How much drug price control are we getting in the Inflation Reduction Act?

Subscribe (free) to xpostfactoid

When media addresses the prescription drug cost control measures in the Inflation Reduction Act, the provisions empowering Medicare to negotiate the price of select high-value drugs tends to suck up all the attention. 

Rightly, perhaps. While the negotiation regime is slow to start (beginning with 10 drugs to be negotiated in 2026), modest in number (rising to 20 drugs negotiated in 2029), and abjuring reference pricing from European countries (instead capping prices at a set discount of average U.S. prices), it establishes a vital principle, and the scope and terms of negotiation may be expanded and strengthened over time. 

That said,  a lower-profile provision that kicks in quickly (in 2023) is projected (by the Congressional Budget Office) to save/raise roughly as much money as drug negotiation: Inflation caps on the prices of drugs currently on the market. If a drug manufacturer raises the average price charged for a given drug by an amount that exceeds the consumer price index for urban consumers (CPI-U) it must rebate the difference to Medicare. That provision not only starts right away, it also applies to employer-sponsored and individual market health plans as well as Medicare (the rebates accrue from all drugs sold but are paid only to the federal government). CBO projects that the inflation caps will generate $62 billion in savings and $38 billion in revenue over ten years.

The revenue forecast stems from the assumption that as  the inflation caps will lower drug costs in employer-sponsored health plans, employers will plow much of the savings into increased wages, which, unlike health benefits, are taxed. A December 2021 Urban Institute analysis by Michael Simpson and John Holahan of a similar provision in the Build Back Better Act assumes that the forecast revenue represents about 29%* of the wage increases resulting from health plan savings. Applying that formula to $36 billion** in new tax revenue from increased wages suggests about $124 billion in wage increases over ten years. 

The estimated revenue and savings are inhibited by CBO's assumption that capping price increases on existing drugs will induce pharma manufacturers to charge more for new drugs as they enter the market. (The Medicare negotiation provision is also expected to put some upward pressure on launch prices, but less so, because drugs don't become eligible for negotiation for many years (at least seven years for small-molecule drugs, eleven for biologics).  Drugmakers will also likely reduce the rebates they negotiate with insurers in employer plans and Medicare Part D.

Some political hay is being made of this presumed launch price inflation this week because CBO spelled it out yesterday in a short response to a request by Republican Jason Smith, ranking member of the House Budget Committee. But the anticipated effect on launch prices has been baked into CBO projections for every iteration of these cost control measures, dating back at least to H.R. 3, a more sweeping drug cost control bill that passed the House but died in the Senate in 2019. The extent of the upward pressure on launch prices is all but impossible to gauge because, as Juliette Cubanski of the Kaiser Family Foundation pointed out to me, the cost control measures are unprecedented.

If the provisions are implemented, we won't know the counterfactual. "We'll have a hard time knowing whether launch prices will be higher than they would have been," Cubanski said. "They're higher now than they were ten years ago, and were higher ten years ago than ten years before that. It's rational to expect drug companies to maximize revenue. Nothing in this legislation will stop them from charging higher prices for new drugs in the future."

On the other hand, Cubanski said the Medicare negotiation provisions have the potential to build Medicare's negotiating capacity over time (assuming that the IRA passes, its prescription drug provisions survive any Republican takeover of Congress and the presidency, and these provisions are implemented by a willing HHS secretary).  While the number of drugs subject to negotiation starts off modestly, Cubanski pointed out, the total will accumulate over the years. Indeed, given the criteria under which a drug becomes eligible for negotiation -- that is, having been on the market for at least 7 to 11 years prior to negotiation; being among the 50 highest-cost drugs in Medicare Part D or B; and costing Medicare at least $200 million, subject to various exemptions and exclusions*** -- after some years there might not be any drugs newly available for negotiation.  If the process takes hold and proves effective, Cubanski said, Congress may modify the criteria and increase the number of drugs subject to negotiation in the future.

As negotiated drugs accumulate, the negotiation process and inflation caps may form a kind of pincer movement -- though the lack of controls on newly introduced drugs still gives drug makers plenty of room to run.  Since the core argument against price controls is the constraints controls impose on new drug development -- a tradeoff deemed acceptable by all countries but the U.S. -- perhaps that retained pricing power is an acceptable concession -- at least in American terms. 

UPDATE, 8/6/22: The Senate Parliamentarian has ruled that under budget reconciliation rules, the inflation rebate can only apply to Medicare, not commercial plans. There goes $38 billion in estimated revenue.

-----

* The 29% figure is the Urban-Brookings Tax Policy Center's estimate of the effective marginal tax benefit for employers' contributions to health insurance premiums

** To calculate wage increases, the Urban Institute analysis subtracts $2 billion from the projected revenue increase, attributing that amount to reduced premium subsidies in the ACA marketplace. It's not clear to me why reduced subsides are counted as revenue rather than savings.

*** Courtesy of Juliette Cubanski, exemptions/exclusions include: “small biotech drugs,”  defined as those which account for 1% or less of Part D or Part B spending and account for 80% or more of spending under each part on that manufacturer’s drugs, until 2029; drugs with Medicare spending of less than $200 million in 2021 (increased by the CPI-U for subsequent years); drugs with an orphan designation as their only FDA-approved indication; and plasma-derived products.

Subscribe (free) to xpostfactoid

Photo by SHVETS production