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A Closer Look at Nancy Pelosi’s Plan for Lower Drug Prices

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The new bill, H.R. 3, includes some ideas designed to put Republicans in a tough spot, but there are still many back doors and ambiguous points. 

All year, Congress-watchers have expected a bipartisan drug-pricing bill to reach the president’s desk. Democrats and Republicans both have an interest in passing something, given constituent anger over the cost of their prescriptions and an election-year need to tout meaningful accomplishments. But the usual Washington bloodsport always resisted an easy path to legislative success.

Because Trump has floated some pretty interventionist ideas on drug prices out of desperation to cash in on campaign promises before 2020, Democrats could have strategically pushed a plan to deliver real relief to patients, catching conservatives between their corporate lobbyist base and their ideologically malleable leader. That was not the initial impulse from Nancy Pelosi and her key health policy aide Wendell Primus.

Representative Lloyd Doggett’s plan to have Medicare directly negotiate with drug companies, under threat of having their patents pulled and distributed to generic competitors, had the majority support of the Democratic caucus. But Pelosi’s first policy used the threat of a third-party arbitrator to set the price if negotiations fail. Even stranger, the arbitrator was pegged as the Government Accountability Office, which has no expertise in drug pricing or history of arbitrating anything. It made about as much sense as pulling a random person off Miami Beach to work at a smelting plant.

Fortunately, Pelosi responded to the caucus on this issue, overhauling her first concept. The new bill, H.R. 3, has not been formally released, but last week the Prospect obtained a copy of a summary. And while it does advance the ball, and includes some ideas designed to put Republicans in a tough spot, ultimately there are still many back doors and ambiguous points. Let’s take a look.

H.R. 3, like its predecessor concept, empowers the Secretary of Health and Human Services to negotiate prices directly with drug companies on the 250 most costly drugs in Medicare that lack any competition (initially Pelosi limited this to 25 drugs, but changed that later on). “Lacking competition” is defined as not facing two or more competitor drugs on the market. Most brand-name drugs get patent exclusivity for several years, and therefore have no competition, as well as no upper boundary on the prices they set.

But this would not apply to insulin, one of the most tragic cases of soaring drug costs leading to lack of access and even death. To its credit, the bill does explicitly make insulin eligible for negotiation. But the point is that even multiple competitors in a drug does not guarantee downward pressure on prices. Studies indicate that several generic competitors need to enter a market before patients see legitimate reductions in prices. H.R. 3 potentially leaves too many drugs outside its mandate, and at the whim of inadequate market forces.

The 250 drugs would be those with the highest cost to Medicare, rather than a public health standard that indicates the greatest need for patients. In addition, the cut-off at 250 drugs seems arbitrary, and even this has a hedge: At one point the summary says the HHS would have the power to “negotiate as many as possible” out of that 250. There’s no hard requirement to negotiate any drugs at all, actually.

“Why cap the annual number of negotiated drugs at 250 if the goal is for HHS to negotiate on as many as possible?” wrote Congressional Progressive Caucus co-chairs Mark Pocan (D-WI) and Pramila Jayapal (D-WA) in a statement last week.

After selecting the drugs, HHS would negotiate a “maximum fair price,” seen as no more than 120 percent of an international index of the volume-weighted average price of the drug (not the median price, which seems like a mistake) from six industrialized countries: Australia, Canada, France, Germany, Japan, and the U.K. There’s no reason given for setting the maximum 20 percent above the international average, allowing a healthy profit for the same drug that often comes out of the same manufacturing facilities. But it is a ceiling; a motivated HHS secretary could always negotiate lower. The drugs would stay in annual negotiations, bound by the international index, until sufficient competition emerges.

According to the summary, HHS would take into account a company’s research and development costs, the cost of production, and domestic and international sales information. Why this is all necessarily important to a negotiation intended to make prescription drugs accessible to the public is unclear to me.

