High drug costs are burdening seniors with excessive out-of-pocket expenses and straining the Medicare program’s finances. A recent study of 79 brand drugs without generic competition (and that accounted for the greatest spending on Medicare Part D) found that the U.S. pays 3 to 4 times more for these drugs than other countries do.
Medicare beneficiaries’ average out-of-pocket costs for certain brand name drugs rose by 40 percent between 2011 and 2015. This trend is clearly unsustainable and policy makers are looking for ways to rein in drug costs in the Medicare program.
Three policy approaches to lowering drug costs that Congress is actively considering are: 1) allowing the government to negotiate directly with manufacturers in the Medicare Part D program, 2) placing inflationary spending caps on drugs, and 3) so-called reference pricing.
Drug Price Negotiation
The Medicare Modernization Act of 2003 (P.L. 108-173) created the Medicare Part D prescription drug program, which is administered through private insurance plans. The law prohibits the Medicare program from negotiating the price of drugs with manufacturers. Instead, negotiations with drug manufacturers are conducted by insurers. This structure spreads the bargaining power of the Medicare program across multiple private plans. As a result, the federal government pays more for Medicare drugs than it does for drugs purchased through other federal programs such as the Department of Veterans Affairs (VA) and Department of Defense health systems, where the government directly negotiates with manufacturers in exchange for placement on its formulary, or Medicaid, which requires a manufacturer discount in the form of a mandatory rebate. The Congressional Budget Office found that the average price per prescription that Medicare Part D pays is almost twice what Medicaid pays for high-priced specialty drugs ($3,600 compared to $1,920).
Lifting the prohibition on Medicare directly negotiating for drugs, in and of itself, would do little to bring down drug costs unless Medicare has leverage to compel a company to provide a competitive price. There are a range of proposals that arm Medicare with a mechanism to induce drug manufacturers to offer prices more in line with what other wealthy countries pay for their drugs. Some proposals, like Rep. Jan Schakowsky’s (D-IL) “Medicare Fair Drug Pricing Act of 2018,” create a default price, such as the price secured by the VA, that manufacturers would pay if negotiations fail.
Other proposals would allow Medicare to adopt a national formulary (a list of drugs that the program will cover), which would allow Medicare to bargain with drug makers in exchange for placement on the formulary. An example of such a proposal is the “Medicare Drug Price Negotiation Act,” introduced in 2017 by Senators Bernie Sanders (D-VT) and Patrick Leahy (D-VT), and Representatives Elijah E. Cummings (D-MD), Lloyd Doggett (D-TX), and Peter Welch (D-VT).
Another approach is allowing Medicare to issue a license to another manufacturer to produce the drug for a reasonable fee when a manufacturer will not otherwise agree to a reasonable price for a drug. H.R. 1046, the Medicare Negotiation and Competitive Licensing Act, sponsored by Representative Lloyd Doggett (D-TX), allows the Secretary of Health and Human Services to issue a license to a manufacturer other than the patent holder, when drug price negotiations come to an impasse.
Drug Inflation Caps
While still allowing manufacturers to set the initial price of the drugs, these proposals would cap payment to manufacturers when drugs rise above the rate of inflation. One of the benefits of this approach is that it seems to have support across the political spectrum. Senator Sanders has supported Medicaid inflation rebates in the past. The Trump administration has proposed an inflation cap on Medicare Part B drugs (the drugs people take in physician offices, such as oncology drugs). While there are differences in approaches to inflation caps, this may be an area where bipartisan agreement can be reached.
Reference pricing is when a drug purchaser sets a limit—of reference price—for what it is willing to pay for a drug. For example, the Trump administration has proposed tying payment for Medicare Part B drugs to an international pricing index. The government would not pay more for the drug than the reference price.
NATIONAL COMMITTEE POSITION
The National Committee supports allowing the Medicare program to negotiate directly for drugs and to provide the program with meaningful tools to encourage manufacturers to price products fairly. We also have supported proposals to use inflation caps in Medicare. The National Committee is evaluating reference price proposals and has not taken a position.
The National Committee also supports policies that would lower drug costs for all drugs, not just those used by Medicare beneficiaries. We urge Congress to enact reforms that would reduce expansive patent and regulatory marketing monopolies to allow generic drug competitors to come to market sooner and drive down drug costs. For example, we support shortening the marketing exclusivity (a monopoly period distinct from a patent granted through the Food and Drug Administration approval process) for biologics from 12 years under current law to 7. We favor eliminating excessive evergreening of patents and banning anti-competitive pay-for-delay agreements where brand drugs pay generics to stay off the market.
Government Relations & Policy, June 2019