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Democrats approve curbs for Medicare plans, but not for commercial drug coverage.
Despite extensive opposition from biopharmaceutical manufacturers, Senate Democrats have pushed through legislation authorizing Medicare to negotiate prices on certain medicines and to limit outlays for seniors with high drug costs. The $740 billion Inflation Reduction Act (IRA) of 2022 also extends subsidies for health insurance provided under the Affordable Care Act (ACA) for an additional three years.
These provisions are part of a broad package of reforms in energy and tax policy designed to combat global warming and to boost taxes on wealthy corporations and individuals.1 Republicans unanimously rejected the entire package, particularly the tax provisions and drug price controls, painting the Democrats’ plan as inflationary and fiscally irresponsible. The House is slated to vote on the bill later this week to seal this important political victory for the Biden administration. Democrats control that body by only a slim margin, setting the stage for a very tight vote in the face of stiff Republican opposition.
The prescription drug provisions in the bill will largely effect adults over age 65, as Senate rules blocked the application of certain cost controls to individuals who get health insurance through employment. The bill thus drops penalties for pharma companies that raise prices each year higher than inflation for commercial plans as well as a policy capping patients’ insulin outlays at $35 a month for consumers. Many plans already have some limits on insulin costs, but high prices on this critical drug has become a hot-button issue.
However, in a boon for health plans and consumers, the legislation delays premium increases for some 13 million individuals who currently receive discounted coverage for health insurance provided through Obamacare state and federal exchanges. Broader subsidies were authorized during the COVID-19 pandemic and are set to expire this year without the added $64 billion authorized here to continue the cost reductions in premiums for three more years.
The changes affecting Medicare drug benefits, however, are significant. The legislation would cap out-of-pocket drug costs for Medicare beneficiaries at $2,000 a year beginning in 2025, a provision likely to benefit more than one million seniors, possibly up to three million as more costly therapies come to market. Pharma companies also would have to pay large “rebates” or fees to the government if they raise Medicare drug prices beyond the rate of inflation. And insulin costs would be capped at $35 a month for seniors.
Most notable is the provision authorizing Medicare price negotiations on certain costly medicines, the holy grail in health benefit reform for many Democrats for decades. Starting in 2026, this highly contentious provision will permit Medicare to negotiate prices on ten expensive and widely used drugs near patent expiration date, expanding to 20 drugs annually by 2029. If the manufacturer rejects the Medicare price it would pay a hefty fee to the program, a process that industry attacks as closer to price controls than to negotiations.
One thing for sure is that there will be considerable jockeying among biopharma companies over which drugs are put on the price negotiation list as the new program shakes out.
The Pharmaceutical Research and Manufacturers of America (PhRMA) led a massive assault on the proposal, with non-stop TV and radio ads predicting long-term harm to patients and the health care system.2 Similarly, the Biotechnology Innovation Organization (BIO) has kept up a steady stream of warnings that Medicare drug regulation would limit access to many important drugs and result in fewer new cures for patients.3 PhRMA president Steven Ubl has suggested that industry may file suit to block negotiations and will challenge new rules and other features as Medicare moves to implement the new policy.
Less visible was similar objections from the generic drug industry to the Medicare price negotiations. The Association for Accessible Medicines (AAM) pointed out that the likely brand candidates for spending limits will be widely used, expensive medicines just as they become eligible for generic competition. However, negotiations that lower list prices will leave less room for generic makers to offer lower-priced alternatives that are profitable, and very little incentive for multiple copy cats to move into the market. In addition, Medicare drug plans will have little incentive to give favorable formulary placement to only slightly less expensive generics. Biosimilar makers have raised similar issues, as negotiations to lower prices on expensive biotech therapies will make it more difficult for competing follow-ons to gain market share and become profitable.
It’s not clear, moreover, how these new policies will affect state Medicaid programs. Curbs on annual drug price increases for Medicare could raise prices for other public and private plans. New pricing policies may prompt higher launch prices for new therapies, change how formularies cover brand and generic products, and alter the design of both Medicare Part D drug plans and commercial coverage.
Another unknown is the impact of coverage and pricing policy changes on investment and innovation in the biopharma industry. Pharma and biotech manufacturers have loudly predicted that limits on prescription drug revenue from forced negotiations will curb incentives to invest in R&D, particularly in new biotech firms, reducing jobs, and the discovery of many life-saving medicines. Some health analysts reject such dire outcomes, maintaining that innovation will continue as the new program spurs competition and benefits Americans more broadly.