Dan Gorenstein: One in four older Americans — one in four — struggle to pay for prescription drugs. Since President Joe Biden signed the Inflation Reduction Act last fall, he has promised Americans that relief is on the way.

Biden: Bringing down prescription drug costs doesn’t just save seniors money. It cuts the federal deficit by billions of dollars. [Applause] Hundreds of billions of dollars!

DG: The law gives Medicare the power to negotiate prices directly with drug companies for the first time ever. And on September 1st, Medicare will announce its first targets — 10 of the country’s costliest drugs.

But what makes a drug price fair? For who? Consumers? Drugmakers? Medicare has a tough job to do.  

Steve Pearson: They’re going to try to figure out how to drive down the middle of that very difficult highway, knowing that they’re gonna get shot at from both sides. 

DG: Today, as Medicare blazes a new trail for prescription drug pricing in America, the stakes are high and the road ahead promises difficult choices. From the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein. This is Tradeoffs.

***

DG: We’re joined by Tradeoffs senior producer Leslie Walker, our team’s go-to guide on wonky drug policy stories. Welcome back, Leslie.

Leslie Walker: Thanks, Dan.Still waiting for some hazard pay for that last story on biosimilars but I’ll follow up with you about that later.

DG: Totally dude. The check is in the mail. So look, Leslie, you are really here today because on September 1st — before Labor Day — Medicare is going to flex its power to start negotiating some prices directly with drug companies for the first time ever. 

LW: Yeah, kind of wild when you consider that Medicare is the drug industry’s single biggest customer, spends roughly $150 billion a year on meds for the program’s 65 million beneficiaries and that they basically name their price for every other service they cover — doctor’s visits, x-rays, surgeries. And yet they’ve never negotiated drug prices before.

DG: It’s historic. So let’s dig in. We’ll start by talking about what’s really on the line here, Leslie. Why should we care what Medicare does or doesn’t do at this “negotiating table?”

LW: Sure, so at it simplest, there are two big things at stake: dollars and drugs. On the money front, Medicare already gets some discounts from drugmakers but this new power could save Medicare $100 billion by 2031 according to one federal report. And obviously it should save patients some money too. 

DG: Now, of course, money back in the pockets of one group generally means someone else is going to take a hit. In this case, that’s the pharmaceutical industry.

LW: That’s right and that’s one big reason why several companies and trade groups have filed lawsuits to try to stop these negotiations.

But we should also be clear here, Dan, that the law only lets Medicare negotiate drugs that have been on the market at least seven years and are among companies’ top sellers. So these companies have generally already made many billions of dollars on these products.

DG: Okay, so that’s the dollars that are at stake. You also said drugs are at stake. How does that work?

LW: Yeah, so the question is whether this process will affect game-changing, blockbuster drugs down the road. To break that down a bit more: By changing the rewards — the dollars available to drugmakers — does Medicare also change the risks those companies are willing to take?

Darius Lakdawalla: The long term effects of the kinds of innovation that you encourage, that is in some ways the biggest outcome of this law.

LW: That’s health economist Darius Lakdawalla from the University of Southern California. He’s saying Medicare has this chance to send a powerful signal to the drug industry. Like look, we’re willing to pay more for so-called clinical home runs and less for the dribbles up the line, the bunts.

DG: To be clear here, Leslie, until now Medicare has often paid top dollar for both the life-saving breakthroughs and the minor incremental improvements. You’re saying this law gives Medicare a lot more bargaining power, which means now they can — theoretically — reward major innovators and ding companies that barely move the needle.

LW: Yeah and overnight, Dan, this new power is turning the tables on drugmakers.

Now, the industry, they’re warning this could hurt them and people who are sick. Here’s Lauren Neves from the trade group PhRMA and Darius at USC sees it the same way too.

Lauren Neves: We may not see the immediate impact of this on innovation tomorrow, but we are definitely going to see it for patients 10 years from now, 20 years from now. 

Darius Lakdawalla: I worry that that long-term effect is not properly being considered, and that future generations of patients do not have a seat at the table.

LW: The way the drug industry works, Dan, companies place bets today on molecules that may not come to market for years. One industry report projects over the next decade — because of Medicare’s new negotiating power — we’ll see up to 139 fewer drugs.

DG: But this is far from certain, right Leslie? Everybody agrees this new role for Medicare will change innovation but no one’s sure how much.

LW: Exactly — on the other end, there’s a federal report that says we’ll lose just 15 drugs over the next 30 years. And some economists at Northwestern found any drugs we do lose are less likely to be these big time blockbusters we all want.

DG: So to recap, the tricky task ahead of Medicare is balancing these two big concerns: That the drugs we have today are priced low enough that patients who need them to live [and] to breathe can actually afford them and Medicare can too; but those prices also need to encourage companies to keep taking big swings.

