Dan Gorenstein: On August 16th, President Joe Biden signed into law a sweeping climate, tax and health care package known as the Inflation Reduction Act.

Music: Hail to the Chief plays, with applause

Biden: This law that I’m about to sign finally delivers on a promise that Washington made for decades to the American people.

DG: At that ceremony, Democrats declared victory. Game over.

Biden: With this law, the American people won and the special interests lost. 

DG: But for people behind the scenes — those charged with putting some of the law’s most polarizing health care provisions into action — the game has just begun.

Today, the federal government’s race to ratchet down prescription drug prices and the pharmaceutical industry’s efforts to blunt the impact. 

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

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DG: The Inflation Reduction Act, nicknamed the IRA, includes lots of health care reforms like extending Obamacare subsidies and cutting low-income seniors’ Medicare costs.

As important as those provisions may be, they’re not what Democratic Leader Senator Chuck Schumer was talking about when he took a victory lap at that August 16th signing ceremony.

Sen. Schumer: For years the naysayers said we could never take on the big drug companies and lower the cost of prescription drugs, but now we have.

DG: Schumer, accurately, was touting a historic change in the law. For the first time in its 57-year history, Medicare can cut and cap the prices it pays for prescription drugs.

How big of a deal is that?

Well, over the last two years, the pharmaceutical industry spent $200 million dollars lobbying to stop it.

Montage of drug industry ads: Politicians say they want to negotiate medicine prices in Medicare, but make no mistake // Really it’s just a way to cut your benefits // tell Congress hands off our cures.

DG: Make no mistake. Medicare’s new pricing power is a seismic shift in the relationship between the drug industry and their single biggest customer, a public insurance program that spends $180 billion a year on drugs and covers 64 million people.

Alice Curran: It transcends any of the other pricing reforms I’ve ever seen, because it is so expansive.

DG: For Alice Valder Curran, a partner at the law firm Hogan Lovells, that August 16th signing ceremony was surreal.

AC: I guess when it finally passed, it was just pausing and thinking, wow, this has actually happened. It’s actually gotten over the finish line. 

DG: But Alice had no time to reflect. She had to start running a new race, a race to prepare her clients, some of America’s top drug companies, for this new world order.

Just about a mile away, across the National Mall, Amber Jessup heard the same starting gun. And she…was ready to get to work.

Amber Jessup: You know, I’m a government economist. This is as exciting as my life gets.

DG: Amber’s the chief health care economist at the Office of Inspector General, or OIG, for the Department of Health and Human Services, where Medicare is housed.

Alongside a team of auditors, analysts, evaluators and lawyers, Amber’s also racing to prepare for this new reality. Her role: government watchdog, looking for what Amber calls vulnerabilities — loopholes in this new law that drug companies could exploit.

These two women, Alice and Amber, are running the same race for two very different teams. The stakes for both: hundreds of billions of dollars over the next decade.

For Alice’s team, the pharmaceutical industry, that’s revenue they could spend on making and marketing drugs.

For Amber’s side, the federal government, that’s money seniors could save and taxpayers could put toward other priorities like roads, bridges and education.

So what’s ahead for these two women, and many other people like them in the drug industry and the federal government, as they race to prepare for this historic law to go live? 

To help us answer that our senior producer Leslie Walker joins us. 

Leslie, so good to have you here.

LW: Thanks, Dan. Good to be here.

DG: So, how many track meets have you been to?

LW: This is actually my very first. In fact, the great irony of this episode’s whole metaphor is that I was always by far the slowest kid in school. 

DG: That shocks me. You’ve always struck me as sort of speedy. 

LW: Not kidding. That’s how you end up a left-handed catcher on your softball team.

DG: That is brutal.

Okay look, Leslie, let’s just start with the basics. With the IRA, lawmakers gave Medicare new powers to lower prescription drug prices. What are powers?

LW: So there’s basically two big ones.

First, negotiation: this targets some of the drugs that Medicare spends the most money on. 

DG: Drugs that have been on the market for years, but still have a monopoly.

LW: Right, like a lifesaving blood thinner, an IV drug for people with lung cancer, a pill for the millions of Americans with Type 2 diabetes.

For those drugs, Medicare can now compel companies to strike a better deal or else face huge tax penalties…I’m talking up to 95% of a drug’s sales.

DG: Okay, so this provision is really going after a small number of big-ticket drugs that Medicare spends a bunch of money on. What about the other power? 

LW: So the second new tool in Medicare’s toolbox: inflation rebates. Now these apply to nearly every drug and if a company increases a drug’s price faster than the rate of inflation, Medicare now gets to claw that extra money back…essentially, a refund.

