmakers are not required to sell their products to Medicare, and there are no limits on the prices they can charge to private insurers.
Some are concerned that drug manufacturers will try to charge higher prices to private insurers and employers to make up for lower prices in Medicare. That’s possible, though there are reasons to believe that won’t happen. If drug companies could charge more in the private sector and boost profits, why wouldn’t they already do that? And Medicare will make its negotiated prices public, bringing transparency to a market that is notoriously secretive and potentially setting a benchmark for private payers of health care.
If the Supreme Court ultimately overturns drug price negotiation, it would be a blow to a signature element of President Biden’s health care agenda. However, as the cases now wind their way through the lower courts, the pharmaceutical industry may not win in the court of public opinion.
According to KFF polling, 81 percent of the American public favors negotiation of drug prices in Medicare, with support spanning the political spectrum, so it’s no surprise that Democrats see this as a winning political issue in the 2024 election.
But they have work to do in educating the public: In advance of last week’s announcement, just 25 percent of adults even knew that the government now had the authority to negotiate drug prices.
The more the pharmaceutical industry does to attack drug price negotiation, the more the public will become aware of the most noteworthy health reform initiative since passage of the Affordable Care Act more than a decade ago.
Larry Levitt is the executive vice president for health policy at KFF, formerly known as the Kaiser Family Foundation.
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