If drug makers refuse to negotiate, they would get hit with an excise tax of 75 percent of the annual gross sales of that drug in the previous year. Topher Spiro of the Center for American Progress pioneered this idea. The summary directly confronts the idea of compulsory licensing, saying “the penalty gives the HHS secretary leverage … without the interruptions of contracting, building and approving a whole new production line.” Of course, that’s a one-time interruption, and the generic manufacturer would shoulder those costs.

One positive in H.R. 3 is that the savings would benefit everyone, not just Medicare patients. The negotiated drug price would serve as the list price across the entire population. Strong civil penalties would be put in place for pharmaceutical companies overcharging above the list price. Of course, the penalty payment does not go directly to patients but to the government; if punishments don’t work, the patient remains stuck paying high prices.

H.R. 3 also doubles as a mirror of the Senate’s Grassley-Wyden bill, which contains a few minor improvements on drug prices that mostly impact seniors. Grassley-Wyden advanced through the Senate Finance Committee (with mostly Democratic support) and could get a Senate vote soon. Because H.R. 3 features similar proposals, it could enter into a conference committee with the Senate bill, giving direct price negotiation a shot to emerge in a reconciled bill, and making things harder on Republicans politically.

The Grassley-Wyden package has two main features. First, it would disallow all drugs purchased through Medicare Part B and Part D from raising prices annually above inflation. Drug companies would have to rebate Medicare for the excess. Second, Grassley-Wyden caps out-of-pocket spending in Medicare at $3,100 a year (currently, there’s a partial cap at $5,100).

H.R. 3 has a retroactive inflation rebate that would recapture price hikes above inflation in prior years, though it only looks back to 2016, giving drug companies a high baseline of profits. Also, because the inflation rebate is limited to Medicare, companies could keep those price increases low, while hiking costs in the private market with relative impunity.

On out-of-pocket costs, H.R 3 is a little contradictory, saying at one point it “could” include a $2,000 out of pocket limit, and later saying it will, although without a specific number attached (it literally says “$X”). Whatever the outcome, H.R. 3 would index out-of-pocket spending after 2022 to Medicare Part D growth, raising prices for seniors each year. It adds cost-sharing tweaks to alleviate that burden somewhat.

Finally, H.R. 3 applies Medicare savings expected from the negotiations to “historic improvements” in two areas. Primarily, it would fund new treatments and cures, as did the 21st Century Cures Act, a bill that passed at the end of the Obama administration. That bill also had a number of giveaways to the pharmaceutical and medical device industries. Even here, private companies would profit from federal spending on treatments through exclusive patents, though that’s mitigated slightly by the new negotiation setup. If there’s money left over, H.R. 3 would funnel it to improvements to Medicare, like coverage for vision, hearing, and dental. But that would not be assured.

Overall, a number of questions remain about H.R. 3. Does every country in the international index need to have the drug available for negotiations to work, and what if drug companies introduce new products solely in the U.S.? Does the excise tax get imposed annually, and can drug companies drag out the negotiation to delay it? Could drug companies just launch drugs with high prices, and then enact modest increases to stay clear of the inflation rebate? If the drug company pays the inflation rebate in one year and keeps their prices the same, do they avoid the rebate the next year? And isn’t granting monopoly rights to drug companies via patents the real problem? Shouldn’t that be the focus of the overhaul?

Unfortunately, K Street may have answered all of these questions, and not in ways that benefit patients. I was told when I received the draft summary that it was probably already out of date, amid furious industry lobbying. H.R. 3 may represent the high water mark; if something passes, it will more likely look like Wyden-Grassley, and Mitch McConnell has been gunning to take out the inflation rebate, leaving no more than a shell left.

Trump has supported international indexing and direct price negotiation in the past. If Pelosi and the Democrats had a more robust plan to organize around, they could at least have used it as a strong political cudgel, if not a way to force Republicans to heel. Pre-compromising diminished the outcome and robbed the political value. Hopefully for patients, something can still be salvaged.

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