prescription drugs and money

Changes Loom for CMS and Drug Manufacturers

August 29, 2023

On Tuesday August 29, the Centers for Medicare and Medicaid Services (CMS) released a list of the first 10 drugs that will be subject to price negotiation as prescribed by the Inflation Reduction Act’s (IRA) drug pricing provisions. Politically controversial, but popular with the public, this represents a significant change in how drug manufacturers are paid for their drugs in Medicare’s prescription drug benefit, also known as Medicare Part D.

According to the IRA, high-priced, widely used drugs that do not have generic competitors and are a number of years past their FDA approval are subject to the parameters of the law. After months of speculation, the newly published list includes the broad categories of drugs such as blood thinners, diabetes medicines and cancer drugs.   

It’s unsurprising that the government has been actively seeking ways to lower health care expenses since the pandemic. However, the tactic of negotiating drug prices signifies a fundamental change in how the government handles drug payments. Simply put, it’s unprecedented.

While the pharmaceutical industry supports certain aspects of the IRA, such as capping out-of-pocket costs for seniors, the negotiation provision is perceived as an excessive measure that lacks the essence of genuine negotiation. As drug manufacturers grapple with the shift away from established methods of government drug payments, several questions remain: how well will CMS be able to execute this new law?  What impact will it have on the industry? Will it actually lower prices for seniors?

For physician and hospital reimbursement, which CMS has regulated for decades, CMS uses an annual price setting rulemaking process. To do this, CMS uses what is called a prospective payment system in traditional Medicare. Based on regulation put in place by federal law, Medicare pre-determines a base payment rate for things such as a hospital stay, a doctor visit or a particular service. Then, CMS adjusts its payments based on various factors, such as the provider’s geographic location and the medical complexity of the patient receiving the service. Medicare updates payment rates annually to account for inflation adjustments.

For drug price negotiation the process is different.  Companies whose drug or drugs are in the first 10 and they choose to enter into talks with CMS, they will receive an initial offer from CMS for each selected drug in the Negotiation Program, with a proposal for the maximum fair price and a concise justification no later than February 1, 2024.  Assuming no interruptions, final prices will show up at pharmacy counters on January 1, 2026. CMS will then negotiate prices on another 15 drugs for 2027.

Companies do have the option of not entering into talks but if they choose this path, they could face excise taxes up to 95 percent. Their other options is to leave the Medicare and Medicaid programs. Both of these options are unlikely.

To some, this new process looks less like a negotiation and more like price setting. However, Democrats have long viewed Medicare negotiation as a major part of their drug pricing agenda and have been pushing it for decades. Republican support has been more nuanced. Some supported such new power, while others opposed it as an unnecessary expansion of federal power. The pharmaceutical industry and many free-market organizations strongly oppose the law as they believe it will have a negative impact on drug innovation and discovery. The claim is that if prices are set too low and profits are limited, drug manufacturers will have less resources to invest in new research and development, which will disproportionately impact investment in expensive and the most challenging disease areas.

In politics, you want the rewards of your actions to be realized quickly. However, it is likely to take years before the government can reap any savings and then pass them on to seniors. So, whether Democrats will be rewarded for their success in passing the negotiation provision in the IRA is very much up in the air. As a comparison, Democrats were optimistic that they would be rewarded publicly for the passage of the Affordable Care Act (ACA), but instead were defeated in the 2010 election when they lost the House. Despite the political setback, the law managed to withstand votes to repeal it and several legal challenges in the courts. Ironically, the ACA has done what it promised and that it has arguably been instrumental in reducing the uninsured rate in the United States.

Like the ACA, the IRA drug negotiation provision is facing multiple court challenges—this time from drug companies and the U.S. Chamber of Commerce who are challenging the provisions as being unconstitutional. So far, six drugmakers have joined the legal effort to oppose drug price negotiations in 8 total lawsuits. Although the lawsuits have not slowed down the process, a favorable outcome for the challengers could disrupt this entire trajectory. Nonetheless, it will likely take years for the legal challenges to make their way through the courts.

Until then, both the process and the law are one of the top issues shaping the health care debate in Congress and across the country.

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