Senate Finance Proposal on Drug Pricing Misses the Mark

On Tuesday, Senate Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) released a long-awaited proposal to overhaul how Medicare Part D, Medicare Part B, and Medicaid pay for prescription drugs. While there are a few proposals in this legislation that will save money for taxpayers and patients, the legislation includes inefficient inflation caps for drug increases in Parts B and D.

The proposed bill, “The Prescription Drug Pricing Reduction Act (PDPRA) of 2019,” will be marked up by the Senate Finance Committee on Thursday, leaving around 48 hours for lawmakers, advocates, and ordinary citizens to review its expansive provisions. While NTU doesn’t take a position on all provisions in the legislation, there are some aspects of the bill we hope are developed for future reform packages and others that should be left behind.

Inflation Caps Are Ineffective and Counterproductive

PDPRA effectively proposes capping drug price increases to inflation under Medicare Parts B and D by requiring drug manufacturers to rebate to Medicare the cost of drugs beyond a benchmark price plus quarterly changes to inflation. Another important feature of these caps is that they would only apply to brand name drugs and biological products, and not to biosimilars and vaccines in Part B or to biosimilars and generic drugs in Part D.

NTU has warned about the dangers of introducing an inflation cap to Medicare Part D, and similar concerns apply to introducing one to Medicare Part B. As we wrote earlier this month:

“An inflation cap, on the other hand, would effectively put the federal government in charge of drug prices, rather than a competitive free market...

the larger the difference between this government-imposed cap (on a program with 45 million enrollees) and the market price for a drug, the more plan sponsors and drugmakers will seek to recoup those costs elsewhere.”

We also noted in a letter to the Senate Finance Committee that Part D, which more than any other federal health program was designed with a robust free market in mind, has been successful precisely because it has avoided costly government controls and mandates. Now is the wrong time to undermine the Part D program, as enrollment increases, monthly premiums decrease, and per-enrollee spending comes in much lower than the Medicare Trustees originally projected.

Fortunately, one reform included in PDPRA may, with proper study and careful attention to design, provide additional protection to taxpayers.

Redesigning the Medicare Part D Benefit: Challenges & Opportunities

Unlike when the Part D program first started in 2006, a plurality of taxpayers’ costs for the program today go toward reinsurance. These costs occur in the catastrophic phase of a Part D enrollee’s drug spending when, beyond a certain threshold, Medicare covers 80 percent of an enrollee’s costs, the insurer covers 15 percent, and the enrollee covers five percent.

PDPRA’s proposal for reforming Part D’s catastrophic phase could be a good start to limiting taxpayer exposure and cutting costs for the program. It makes plan sponsors liable for a majority of the costs (60 percent), and moves drug manufacturer rebates (of 20 percent) from the “donut hole” phase (eliminated under PDPRA) to the catastrophic phase. Medicare would cover just 20 percent of the costs in this phase, as opposed to 80 percent under current law.

Both the American Action Forum (AAF) and the Medicare Payment Advisory Commission (MedPAC) have identified this kind of reform as a possible solution to the rising program costs in Part D. MedPAC noted it would “Provide stronger incentives to use generics;” “Increase affordability for enrollees and Medicare (taxpayers);” “Provide stronger incentives for plans to manage spending;” and “May provide [a] disincentive for manufacturers to set high launch prices and/or increase prices rapidly.”

Is the new “60/20/20” formula the best one for taxpayers over the long run? According to Chairman Grassley’s office, the Congressional Budget Office (CBO) has said this redesign will save $35 billion over the next 10 years, and reduce beneficiaries’ out-of-pocket costs by $20 billion over the same period. These estimates, along with the details of the proposal, deserve more examination during the markup process - and beyond. Cost-saving projections in health care spending typically carry a great deal of uncertainty, and policymakers should strive to consider as many implications as possible before moving forward. For example, would the shifted cost shares also shift investment in research? How would private insurers outside of Part D react? How does the Senate Finance proposal differ from those analyzed by AAF and MedPAC? These are important questions.

Other Provisions of the Bill Rely Too Much on a Heavy Government Hand

The inflation caps and Part D redesign make up only three of 31 sections in PDPRA, and the remainder of the bill contains a large share of troubling items. Other provisions that NTU is concerned about include:

  • Increasing the maximum rebate amount in Medicaid’s Drug Rebate Program. Currently, drug manufacturers that participate in Medicaid are required to offer two rebates for covered drugs: a basic rebate that covers the difference between the offered price and the manufacturer’s lowest “best” price, and an inflation rebate similar to the one being proposed for Medicare Parts B and D. The total value of the inflation rebate cannot exceed 100 percent of the drug’s inflation-adjusted average manufacturer price (AMP). PDPRA proposes increasing the maximum rebate amount to 125 percent of the AMP starting in October 2022. NTU has noted in the past that removing the rebate cap “will further aggravate Medicaid’s price control structure, cause more price shifting, and hurt competition, resulting in higher drug costs.” We believe that raising the cap will have a similar effect.