LW: Yep, that’s exactly the tension at the center of this all. 

DG: Okay, so now that we know we’ve got billions of dollars, generations of drugs, and life and death on the line here…

LW: No big deal.

DG: Indeed, exactly. So let’s dive into this negotiation process.

LW: Excellent! Because I’ve got a treat for you Dan: Tradeoffs very own game show!

Game show clip: Two $1 million cases in play. The offer for you is 48,000 dollars!

LW: No suitcases full of cash, but there will be drama.

Steve Pearson: It’s a huge change in the way that people will view the role of government in our health care system. It’s going to have all kinds of ripple effects.

LW: That’s Steve Pearson. He’s the founder and president of ICER, the Institute for Clinical and Economic Review. They’re this kind of think tank that’s basically done for almost 20 years a version of what Medicare’s now trying to do — develop a process for putting fair price tags on prescription drugs.

So I challenged Steve with a kind of game show of my own. I’m calling it… 

Game show music

LW: Going Up!

DG: Oh god, Walker. Seriously dude? This is brutal.

LW: I know. But I said to Steve: Pretend we’re in an elevator and you’ve got 90 seconds to the top. How would you explain how Medicare’s gonna negotiate drug prices for the first time in history?

DG: That’s a lot of pressure!

LW: I know! I was worried too. But Steve, the guy didn’t blink.

SP:  I live in an elevator. 

LW: What does that even mean?

SP: Everything I say is an elevator pitch. 

LW: Aright. So, you’re feeling confident then? 

SP: Yes. 

LW: Alright, elevator’s going up, Steve.

SP: Alright, here we go. 

Elevator sound effects

SP: First, the government’s not gonna negotiate the price for every drug at any point in time. They’re going to start with the top 10 highest cost drugs to Medicare that have been on the market for at least about a decade, and which do not have competition from generics. 

Elevator sound effects

SP: They have to at least start with about a 25% discount off of the current price that’s being paid by private insurers in the market. Then they — the government — is going to look at what other drugs are out there that can do the same thing and are these drugs better or worse or about the same? They’re going to throw all that into a blender. 

Elevator music

SP: They’re going to sit down with the drug company and say, okay, we think the best fair price is about 50% off. Now the drug company, their jaw is going to drop.

Elevator sound effects

SP: The drug company gets one chance to come back with a formal counter offer. Then they can go back and forth negotiating for a few extra months. But at the end of the day, the government gets to say, this is our best and final offer and if you don’t like it, there’s a stiff penalty to pay or you have to take your drug off the market. And that’s it.

Elevator sound effects

LW: And with 17 seconds to spare Dan, Steve did it! He condensed a 200 page memo from Medicare, battled some truly horrible elevator music and beat the clock! A stunning victory! 

DG: Wow, Steve with the win! And what does he get?

LW: One very enthusiastic clapping emoji on Zoom. No corporate sponsors just yet for Going Up.

DG: I’m sure it’s only a matter of time. I gotta say, Leslie, I mean, Steve did shockingly make this process sound pretty straight forward.

LW: He did. I mean he did kind of an amazing job. And I said the same thing to him: Like come on Steve, is this really that simple?

SP: It sounds pretty straightforward, but in almost every other word of what I just said there are still uncertainties about how it’s actually going to work.

LW: Uncertainties, Dan, like how will Medicare quantify a drug’s value? For who? And what metrics will they use?

DG: And those decisions could have a big effect on the savings that we see and the treatments we get. We’ll get into a couple of the tough choices Medicare is facing…after the break.

MIDROLL

DG: Welcome back. We’re just a few weeks away from Medicare naming the first 10 drugs ever picked for price negotiations directly between the federal agency and drugmakers. 

As you may expect with any new process, big questions remain about how this will all work. Our senior producer Leslie Walker is here to explain those uncertainties — and why they matter.

Hey again, Leslie.

LW: Hey, Dan.

DG: Before the break,Steve Pearson laid this negotiation process out for us. Basically Medicare compares a negotiated drug to similar treatments, then asks for a discount relative to the other options out there. They haggle a bit back and forth. The end.

As Steve told us, though, this is not that simple. What are we missing?

LW: Fair question. To understand the complexity here, Dan, it might help think of this process like one of your favorite pastimes: a road trip.

DG: I do love the open road, a perfectly curated playlist and a White Castle somewhere along the way.

LW: Don’t forget the Elliott Smith. 

So look at it like this: Congress gave Medicare a clear destination, right? Lower drug prices. And in the law they spell out a few specific places — a few pit stops — Medicare needs to stop along the way. But otherwise, Medicare can get to that final destination in an almost infinite number of ways.

And as you know, as the king of road trips over there, Dan, you can have a very different trip depending on the roads you take.

DG: Totally. You could power through on the interstates or you could snake along a two-lane highway somewhere. Route 56, Leslie, in Kansas is amazing.

