So much for self-reflection after a political drubbing. Democrats are responding to last week’s defeat by rushing President Biden’s spending framework through the House while rewriting it on the fly—and they’ll worry about the consequences later. Consider the latest compromise to reduce drug prices, which will do the opposite.
Progressives hope that passing legislation in the name of lower prices will increase senior support for their spending bill. But some House Democrats balked at earlier legislation that imposed draconian price controls that would have killed the incentive for drug innovation. Enter Chuck Schumer and Nancy Pelosi, who pieced together an agreement between their party’s warring factions. It should come with a black-box warning.
Start with the softened price controls. The Health and Human Services Secretary will “negotiate” 10 to 20 of the drugs that Medicare spends most on, starting in 2025. Drug makers will get socked with a 95% excise tax on gross sales if they don’t agree to the government’s price. The government will make companies an offer they can’t refuse.
The compromise also sets a price ceiling for targeted drugs that is from 40% to 75% of their 2020 inflation-indexed average price. Drug makers would be allowed to make some profit since small-molecule compounds would be excluded from price controls for nine years after their launch, as would complex biologics for 13 years.
But the price controls would still reduce the incentive for companies to spend money testing drugs for new purposes. Many drugs are initially approved only for a subset of patients, and companies later seek regulatory approval to expand indications to more patients or illnesses after doing more trials, which can take years. For example, the “compromise” price controls could make drug makers less likely to test whether immunotherapies that work against one form of lymphoma work against other forms. The result: Fewer patients will benefit from drug innovation.
Branded drugs will also see less generic competition, which will result in higher prices. New biosimilar competitors to biologics on average have reduced prices by 30%. Four or more generic entrants into a drug market on average drive down prices by nearly 80%.
Generic manufacturers on average spend $100 million to $250 million to bring a biosimilar to market. They won’t invest that much if the government may later undercut them by imposing lower prices on branded drugs. Government discounts might reduce prices that Medicare pays on some drugs, but overall drug prices will stay higher if investment in new generics diminishes. Drug makers will also no doubt increase prices for privately insured patients to make up for Medicare discounts, as they do for required Medicaid rebates.
Democrats also want to require drug makers to pay Medicare rebates on all drugs sold if their prices increase faster than the consumer-price index. This price cap, which extends to drugs in the private insurance market, provides Democrats a huge revenue windfall to finance their spending bill. Generic manufacturers would lose money whenever their supply costs rise faster than inflation while branded manufacturers will respond by launching drugs at higher prices.
These technical complexities aren’t understood by most Members, much less the public. So Democrats are highlighting a new $2,000 cap on out-of-pocket costs for Medicare Part D beneficiaries, which would provide seniors a tangible financial benefit. Most of the other “savings” accrue to government.
Republicans also support redesigning Part D to limit out-of-pocket costs, but the rub has been apportioning the new benefit’s costs among government, drug makers and insurance plans. Beneficiaries currently pay 5% of drug costs for catastrophic coverage while the government covers 80% and plans pay 15%.
Democrats want to eliminate the patient costs while shifting most of the government’s costs to private parties. This will save the government money, but who knows how drug makers and health plans will respond. Democratic leaders are also eager to pass their bill before a CBO analysis that might reveal these unintended consequences. Remember: There’s no such thing as a free drug.