Congressional Democrats are on the precipice of achieving their long-standing goal of empowering Medicare to essentially set the prices of some drugs. While the political significance is undeniable, the ultimate implications for consumers and drug markets are far more uncertain than many supporters (and detractors) are implying.
It will be years before we understand exactly how much the legislation has changed the landscape of American health care.
The Inflation Reduction Act, being voted on by the House Friday before being sent to the president’s desk, includes a host of changes to health care coverage, climate policy and tax policy. Among the health provisions stands a crown jewel — a provision allowing Medicare to regulate the prices of some drugs. Its inclusion represents a political victory for Democrats, who have pushed for some version of this policy since the Clinton era.
Unsurprisingly, this provision has been contentious. To some drug manufacturers, rate setting by Medicare represents “a tragic loss for patients,” as they warn it will upend drug innovation. Democrats and advocacy groups, on the other hand, argue it risks little and is necessary to combat the pharmaceutical industry’s greed. It is easy to suggest the truth lies somewhere in between, but it is much harder to say where.
Legal, political and economic uncertainties make it very difficult to predict what this new authority will ultimately mean for drug prices and for consumers. Which is why Americans should be wary of politicians’ promises about how this will affect our wallets and our health.
Under the new law, Medicare will have the authority to regulate high-revenue drugs that have been on the market for at least nine years and do not have a competitor. Currently, drug manufacturers can set their own prices for drugs. Only once their patents expire are generics allowed to enter the market to compete with the name-brand drug via lower prices. For high-selling drugs, it takes about 13 years on average for this to occur. Supporters argue this new authority will bring down prices much sooner. Blockbuster drugs such as Eliquis, Trulicity and some types of insulin are likely to be targeted initially.
If selected by Medicare, drugmakers will face off against federal regulators who will determine a price based on factors such as the drug’s effectiveness and research and development costs. In practice, firms will then have to accept this price because they’ll face very high financial penalties if they don’t.
Drug manufacturers, however, will likely do what they can to minimize revenue losses. For starters, they will almost certainly work to avoid being selected for rate regulation. They could do this by, for example, making agreements with generic drug producers that allow the generic to enter the market before the patent protection period ends under the condition that only a small quantity of the generic is sold. This would exempt the drug from Medicare’s price-setting authority while minimizing the drug company’s financial losses. If successful, this kind of behavior could render Medicare’s new authority relatively toothless.
Beyond strategic responses, the political environment presents its own uncertainty. This is particularly true since the legislation gives federal regulators considerable flexibility in how they set a drug’s price, allowing future policymakers to play an important role in the process.
To start with, regulators are told to consider a number of factors about the drug but are given much less guidance on how to ultimately decide on a final dollar figure. While Congress mandates that drugmakers give Medicare a minimum discount on a particular price (e.g., Medicare’s price needs to be 25% lower than the price paid by wholesalers), drugmakers can artificially inflate the price. Thus, in the long run, it likely won’t constrain Medicare’s prices very much.
Within this vague framework, one can easily imagine “Medicare negotiation” looking quite different under successive presidential administrations. Someone like Sen. Elizabeth Warren, D-Mass., who has been very critical of the drug industry, might use this authority much more aggressively than an administration led by one of the Republicans who voted against the provision.
Beyond this, politicians are already jockeying to change the law itself. Some Democrats think the current bill doesn’t go far enough and should just be the jumping off point for Medicare’s ability to regulate drug prices. If they expanded this authority to more drugs, or applied these prices to the 50% of the population on private insurance, it would increase cost savings and help pay for other legislative priorities. Meanwhile, Republicans have expressed concerns that this authority would depress incentives to develop new medicines and are likely to seek ways to limit the bill’s provisions.
Compounding matters, the pharmaceutical industry is expected to mount legal challenges in response to the legislation. Key provisions like the penalties levied on firms who do not comply with federal rate regulators are almost certain to come under attack. The bill as written allows firms to be fined up to 95% of the drug’s revenue if they do not comply with the so-called negotiation process. The industry argues this is so severe as to violate the excessive fines clause of the Constitution. If these penalties are lessened or disallowed, Medicare’s ability to compel drug makers to agree to price reductions would be reduced.
The passage of this bill undoubtedly marks a political victory for congressional Democrats who will sell it as a major achievement heading into the November midterms. But, in fact, it will be years before we understand exactly how much the legislation has changed the landscape of American health care — and whether that change is for the better.