DG: So the goal here is really to slow how fast drug prices rise year over year. 

LW: Yep, you got it.

DG: Okay, let’s take the first one, negotiation. I mean that’s something that, for what feels like every one of the 47 years I’ve been on this planet, Democrats have been promising and drugmakers have been fighting.

Now, it’s finally here. Leslie, do we have a sense of the kind of impact it’s actually gonna have?

LW: Well, federal officials estimate it’ll save $100 billion in its first few years.

But it’s hard to do much other than estimate here, Dan, because these are such early days. Negotiated prices don’t kick in until 2026, and we’re still waiting for all these rules, like what happens if Medicare and a drugmaker can’t agree on a price? 

And don’t get Alice started on the 1,001 other questions she has.

AC: You know, on the negotiation provisions it’s…[sigh]…I don’t know really where to start. There is just so much, so much that needs to be explained. 

LW: Then there’s one other big thing, Dan. 

DG: What’s that?

LW: There’s a real chance this provision doesn’t even make it to 2026.

Mark Newsom, a policy consultant who used to work for the Medicare program, said once more of these rules over price negotiation come out they’ll become a kind of ammunition for the industry.

Mark Newsom: They’re gonna go to the Hill and ask for legislative change, or they’re gonna go to the courts and they’re gonna litigate.

LW: I talked to almost 20 people for this story, Dan, and more than half predicted some part of this law ends up in court. One target that came up a lot: that massive tax penalty for companies who refuse to cut Medicare a deal, which can start to sound more like coercion than negotiation.

DG: And all that makes sense, I mean, the drug industry spent $200 million trying to stop these reforms in the first place. They’re not gonna stop that now.

LW: Yeah, so I guess this part of the race is really shaping up to be more of a marathon. But that other provision, the inflation rebates, kicks in this year for a lot of drugs. 

DG: And that is a sprint! Why don’t you grab some Gatorade and we’ll catch you after the break.

LW: Sounds good. See you then.

DG: When we come back, getting up to speed…30 years of evidence and…lucrative loopholes. 

MIDROLL

DG: Welcome back. Just a few weeks ago President Biden signed the Inflation Reduction Act, or IRA, into law giving the Medicare program two new tools to lower drug prices.

One of Medicare’s new tools, the ability to negotiate deep discounts on some very costly drugs, is totally unprecedented. The other, known as the inflation rebate, is not so novel. 

In fact, Medicaid, the big government insurance program that serves low-income and disabled Americans, has gotten inflation rebates since 1991. And they kept records. But before we get into what we’ve learned over those 30 years, a quick explainer on how these rebates work.

Music

DG: Welcome to Inflation Rebates 101. Our teacher, Sean Dickson…

SD: Director of health policy at the West Health Policy Center.

DG: Full disclosure: West Health is one of Tradeoffs’ funders.

Real quick, Sean, before you get too deep into this, let’s actually pick a price so people can hold onto one number.

SD: So you take your average starting price for a period, let’s say a hundred dollars…

Sfx: Adding machine noises

SD: …And then you adjust that price for inflation. Let’s call that 2% a year. 

Sfx: Adding machine noises 

SD: So after year one, you’re allowed to have a price of $102. If your price is $110, you have to pay an $8 difference back to the Medicare program. 

Sfx: Adding machine noises 

Music

DG: And that is how these inflation rebates work, in theory. But do they work in reality?

Here’s where that 30 years of Medicaid rebate data comes in handy. And there are two big takeaways.

First, these rebates work. One study by the Congressional Budget Office looked at some of the top selling drugs and found that Medicaid paid one-third what Medicare paid for the exact same drugs. One third! Inflation rebates played a huge role in that.

The second takeaway? Sean says drugmakers do not love refunding the government.

SD: There’s a long track record of manufacturers taking creative strategies to avoid paying these rebates

DG: Sean knows. As a lawyer for drug companies, he used to help them comply with laws like these. He says firms work around Medicaid’s inflation rebates in a couple of ways. 

Occasionally, they flat out break the rules.

SD: There have been some big settlements from the Department of Justice. There was a $230 dollar million settlement reached with Mallinckrodt…Mylan had to pay over 400 million dollars  for the way it made its calculations. 

DG: But far more often, companies simply take advantage of the rules…a vague term here, a flawed formula there…little loopholes that add up to big savings. And now, these same loopholes are coming to Medicare. 

So, given those lessons, how are people like OIG economist Amber Jessup and attorney Alice Valder Curran preparing for these rebates to arrive in Medicare?

