Medicare Given Historic Powers to Negotiate Drug Prices

Medicare's negotiating power is being expanded in response to the high and rising costs of prescription drugs, which have put a strain on the federal budget and caused many seniors to struggle to afford their medications. Under new rules, Medicare will be able to directly negotiate the prices of some of its most expensive drugs with drug companies.

This is a major shift from the current system, which leaves it up to drug companies to set their own prices for Medicare patients. Under the new system, Medicare will be able to use its enormous buying power to negotiate lower prices for drugs that are used by a large number of seniors. This could lead to significant savings for Medicare and its beneficiaries.

The Inflation Reduction Act, passed by House Democrats in a 220 to 207 vote along party lines, and signed by President Biden August 16, 2022 includes $433 billion in investments in health-care and clean energy. The bill was a result of over a year of difficult legislative work, and its passage represents a significant victory for the Democratic Party.

The bill will give the Health and Human Services Secretary (HHS) the authority to negotiate prices for some drugs covered under Medicare Part B and D. This would help to ensure that seniors have access to affordable prescription medications. In addition, the legislation will place a cap on out-of-pocket costs at $2,000 for people enrolled in Medicare Part D by removing coinsurance above the catastrophic threshold starting in 2024, then adding a $2,000 cap on spending in 2025. In 2022 the catastrophic threshold is set at $7,050. Currently beneficiaries end up paying roughly $3,000 out of pocket for medications before even getting to the catastrophic coverage phase. This would provide relief for seniors who often struggle with high prescription drug costs. 

In 2003, Democrats pushed for a provision in the Medicare Modernization Act that would have allowed the federal government to negotiate drug prices on behalf of seniors enrolled in the new prescription drug benefit, Part D. However, this provision was removed at the last minute under pressure from the pharmaceutical lobby and Republican lawmakers.

Since then, various versions of this idea have been proposed, but all have failed to gain traction due to strong opposition from the pharmaceutical industry and Republicans. Part D currently bars HHS from negotiating prices with drugmakers, meaning seniors are stuck paying whatever price the industry sets. However, HHS now has the authority to negotiate. 

Currently, HHS does not have the authority to directly negotiate prices with drug companies. However, the new law gives HHS that power. It is unclear how much impact this will have on drug prices, but it could be significant.

AARP CEO Jo Ann Jenkins said the group has fought for nearly twenty years to allow Medicare to negotiate drug prices. Millions of older adults are now “one step closer to ease from out-of-control prescription drug prices,” Jenkins said. The legislation is a historic victory for older adults, and will help them immensely.

The new legislation is a historic step in the right direction, but the negotiation provisions are very narrow in design, according to Andrew Mulcahy, an expert on prescription drug prices at the RAND Corporation. And the negotiations won’t provide relief until 2026 when the renegotiated prices on ten of the program’s most expensive drugs take effect.

Some lawmakers, such as Sen. Bernie Sanders has been an outspoken critic of the legislation for not including the large number of Americans who are not on Medicare. On the other hand, in the eyes of the pharmaceutical industry, the bill is taking things too far.

The new rule would allow the HHS to negotiate prices for some of the most costly drugs covered under Medicare Part B and Medicare Part D. Medicare Part B covers specific drugs administered by health-care providers, while the latter covers drugs that are filled at retail pharmacies. Under the rule, the HHS could choose not to cover a particular drug if the manufacturer refuses to negotiate a fair price.

The change is expected to save taxpayers billions of dollars over time, as it will force drug companies to compete on price. It is also likely to lead to lower costs for patients, as negotiated prices are typically lower than list prices.

It remains to be seen the number of seniors that stand to save on costs from the new drug negotiations, as it largely depends on which drugs the HHS secretary decides to focus on. However, with over 63 million Americans insured through Medicare and nearly 49 million enrolled in Medicare Part D, the potential for impact is significant.

As experts note, the key will be in getting pharmaceutical companies to agree to lower prices for the medications that are most commonly used by seniors. Otherwise, the savings from the negotiations may be relatively small. But if successful, this could be a major win for seniors who struggle with high drug costs.

When the Inflation Reduction Act was set to be enacted into law, it was estimated that Medicare Part D would cost over $1.6 trillion over the next ten years. This estimate came from the non-partisan Congressional Budget Office. In addition, Medicare Part B was estimated to cost $6.5 trillion over the next decade. However, the CBO estimates that drug price negotiations stand to save taxpayers a projected $102 billion through 2031. This is a significant amount of money that can be used to help improve other areas of Medicare or to help offset the cost of other programs.

The proposal would allow HHS to negotiate the prices of up to 250 drugs each year that are covered by Medicare Part B and Part D. However, only drugs that are considered "high-cost" would be included in the negotiations.

According to Dan Mulcahy, a partner at the law firm Foley & Lardner, this means that most of the drugs that would be impacted by the rule are older drugs that don't have any generic or other competitors. "The focus is on these older drugs that for one reason or another don't have competition," he said. Mulcahy added that the proposed rule could have a "marginal" impact on the prices of drugs covered by Medicare, since the HHS would only be able to negotiate prices for a limited number of drugs each year.

