Passage of Cut Inflation Act Gives Medicare Historic New Powers

A pharmacist collects prescription drugs from a pharmacy.

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Medicare is set to renegotiate prices for some of its most expensive drugs in a historic expansion of its power, which could reduce costs for many seniors as well as federal spending on its prescription drug plan.

The changes are hidden in a huge spending and tax bill in Congress that includes $433 billion in investments in health care and clean energy. House Democrats passed the Cut Inflation Act on Friday in a vote of 220 to 207 along party lines, ending a tortured legislative process that has lasted more than a year.

The bill empowers the Secretary of Health and Human Services to negotiate the prices of certain drugs covered by two different parts of Medicare and to punish drug companies that don’t follow the rules. The legislation also caps out-of-pocket expenses at $2,000 beginning in 2025 for people who participate in Medicare Part D, the prescription drug plan for seniors.

Democrats have been fighting for decades to give Medicare the power to persuade drugmakers to lower prices. But the powerful pharmaceutical lobby and the Republican opposition have shattered past efforts. Medicare Part D currently prohibits HHS from negotiating prices with industry.

But HHS is now on the verge of gaining bargaining power. President Joe Biden is expected to sign the bill soon.

The American Association of Retired Persons, which represents 38 million people, described the legislation as a historic victory for seniors. AARP CEO Jo Ann Jenkins said the group has been fighting for nearly two decades to allow Medicare to negotiate drug prices. Millions of older adults are now “one step closer to real relief from spiraling prescription drug prices,” Jenkins said earlier this week.

Although the legislation is landmark, the negotiation provisions are “very narrow” in design, according to Andrew Mulcahy, a prescription drug pricing expert at the RAND Corporation. And the negotiations won’t bring relief until 2026, when renegotiated prices for ten of the program’s most expensive drugs come into effect.

Left-leaning lawmakers such as Sen. Bernie Sanders, I-VT, have criticized the legislation for excluding the overwhelming majority of Americans who do not receive Medicare. For the pharmaceutical industry, however, even the limited scope of the bill goes too far.

Chronology of negotiations

Under the legislation, HHS can negotiate prices for some of the more expensive drugs covered by Medicare Part B and Medicare Part D. The former covers specialty drugs administered by health care providers, while the latter covers drugs that are filled in retail pharmacies.

The program is spread over four stages over several years. Here’s how it works:

  • Phase 1: HHS negotiates 10 Medicare Part D drugs. Pricing takes effect in 2026.
  • Phase 2: HHS negotiates 15 Part D drugs. Pricing takes effect in 2027.
  • Phase 3: HHS can negotiate 15 Medicare Part B or D drugs. Pricing takes effect in 2028.
  • Phase 4: HHS negotiates 20 Part B or D drugs. Prices take effect in 2029. The Secretary may negotiate 20 drugs in all subsequent years.

Possible drug candidates

How many seniors will benefit from the negotiations largely depends on which drugs the HHS secretary decides to target. More than 63 million Americans are insured by Medicare overall and approximately 49 million are enrolled in Medicare Part D.

Before the Inflation Reduction Act was signed into law, Medicare Part D cost just over $1.6 trillion over the next decade, according to the nonpartisan Congressional Budget Office. Medicare Part B had an estimated cost of $6.5 trillion over the next decade. The CBO projects that drug price negotiations alone will save taxpayers about $102 billion through 2031.

HHS can only negotiate prices for drugs that Medicare Parts B and D spend the most money on and that have been on the market for years without any generic or other competitors, according to Mulcahy. “The focus is on those older drugs that for one reason or another don’t have competition,” he said.

There is no official, publicly available list of drugs that HHS plans to target for negotiations. But Bank of America has highlighted some potential candidates for Medicare D based on how much Medicare spends in 2020:

  • Bristol-Myers Eliquis, $9.9 billion. It is an anticoagulant to prevent blood clotting to reduce the risk of stroke.
  • J&J’s Xarelto, $4.7 billion. It’s another blood thinner.
  • Merck’s Januvia, $3.8 billion. It is a pill to lower blood sugar in people with type 2 diabetes.
  • Abbvie’s Imbruvica, $2.9 billion. It is a pill for different types of blood cancers.

