Dan Gorenstein: Drugmakers have made the case for years that lowering their profits will stifle innovation.

And this year has been more of the same. 1,600 lobbyists — three for every one member of Congress — swarmed the Capitol.

And industry trade groups hit the airwaves…

Industry ads: Some lawmakers now want to repeal an important Medicare safeguard // What politicians mean is that they’ll decide which medicines you can and can’t get

DG: …rolling out 20 TV and online commercials.

Ads: Laws are being made that stifle not only innovation, but it stifles access to medication. // The result: fewer life-saving cures

DG: But this year, that familiar threat of losing out on new treatments…  

Ad: Tell Congress: Hands off our cures.

DG: …hasn’t worked as well.

Democrats are on the brink of a historic deal to cap out-of-pocket drug costs for millions, and give the federal government new power to negotiate prices directly with drugmakers.

Today, what we know and don’t know about the impact these reforms could have on patients, insurers and the drug industry.

From the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein, and this is Tradeoffs.

***

DG: Today’s entire show comes with one big caveat: the deal we’re discussing — an 11th hour compromise between progressive and moderate Democrats — is far from done.

It’s part of the larger Build Back Better Act, which hasn’t passed the House or the Senate, and could change again at any minute. 

But when it comes to meaningful action on the $500 billion that the U.S. spends every year on drugs, this is the closest that Democrats have gotten to consensus…in more than a decade.

So, we invited on Rachel Sachs, a law professor at Washington University in St. Louis, who’s been following this legislation closely… 

DG: Okay, you good?

Rachel Sachs: Yep, should I start?

DG: Hit the red button.

RS: Okay.

DG: Okay so, Rachel, some people have called these drug price reforms in the Build Back Better bill diluted, others are calling them historic. Which is it…if you had to pick?

RS: I would say that it’s both a scaled down version of the previous bill that we saw from House Democrats on this, H.R. 3, but also in the grand scheme of American drug pricing reform, it is a significant step forward structurally for our system.

DG: So let’s start with the basics here, Rachel. At a high level, what problem are these reforms trying to solve?

RS: So there are three different types of provisions in this negotiated agreement, and they all work together because there’s not one drug pricing problem. First, it’s trying to help out patients who have really high out-of-pocket costs. So for the first time the bill puts a cap on Medicare Part D’s out-of-pocket costs and a cap on copays for insulin for all Medicare beneficiaries.

DG: And Part D is the prescription drug coverage program that 48 million Americans on Medicare have, so this cap would give these people some kind of cushion, some predictability in their costs, right?

RS: That’s right. So the annual cap is $2,000 that the bill places on Part D, and data from the Kaiser Family Foundation show that more than 3.6 million Part D beneficiaries spent over $2,000 on out-of-pocket costs in at least one year over the last decade. Plus, all insulin copays  would be capped at $35 a month. And there’s more than 3 million Medicare beneficiaries who use insulin products. So together, these provisions should provide relief for millions of people on Medicare.

DG: Okay, so that’s the one piece and what’s the next one?

RS: So if all you did was you capped out of pocket costs, prices don’t go down. They go up. And the reason is that people can afford their medications more easily, and that’s a wonderful thing. But companies might even raise their prices because people are now going to be insulated from those high prices. So it’s very important that this bill includes two other types of provisions which help discourage companies from doing this. The first are the inflation-based rebates.

DG: And what are inflation-based rebates?

RS: The basic idea here is that if a manufacturer raises the price of their drug faster than inflation, which they do quite often, then they would be required to pay the government a rebate for doing so. The Medicaid program has had an inflationary rebate system in place for decades, and this bill would extend those rebates to both Medicare and private insurers.

DG: And so really, this is an effort to try to, like, send a very strong signal to the drugmakers: Hey, we do not want you raising prices faster than the rate of inflation. Don’t do it. 

RS: I want to be clear. Companies can raise the prices of their drugs more quickly than inflation. They just have to pay money back to the federal government when they do so. But another possibility is that it discourages manufacturers from raising their prices, especially because of the size of the market of privately insured patients and Medicare as compared to the Medicaid program maybe they won’t want to take those price increases as rapidly as they have been.

