By Rich Bagger, Partner and Executive Director, Christie 55 Solutions
This column is adapted from Rich Bagger’s comments as a panelist on “Federal Government Pharmaceutical Price Negotiations” at the Pharmaceutical and Medical Device Ethics and Compliance Conference last fall in Washington, D.C.
While the inaptly named “Inflation Reduction Act” finally enacts long-overdue Medicare Part D benefit design changes that will reduce patient out-of-pocket prescription drug costs for Medicare beneficiaries being treated for serious health conditions, it also establishes a system of government price controls that will seriously inhibit development of new medicines, including in areas of the greatest medical need.
First, the positive: the legislation redesigns the Medicare Part D prescription drug benefit, providing a much-needed, significant improvement in patient access by replacing open-ended patient cost-sharing with an annual patient out-of-pocket cap, spread evenly throughout the year at $167 per month.
However, the Act also includes completely unrelated price control provisions that will reduce the number of new treatments available in the future for patients with serious unmet medical needs.
The drug pricing provisions of the new law are not at all as they are portrayed. Despite the often repeated claim that Medicare doesn’t negotiate prescription drug prices, biopharmaceutical companies already negotiate in Medicare Part D — with pharmacy benefit managers (PBMs), the prescription drug intermediaries that actually provide the benefit and determine the prices patients pay. The three largest PBMs – CVS Caremark, Express Scripts, and OptumRx – each negotiate on behalf of more people than are covered by the entire Medicare Part D program. These PBMs already get the best deals available. That is why the Congressional Budget Office consistently concluded that legislation simply allowing the Centers for Medicare and Medicaid Services (CMS) to “negotiate” Medicare drug prices would not achieve additional savings. The drug pricing provision is only predicted to save the government money because of an excise tax of up to ninety-five percent of a drug’s total sales (not just Medicare sales), paired with the threat that CMS can ban the entire company from participating in Medicare and Medicaid, for failing to accept the government’s price. That’s literally an offer that can’t be refused, and why the new law amounts to government price setting, not negotiation.
These drug pricing provisions could lead to several serious, unintended consequences.
First, the new law strongly disincentivizes investment in small molecule (typically oral medicines) drug development. Small molecule drugs become eligible for “negotiated” prices nine years after FDA approval (the “negotiations” begin at seven years), and biologics (often injectable medicines) become eligible for “negotiated” prices thirteen years after FDA approval (the “negotiations” begin at eleven years). A drug’s selection for “negotiation”, which could result in a price at any level (the new law does not set a minimum price), could be considered by investors to be effectively a “loss of exclusivity” event, similar to patent expiration. Considering that the current commercial life for patent protected small molecule drugs averages fourteen years, reducing that period to nine years represents a thirty-six percent reduction in a drug’s commercial life. Because a drug’s commercial value is back-loaded due to launch ramp-up, the five-year reduction in a drug’s commercial life could actually translate to something like a fifty percent reduction in value. A shorter time to recoup research and development investment will mean fewer new medicines, because the cost of drug development and low probability of success will no longer clear investors’ financial hurdle.
This unanticipated result can be remedied: Congress could amend the law to provide for “negotiated” pricing to begin at thirteen years for both small molecule drugs and biologics.
Second, the new law will result in fewer new indications for approved medicines. “New indications” refers to subsequent FDA approvals of an existing drug for additional medical conditions or patients based on further clinical trials. If a patent protected small molecule drug’s commercial life is reduced to nine years, lifecycle management will invariably be impacted. Will biopharmaceutical companies wait for the largest indication before seeking initial FDA approval? Could that result in a delay for patients? What will the provision’s consequences mean for cancer drugs that are often first approved for later lines of therapy and move forward, based on significant clinical investment, to earlier treatment over time?
Fortunately, the new law exempts orphan drugs for rare diseases from government price setting. However, this exemption is lost if the orphan drug is approved for a second indication of any kind, including a second orphan indication. Investment in additional indications for rare conditions that are clinically significant but have little commercial value, especially at government-set prices, might be at risk. Will biopharmaceutical companies develop additional, non-commercially viable indications for small patient populations if doing so means price controls will then be triggered for the first, commercially viable indication? The consequences pose potential risk for new treatments for rare disease patients with unmet medical needs.
There is a potential fix for the new law’s unintended consequences for rare diseases: exempt orphan drugs from government price setting altogether.
Third, the new law reduces payments to providers for physician-administered drugs. Lower prices for Medicare Part B drugs will result in reduced payments to providers for “buy and bill” drugs. A leading health care consultancy estimates a forty-four percent reduction in add-on payments to providers for Medicare Part B drugs.
Finally, the new law will reduce incentives for generic drugs. Generic drugs can only be approved after patent expiration. The first approved generic version of a drug usually gets six months as the sole generic on the market. If “negotiation” becomes a loss of exclusivity type event for pricing, years before patent expiration, the incentives for generic development and being the first approved generic will be dramatically reduced.
What could Congress have done instead to address the real drivers of increasing drug costs?
It’s noteworthy that the new law doesn’t do anything to reform PBMs, which operate largely out of sight and are a key driver of increased prescription drug spending. Their business model – based on collecting rebates from biopharmaceutical companies and co-pays from patients – creates perverse incentives for higher list prices and higher patient cost-sharing, often shielded by lack of transparency. Over half the states have taken some action to implement bipartisan PBM reforms, including implementing “reverse auctions” to lower costs for state prescription drug programs, creating a duty of care standard for PBMs, providing transparency on rebates, allowing pharmacists to advise patients how to lower their drug costs (such as by paying cash for generics, bypassing the PBM), and prohibiting patient co-pays that exceed the cost of the drug.
Unfortunately, Congress missed an opportunity to enact similar common sense reforms at the federal level providing guard rails for PBMs, and instead opted for government price setting that will disrupt the incentives for investment in drug development and impact access to new medicines for patients with unmet medical needs.