LW: You get it. So, as Ben Rome, a Harvard health policy researcher laid out, the first decision Medicare has to make is this: Which other treatments will they compare each of these negotiated drugs to?

Ben Rome: If you say a drug works really well, you have to say works really well compared to what? How much added value does it offer over what’s already out there?

LW: I asked Ben, who is also a doctor, to give us a specific example. Like what’s so hard about identifying other drugs that treat the same disease? 

He brought up this one that helps stop blood clots and strokes. It’s called Eliquis.

DG:  Oh yeah, Eliquis. My mom’s on that for her a-fib!

LW: Yeah, atrial fibrillation if you want to be formal. That’s totally possible and would make sense. Eliquis is prescribed to about 3 million people on Medicare.

The agency spent more on Eliquis in 2021 than any other retail drug — about $12 billion bucks not including some discounts. And for patients, the drug can cost anywhere from $40 to $500 dollars a month.

DG: Sounds like a good candidate for Medicare’s negotiation list.

LW: That’s the word on the street. And it’s at least curious that Eliquis’s manufacturer, Bristol Myers Squibb, filed one of the first lawsuits to stop these negotiations.

Anyway, when it comes to deciding which other drugs to compare Eliquis to, Medicare has basically two roads they could take. 

They could just compare it to these three other drugs that work in similar ways — all newer, fancier blood thinners, all priced north of $100 a month.

Or, Ben Rome says, they could throw this fourth drug in the mix: a little pill called warfarin. 

BR:  Warfarin has been around for decades and it is extraordinarily inexpensive.

LW: We’re talking like four bucks a month at Walmart here. 

DG: And it treats the same condition?

LW: It does, but for some patients, it’s not as effective at stopping blood clots [and] can have more dangerous side effects, like brain bleeding.

The way Congress wrote this law, Dan, they instructed Medicare to compare these negotiated drugs like Eliquis to “therapeutic alternatives,” but left it up to Medicare to define that term. 

So a tough question could be: Is warfarin a legitimate alternative?

BR: The idea of including warfarin really implies that it’s totally interchangeable. And I think many doctors, including many cardiologists and specialists, wouldn’t necessarily be comfortable, for example, flipping a coin and assigning the patient based on that.

LW: All that being said, Ben Rome absolutely thinks Medicare should include warfarin in the mix because it offers this kind of baseline.

DG: Right, it’s like if we were shopping for a car for our hypothetical road trip knowing what the Kia costs helps us decide if we want to splurge for the vintage 1988 navy blue Volvo 240 wagon. Is it really worth the upgrade? 

LW: Right, Bristol Myers Squibb, who makes Eliquis, saw their product as an alternative to warfarin. Get this, Dan, the company literally marketed Eliquis by promising it’s better than warfarin.

Eliquis ad: If there’s a better treatment than warfarin, I’ll go for that. Eliquis. Eliquis reduces stroke risk better than warfarin and has less major bleeding than warfarin. Eliquis has both.

DG: Classic. Okay, so let’s say Medicare does include warfarin in the mix. The next big decision is slapping a price tag on it, right?

LW: Totally. It’s gut-check time for Medicare, where they must actually put a dollar amount on how much more they value what Eliquis offers patients compared to warfarin. 

Is it worth five times more? 10 times? Right now, Medicare pays about 40 times more per dose of Eliqiuis than warfarin.

DG: And just to remind folks of our stakes here: Medicare’s answer to that question could cut a life saving drug’s price by a half, two-thirds, maybe more. At the same time, that price cut will also send a signal to other companies considering whether to develop safer, better alternatives to old therapies like warfarin. Is that investment worth it?

LW: That’s exactly right. And here’s, Dan, where Medicare’s road trip could really branch in like a thousand different directions. 

Avanceña: When you think about the value of a car, you’re thinking about safety, you’re thinking about speed, you’re thinking about fuel economy. In the same way, you know, health is just more than length of life and quality of life, right?

LW: University of Texas’s Anton Avanceña is saying there are so many factors Medicare could consider here. Does the drug help people skip fewer days of work or depend less on a caregiver? And some might matter more to one patient than another.

Then, there’s an entire list Congress told Medicare they have to at least consider …

Rome: How much has the federal government supported the drugs discovery? // Seshamani: The cost of producing and distributing that drug // Pearson: What the drug company spent to develop the drug // Rome: Whether the manufacturer has been able to recoup those costs based on how much it’s already made.

DG: If it were me, I’d just choose the road with the most White Castles on it. Double jalapeno cheeseburger or bust!

LW: But then you’d also need to choose the road with the most bathrooms on it so as you can see, Dan, how all of these roads require some complex calculations.

DG: I see what you’re saying. Okay. Alright. 

