A bill crafted by House Speaker Nancy Pelosi intended to reduce drug prices will make its way to the House floor after the House Ways and Means Committee approved it on Sept. 22.

H.R.3 – Lower Drug Costs Now Act of 2019 would permit The Centers for Medicare and Medicaid Services (CMS), an agency within the U.S. Department of Health and Human Services, to directly negotiate drug prices with manufacturers – a big change from the status quo. The bill would roll back the noninterference clause that was included in the Medicare Modernization Act of 2003. One of the more groundbreaking aspects of the bill is that the price, once it’s established, also applies to the private market.

Drug Price Negotiation

The House Democrats’ legislation is set up to allow price negotiations for 25 to 250 drugs per year that have the highest cost to Medicare. In order to qualify for negotiation, the drugs must be supplied by at most two manufacturers so that there isn’t too much competition in the market. Studies show the most effective competition comes when there are three or more interchangeable generics on the market, so the bill attempts to focus on drugs for which competition is least robust.

Many of the drugs that would meet those criteria would be those that were on the market for a longer period, and therefore have seen year-over-year price increases in the U.S. that have not occurred in other countries. It is possible prices may have fallen in other countries because of competitive pressures from manufacturers that don’t exist in the U.S.

Newer drugs, in general, probably wouldn’t qualify for negotiation because it usually takes at least a year, except for the biggest ticket drugs, before they would hit the highest-cost-to-Medicare list. It would also take time for new drugs to get a reference price in other countries.

The Ways and Means Committee released a report in which they estimate the differences between other countries’ and the U.S.’s drug prices. They found there were surprisingly major differences, with U.S. drug prices nearly four times higher than the combined average of 11 other similar countries. “Americans pay as much as 67 times more than consumers in other nations for prescription drugs, even when accounting for rebates,” according to a summary of the report.

The average price of drugs in six countries – Australia, Canada, France, Germany, Japan, and the United Kingdom – will be used to create the price index. A 120% cap would then be levied against the weighted price from those countries. Some of those countries have well-developed systems for evaluating drugs based on the value they provide, then negotiating a price with manufacturers for those products.

Drug Pricing: Europe vs. United States

The concern that drug prices might increase in those countries is legitimate. If the price in the United States becomes more explicitly tied to the price that is set overseas, companies may take a harder stance on their negotiations with other countries. Taking that stance is a bad PR move for pharmaceutical manufacturers, so they’ll have to weigh the costs. Some may declare that they’re not going to sell their product in a certain country because they don’t feel the price is reasonable. On the other hand, governments want to make important products available to their citizens. The extent to which that game of chicken ends up getting resolved will be based on just how important and useful the drug is and whether there are reasonable alternatives.

The enforcement mechanisms within the House’s bill if manufacturers don’t comply is a tax, starting at 65%, of the gross sales of the drug in the previous year. That penalty increases by 10% each quarter of noncompliance. This is a meaningful stick, but it won’t be useful if the drug is new and doesn’t have a record of sales. So, one of the ways that manufacturers could get around this mechanism would be to develop slightly changed formulations of the product. But there are practical limitations to a company’s ability to do that. Product hopping too frequently is also challenging from a sales and administration point of view.

What Price Insulin?

The bill also specifically targets insulin for negotiations. The high price of the drug is one of the most paradoxical aspects of the U.S. drug system. Although insulin was discovered 100 years ago, high prices are rampant, forcing people to ration the medicine. Manufacturers have expensive prices for insulin because of a lack of competition, in part due to innovations on its administration device, rather than the medicine itself.

Meanwhile, the Senate has introduced its own bipartisan bill, the Prescription Drug Pricing Reduction Act of 2019. This bill has fixes to the brand-to-generic transition period and places a cap on drug price increases over time. It doesn’t include any negotiation power or limitations on drug prices.

What both bills have in common is that they attempt to reorganize the way that Medicare Part D covers drugs and the share that the government pays versus the share that the companies pay. Democrats and Republicans agree that some restructuring of Medicare Part D is in line because the high amount of coverage that the government provides for high cost products. The out-of-pocket costs are important as well because they are what’s going to affect what patients experience most directly. Patients also experience costs in their premiums, but that’s more hidden from them.

The Politics of Drug Pricing

Drugs that are more likely to be on the top spending list and with the biggest price differences between the U.S. and other countries are going to be prioritized if the bill makes it through the minefield of the political landscape. This is a dim prospect. Coming to an agreement will be challenging, in part because these two bills are focused on such different solutions to the market. One obstacle for the House bill is Senate Majority Leader Mitch McConnell, who declared Pelosi’s bill dead on arrival. The pharmaceutical industry has raised opposition to both the Senate and House bills.

But Pelosi’s legislation may have an unlikely supporter in President Donald Trump, whose administration voiced support for the international pricing index created by the bill. It’s unclear whether the Trump administration was playing politics to gain a win in the 24-hour news cycle, so we’ll have to wait and see. If the legislation does have the president’s support, he could start turning the screws on Senate Republicans to get behind it, in which case things will move forward.

---

About Aaron Kesselheim