Posted: 26 Nov. 2019 5 min. read

Many lawmakers want to address drug pricing, but can they agree on a solution?

By Sarah Thomas, managing director, Deloitte Center for Health Solutions, Deloitte Services LP

Several months ago, I offered my take on where we were on prescription drug pricing regulation and policy changes. At that point, the administration had decided to pull its proposed regulation on drug rebates, which would have altered business practices between drug companies and pharmacy benefit managers (PBMs). This policy would have meant lower drug costs for some consumers and higher costs for others. It also would have increased drug benefit premiums for Medicare beneficiaries, which might have been difficult to sell to constituents as a big win.

While that policy now seems like a dim memory, two new PBM bills did pass the House. One of them would require the US Centers for Medicare and Medicaid Services (CMS) to collect and publish information from PBMs about their generic dispensing rates, aggregate drug discounts and rebates by therapeutic area, and payments between PBMs, health plans, and pharmacies. A second bill would provide rebate data to the Medicare Payment Advisory Commission (MedPAC) and the Medicaid and CHIP Payment and Access Commission (MACPAC).

While the earlier proposals would have done away with rebates as we know them, these two bills could change the rules of drug pricing but might not replace the existing system. Depending on how the regulations are written, PBMs, manufacturers, and payers would need to revisit their pricing and formulary placement strategies. This could shift demand among consumers and impact access to some drugs, but the market would likely continue to function as it has.

Lawmakers shift focus from PBMs to pharmaceutical companies

Other bills on Capitol Hill, one in the House and the other in the Senate, seek to change the Medicare Part D benefit and reduce the amount enrollees pay. Depending on the outcome of the elections next November, either bill could become a starting place for whichever parties control the House, Senate, and White House. Much of the press coverage has focused on how each bill would approach payment—and I’ll get to that in a moment. But I find it interesting that both bills would also affect coverage, which could directly help the subset of Medicare beneficiaries who face substantial out-of-pocket costs today.

Bills would change Medicare Part D

Medicare Part D coverage is a popular program—almost 72 percent of Medicare beneficiaries choose to pay a premium to a Part D plan. Premiums, which are paid out of Social Security checks, average about $35 per month, and low-income seniors receive financial help to cover the expense. However, Medicare beneficiaries who are not low-income but use high-cost drugs might spend a lot out of their own pockets. Beneficiaries face a deductible and are responsible for cost nsharing for covered drugs—with some expensive drugs on a formulary tier that requires higher cost sharing. Beneficiaries also pay more in the so-called donut hole/coverage gap, as well as covering fivepercent of a drug’s cost after meeting the catastrophic threshold.

Medicare graph

Both bills would eliminate cost sharing for beneficiaries in the catastrophic phase, but the House bill would reduce out-of-pocket spending more than the Senate bill. Each bill takes a different approach toward restructuring cost-sharing between the government, the drug company, the beneficiary, and the plan (which would presumably pass on to premiums). The bottom line is that beneficiaries would have caps on their total out-of-pocket spending. The Senate bill, which calls for more payments from drug companies, would save federal dollars.

Setting prices for drugs
Both the Senate and the House bills rely primarily on savings through regulatory price setting rather than competition to reduce the federal dollars spent on drugs⁠—through both the Part B and Part D programs. A significant difference between the two bills is the approach they take toward pricing formulas for Medicare as well as other markets.

The Senate bill would cap year-to-year price increases for Medicare Part D and change the payment formula for Part B drugs and caps increases in that program.

The House bill, by contrast, would require drug companies to negotiate prices for up to 250 drugs. Regardless of the negotiated price, the payment for a drug could not exceed the international average price, which is based on pricing data from Australia, Canada, France, Japan, and the United Kingdom. These prices would apply to Medicare, Medicare Advantage plans, and commercial payers (see the September 24, 2019 Health Care Current).

The administration had proposed a pilot that would have used an international average to pay for Part B drugs. That program has not been finalized yet, and may itself be evolving, according to the Secretary of HHS.

Senate vs. House: How did CBO score the bills?
The Congressional Budget Office (CBO) estimates that, over 10 years, the Senate bill would save the government:

  • $10.7 billion for Part B drugs
  • $34.6 billion for the Part D benefit redesign
  • $57 billion for Part D drugs
  • $12 billion through changes to Medicaid formulas1

For the House bill, savings to the government could be much larger. CBO estimates the bill would reduce Part B and Part D drug spending by $345 billion over 10 years. In addition to estimating cost savings, CBO also said:

  • The lower prices under the bill would immediately reduce current and expected future revenues for drug manufacturers, change manufacturers’ incentives, and “have broad effects on the drug market.”
  • Enactment of the international-pricing mechanism would likely increase drug prices in other countries.
  • “In the short-term, lower prices would increase the use of drugs and improve people’s health.” In the longer term, however, the agency said the bill would likely cause drug manufacturers to spend less on research and development (R&D), which would mean fewer new drugs being released.2 CBO estimated that the House bill would mean between eight and 15 drugs would come to market over the next 10 years, while 300 new drugs would be marketed over that period—about a four percent reduction in the rate of innovation.3

If the House and Senate bills change in the coming weeks and months, CBO scoring might change.

Do either of these bills have legs?
The House is expected to vote on its drug bill in November. While this bill might pass a House vote, it remains to be seen if there is room for a solution between these two approaches. Lawmakers and the public are considering the issue that CBO’s commentary also notes—where is the right balance between investment into drug R&D and affordability for individuals and purchasers? Stay tuned.

Endnotes
1. The Prescription Drug Pricing Reduction Act of 2019, CBO, July 24, 2019
2. Letter to the House Committee on Energy and Commerce, CBO, October 11, 2019
3. CBO estimate on Pelosi drug bill misses its long-term impact on health, October 16, 2019

 

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Meet Sarah Thomas

Sarah Thomas

Sarah Thomas

Managing Director | Center for Health Solutions

Sarah is the managing director of the Center for Health Solutions, part of Deloitte LLP’s Life Sciences & Health Care practice. As the leader of the Center, she drives the research agenda to inform stakeholders across the health care landscape about key trends and issues facing the industry. Sarah has more than 13 years of government experience and has deep experience in public policy, with a focus on Medicare payment policy.