The House of Representatives passed and sent to the Senate the Elijah E. Cummings Lower Drugs Now Act (House Resolution 3). It’s a complex piece of legislation that, among other things, gives the secretary of Health and Human Services the ability to negotiate prices directly with drug manufacturers on behalf of Medicare recipients. It seems like a no-brainer but is actually more complicated. Here’s the scoop.
The Medicare Modernization Act of 2003 established our prescription drug benefit but contained a “noninterference” clause preventing the HHS secretary from participating in price negotiations.
However, that doesn’t mean prices aren’t negotiated. Currently, certified nongovernmental benefit managers, like third-party administrators, negotiate with drug manufacturers. Then, these group prices are used to establish the broad prices Medicare pays.
So, prices are negotiated, just not directly by the secretary of HHS on behalf of the tens of millions of Medicare recipients.
Opponents of change, generally drug companies noting the probability of reduced revenue, argue that the lost revenue would hinder research and development of new drugs.
They also note that Medicare Part D enrollment is concentrated in a few third-party plans with two sponsors having 40 percent of all enrollees. As a result, it’s argued, consumers already have substantial bargaining power. So, the difference between the proposed negotiated price for all Medicare beneficiaries and the price now won’t be that great.
They also argue that direct negotiations could limit the number of drugs covered by the plan.
Well, in 2007, the Congressional Budget Office did determine that direct negotiation by itself would have “negligible effect” unless the secretary of HHS is given authority to determine what drugs will be covered and/or to set prices administratively, should an agreement not be reached. Without some coercive power, it is thought, the manufacturers may simply refuse to cut prices.
Recent congressional proposals addressed this leverage issue and one or more may end up in a final bill, if passed. One proposal is to impose penalties on manufacturers if negotiations aren’t successful. Not a Republican view, I’d say.
Another is to fall back on other pricing if there’s no agreement. That includes using prices charged to the Veterans Health Administration, which has its own agreements with drug manufacturers, as a base. Or benchmark prices in selected industrialized nations. Or to use the lowest price that a manufacturer offers to a U.S. buyer.
Another proposal would give the secretary authority to issue compulsory licenses to third parties to manufacture prescription drugs — including drugs with federal patent and exclusivity protections — in cases where the secretary and manufacturers could not agree on a price. Any entity manufacturing drugs under such a compulsory license would have to provide “reasonable compensation” to the original manufacturer.
Another suggestion is to set drug prices through arbitration, where a neutral third party makes a binding decision.
The Congressional Budget Office estimates the provisions of recently passed HR 3 to achieve $345 billion in Medicare savings during the period from 2023 (first year maximum fair prices could be used) through 2029.
But it also notes the lower prices would lead to eight to 15 fewer new drugs over the next 10 years, out of approximately 300 expected to be approved during that time.
Overall, the result, they say, would be lower prices in the United States, higher prices in other countries, higher use of prescription drugs here, improved health outcomes resulting from greater medication adherence due to reduced costs, and lower utilization and spending for other Medicare-covered services due to higher adherence.
So, lower prices or fewer drugs?
My view is that we should negotiate and go with lower prices. Apple hasn’t needed guaranteed income or an artificial price advantage to keep popping out new iPhones every year or so. And that’s true with all research and development with every other product or service. Why should pharmaceuticals be any different?
Besides, what Republican isn’t for the free market setting its own price? Negotiate.