Over the past few weeks, the two leading Democratic candidates for President, former Secretary of State Hillary Clinton and Senator Bernie Sanders (I-VT), have both released plans aimed at tackling the rising cost of prescription drugs. The issue has taken on increased importance in 2015 with new, highly-expensive medications hitting the market and the prices of a number of drugs skyrocketing, including the recent high-profile case of Turing Pharmaceuticals' Daraprim price being raised from $13.50 per tablet to $750 before the company backtracked.
High and rising prescription drug prices have become a major story in the past few years. Between 2010 and 2013, Total drug spending averaged only two percent growth as many blockbuster drugs lost patent protection and was a major driver of the health care slowdown in the late 2000s through 2013. However, drug spending bounced back in a big way with 12.6 percent growth in 2014. Over the next decade, system-wide prescription drug spending is expected to grow slightly faster than overall health spending (6.3 percent annually versus 5.8 percent). This is also true in Medicare, where Part D prescription drug coverage is projected to be the fastest growing part of the program.
This jump in spending growth is driven by the introduction of new specialty drugs with high price tags and headline-grabbing price increases for some brand-name and generic drugs. Price increases for generic drugs are particularly concerning since they are generally much cheaper than their brand-name equivalents, and their expanded use was a key driver of the recent spending slowdown. These generic drug price increases already drew the attention of Sen. Sanders earlier this year.
Increases in overall prescription drug spending growth can filter through to government finances by driving up spending in Medicare (mainly in Part D but also Parts A and B), Medicaid, and the health insurance exchanges, and increasing premium growth for employer-provided insurance plans (which reduces revenue because they are tax-exempt).
Policies in Both Plans
The centerpiece in both plans allows Medicare to negotiate prescription drug prices for Part D and require drug manufactures to offer minimum rebates off the sticker price in order to participate in Medicare, at least for lower-income beneficiaries.
A similar proposal, which would extend the minimum rebates that drug manufacturers are required to provide for Medicaid prescription drugs to low-income Medicare beneficiaries, has been proposed in President Obama's budget and was most recently estimated to save $135 billion over ten years. Alternatively, minimum rebates could be mandated for all Medicare beneficiaries, which would either increase the amount of savings, allow the minimum required rebate to be lower, or some combination thereof.
The savings from simply allowing Medicare to negotiate drug prices for Part D, something that is currently done by the individual drug plans in the program, are less clear and depend on additional factors. The Congressional Budget Office (CBO) has previously said that just allowing Medicare to negotiate would save little unless it was accompanied by the ability to "establish a formulary, set prices administratively, or take other regulatory actions against firms failing to offer price reductions."
Both proposals would also lower barriers to importing drugs from other countries and prohibit "pay-for-delay" agreements that delay the introduction of generic equivalents to brand-name drugs.
Additional Policies in Sen. Sanders's Proposal
In addition to these policies common to both plans, Sen. Sanders, building on his work in the Senate, would take a number of actions to combat high drug prices:
- Close the Part D "donut hole" three years earlier than scheduled;
- Require generic drug manufacturers to provide a higher rebate to Medicaid if the price of a drug grows faster than inflation (the existing policy only applies to brand-name drugs); and
- Cancel patent protection for drugs if fraud was involved in the manufacturing or sale of the drug.
Additional Policies in Sec. Clinton's Proposal
In addition to the common policies, Sec. Clinton's plan would:
- Institute a $250 monthly cap on out-of-pocket prescription drug costs (although the proposal is not specific, presumably this would apply to health plans in the insurance exchanges, employer plans, and Medicare);
- Require drug companies to spend a certain amount of their revenue on research or pay a rebate "to support basic research," presumably through the National Institutes of Health (NIH) or similar entities;
- Reduce the patent exclusivity period for specialty biologic drugs from 12 to 7 years; and
- Eliminate deductions for direct-to-consumer drug advertising.
With regards to the last policy, CRFB discussed possible changes to the overall advertising deduction in a 2013 paper that appeared in Tax Notes.
Fiscal Impact of the Plans
Most of the savings in the two plans would come from the Medicare drug rebates. Sen. Sanders says that his policy to extend Medicaid drug rebates to Part D would save $103 billion over ten years, while a policy similar to the President's budget would save $135 billion.
Although similar to Medicare drug rebates, allowing Medicare to negotiate drug prices would not necessarily save money without additional authority. There could be additional savings if Medicare was given authority to set a formulary or mandate the negotiated prices administratively for the entire program, but no official estimate exists. Some of the other policies in the candidates' plans would save smaller amounts, detailed in the table below.
|Comparing the Fiscal Effects of the Sanders and Clinton Plans|
|Require minimum rebates for Medicare Part D||Yes||Yes||$135 billion|
|Allow Medicare to negotiate drug prices||Yes||Yes||*|
|Lower barriers to importing drugs||Yes||Yes||$20 billion|
|Prohibit pay-for-delay agreements||Yes||Yes||$3 billion|
|Close Part D donut hole 3 years earlier by accelerating rebates||Yes||No||$15 billion|
|Rescind patents for drugs if fraud is involved||Yes||No||unknown|
|Expand Medicaid drug rebate||Yes||No||$1 billion|
|Cap monthly out-of-pocket drug costs at $250||No||Yes||Cost unknown|
|Lower specialty drug exclusivity period to 7 years||No||Yes||$4 billion|
|Eliminate deductibility of prescription drug advertising||No||Yes||$40 billion|
|Require companies to spend certain amount on research||No||Yes||N/A|
|Rough Total Savings||$174 billion||$202 billion^|
Source: Sanders and Clinton campaigns, CBO
*CBO estimates that the ability to negotiate itself would save little, but with additional authorities could save more.
^Total excludes the potential cost of the $250 cap.
It is encouraging to see both candidates trying to tackle health care costs and prescription drug costs in particular, which will be critical for families and businesses and to help rein in our nation's debt.
Update on April 14, 2016: This blog as been updated to reflect CBO's most recent estimate of the President's Budget for Medicare rebates, pay-for-delay agreements and exclusivity period plus higher savings from lowering barriers to importing drugs, which is now $20 billion and includes savings from Medicare Part D, and higher savings from eliminating the deductibility of prescription drug advertising.