Return of Effort to Tax Prescription Drugs Would Not Solve Broad Drug Cost Concerns

Congressional Democrats are preparing to re-introduce their sweeping prescription drug pricing legislation, H.R. 3. Previous estimates indicating the bill could raise more than $500 billion in revenue over a decade could make H.R. 3 a possible candidate for inclusion in President Biden’s forthcoming “American Family Plan” or as a so-called “pay-for” for another of the President’s ambitious spending priorities. Passage of H.R. 3 in any form would be a disastrous mistake for taxpayers and consumers that rely on prescription drugs.

NTU has written about H.R. 3 on numerous occasions since Speaker Pelosi first introduced the legislation in 2019. Our objections today remain broadly similar to the ones we raised a year and a half ago, but the experience of the COVID-19 pandemic -- and the historic race for COVID-19 treatments and vaccines -- has only served to underscore the potentially deleterious effects of bills like H.R. 3.

First, a refresher on what’s in H.R. 3, which was eventually called the Elijah E. Cummings Lower Drug Costs Now Act in 2019:

  • The bill would give the Secretary of Health and Human Services (HHS) the authority to negotiate drug prices for the entire Medicare Part D program for the first time ever; in 2019 Part D served 45.4 million people, who choose private-sector prescription drug plans subsidized by the federal government;
  • The HHS Secretary would be “empowered” to negotiate prices for up to 250 drugs per year, with the most expensive drugs targeted for negotiation first;
  • ‘Negotiation’ is something of a misnomer, though, given the sword the federal government could hold over manufacturers’ heads in the so-called ‘negotiation’ process: the threat of excise taxes, starting at 65 percent of gross sales for a particular drug and escalating to 95 percent of gross sales, for “Non-Compliance”;
  • The ‘negotiation’ is also rigged from the start, given the maximum drug price manufacturers could seek would be set by an “international price index” that ties maximum U.S. drug prices to the average drug prices set by foreign governments (who often have centrally-planned health systems);
  • Manufacturers could not realistically seek to recoup losses from this ‘negotiation’ process with price increases in the private sector, given H.R. 3 would make the government-set price “available to the commercial market, not just Medicare beneficiaries”; and
  • Manufacturers also could not seek to offset losses with price increases on other drugs in their product line, given they would be hit with new penalties for increasing the price of drugs faster than inflation in Medicare Parts B and D; importantly, this provision is retroactive, targeting manufacturers who raised prices for drugs “above the rate of inflation since 2016.”

Proponents of H.R. 3 will likely frame such provisions as a matter of simple ‘fairness,’ or they may frame ‘negotiations’ as merely encouraging manufacturers to ‘come to the table.’

NTU has countered before that H.R. 3 is more like a hostage-taking scenario than a negotiation. The playing field is nothing close to level when one negotiating party can strip the other party of 95 percent of their gross sales for failing to ‘comply.’ The playing field also isn’t level when the maximum price has already been set at a level that reflects the average of what centrally-planned health systems receive for a drug.

It’s also worth noting that Part D plans already have several tools at their disposal for negotiating the cost of prescription drugs they acquire for their beneficiaries, as do the plan sponsors covering a plurality of Americans in the private insurance market. The Medicare Payment Advisory Commission (MedPAC) discussed several of these price and cost management tools in their 2019 status report on Part D. They include:

  • Reliance on lower-cost generic alternatives to brand-name drugs: According to MedPAC, by 2016 nearly 90 percent of prescriptions filled in Part D were for generic medications; that’s a 43-percent increase from nine years prior (2007), when 61 percent of Part D prescriptions filled were for generics;
  • The development and adjustment of drug formularies: Formularies enable plan sponsors to control costs and steer patients, when medically appropriate, to lower-cost alternatives;
  • Negotiation with manufacturers for brand-name rebates: As MedPAC notes, “sponsors and their [pharmacy benefit managers] PBMs negotiate with brand manufacturers for rebates that are paid after a prescription has been filled,” reducing the cost of some more expensive brand-name drugs for plan sponsors;
  • Management of pharmacy networks and the use of specialty pharmacies: Sometimes plan sponsors even own their own specialty pharmacy networks, which can reduce plan sponsor costs in distributing prescription drugs and, when savings are passed on to beneficiaries, encourage beneficiaries to utilize lower-cost pharmacies when obtaining their prescriptions.

H.R. 3 would largely replace many of these management tools honed and crafted over decades by the private sector with a top-down, price-fixing regime run by HHS. Private insurers and Part D plan sponsors would potentially cheer the news, given they’d likely pay less for drugs under the H.R. 3 regime. The revenue impact of H.R. 3 -- without corresponding spending increases elsewhere -- might even give federal deficit hawks reason for optimism. There are a few reasons, though, why the long-term costs to consumers and taxpayers would very likely outstrip the short- or medium-term benefits of the legislation:

The “savings” to taxpayers are likely to be diverted to new spending right away, rather than deficit reduction: Whether one considers H.R. 3 as standalone legislation or as a part of President Biden’s American Family Plan, the more than $500 billion in revenue increases over a decade -- largely tax and rebate hikes on manufacturers -- would be spent on new federal programs immediately rather than applied to record levels of debt and deficits. This should give deficit hawks pause when supporting some of the revenue-raisers in H.R. 3. In 2019, Democrats proposed using the additional revenue to pay for dental, vision, and hearing coverage under Medicare, Sen. Bernie Sanders (I-VT) would also like to use the revenue to lower the Medicare eligibility age from 65 to 60 or 55,, whereas Speaker Pelosi and/or President Biden might like to use the revenue to pay for permanent extension of expanded and expensive Affordable Care Act (ACA) subsidies that benefit many households making six figures or more per year. H.R. 3 proponents might be on more understandable grounds if they were planning to use H.R. 3 revenue to pay down the deficit -- though it would still be terrible policy for consumers (more on that below). This legislation is not even friendly to taxpayers, though, given there’s no indication the revenue would be applied to debt and deficits.

