Negotiation or Extortion?
Chairman Wyden, like many other Congressional Democrats (and President Biden), has called on Congress to allow Medicare to negotiate prescription drug prices at a national level for the first time.
An important principle often lost in the debate over Medicare negotiation for prescription drug prices is that the private plans covering all Medicare Part D beneficiaries already can and do negotiate the price of prescription drugs on behalf of their customers with tools like formularies, pharmacy networks, and rebates available to plan sponsors to lower the net cost of drugs. With Medicare Part D beneficiaries able to choose from between 25 and 35 prescription drug plan offerings in their region, patients can often choose a plan that meets their prescription drug needs as well. Consumers also have the power to reward plan sponsors who negotiate down costs for the drugs that matter to them.
What Chairman Wyden and other Democratic policymakers would do is replace this market-based system with a top-down negotiation on the prices Medicare (and the private sector; more on that below) pays for prescription drugs.
The Chairman specifies four principles for “negotiation policy” in Medicare, each of which raises further questions and concerns:
- “Establish clear criteria for market failure and for which drugs to negotiate the price”: The criteria for apparent “market failure” in H.R. 3, the House Democrats’ drug pricing legislation, is incredibly broad and sweeping. Medicare could effectively set prices for “up to 250 drugs per year.” The Speaker’s office boasts that “[i]n the first year alone, drugs representing more than half of all Medicare Part D spending, covering tens of millions of patients, would be subject to the negotiation process.” National Taxpayers Union has previously noted that the H.R. 3 process is less a negotiation between Medicare and manufacturers than it is a government extortion of manufacturers, but in any case the criteria for alleged “market failure” in H.R. 3 is hardly narrow. NTU believes that allowing Medicare to nationally negotiate the prices of drugs is a mistake under any circumstances, but at minimum the Chairman should reject the catch-all “criteria” under H.R. 3 that subjects the majority of Part D spending to top-down negotiations.
- “Define what constitutes a fair price in these circumstances”: If there is one thing that stakeholders have learned about price controls in the existing federal health programs, it is that the federal government is not good at “defin[ing] what constitutes a fair price.” For many drugs, Medicaid requires manufacturers to pay rebates that equal 23.1 percent of the manufacturer’s average price per unit, with additional penalties if a manufacturer increases the price of their drug beyond inflation as measured by the Consumer Price Index for Urban Consumers (CPI-U). As the non-partisan Congressional Budget Office (CBO) has pointed out, Medicaid’s average price for brand-name drugs is often just 35 percent of the average price in Medicare Part D. In other words, if the “fair price” to lawmakers is the lowest-common denominator, or so-called ‘best price,’ rather than a price that reflects the costs of bringing a pharmaceutical product to market (along with the costs of numerous products that failed to reach the market), then Medicare price negotiations could undermine future research, development, and medical innovations. And the abuse of the 340B Drug Pricing Program, which has seen 3,000-percent growth in participating providers in the last 15 years, demonstrates how government-mandated, below-market prices will attract ill-intentioned payers looking to latch on to the government-set price.
- “Give the Secretary both tools and guidelines to negotiate a fair price”: One finding that CBO shared with lawmakers in 2007 and reaffirmed in 2019 is that giving the federal government the authority to negotiate prescription drug prices in Part D will not work unless the Secretary of Health and Human Services has some kind of “leverage … to secure larger price concessions.” CBO also said in 2019 that such leverage could include a “formulary or institute a price structure.” The challenges the federal government would face creating a national formulary for Medicare Part D are numerous. This American Academy of Family Physicians primer on “Patient-Centered Formularies” details some of the challenges facing any payer building a formulary, including patient access, fiscal responsibility, and evidence-based decision-making. And even though the vast majority of Americans covered by an employer health plan are subject to formularies for prescription drug coverage, the tradeoffs mentioned above become much more challenging when the federal government is negotiating the same formulary for all plans rather than private insurers negotiating different formularies for different plans. As for CBO’s “price structure” option, the introduction of H.R. 3 shows just how destructive these proposals can be. H.R. 3 would threaten manufacturers with an up to 95-percent excise tax on the gross sales of a disputed drug if the manufacturer cannot agree with the government’s suggested price. As we have said before at NTU, that is less like a negotiation than an extortion, given the government’s power to seize 95 percent of a manufacturer’s sales revenue.
- “Create the right incentives to ensure that pharmaceutical companies participate in the negotiation process”: Again, the challenge for Chairman Wyden here — and for any policymaker suggesting national negotiation of prescription drug prices — is to prove that terms like “incentives” and “negotiation” are not merely political cover for extortion and for punitive and shockingly high taxes. H.R. 3 has certainly gone down the route of extortion, and even a lower excise tax in a Wyden framework would be the wrong path.
Public Program Price-Setting vs. Private-Sector Price-Setting
Perhaps one of the most concerning aspects of Chairman Wyden’s framework is that, like the House Democrats supporting H.R. 3, he supports allowing private-sector health insurers to automatically benefit from the federal government’s prescription drug price-setting:
“Drug pricing reforms that keep prices and patient costs in check should extend beyond Medicare to all Americans, including those covered by employer and commercial health plans.”