And Bank of America considers these Medicare B drugs to be potentially affected by the negotiations. Here are their costs for Medicare in 2020:

  • Merck’s Keytruda, $3.5 billion. It is an immune therapy for certain cancers.
  • Regeneron’s Eylea, $3 billion. It’s an injection for macular degeneration.
  • Amgen’s Prolia, $1.6 billion. It’s an injection for osteoporosis.
  • Bristol Myers’ Opdivo, $1.5 billion. It is an immunotherapy treatment for certain cancers.
  • Roche’s Rituxan, $1.3 billion. It is an immune therapy for certain cancers and inflammatory disorders.

But it is difficult to determine which drugs the HHS will really target. The list of drugs that would be eligible for negotiations will change significantly by the time the bill’s provisions take effect, as many will lose patent protection by then, according to a Bank of America research note.

Still, negotiations through Medicare could cut prices by 25% for the 25 drugs the program spends the most on in 2026 and beyond, according to Bank of America.

The degree of price reduction ultimately depends on whether HHS is really looking into negotiations with drug companies, Mulcahy said. Bill Sweeney, government affairs manager at AARP, said the bill’s successful implementation was crucial. AARP wants to make sure HHS fights for the best price for seniors and that there are no loopholes the industry can exploit, Sweeney said.

Industry could game the system by allowing limited competition for their drugs to avoid price controls, according to an analyst note from SVB Securities.

HHS will have enforcement authority. The companies face heavy financial penalties for failing to meet negotiated prices, fines of $1 million for violating terms of the agreement, and fines of $100 million for providing false information.

Inflation reimbursement

Although seniors won’t see the price drop until 2026, the legislation would penalize drug companies for raising Medicare drug prices faster than the rate of inflation later this year. If the price of a drug increases by more than inflation, the company must pay the government the difference between the billed price and the rate of inflation for all Medicare sales of that drug, according to AARP.

Prices rose faster than inflation in 2020 for the overwhelming majority of the 25 drugs Medicare Parts B and D spent the most money on, according to the Kaiser Family Foundation.

The United States spent more than $1,000 per capita on prescription drugs in 2019, double the $552 other high-income countries spent on average per capita, according to KFF and the Peterson Institute on Healthcare. US spending on prescription drugs jumped 69% between 2004 and 2019, compared to a 41% increase in comparable countries.

“Baby Come On”

Sanders called the bargaining powers given to the HHS secretary a “small step forward.” The senator pointed out that the first round of price cuts won’t go into effect for another four years, and that people who don’t have Medicare — the overwhelming majority of people are under 65 — are completely excluded.

“If anyone thinks that as a result of this bill, we’re suddenly going to see lower prices for Medicare, you’re wrong,” Sanders said during a Senate speech earlier this week. “If you’re under 65, this bill will have no impact on you and pharmaceutical companies can just go on their way and raise prices to whatever level they want.”

The pharmaceutical industry, on the other hand, has argued that the bill goes too far. Stephen Ubl, CEO of Pharmaceutical Research and Manufacturers of America, said the legislation will slow innovation and lead to fewer new cures and treatments for diseases.

Bank of America does not view the bill as a major negative to industry growth, according to an August research note. UBS analysts said Medicare’s negotiation provisions, which have limited scope, are far from the worst-case scenario for the industry. The legislation would provide clarity for the market and remove the threat of even tighter drug pricing, according to UBS.

“We believe that the final passage of the current drug pricing reforms represents a clearing event in terms of future industry earnings, removing the risk of higher drug pricing that has weighed on biopharmaceutical valuations since the issue of drug pricing rose to political prominence in 2015,” UBS analysts wrote in a research note earlier this week.

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