Understanding The Democrats’ Drug Pricing Package

Andara Puchino

On Sunday, the Senate passed the Inflation Reduction Act (IRA) of 2022, which includes comprehensive reforms to Medicare drug pricing policy. The House is expected to take up the legislation on Friday. The Senate approved the IRA on a 51-50 party-line vote, with Vice President Kamala Harris casting the tie-breaking vote. Only a simple majority (rather than 60 votes) was needed because the IRA moved through the budget reconciliation process, which carries a set of rules and limitations.

The IRA’s drug pricing reforms include Medicare drug price negotiation, Medicare inflationary rebates, and Medicare Part D redesign; together they represent the achievement of policy goals sought by Democrats for decades. At the same time, the IRA’s drug pricing reforms are narrower than those in reform bills introduced by Democrats over the last few years.

In this post, I first provide a broad overview of the three main pillars of the IRA’s drug pricing reforms—considering their differences from prior legislative proposals, as well as clarifying what other reforms are not included in the package. I then look backward, situating these drug pricing reforms within the context of efforts over the last 30 years to establish drug pricing negotiation programs. Finally, I look ahead with a focus on the IRA itself to consider the next steps for this legislation.

Key Drug Pricing Reform Provisions

The IRA includes three main elements to reform Medicare drug pricing policy. First, the IRA provides the Secretary of Health & Human Services (HHS) with the authority to negotiate prescription drug prices for Medicare and requires them to do so, though this authority is more limited than the authority proposed in previous reform packages. Second, the IRA aims to limit the rate at which companies increase the prices of existing prescription drugs in Medicare by requiring the payment of inflationary rebates, a policy which has worked effectively in the Medicaid context. Third, the IRA restructures the Medicare Part D benefit both to limit patients’ out-of-pocket costs and to rebalance the bearing of risk for stakeholders in that program, a policy change which has previously had more bipartisan support than the other two elements.

The Congressional Budget Office (CBO) had initially projected that the drug pricing provisions of the IRA could save the government roughly $287 billion over the next decade. However, the Senate parliamentarian subsequently ruled one aspect of the inflationary rebates to be outside the bounds of the reconciliation process, a decision which will decrease these savings modestly.

Medicare Drug Price Negotiation

The IRA creates a drug price negotiation program within HHS, enabling the Secretary to negotiate for the prices of certain costly drugs within the Medicare program. This authority is limited in a range of ways. First, not all costly drugs are eligible for negotiation. Negotiation is limited to costly single-source drugs, those among the highest-spend products in Part B or Part D that do not have competing small-molecule generics or biosimilars which are both FDA-approved and marketed. Consider a product like Humira, which has spent several years as the best-selling drug in the world, yet which lacks biosimilar competition in the United States after nearly 20 years on the market. These are the types of products which would be eligible for negotiation under the IRA’s reforms.

More generally, the IRA prioritizes generic or biosimilar competition as a strategy to lower prices, when compared with negotiation. For example, it includes specific provisions to delay negotiation for biologic products where there is a “high likelihood” (a term defined in the IRA) that a biosimilar will be both “licensed and marketed” within the next two years. However, the IRA does its best to contemplate and respond to a range of strategies companies might use to game this provision and delay the negotiation process. If, for instance, a biosimilar is not “licensed and marketed” within the time frame, the biologic manufacturer must pay a certain amount back to HHS. And in light of the fact that biologic manufacturers often succeed in preventing licensed biosimilars from being marketed for many years—as one example, the first biosimilar was licensed for Humira in 2016, but has yet to be marketed—the IRA forbids the delay to be used to avoid price negotiations in such a circumstance.

Second, HHS is limited in terms of the number of drugs whose prices can be negotiated in any given year. In the first year of the negotiation program (2026), the agency can negotiate for the price of only 10 drugs in Part D, a number which rises by an additional 15 Part D drugs in 2027, an additional 15 Part D or Part B drugs in 2028, and an additional 20 Part D or Part B drugs in 2029 and subsequent years. Given that large shares of Medicare drug spending are attributable to just a few drugs, as Kaiser Family Foundation analyses have shown, this limitation still leaves room for the law to achieve significant savings.