LW: So when it comes to how Medicare is going to measure and weigh all these different inputs they have to consider, they have published some details on the data they plan to collect. And in many cases, Ben Rome says, they’ll be overwhelmed by what they find. 

BR: These drugs have been on the market for a long time so that has generated a lot of new evidence about their safety and effectiveness. 

LW: But in other cases, the government may face some gaping holes in the data.

BR: You know actual head-to-head trials might not be available between Eliquis and some of the other drugs in the same class. And that’s going to be a problem for Medicare when it goes to actually assess these products. 

DG: Okay Leslie, so once Medicare wades through these piles of data — somehow boils them down into a single price — I assume they offer that to the company. What’s next?

LW: Then the company gets to counteroffer and the real negotiations begin — at least in theory. One big unknown here is just how much of a good faith back and forth this will be. 

And once that all ends, there’s one other big decision for Medicare. How do they apply the process they just used for, say, Eliquis to all the other drugs they need to negotiate?

DG: Right because these first 10 drugs aren’t the last drugs Medicare will have to negotiate, right?

LW: Yeah, and the law says Medicare’s got to negotiate as many as 15 more the next year, 15 more the year after that and another 20 after that.

DG: And I mean obviously, Leslie, we are not the first country to attempt this type of process. 

LW: No, we are in fact extraordinarily late to the government price negotiation party.

DG: So when it comes to figuring out a single process that works for all these different drugs, is there anything the U.S. can borrow from other countries who do this — some kind of road map?

LW: Yeah, I mean we could do a whole episode on all the fascinating ways other countries do this work. The problem is they tend to use very formulaic, quantitative approaches. And so far, Medicare has said publicly they plan to start with a qualitative approach — no explicit formula, lots of flexibility.  

I asked the agency’s director Meena Seshamani more about that and here’s what she said.

Meena Seshamani: We absolutely plan on using data and analyses as part of the process. Where we come to the qualitative is how you then bring all of those data points together when you are engaging in a back and forth negotiation process. You have to maintain flexibility to be able to consider the nuanced differences between different drugs. 

DG: Okay, Leslie, what Meena’s saying makes sense to me. Like, you might have a route planned for your road trip but sometimes you’ve got to audible. So Medicare might take one approach with Eliquis — maybe they weigh those bleeding risks extra carefully. But for the next drug they negotiate — maybe it’s a cancer drug — Medicare focuses on how many extra days it adds to someone’s life.

LW: That’s right. And some folks I talked to think that flexibility is a good thing for Medicare, especially as they get their sea legs. But the flip side of flexibility — at least if you’re the drug industry here — is unpredictability. 

DG: Right and so you’re saying an unpredictable process is essentially bad for business — makes it hard for companies and investors to know where to put their money.

LW: That’s right. And I thought Darius Lakdawalla summed up the tension for Medicare here pretty well.

DL: If they just had a quantitative method and they said, we’re going to calculate value this way. It would definitely be imperfect. But the question is whether that’s better than a process that nobody can predict — even if it is a really sophisticated, fantastic way of measuring value to patients. Because what good is it if companies can’t rely on that being true when their drug comes to market?

LW: And for people who don’t lose any sleep over these billion dollar companies and how best to spend their money, experts like Ben Rome and Steve Pearson told me more consistency could help this whole process be more credible, less vulnerable to political pressure and potentially a blueprint for employers and private insurers who are fighting the same fight. 

DG: So, Leslie, just starting to wrap up here. We’re watching this major government agency stand up a brand new team of economists, analysts, pharmacists, data scientists, pour all this time and effort into grappling more publicly, more directly than we’ve ever seen with this kind of foundational question that honestly has dogged us for decades: What is a fair price to pay for prescription drugs?

LW: That’s right. And as with all difficult questions, there are no easy or obvious answers. Depending on who you are and what you value, you can come to a very different conclusion about what’s fair. 

But here’s the thing: Even if Medicare hits some bumps in the road, as Steve Pearson says, it’s already a win that the agency is finally grappling with this tension between making drugs affordable and encouraging innovation. And they’re doing it out in the open for the entire country to see.

Steve Pearson: Anytime that government starts a new process, it may not live up to everybody’s hopes and expectations. But there’s also hope that they can learn and engage the American public in a dialogue around value and pricing that will expand way beyond drugs and make these kinds of tradeoffs more transparent so that we can make decisions around pricing, value and access that try to get the balance right going forward.

DG: Leslie, thanks for all your great work on this story, one we’ll keep following. And there will be an additional check in the mail too. You can count on that.

LW: You’re welcome, Dan.

DG: Medicare will make its first price offers to companies next February and negotiations will continue through August. The agency will then publish the final prices next September and they will take effect in 2026.

I’m Dan Gorenstein. This is Tradeoffs.

Tradeoffs’ coverage of health care costs is supported, in part, by Arnold Ventures and West Health.