Even when the rule is finalized, it's unclear how much negotiating power the HHS would have with drug companies. The agency would only be able to negotiate prices for drugs that are considered to be "high-cost," which means that drug companies could simply refuse to negotiate if they don't think the HHS is offering a fair price.

Though it's unclear which drugs HHS will focus on, the list of drugs that would be included for negotiations will change drastically by the time the bill's requirements take action. Many drugs lose their patent protections by then, according to a Bank of America research note.

The federal government is currently negotiating with drug companies to try and lower prices for the 25 drugs that Medicare spends the most on. Bank of America estimates that these negotiations could result in a 25% price reduction for the drugs the program spends the most on by 2026. This would be a significant savings for the Medicare program, and would help to make these vital medications more affordable for seniors.

HHS will have a lot of power to negotiate prices down, but it's important that they use that power wisely. Bill Sweeney, head of government affairs at AARP, said proper implementation of the bill is crucial. AARP wants to make sure HHS fights hard for the best price for seniors and there aren’t loopholes the industry can exploit, Sweeney said. If done right, this bill could be a huge win for seniors who are struggling to pay for their prescription drugs. But if not, it could end up being yet another disappointment.

Some industry analysts have raised concerns that drug manufacturers could play the system to their favor by authorizing limited competition for their drugs in order to avoid price controls. SVB Securities analyst Christopher Moriarity wrote in a note to clients that such a move would "allow firms to compete on price while still maintaining high prices." Moriarity warned that this could lead to higher costs for consumers and may even encourage some companies to stop developing new drugs altogether.

HHS will have the power to enforce negotiated prices and impose hefty financial penalties on companies that do not abide by them. Companies that violate agreement terms could face fines of up to $1 million, and those that provide false information could face fines of up to $100 million.

These tough new penalties will help ensure that companies are held accountable for providing accurate information and adhering to the terms of their agreements.

The legislation will penalize drug companies for raising Medicare drug prices faster than the rate of inflation later this year. If a drug’s price increases more than inflation, the company must pay the government the difference between the price charged and the inflation rate for all Medicare sales of that drug, according to AARP.

This would provide some relief for seniors who have been struggling to afford their medications. However, it is important to note that the lower prices would not go into effect until 2026. In the meantime, seniors will continue to see high prices for their medications.

Prices for the 25 most expensive drugs under Medicare Parts B and D rose faster than inflation in 2020, according to the Kaiser Family Foundation. The average price increase for these drugs was 6.4%, compared to an inflation rate of 1.4%.

The prices of some of the most expensive drugs increased by double digits. For example, the price of Humira, a treatment for Crohn's disease and other conditions, rose 14.6%. Other drugs with large price increases include Lantus (a insulin treatment) and Gleevec (a cancer medication), which both saw prices increase by 11.3%. These price increases come at a time when many Americans are already struggling to afford their medications. In fact, one in four Americans say they have difficulty paying for their prescriptions.

There are several reasons why drug prices continue to rise. One is that drug companies have a monopoly on the medications they produce, so they can set whatever price they want. Another reason is that the U.S. government does not regulate drug prices like other countries do.

In 2019, the United States spent over $1,000 per capita on prescription drugs. That's twice the $552 that other high-income nations spent per capita on average, according to KFF and the Peterson Institute on Healthcare. U.S. spending on prescription drugs shot up 69% from 2004 to 2019, compared to a 41% increase in comparable countries.

The high cost of prescription drugs in the United States is a major driver of healthcare costs. In 2018, spending on prescription drugs was the fastest growing area of healthcare spending, accounting for 10% of total healthcare spending.

Bernie Sanders referred to the negotiation powers given to the HHS secretary as a "baby step forward." The senator mentioned the initial set of price reductions won't culminate for four years, and people who aren't on Medicare – the overwhelming majority of people are under age 65 – are completely left out. Sanders has argued that this is not enough, and that more needs to be done to bring down prescription drug prices. He has proposed a number of solutions, including allowing the importation of cheaper drugs from Canada, increasing transparency around drug pricing, and creating a new government entity to negotiate directly with drug companies. 

His ideas have been met with resistance from the pharmaceutical industry, but he argues that they could potentially make a real difference in the lives of American consumers.

Despite claims from supporters of the new bill, Sanders says that it will not lead to lower prices for Medicare. He argues that the bill does nothing to address the root cause of high drug prices: the power of the pharmaceutical industry. Sanders believes that unless we take on the drug companies, they will continue to raise prices at will.

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

The pharmaceutical industry has long been criticized for high drug prices, which often prevent patients from getting the treatments they need. This bill is an attempt to address that issue, but the industry argues that it will ultimately do more harm than good.

Bank of America and UBS both agree that the new bill is not a major negative for industry growth. The Medicare negotiation provisions may be limited in scope, but they are still far from the worst case scenario for the industry. The legislation will provide a clearer picture of the market and take some of the pressure off drug pricing, according to UBS. This is good news for the pharmaceutical industry, as it means that they can continue to grow and innovate without worrying about stricter regulation. 

Passage of drug pricing reform in the United States is a milestone achievement toward making prescription drugs more affordable for Medicare patients and represents a positive sign for the future of the pharmaceutical industry. This small step toward lowering healthcare costs, while at the same time not slowing innovation, could create the framework for future reform in the years ahead.  

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Blog by: The ForeSee Medical Team