Lawmakers who support or are considering supporting such a proposal should ask themselves if they would also be comfortable with the government setting the prices that private insurers pay hospitals and doctors for their services. Despite pharmaceutical manufacturers becoming a bogeyman on Capitol Hill for high health costs in America, retail prescription drug spending made up only 10 percent of national health expenditures (NHE) in the U.S. in 2019. That pales in comparison to hospital and physician spending:
- Hospital care spending in 2019: $1.2 trillion, or 31 percent of NHE
- Physician and clinical care spending in 2019: $760 billion, or 20 percent of NHE
- Retail prescription drug spending in 2019: $380 billion, or 10 percent of NHE
Ask the nation’s hospitals or its physician groups how they feel about Medicare and Medicaid payment rates and they will likely tell you the federal health programs often pay less than the cost of providing goods and services to patients (and not just less than the charges providers send to public and private payers). Given Congress regularly passed legislation in the 2000s to prevent physicians from getting a cut in their Medicare payments, it seems many lawmakers — Republican and Democratic — would not want government rates applied to the services provided by all hospitals, doctors, and health professionals in the country. That same principle should apply to prescription drug prices, which constitute a much smaller portion of NHE than hospital or physician services.
Paying a Market Price Is Not a ‘Subsidy’
Chairman Wyden seems intent on reviving a years-old debate over whether manufacturers should pay Medicare Parts B and D a penalty (or “rebate”) if the manufacturer increases the price of their drug faster than inflation. NTU has written on this topic before, and we have challenged the argument from policy professionals across the ideological spectrum that paying for drugs whose prices have increased faster than inflation is a “subsidy” for manufacturers.
To peg the allowable price Medicare will pay for a prescription drug to a broad measure of price increases like the Consumer Price Index (CPI) is to effectively attempt to set the price of the drug. While there are obvious examples of abusive price increases that are clearly not tied to market conditions, such as Martin Shkreli increasing the price of malaria and HIV medicine from $13.50 to $750, manufacturers can and do weigh more than just CPI in setting the price of drugs. Private payers in Part D should be able to push back on what they deem to be excessive price increases in negotiations with manufacturers, and private payer negotiations also affect the price of drugs in Part B because Part B reimbursement is based on average sales price.
But it makes little sense to tell manufacturers they will pay a penalty for increasing the price of their drug even a penny beyond a blunt and market-wide measure of inflation, just as it would be absurd for the government to try to set the price of lumber by demanding forest landowners pay a penalty for prices that rose beyond CPI. Federal policymakers should trust the market to guard against excessive price increases, and should instead be focused on protecting the patients most exposed to high drug costs (more on that below).
Government R&D Funding Cannot Easily Displace the Private Sector
Occasionally, proponents of government price-setting for prescription drugs have suggested that increased federal funding for research and development (R&D) can hedge against any declines in private-sector R&D that result from pharmaceutical price-fixing. Some proponents of H.R. 3 and similar legislation have also posited that the government has a right to set drug prices, given that federally funded research can contribute to the discovery and development of new drug products.
Here are a few stats that demonstrate why both of these views are misplaced:
- According to a 2016 study published in Therapeutic Innovation & Regulatory Science (TIRS), a scientific journal, of a few dozen drugs, drug classes, and drug combinations studied, the public sector achieved 54 percent of basic science milestones while the private sector achieved only 27 percent. However, the private sector achieved 58 percent of drug discovery milestones as opposed to 15 percent for the public sector. And the private sector dominated the public sector in production (81 percent) and development (73 percent) of new and innovative drugs.
- Science Magazine pointed out in 2017 that the federal government’s share of even basic research discoveries was declining, thanks in part to the fact that pharmaceutical manufacturers more than doubled their spending on basic research from 2008 ($3 billion) to 2014 ($8.1 billion).
- Overall, the pharmaceutical industry spent $83 billion on R&D in 2019 alone, according to CBO. This compares to an average of $35 billion in basic research funding per year at the National Institutes of Health (NIH) over the past two decades.
- H.R. 3 would use tax revenue and drug spending reductions from their price extortion to increase NIH funding by $7 billion over 10 years, at an average of just over $700 million per year. That is a relatively small increase as the bulk of revenue increases or spending reductions from H.R. 3 are spent instead on expanding Medicare to universal dental, vision, and hearing coverage.
A Better Path Forward
Despite the numerous potholes in Chairman Wyden’s framework, no serious policymaker can deny that some Americans have trouble accessing and/or affording prescription drugs. Congress should be focused on helping these individuals first and foremost, rather than throwing out the existing system of private-sector price negotiations and replacing it with a top-down, government-set price for drugs that could threaten access and innovation in the long run.
NTU has offered lawmakers a taxpayer- and market-oriented path forward for federal prescription drug policy. Our full paper is here, but a few of our recommendations are:
- Ensure R&D costs do not rise for manufacturers — and all American businesses — starting in 2022, by ensuring businesses can continue to fully expense their R&D costs on their tax bills. As noted above, pharmaceutical manufacturers play a disproportionate role in the American private sector’s investments in R&D.
- Redesign the Medicare Part D prescription drug benefit, including an out-of-pocket cap for seniors. Most versions of this proposal would protect seniors in Part D with the first-ever out-of-pocket cap in the benefit (ranging from $2,000 to $3,100 per year). Even better, most versions of this proposal would pay for that protection by redesigning the “catastrophic” phase of the benefit — asking plans rather than taxpayers to foot the bill.
- Reduce, rather than increase, distortionary rebates in the Medicaid program, which could in turn reduce the impact that below-market Medicaid payments for prescription drugs have on Medicare and on the private sector.
There are many more reform options in the paper. In short, Chairman Wyden’s principles seem to be taking federal prescription drug policy in the same troubling direction as House Democrats’ H.R. 3. We encourage lawmakers to instead work on a bipartisan basis on prescription drug reforms that protect patients who need the support the most.
Andrew Lautz is the Director of Federal Policy for National Taxpayers Union.