  • Requiring drug manufacturers to publicly justify price increases. This provision would apply to a wide variety of drug manufacturers in three broad categories: 1) “Prescription drugs or biologics with list price of at least $10 per dose and price increase,” 2) “Prescription drugs and biologics in the top 50% of net spending (per dose) in Medicare or Medicaid in at least one of the preceding 5 years and a list price increase,” and 3) “New drugs with a list price established for the first time, if the list price for a year supply or course of treatment exceeds the gross spending for covered Part D drugs necessary to meet the annual out-of-pocket threshold (about $10,000 in 2022).” The same provision includes an expansive definition of what information manufacturers may have to submit to the Secretary of Health and Human Services (HHS) to justify their price increases. We believe that promoting increased generic drug utilization and competition in the pharmaceutical industry are more productive approaches to lowering health care costs than requiring public disclosure of the business practices of private entities.

But There Are Other Parts of PDPRA That Could Work

Despite NTU’s numerous concerns with the legislation as is, certain aspects of what the Senate Finance Committee included in PDPRA - and what they didn’t include in PDPRA - can point the way forward. Provisions that could have a positive impact include:

  • Requiring state Medicaid programs to include conflict-of-interest policies and disclosures, for members of their Drug Use Review (DUR) and Pharmacy & Therapeutics (P&T) committees. These committees help create formularies for state Medicaid programs, and requiring conflict-of-interest disclosures could improve the integrity of these programs.

  • Increasing the use of real-time benefits tools (RTBTs) in Part D. This provision would require Part D insurers to provide a new, electronic tool that offers “formulary and benefit information to each enrollee’s prescribing clinician,” and would require that this technology be integrated “with clinicians’ electronic prescribing and [electronic health record] EHR systems.” RTBT use could encourage patients, clinicians, and Part D insurers to make smarter health decisions that save taxpayers and patients money.

Other than the inflation caps and the Part D redesign, perhaps the most notable part of this new legislation is what it doesn’t include. Despite pressure from a number of stakeholders, lawmakers on the Senate Finance Committee avoided including the following counterproductive measures:

  • Allowing for prescription drug importation or re-importation. NTU has noted before that allowing Americans to import drugs from abroad “would undermine the entrepreneurial economy, introduce price controls, trample on property rights, abet protectionism, harm U.S. exports, encourage socialistic health care policies, and, ultimately, burden taxpayers.” It is a good sign that the Senate Finance Committee excluded such proposals from PDPRA, and Senators should reject any efforts to add drug importation or re-importation measures by amendment.

  • Indexing U.S. drug prices to prices set in foreign countries. NTU wrote last year that price controls “come with consequences,” including reduced life expectancy and less innovation in U.S. drug products. We are encouraged that the Committee did not include an international pricing index (IPI), or similar proposals, in their legislation, and encourage Senators to reject efforts to add international reference pricing through amendments.

  • Allowing Medicare to negotiate prescription drug prices. We have said before that the government “should not interfere with something that is not broken.” While proposals like allowing Medicare to negotiate prescription drug prices are tempting for some free-market advocates, CBO has reported that drug-price negotiations would only cut costs in the Medicare program if paired with authority for the HHS Secretary to establish a formulary. Translation? A more restricted, limited list of drugs available for reimbursement by the government, and fewer options for seniors. Again, Senators should avoid adding such a provision to PDPRA via amendment.

  • Removing USP standard requirements for biological products. This proposal, currently Section 207 of the Senate Health, Education, Labor, and Pensions Committee’s Lower Health Care Costs Act, seems at first glance to be well-intentioned - it seeks to remove perceived regulatory barriers for biological products (“biologics”) and biosimilars. However, removing standards currently put in place by a non-governmental non-profit could necessitate a larger regulatory role for the Food and Drug Administration (FDA) at some point in the future. This would be the opposite of the progress that NTU seeks in the promising field of biological products.

Despite an occasional promising turn, and our encouragement over what PDPRA does not include, the legislation as a whole represents a troubling direction for drug-pricing proposals on Capitol Hill. NTU has long maintained that lower health care costs are best pursued with reforms that offer patients more choice, reduce regulatory barriers for innovative businesses, and reduce taxpayer costs for federal health programs. PDPRA largely takes health care reform in the opposite direction, with counterproductive cost controls and enhanced regulatory burdens that will hamper innovation. We encourage Finance Committee Members to significantly reform the legislation before advancing it to the full Senate.