Passage of the Inflation Reduction Act gives Medicare historic new powers

A pharmacist collects prescription medication from a pharmacy.

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Medicare is poised to renegotiate the prices of some of its most expensive drugs in a historic expansion of its power, which could reduce costs for many seniors as well as federal spending on its prescription drug plan.

The changes are tucked inside a massive spending and tax bill in Congress that includes $433 billion in investments in health care and clean energy. House Democrats on Friday passed the Inflation Reduction Act in a vote of 220 to 207 along party lines, ending a tortured legislative process that took more than a year.

The bill authorizes the Health and Human Services Secretary to negotiate prices for certain drugs covered by two different parts of Medicare and penalize pharmaceutical companies that do not follow the rules. The legislation also caps out-of-pocket costs at $2,000 starting in 2025 for people participating in Medicare Part D, the prescription drug plan for seniors.

Democrats have fought for decades to give Medicare the power to persuade drugmakers to lower prices. But the powerful pharmaceutical lobby and Republican opposition shot down earlier efforts. Medicare Part D currently prevents HHS from negotiating prices with industry.

But HHS is now on the verge of gaining the power to negotiate. President Joe Biden is expected to sign the bill into law soon.

The American Association of Retired Persons, which represents 38 million people, described the legislation as a historic victory for older adults. AARP CEO Jo Ann Jenkins said the group has fought for nearly two decades to allow Medicare to negotiate drug prices. Millions of older adults are now “one step closer to real relief from out-of-control prescription drug prices,” Jenkins said earlier this week.

Although the legislation is historic, the bargaining provisions are “very narrow” in design, according to Andrew Mulcahy, an expert on prescription drug pricing at the RAND Corporation. And the negotiations will only provide relief in 2026, when the renegotiated prices of ten of the programme’s most expensive medicines come into force.

Lawmakers on the left, such as Sen. Bernie Sanders, I-VT, have criticized the legislation for leaving out the overwhelming majority of Americans who are not on Medicare. For the pharmaceutical industry, even the limited scope of the bill is a bridge too far.

Timeline for negotiations

Under the law, HHS can negotiate prices for some of the most expensive drugs covered by Medicare Part B and Medicare Part D. The former covers specialty drugs administered by health care providers, while the latter covers drugs filled at retail pharmacies.

The education is phased in through four phases over several years. That is how it works:

  • Phase 1: HHS negotiates 10 Medicare Part D drugs. The prices will come into force in 2026.
  • Phase 2: HHS negotiates 15 Part D drugs. The prices will come into effect in 2027.
  • Phase 3: HHS can negotiate 15 Medicare Part B or D drugs. The prices will come into effect in 2028.
  • Phase 4: HHS negotiates 20 Part B or D drugs. The prices take effect in 2029. The secretary can negotiate 20 drugs in all subsequent years.

Possible drug candidates

How many seniors benefit from the negotiations depends largely on which substances the HHS secretary decides to target. More than 63 million Americans are collectively insured through Medicare, and about 49 million are enrolled in Medicare Part D.

Before the Inflation Reduction Act was set to pass into law, Medicare Part D was estimated to cost just over $1.6 trillion over the next decade, according to the nonpartisan Congressional Budget Office. Medicare Part B had an estimated cost of $6.5 trillion over the next decade. CBO projects that the drug price negotiations alone will save taxpayers an estimated $102 billion through 2031.

HHS can negotiate prices only for drugs that Medicare Parts B and D spend the most money on and have been on the market for years without generic or other competitors, according to Mulcahy. “The focus is on these older drugs that for one reason or another don’t have competition,” he said.

There is no official, publicly available list of drugs that HHS plans to target for negotiations. But Bank of America highlighted some potential Medicare D candidates based on how much Medicare spent on them in 2020:

  • Bristol-Myers’ Eliquis, $9.9 billion. It is an anticoagulant to prevent blood clots to reduce the risk of stroke.
  • J&J’s Xarelto, $4.7 billion. It is another blood thinner.
  • Merck’s Januvia, $3.8 billion. It is a pill to lower blood sugar for people with type 2 diabetes.
  • Abbvie’s Imbruvica, $2.9 billion. It is a pill against various types of blood cancer.

