Momentum for Lower Drug Prices Emerging

Policymakers have been quietly making progress on lowering drug prices in recent weeks. Most notably, the Department of Health and Human Services announced plans to issue a proposed rule last week to test a new payment model for Medicare Part B drugs that would base reimbursements on other countries' prices. In addition, Congress has enacted legislation that would repeal pharmacist gag clauses and align the process for bringing "biosimilars" to market with rules governing generic drugs, while proposed Senate legislation would close the "REMS loophole" that delays generic drugs from getting to market. These three efforts represent positive steps to lower drug prices for consumers and the federal government.

The potentially largest development is the HHS announcement that they plan to test a new model that would change how Part B, or physician-administered, drugs are reimbursed. The current system reimburses drugs physicians purchase and use at the Average Sales Price (ASP) plus 6 percent (reduced to 4.3 percent due to the Medicare sequester). This percent add-on encourages physicians to use higher-cost drugs since they provide a larger dollar mark-up. To correct this, the Obama Administration proposed in 2016 a demonstration that would have reimbursed Part B drugs with a combination flat fee and reduced percent add-on and eventually moved towards using various value-based purchasing approaches. However, political pressure ultimately resulted in the project being dropped by the Obama Administration and cancelled by the Trump Administration the following year.

The Trump Administration proposal would actually go further than that by testing setting Part B reimbursements based on international prices. Specifically, HHS proposes to create an International Pricing Index (IPI) based on other countries' prices to replace ASP as the basis for reimbursements. In addition, instead of reimbursing physicians directly for the drugs, Medicare would reimburse private vendors who would be tasked with supplying drugs to physicians, a policy that was recommended by the Medicare Payment Advisory Commission (MedPAC). The IPI model would start in 2020 and run through 2025, covering about half of the country, with the remainder serving as a control group. HHS estimates the proposal would save $17.2 billion over five years, with most of the savings accruing to the federal government. It is unclear whether this estimate considers potential responses by drug manufacturers and other countries (for example, drug companies attempting to raise prices abroad to inflate the IPI), and in any case, the estimate is uncertain since this is an untested proposal.

The model would also experiment with different types of add-on payments for the physicians administering the drugs. HHS's release is non-committal on what specifically this could involve but states that it could involve moving toward flat payments for the add-on or a flat payment to vendors per month and could be determined by drug class, physician specialty, or physician organization. At any rate, these changes would be similar to ones that the 2016 demonstration envisioned.

There is a lot of uncertainty about what effect these policies could have on Part B drug spending. Using the vendors to purchase, store, and distribute drugs was tried before in the Competitive Acquisition Program (CAP) during the last few years of the Bush Administration, but it generated very little interest from either physicians or potential vendors. Rachael Sachs in Health Affairsamong others, also questions whether drug manufacturers would find ways to mitigate the IPI's potential savings or refuse to sell drugs to vendors at lower prices, leaving vendors with the option of losing money on drugs or refusing to sell them to physicians. Of course, the effects will depend to a large degree on the specific details CMS ultimately proposes and finalizes, but they have promise to reduce Medicare drug spending, so they are certainly worth monitoring going forward.

Budgetary Effect of Congressional Drug Bills

Policy Cost/Savings (-)
Prohibit pharmacist gag clauses $69 million
Apply reporting requirements about manufacturer agreements to biologics and biosimilars -$109 million
Total, Patient Right to Know Drug Prices Act -$40 million
Eliminate REMS loophole and similar tactics -$3.7 billion
Allow generic manufacturers to use similar rather than identical risk management systems -$0.2 billion
Total, CREATES Act -$3.9 billion

Source: Congressional Budget Office

Action on drug spending has also been taking place in Congress. They recently enacted the Patient Right to Know Drug Prices Act, which bans pharmacist "gag clauses." These clauses are agreements between insurers and pharmacists to restrict pharmacists' ability to share information about drug prices. This can result in situations where a patient's insurance co-payment actually exceeds the cost of the drug, so the patient would save money by paying for it out of pocket. If they instead use their insurance, intermediaries like pharmacy benefit managers (PBMs) can pocket the difference between the co-pay and the actual price. The Congressional Budget Office (CBO) estimates that prohibiting gag clauses would actually cost the federal government $69 million over ten years, presumably because PBMs would be expected to charge more for their services to make up for the lost revenue, and higher charges to insurers would increase premiums. The bill fully offsets the cost with $109 million of savings by applying existing rules about reporting requirements to protect against anti-competitive agreements between generic and brand-name drug makers to "biosimilars" and biologic drugs.

In addition, the Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act (S. 974) has been introduced in the Senate with a bipartisan group of 30 co-sponsors. The bill, which was also proposed last Congress, would weaken a few barriers that allow brand-name and biologic drug manufacturers to stonewall generic and biosimilar manufacturers from developing their products. The main policy would create a legal right of action for generic and biosimilar manufacturers to sue if they are not provided with samples so they can make equivalent products to brand-name or biologic drugs. This policy is intended to address the use of rules like Risk Evaluation and Management Strategies (REMS) that allow manufacturers to withhold samples from generic and biosimilar manufacturers. In addition, the bill would allow generic drug manufacturers to use similar rather than identical risk management systems to the brand-name drug it intends to compete with. Both of these policies would make it easier for cheaper generic and biosimilar drugs to be made and come to market, so CBO estimates they would save $3.7 billion over ten years.

The Administration's Part B drug proposals will certainly be interesting to watch and hold promise for containing costs, while progress in Congress may marginally help reduce drug costs. Certainly, there is room for much more ambitious proposals of the kinds found in the Trump and Obama budgets, MedPAC reports, and others that would promote competition and lower costs for the federal government and the entire health care system. With both House Democrats and President Trump showing interest in reducing drug costs, the new Congress may further the developments we have seen this year.

This blog is part of the American Health Care Initiative, a joint collaboration of the Committee for a Responsible Federal Budget and the Concerned Actuaries Group dedicated to informing the public, policymakers, and key stakeholders regarding the fiscal and managerial challenges confronting our health care system. As part of the initiative, the two organizations will each publish and promote a series of papers, briefings, presentations, and other materials intended to energize a much needed conversation about improving the sustainability and accessibility of our health care system and managing the rising costs that threaten our current system.