Let’s bring back senior producer Leslie Walker. Leslie, ready to jump back in the race?

LW: Ready as I’ll ever be.

DG: So, you talked to both Amber and Alice. How are they spending these precious few months before the inflation rebates go live in Medicare?

LW: Well truthfully, Dan, they’ve both been a lot more focused on that negotiation provision because that one is so unprecedented. And that’s meant a lot of long days.

AC: I have an outline of issues that we talked through with a company a couple days ago and you can see scribbles all over it…

AJ: I plowed my way through a good bit of the statute, making little notes to myself in the margin…

AC : …and all of those scribbles are talking through those issues with the client and thinking, “Oh,  expletive. I gotta remember that too.”

LW: Both women were quick to tell me that what keeps them going, burning that midnight oil, are the patients this law will ultimately affect.

AC: I work with companies that want to help patients live longer and have a better quality of life.

AJ: We’re always thinking about the best care for our beneficiaries. We want patients to get, you know, the right drugs and have access to those drugs.

LW: And, Dan, when it comes to the patients, Amber says she’s been losing sleep sometimes, concerned how companies might exploit loopholes in the rebate rules siphoning money away from the government.  

Her team has published reports over the years flagging holes where the Medicaid rebate program was leaking money. They’ve even managed to help Congress plug a few.

AJ: We are excited when we find those loopholes and have that concrete impact. That’s why we come to work every day.

LW: One that lawmakers closed a couple years ago had been costing Medicaid nearly $600 million a year in lost inflation rebates and other kinds, according to estimates by OIG.

But Amber knows the Medicaid inflation rebate program, and now its carbon copy in Medicare, are still littered with gray areas.

With hundreds of manufacturers out there selling thousands of products, each priced differently depending on who’s paying, it’s almost impossible to keep up.

AJ: It’s a constant effort to really kind of keep churning through and finding where those vulnerabilities lie.

DG: So Leslie, as I imagine Amber playing this game of Whack-a-Mole, it’s easy to imagine Alice running around looking for the next great loophole. Is that right?

LW: Well if she is, she didn’t tell me that. She said her clients take compliance very seriously.

What she’s really focused on is the business ramifications of these rebates because the big thing here, Dan, is drug sales in Medicare are three times what they are in Medicaid.

DG: So Medicare is a much, much bigger market, right?

LW: Yeah, this is a market where drug makers have historically made a lot of money.

One Kaiser Family Foundation study found that the prices of nearly half of all drugs that Medicare covers…rose faster than the rate of inflation in 2020. That’s more than 1,900 drugs. 

DG: So raising prices faster than inflation happens a lot?

LW: Exactly, but rebates arriving in Medicare could change that calculus for drug company CEOs.

DG: How so, Leslie?

LW: Well, Alice told me she honestly isn’t even sure yet.

AC: We’re really still in the discovery phase is what I would say about understanding the law’s implications.

LW: And that’s what she’s hurrying to help clients figure out.

AC: Just trying to understand not the top layer implications, but the secondary and third layers, because that’s really what’s happening. Just a lot of work to do.

LW: Listening to her, Dan, I kinda thought of three, maybe four-dimensional chess! Remember, these companies have to account for the impact of not only rebates, but the negotiation provision too.

Medicare, one of their biggest customers, just turned around and said, “Hey, those extra price hikes you used to take on hundreds of your products…not paying those anymore. Oh and by the way, we’re also going to pick some of your top sellers and negotiate those prices way down too.”

DG: This is why you’re talking about four-dimensional chess.

LW: Yeah, I mean there’s just stuff going on on every level here. And no one’s making any moves yet. 

But the industry experts I spoke to say steps companies could consider taking include hiking prices on other customers like private insurers, raising the launch prices of new drugs down the road…even rethinking which products are in their pipelines.

AC: Any companies, if they know that their revenue’s gonna be capped on their product, are going to be thinking long and hard about how much they invest in its development. And I don’t think that drug manufacturers are any different.

DG: Leslie, thanks so much for running this race together. A quick note — it’s great to have you back after your parental leave. Welcome back.

LW: Thanks Dan. It’s great to be back.

DG: As hard as Alice and Amber are working, you can only prepare so much for an event this unprecedented.

Even with all of their expertise, at the end of the day, they’re still left pondering the same big questions as everybody else.

How much money will Medicare really save?

Will lower prices lead to fewer innovative treatments in the future?

And most important of all to Alice and Amber, how will this law affect the 150 million people across America who need prescription drugs to stay healthy?

I’m Dan Gorenstein. This is Tradeoffs.

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