And Bank of America sees these Medicare B drugs as possibly affected by negotiations. Here are their costs for Medicare in 2020:

  • Merck’s Keytruda, $3.5 billion. It is an immunotherapy against certain cancers.
  • Regeneron’s Eylea, $3 billion. It is an injection against macular degeneration.
  • Amgen’s Prolia, 1.6 billion It is an injection against osteoporosis.
  • Bristol Myers’ Opdivo, $1.5 billion. It is an immunotherapy treatment for certain cancers.
  • Roche’s Rituxan, $1.3 billion. It is an immunotherapy against certain cancers and inflammatory disorders.

But it is difficult to determine which substances HHS will really target. The list of drugs that would qualify for negotiations will change significantly when the bill’s provisions take effect because many will lose their patent protection before then, according to a Bank of America research note.

Still, negotiations through Medicare could lower prices by 25% for the 25 drugs the program spends the most on by 2026 and beyond, according to Bank of America.

How much the prices are reduced ultimately depends on whether HHS really leans into negotiations with the drug companies, Mulcahy said. Bill Sweeney, director of government affairs at AARP, said proper implementation of the bill is critical. AARP wants to make sure that HHS is fighting hard for the best price for seniors and that there are no loopholes for the industry to exploit, Sweeney said.

The industry could game the system by allowing limited competition for their drugs to avoid price controls, according to an analyst note from SVB Securities.

HHS will have enforcement powers. Companies face large financial penalties for failing to meet negotiated prices, $1 million in fines for breaching contract terms, and $100 million in fines for providing false information.

Inflation discount

Although seniors won’t see the lower prices until 2026, the legislation would penalize drug companies for raising Medicare drug prices faster than the rate of inflation later this year. If a drug’s price rises more than inflation, the company must pay the government the difference between the price charged and the rate of inflation for all Medicare sales of that drug, according to AARP.

Prices rose faster than inflation in 2020 for the overwhelming majority of the 25 drugs Medicare Parts B and D spent the most on, according to the Kaiser Family Foundation.

The US spent more than $1,000 per per capita on prescription drugs in 2019, double the $552 per capita spent by other high-income nations. per capita on average, according to KFF and the Peterson Institute on Healthcare. US prescription drug spending increased 69% from 2004 to 2019, compared to a 41% increase in comparable countries.

‘Baby step forward’

Sanders has called the negotiating powers given to the HHS secretary a “baby step forward.” The senator pointed out that the first round of price cuts won’t take effect for four years, and people not on Medicare — the overwhelming majority of people are under 65 — are completely left out.

“If anyone thinks that as a result of this bill we’re going to suddenly see lower prices for Medicare, you’re wrong,” Sanders said during a speech on the Senate floor earlier this week. “If you’re under 65, this bill won’t affect you at all, and the drug companies will be able to go on their merry way and raise prices to whatever level they want.”

The pharmaceutical industry, on the other hand, has argued that the bill goes too far. Stephen Ubl, executive director of the Pharmaceutical Research and Manufacturers of America, said the legislation will slow innovation and lead to fewer new cures and treatments for diseases.

Bank of America does not see the bill as a major negative for industry growth, according to an August research note. Analysts at UBS said the Medicare bargaining provisions, which are limited in scope, are far from the worst-case scenario for the industry. The legislation would bring clarity to the market and take the threat of even tougher drug pricing off the table, according to UBS.

“We believe the final passage of the current drug pricing reforms represents a clarifying event regarding future industry earnings, removing the risk of more burdensome drug pricing that has weighed on biopharma assessments since the issue of drug pricing first rose to political prominence in 2015 ,” UBS analysts wrote in a research note earlier this week.

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