DG: So that sounds like a really big deal. 

RS: So it could be quite significant. A federal government report found that Medicaid usually gets prices that are quite a bit lower than Medicare for the same drugs. And they found that about half of this difference was attributable to the fact that Medicaid gets inflationary rebates and Medicare does not.

DG: So Rachel, you told us there are basically three big pieces to the Democrats’ latest proposal, and that they all sort of work together to be more effective. We’ve now covered two capping out-of-pocket costs in Medicare and the inflation rebate for both Medicare and private insurers. 

The last leg of this is allowing the Department of Health and Human Services to negotiate directly with drug makers off of their private market prices in the U.S. How exactly would this system work?

RS: ​​Now, unlike the caps on out-of-pocket costs and the inflationary rebates, which apply to all drugs, the negotiation provisions apply to a much more narrow set of products. To be eligible, the drug has to lack competitors. It has to have been on the market for at least nine or 13 years, depending on the type of drug it is. And then of those drugs, it has to be among the top 50 highest-spend drugs in either Part B or Part D or an insulin product.

DG: And just quickly, we’re talking about a total of 100 eligible drugs…the 50 most expensive in Medicare Part B, that covers drugs given to patients in outpatient settings like doctor’s offices…and the 50 most expensive drugs in Part D.

Can HHS negotiate the prices of all these 100 eligible drugs on day one?

RS: Not to begin with. So the text of the provision as it exists today limits negotiation to not more than 10 eligible drugs in the first year of the program, going up to 20 drugs. But that’s additive, so we could get one hundred drugs over time. 

DG: So just for a little context, we’re talking about at least to start 10 drugs out of some 4,000 total drugs that are covered under Medicare Part B and Part D. So this really is a tiny fraction.

RS: That’s right, although it’s important to note that recent analyses have shown that it really is a very small number of drugs responsible for a large share of spending in both Part B and Part D.

DG: Experts are still working to analyze exactly how many of those big ticket drugs would be eligible for negotiation. But one researcher told us at least in Part B, she does not expect most of the highest cost drugs to qualify any time soon.

Setting that point aside, Rachel says for all eligible drugs, the negotiation process would look a little bit different for each product. 

RS: Part of that is because the Secretary of HHS is explicitly told to think about manufacturer-specific information as part of this process. So that includes: How much does it cost to make the drug to distribute the drug? Does it fulfill an unmet medical need? And so the Secretary is supposed to take this into account as part of thinking about what a fair price for the drug would be. 

DG: HHS is also directed to take a drug’s time on the market into account, seeking discounts as big as 60% for drugs that have been around for at least 16 years.

When we come back, the potential downsides of this deal…and how the drug industry might try to get around it.

MIDROLL

DG: Welcome back. We’re talking with Rachel Sachs, a law professor at Washington University in St. Louis, about the deal Democrats recently struck on drug price reforms.

The package caps out-of-pocket costs for millions of people on Medicare, penalizes companies for raising prices too fast, and gives the federal government new power to negotiate directly with drugmakers.

Industry ad: This means fewer new drugs and cures will be developed. 

DG: Of course, the pharmaceutical industry has raised its usual concerns about these reforms. If you cap our profits, you’re going to get fewer game changing drugs and people are going to end up being the losers. 

Industry ad: Tell Washington: Don’t tax our health care.

DG: What’s the best evidence that we have, Rachel, about whether we will lose new drugs because the profits won’t be as big for drugmakers?

RS: A Congressional Budget Office analysis from earlier this year estimated that a pricing reform on the scale of H.R. 3 was expected to result in about two fewer drugs in the first decade after a proposal’s passage and then 23 fewer drugs in the second decade and 34 fewer drugs in the third decade. But to be clear, we don’t know whether these would be real game-changers or whether they would be “me too” drugs, right? 

DG: And when you say “me too” drugs, you mean drugs that are already on the market and these are sort of duplicative of what already exists for patients. 

RS: If you’re bringing together the first drug in decades for an unmet medical need, that’s different than if you’re bringing to market the fourth or fifth drug in an already crowded class. Those have different impacts on patients’ health, and we shouldn’t think about them equally from innovation perspectives.