Price controls don’t work: NTU recently re-circulated a letter signed by over 150 economists in late 2018, which highlighted for health policymakers exactly why prescription drug price controls -- like those proposed in H.R. 3 -- do not work in the long run. They wrote, in part: “In general, setting price controls at below-market rates leads to shortages, squeezes the cost bubble toward some other portion of the economy, and imposes a deadweight cost on society. In this case, price controls can lead to a reduction in patient access to certain drugs, less investment in the research and development of new drugs, and cost-shifting that raises the prices of other therapeutics.” Indeed, with the average R&D cost for drug manufacturers averaging $985 million per product, and with preclinical phases of drug R&D taking around “10.5 years from start to finish,” and with 88 of 100 drugs entering even phase I (of three) clinical trials failing to gain FDA approval, it’s fair to suggest that 95-percent excise taxes will have a severe impact on R&D generally, but especially for risky and/or high-cost R&D endeavors.

Prescription drugs are the wrong target for bending the cost curve in American health care: Progressives, conservatives, and policymakers across the ideological spectrum can probably agree that the U.S. pays too much for health care, whether in the public or private sectors. While prescription drug prices have become a bogeyman in recent years, and while price control proponents point to incidents like the ‘pharma bro’ Martin Shkreli HIV drug price hike as rules rather than high-profile exceptions, prescription drug spending must be compared to total U.S. national health expenditures. The U.S. spent $3.8 trillion on health care in 2019, an astounding $11,582 per person. Retail prescription drug spending made up only ten percent of that figure ($369.7 billion), with physician and clinical services (20 percent) and hospital care (31 percent) making up much larger slices of total spending. While drug spending increased in 2019, by around 5.7 percent, hospital spending increased more (6.2 percent) and physician and clinical services spending increased a similar amount (4.6 percent). And, as NTU has pointed out before, spending on prescription drug research and development (R&D) has the potential to keep people out of more expensive hospitals and physician offices in the long run, potentially saving taxpayers and consumers money down the line.

It’s also impossible to ignore the miracle of multiple  safe, highly effective COVID-19 vaccines put into the arms of hundreds of millions of Americans in just around a year after the devastating pandemic reached our shores. As NTU President Pete Sepp wrote in a recent op-ed:

The United States led the world in vaccine development because of the years of investment the private sector made in new technologies and critical infrastructure. Thanks to this investment, vaccines that typically take years to develop were ready for testing in a matter of months. Mimicking the flawed drug pricing schemes of socialist nations would bring this level of innovation to a screeching halt. And a halt is something no one can afford, given new variants of COVID and the ongoing need for treatments.

Policymakers can and should acknowledge the role the federal government played in helping bring these vaccines to the American public, from research at the National Institutes of Health (NIH) to taxpayer support for R&D and production and purchase guarantees through Operation Warp Speed. That said, as Sepp wrote, U.S. manufacturers were able to move so nimbly and effectively on vaccine development -- and to lead the world in the development of effective vaccines -- in part because of the careful private-sector system nourished by policymakers and innovators over several decades.

A fair response to all these rebuttals, however, could be: what should be done about prescription drug costs? No one can deny that many Americans struggle to afford their prescriptions, either regularly or from time to time. It’s not enough for NTU to ignore patients, consumers, and taxpayers that are struggling here, so we have offered policymakers several blueprints that we consider both taxpayer- and market-oriented. Reform options include:

  • Capping the amount seniors pay out of pocket in Part D for the first time (and paying for these changes by reducing taxpayer liability in the so-called “catastrophic” phase of the Part D benefit where drug spending is highest);
  • Actually reducing distortionary rebates in the Medicaid, Part D, and 340B Drug Pricing programs, where steep, mandatory discounts on the cost of brand-name drugs push the cost bubble for prescription drugs onto other payers, like employers, private health insurers, and private plan sponsors in Part D;
  • Using America’s free trade negotiations with foreign partners to reduce price controls and price fixing in other countries; steep, mandatory discounts manufacturers must provide in other countries pushes the cost bubble for drug R&D, manufacturing, and distribution onto Americans; and
  • Reducing regulatory barriers to competition and patient barriers to access; though the NTU team does not weigh in on the intricacies of Food and Drug Administration (FDA) policy, we are concerned by the numerous complaints from governmental and non-governmental stakeholders that the FDA drug approval process is too costly, too time-consuming, and too burdensome.

The choice is not between passing H.R. 3 and doing nothing. Lawmakers can choose a better path that reduces prescription drug costs for vulnerable populations while protecting key elements of the public-private partnership that have enabled COVID-19 era miracles -- and less heralded but extraordinarily beneficial innovations over decades -- to continue for years to come.