Medicare Price ‘Negotiation’ Process Gets Broad Brush Treatment In New Law
Executive Summary
With enactment of the drug pricing reform provisions in the Inflation Reduction Act, stakeholders now turn their attention to the implementing regulations that will be developed by the Centers for Medicare and Medicaid Services.
The US Health and Human Services Department is authorized to ‘negotiate’ drug prices in Medicare for the first time in newly-enacted legislation. But the law lacks a clear framework for the process, leaving many key aspects to HHS.
That offers manufacturers an opportunity to shape the policy but also creates significant uncertainty about the ultimate impact of the program. The Centers for Medicare and Medicaid Services has a big job ahead and will likely begin to issue regulations and guidance in the coming months, ahead of releasing the initial list of drugs up for negotiation in September of 2023.
[Editor's note: This article appears courtesy of our sister publication, Pink Sheet, where you can find more on pricing and reimbursement policy.]
The Inflation Reduction Act was signed by President Biden 16 August, after passing the House 12 August and the Senate less than a week earlier. The bill moved through Congress without any Republican support, which likely sets up future legislative battles.
But during the signing ceremony at the White House, President Biden highlighted Democrats’ long commitment to legislation authorizing Medicare to negotiate drug prices.
“For years, naysayers said we could never take on big drug companies. But now we have,” he said. “This law that I’m about to sign finally makes good on a promise that Washington made for decades to the American people. I got here as a 29 year-old kid, we were promising to make sure that Medicare would have the power to lower drug prices back then … But guess what? We’re giving Medicare the power to negotiate prices now.”
In its outline of the process for price negotiation, the law sets a ceiling on the “maximum fair price” to be determined by HHS. But aside from that, it gives regulators “considerable flexibility in how to set drug prices,” American Enterprise Institute senior fellows Scott Gottlieb and Benedic Ippolito observe in a recent article for AEI. Gottlieb also is a former US Food and Drug Administration commissioner and senior adviser at the Centers for Medicare and Medicaid Services.
The bill’s approach “is in contrast to rate regulation based on a formal cost-effectiveness framework, for example,” Gottlieb and Ippolito point out. “This likely reflects a desire to avoid politically charged discussions around assigning economic value to the life years gained from new drugs.” However, by doing so, the legislation “obscures important tradeoffs and creates greater uncertainty,” the authors argue.
“Investors must form expectations around how future regulators will use this authority – something that could vary considerably across future administrations. The higher uncertainty created by the absence of a clear framework will add to the cost of these measures, as market actors attempt to price in this future risk and uncertainty to their current investment decisions.”
Defining R&D Costs Will Be Important
One way the drug industry may seek to influence the negotiation process is through lobbying on the definitions of the manufacturer-specific data that must be provided to the government for use in determining the maximum fair price. That process will likely be fleshed out through rulemaking.
As part of the price setting process, manufacturers must provide HHS with information on a selected drug that includes research and development costs and the extent to which the manufacturer has recouped R&D spending.
“For instance, what exactly counts as ‘research and development costs?’ You could imagine definitions of that term that would be more friendly to industry,” said Rachel Sachs, a professor of law who focuses on health policy at Washington University in St. Louis.
Sachs also said drug companies will likely seek to influence the procedural aspects of how this exchange of information between the industry and the government take place, such as how or in what format this communication takes place.
Total Number Of Drugs Negotiated, Exemptions From Process
Some experts believe that even the total number of drugs up for negotiation in any given year may be debated, in terms of whether the number of drugs is cumulative over time. The law says that 10 drugs will be negotiated the first year (2026) and 15 drugs will be negotiated in 2027 and 2028. Twenty drugs will be negotiated in 2029 and thereafter.
“The lobbying effort will shift to CMS, with the Biden Administration likely to pursue an expansive interpretation of provisions such as the number of drugs subject to negotiation – i.e. cumulative rather than a hard cap,” wrote Kim Monk and Rob Smith of Capital Alpha Partners in a 15 August analyst note.
Monk and Smith also think the drug industry will file suit against the “onerous excise tax and the newly-added provision that would exclude all of a manufacturer’s products from Medicare and Medicaid if it refuses to pay the excise tax” if the company doesn’t want to participate in negotiations. (Also see "Medicare Price ‘Negotiation’ : Manufacturer Compliance Gets Tougher Enforcement Provision" - Pink Sheet, 7 Aug, 2022.)
Goldman Sachs equity research analysts expect that CMS will need to “provide more granularity” on the types of drugs (orphan, new formulations, vaccines, plasma-derived therapy and small biotech) that have exemptions or specific constraints on negotiations.
For example, in a 15 August note, Goldman Sachs analysts said they are unsure whether Alnylam Pharmaceuticals Inc.’s Onpattro (patisiran) would qualify under the orphan exemption as it likely turns on whether the drug’s indication for the treatment of transthyretin-mediated amyloidosis patients with polyneuropathy is viewed as a separate condition from transthyretin-mediated amyloidosis patients with cardiomyopathy. The company is already FDA-approved for the first indication and is seeking approval in the latter. (Also see "Alnylam Ready To Expand TTR Franchise With Positive Cardiomyopathy Results" - Scrip, 3 Aug, 2022.)
Another question is whether a drug could get off the negotiation list with the creation of a new formulation.
“Both the health policy consultants and [the Pharmaceutical Research and Manufacturers of America] discussed that while more information is required in this area, the intent of the bill appears broadly to be to prevent patent-extension through new formulations, in their view. Of note, the text does appear to state that a new formulation of an existing product cannot be classified as a ‘small biotech’ drug,” Goldman Sachs analysts wrote.
Pharma’s opponents are gearing up to push back on these efforts. (Also see "Pricing Reform Advocates Poised For ‘Rearguard Action’ By Industry If Legislation Prevails" - Pink Sheet, 21 Jul, 2022.)
“We’ll definitely need to make sure that drug pricing solutions passed as part of reconciliation are … implemented to the fullest to hold manufacturers accountable,” said Jon Conradi, spokesperson for the Campaign for Sustainable Rx Pricing, a coalition of health insurers, pharmacy benefits managers and hospital associations, among others. "And part of that will likely include being ready to counter efforts from the branded pharmaceutical industry to weaken or undo those provisions, using regulatory or legislative levers.”
Drug pricing reform advocates believe industry will be extremely creative in their efforts to thwart negative impacts from the legislation.
“They could start a whole other company and sell their own drug for $1 less and be like, ‘Hey, it has competition.’ But we’re going to have to say clearly that is not allowed by the law,” said Alex Lawson, executive director of Social Security Works. "There are going to be huge regulatory fights and I think [issues around] biosimilars are probably going to be even more dramatic than small molecules.”
“Pharma has made clear in its threatening belligerent letters that it will do everything it can to gum up the works,” said David Mitchell, founder of Patients for Affordable Drugs. “It’s threatening lawsuits. I’m sure it will find a way to say the excise tax is not fair. Who knows what’s coming?”
Mitchell said lower pricing reform groups will be working together to figure out how to best support implementation of the law. “Our job will be to examine the conflicts that are likely to come and to figure out how best to give patients a voice in these conflicts,” he said.