DG: That same Congressional Budget Office analysis you just mentioned did find H.R. 3, the more ambitious predecessor to this new compromise, would have saved about, I think, $450 billion over a decade. But a lot has changed as you know, Rachel, in this bill and we don’t have a new budget estimate, yet. How do you think we should all think about who’s going to save the most here? 

RS: So Medicare beneficiaries will see the largest forms of relief because they will benefit from all three parts of it: the out-of-pocket cap, the inflationary rebates and the negotiation provisions. Medicare should see savings as well, and employers and private insurers should also see some relief from those inflationary rebates too. But because all of these provisions affect one another and there are unknowns including about how industry will respond, the size of the savings are difficult to estimate. And I look forward to seeing the CBO analysis.

DG: Are you at all troubled or concerned that while there could be some relief for people on Medicare, folks who get insurance through their jobs will not see as much relief here? What do you make of that?

RS: I don’t think it’s fair to expect one bill to solve all of our drug pricing problems, especially given the highly fragmented nature of our health care system as a whole. It took us a long time and many different bills to get into this situation, and it’s going to take more than one to get us out of it. That doesn’t mean it’s not a significant step forward, and that doesn’t mean it’s not worth doing.

DG: These pharmaceutical companies are big. They’re savvy. They’re going to adapt to these reforms. What’s the biggest concern about unintended consequences here that you have, Rachel? 

RS: We have seen that the pharmaceutical industry has a great capacity for, let’s call it, “innovation” in strategies that extend their monopolies, that discourage competition — things like patent thickets, evergreening, product hopping. Pharmaceutical companies have been good at this for a long time. I don’t expect that they’ll stop trying now, but they might have somewhat less incentive to do so if they know that they will experience price negotiation the longer they remain on the market without allowing that generic competition.

DG: And in that way, is the threat even just the threat of negotiation a way to hopefully engender some more competition?

RS: That would be, I think, a positive impact of this bill if it turned out that it was no longer profitable for companies to use patents or other tactics to try to get 15, 20, 30 years of exclusivity because they could get out of negotiation by allowing generic competitors on the market. That would be ultimately, I think, quite beneficial.

DG: Trying to avoid negotiating by allowing competition is maybe a glass half full way of looking at this. What’s a worst case scenario in your mind of how they could adapt?

RS: I don’t know that I have one worst case scenario. I have options that I have been considering. One strategy that the pharmaceutical industry has used over time to try to extend its monopolies is to introduce new formulations of older versions of their products and try to transition patients to those newer versions. You might expect that companies would use those same types of strategies here to get patients on newer versions, but they’re really just retreads of the same products.

DG: Rachel, do you think this bill has the power to upend the economics of drug-making in this country?

RS: The U.S. is currently the largest pharmaceutical market in the world, and this bill, even though it nibbles around the edges, won’t fundamentally change that companies will still make more money here than they make anywhere else. 

DG: What will this change then, if this bill’s not going to make a big dent in those profits? You yourself, Rachel, have called this bill precedent setting. What is the precedent that it’s really setting?

RS: It says that the government is not going to be a hostage to whatever price the pharmaceutical industry is setting. Under our current system, the government often has little or no ability to push back on the very high prices that these companies set — even after the government is providing subsidies for research and development, for tax incentives. In some ways, you could view this bill as trying to restore a social contract that’s been broken rather than creating a whole new bargain.

DG: Rachel, thanks for taking the time to talk to us on Tradeoffs.

RS: Thank you for having me.

DG: Now if this episode were a drug ad on TV, this would be the part where we read a whole lot of fine print really fast. The bottom line is there are a lot of ways this delicate compromise could still die on the vine. 

It’s part of a much larger bill, the Build Back Better Act, that faces tough votes in the House and Senate. Plus, it needs to survive the reconciliation process, where obscure Senate rules could render some provisions ineligible.

And, last but not least, drugmakers — and their army of lobbyists — remain on message, looking to peel support away, one vote at a time.  

I’m Dan Gorenstein and this is Tradeoffs.