By Cathy Zhang
At the start of the month, Democrats announced a new drug pricing plan, detailed in the House’s Build Back Better Act (H.R. 5376). In the immediate short term, the drug pricing plan has enabled the $1.75 trillion bill to go forward through the House. If ultimately enacted, it will generate savings for consumers, some more directly than others, and at a more modest pace and magnitude than many had hoped.
Direct cost sharing protections
The new drug pricing plan creates concrete, direct protections against out-of-pocket costs for two groups: seniors with Medicare Part D benefits and people taking insulin.
The plan places a $2,000 cap on out-of-pocket spending on pharmaceuticals for seniors enrolled in Medicare Part D, which currently covers 48 million people, or 77% of all Medicare beneficiaries. As it stands, Medicare has no cost-sharing cap on pharmaceuticals. Instead, Part D features a “doughnut hole” that leaves beneficiaries to pay for 25% of the price of drugs after they’ve already spent $4,130 on drugs in a single year, up until they’ve spent $6,500 on drugs, beyond which the beneficiary is left to pay 5% of the price of drugs for that year. The new plan would eliminate the doughnut hole for consumers entirely.
Part D beneficiaries will also receive the added benefit of paying zero coinsurance for vaccines recommended by the Advisory Committee on Immunization Practices.
Beginning in 2023, the out-of-pocket cost of insulin will be capped at $35 for a 30-day supply under the new plan. This would apply to all insurers, not just Medicare. In recent years, the average yearly out-of-pocket cost of insulin for privately insured adults under 65 has been $613, while the projected yearly out-of-pocket cost for Part D beneficiaries has been $1,329, thanks to the doughnut hole. Estimates for a similar model program by the Centers for Medicare & Medicaid Services suggest that the policy would save the average Medicare patient taking insulin about $466 a year.
Two features of Democrats’ drug pricing plan are geared towards longer-term price controls within Medicare, the effects of which would be felt more diffusely over the course of several years. By controlling costs for Medicare, these provisions could keep Medicare premiums from rising as much over time as they otherwise would. Neither provision applies directly to private insurers, however, limiting the scope of these potential long-term savings.
The most broadly applicable feature of the plan is a limit on drug price increases for Medicare Parts B and D. This provision would require drug manufacturers to pay rebates to Medicare Parts B and D for price increases beyond the general rate of inflation, using 2021 prices as a starting benchmark. The actual rebate system, however, would not go into effect until 2023.
The most widely discussed aspect of the plan is the negotiation element, which will allow the Secretary of the Department of Health and Human Services (HHS) to negotiate the prices of up to 10 drugs from a list of 100 high-cost drugs for Medicare. Drugs would have to have been approved for at least nine years, or 12 years in the case of biologics, before being subject to negotiated prices. Drugs that are targeted for negotiations will have price ceilings of anywhere from 40% to 75% of the average manufacturer price, depending on how long the drug has been approved for.
The negotiation process would begin in 2023, though the price change would not actually take effect until 2025. The number of drugs that the Secretary could negotiate prices for would go up to 20 by 2028.
Some critics point out that because the negotiated prices are only for Medicare and do not extend to private insurers, drug companies have no incentive to keep prices low for all Americans and may game the system, forcing privately insured Americans to bear the brunt of the costs. The same risks apply to the price increase limitation, which only facilitates rebates to Medicare.
What could have been
As far as direct cost sharing protections go, Democrats’ new plan maintains the same $2,000 Medicare Part D cap featured in the previous leading drug bill, H.R. 3. The long-term savings mechanisms, however, are much more modest, and apply much less broadly than they would have under H.R. 3. While no CBO score is available for the new plan, it is estimated to create $250 billion in government savings, compared to $450 billion by the previous plan.
A key difference in the price growth limit is that the previous inflationary benchmark was set at 2016 drug prices, rather than 2021 prices, meaning that when the inflation provision took effect, it would have immediately scaled back drug prices to a much lower level. Instead, the 2023 rebates will only recoup any disproportionate price hikes that happen in the next two years.
The most drastic differences are in the negotiation feature. H.R. 3 required the HHS Secretary to negotiate prices for at least twenty-five drugs, and later at least 50, rather than capping the number of drugs at ten and then twenty. The exemption period for negotiated prices was also two years shorter than the current nine-year (twelve-year for biologics) exemption period. The new plan’s negotiation feature abandoned the use of international drug prices as a reference point and limit to negotiated drug prices, which was a feature of H.R. 3. Perhaps most perceptibly for many consumers, the new plan limits the negotiated prices to Medicare, whereas H.R. 3 extended these prices to private insurance.
The inclusion of any drug pricing plan in the Build Back Better Act was not a certainty, and the inclusion of all three key elements of the previous drug plan — out-of-pocket limits, inflation limits, and negotiation — is a win. There may be opportunity for Congress to build on these mechanisms in the future, but for now it has a moderate starting point for reform.