President Biden released his fiscal year (FY) 2024 budget request on Thursday, and the one major spending reduction his administration called for is an additional, significant cut to what Medicare pays for prescription drugs. Unfortunately, the long-term negative impacts of President Biden’s proposed expansion to Medicare drug price-setting could be felt by taxpayers, consumers, and patients for decades.
Recap: Price-Setting in the Inflation Reduction Act
Under the Inflation Reduction Act (IRA) of 2022, and at the urging of the Biden administration, Congressional Democrats required Medicare to set the prices for prescription drugs in Medicare Parts B and D for the first time. Though policymakers have framed this authority as a “negotiation,” there is a low ceiling on the price manufacturers can receive for their products in Medicare (the highest ceiling, arguably, is 75 percent of non-federal average manufacturer price for drugs that were approved in the nine to 12 years prior to selection) and manufacturers who refuse to accept the government’s offer will be forced to withdraw their drugs from Medicare and Medicaid or be slapped with an excise tax of up to 95 percent of gross sales on the drug.
In other words, the “negotiation” is fundamentally coercive in nature, and the government holds multiples more power in its discussions with manufacturers given the penalties manufacturers face for failing to agree to the government’s terms.
The IRA requires Medicare price-setting for “10 Part D drugs for 2026, another 15 Part D drugs for 2027, another 15 Part D and Part B drugs for 2028, and another 20 Part D and Part B drugs for 2029 and later years,” according to the Kaiser Family Foundation, and this list is additive such that an increasing number of drugs will have their prices set by Medicare over time.
The IRA also hits manufacturers with new penalties in Medicare Parts B and D if they increase their prices faster than a broad-based rate of inflation.
The nonpartisan Congressional Budget Office (CBO) estimated that the “negotiation” provisions would reduce federal spending by $102 billion over 10 years (fiscal years 2022 through 2031) while the inflation penalties would reduce deficits by another $101 billion over the decade ($63 billion in decreased federal spending plus $38 billion in increased federal revenues). These estimates are subject to points of uncertainty, some of which CBO noted in its score of similar legislation H.R. 3.
NTU opposed the drug price-setting provisions in the IRA for several reasons:
- Mandatory top-down negotiations would chill incentives for pharmaceutical manufacturer to innovate and take risks that could pay off for patients, consumers, and taxpayers in the future;
- Mandatory top-down negotiations could present smaller savings to consumers than if policymakers and regulators instead paved the way for more robust generic and biosimilar competition;
- Inflation rebates are blunt measures that are not appropriate for drug reimbursement; and
- There are much less harmful and more bipartisan ways to reduce federal budget deficits that would not threaten future private-sector investment and innovation.
Supercharged Price-Setting in the Biden Budget is Deeply Troubling
The administration has not provided all the details of its new proposals yet, but according to media reports the Biden administration is:
“...proposing to double the number of drugs Medicare would be required to negotiate starting in 2026, according to data from the Centers for Medicare & Medicaid Services shared with Bloomberg Law. That would mean the government would seek to curb the prices of 20 drugs that first year, instead of 10, and 40 each subsequent year, according to the CMS data.
Crucially, Biden is also proposing to shorten the timeline any drug is exempt from negotiation to five years—a major change for some pricey medicines.” [emphases ours]
The Biden administration is also expanding the inflation penalties from the IRA, from just Medicare Parts B and D to the private sector, and “[a]uthorize [the Department of Health and Human Services] to negotiate Medicaid supplemental rebates on behalf of [the] States.” These three changes alone would decrease federal spending by $205 billion, effectively doubling the impact of the drug price-setting enacted in the IRA just seven months ago.
The super-charged price-setting recommendations in the Biden budget request are dead on arrival in Congress, especially with Republicans in control of the House, but are deeply troubling nonetheless. These are concerning to NTU and to taxpayers for all the reasons outlined above (regarding our opposition to the IRA’s price-setting provisions).
There are a few additional reasons why policymakers and taxpayers should cast a deeply skeptical eye at the Biden administration’s recommendations:
- By shortening the exclusivity period manufacturers would enjoy before being subject to price-setting, the Biden proposals would sever the link between investment and financial return that spurs innovation in the pharmaceutical sector: If media reports are accurate, some prescription drugs could be subject to Medicare price-setting as soon as five years after approval. This incredibly short timeline does not account for the obstacles that manufacturers place in bringing their products to market after Food and Drug Administration approval. Many manufacturers, looking at the possibility of having just five years or fewer of market exclusivity before being subject to price-setting in Medicare that could lose them billions of dollars, may instead decline to invest in risky projects that – if successful – could help save lives or treat diseases.
- By allowing commercial insurers in on the inflationary penalties under the IRA, the Biden proposals insert government further into private-sector negotiations between manufacturers and plans: Allowing private insurers to enjoy the inflationary penalties currently flowing to the Medicare program in the IRA fundamentally and forever would insert the government into what previously was a negotiation between two private parties. This will reduce incentives for commercial insurers to negotiate the best deal for their customers.
- While the administration claims the prescription drug spending cuts as part of their deficit reduction efforts, they propose saving the government $200 billion in the budget while spending an additional $684 billion in new or expanded health initiatives: The Biden administration touts the enhanced prescription drug price-setting as part of their deficit reduction agenda, but this is difficult to accept at face value given the administration’s health spending proposals dwarf their projected savings from prescription drug spending cuts by several multiples. Between permanent expansion of Affordable Care Act (ACA) premium tax credits (+$183 billion in 10-year spending), expansion of health subsidies to individuals in states that have not expanded Medicaid under the ACA (+$200 billion in spending), expansion of Medicaid home and community-based services (+$150 billion in spending), additional behavioral health spending (+$76 billion in spending), and more, the administration’s budget would commit far more to additional health spending than HHS would save on prescription drug prices.
NTU is ready to work with any policymaker who believes health spending broadly is increasing at an unsustainable rate, including Biden administration officials who may be concerned about this trend. We have outlined tens of billions of dollars in potential federal health savings in our “Toward Common Ground” report with the U.S. Public Interest Research Group Education Fund. We would also echo many of the savings proposals outlined by Paragon Institute’s Brian Blase and Joe Albanese in their recent paper, “Turning the Tide on Red Ink: Commonsense Policies to Make Federal Health Programs More Sustainable.” Their proposals in the aggregate would save taxpayers hundreds of billions of dollars over the next decade without increasing Medicare taxes or cutting benefits for Medicare and Medicaid beneficiaries.