Third, negotiation is formally prohibited for many years after a product has been on the market, with small-molecule drugs not eligible to be subject to negotiated prices until they have been on the market for 9 years, and biologic drugs not eligible for 13 years (though products may be selected for negotiation earlier, after 7 and 11 years, as the law envisions a multi-year negotiation process). This provision appears designed to respond to concerns that the law does not permit companies to recoup their investments (later steps in the negotiation process itself even require HHS to consider “the extent to which the manufacturer has recouped research and development costs”). Certain products, such as drugs whose only approved indication(s) are for a single rare disease or condition, or plasma-derived products, are categorically excluded from negotiation.

The IRA also provides significant structure, both procedural and substantive, for the negotiation process. In addition to the specifics about which drugs are eligible for selection for negotiation, the IRA spells out a detailed timeline involving an exchange of information between HHS and the manufacturer of a selected drug over the negotiation period. For instance, after the Secretary receives certain pieces of information from the manufacturer, the IRA establishes a deadline for the Secretary to provide the manufacturer with a “written initial offer” that not only contains HHS’ pricing offer but also “a concise justification based on the factors described in section 1194(e)” of the IRA. Among those factors (which are too lengthy to list in full here) are manufacturer-specific data (such as on research and development costs and production and distribution costs) and evidence about alternative treatments (such as whether the drug “represents a therapeutic advance” compared to existing alternatives and whether the drug addresses an unmet medical need). The manufacturer may then counteroffer, but in doing so must justify its counteroffer based on those same factors.

The IRA also includes enforcement provisions designed to encourage manufacturers to participate in the negotiation process. A manufacturer that is not in compliance with the negotiation process (for a variety of reasons, including failure to submit relevant information) is assessed an escalating noncompliance fee beginning at 65 percent of the sales of the drug, increasing to 95 percent once the manufacturer is out of compliance for more than 270 days. Alternatively, the manufacturer may choose to withdraw their products from Medicare and Medicaid, instead of engaging in negotiations.

The IRA drug price negotiation provisions are more limited than other recently-proposed versions in numerous ways, particularly when compared to H.R. 3, also known as the Elijah E. Cummings Lower Drug Costs Now Act, which passed the Democratic-controlled House in 2019. Under the IRA, HHS is eligible to negotiate even fewer drugs per year than envisioned in H.R. 3. The IRA formally prohibits negotiation for many years after the product has been marketed, unlike H.R. 3, although H.R. 3 included negotiation eligibility limitations (such as focusing on the top-spending drugs in particular programs) that may have reached similar results in practice. And unlike H.R. 3, the IRA does not require firms to offer the negotiated prices to private payers—it is Medicare-specific.

Rebates Required For Price Increases Above Inflation In Medicare Parts B And D

The goal of this provision is to discourage pharmaceutical companies from raising the prices of their drugs for both Medicare Parts B and D faster than inflation. Manufacturers who do so are required to provide rebates to the government for the above-inflation amount of their price increase, starting in 2023. Very similar inflationary rebate provisions already exist within the Medicaid program, and government analyses suggest that more than half of the existing price differential between Medicare and Medicaid for the same products is attributable to Medicaid’s ability to benefit from these inflationary rebates. As a result, the Centers for Medicare and Medicaid Services (CMS) already has significant experience implementing these types of rebates.

Substantively, the IRA’s version of the inflationary rebates is similar to previous versions in most respects, whether H.R. 3 or the version present in the Senate Finance Committee’s bipartisan Prescription Drug Pricing Reduction Act (PDPRA) from 2019. To be sure, there are some differences from each of these (the IRA includes prospective rebates only, like the PDPRA but unlike H.R. 3, for instance), but the differences between versions are smaller than they were with the negotiation aspects.

Medicare Part D Redesign

Finally, the IRA restructures the Medicare Part D benefit both to provide financial protections for beneficiaries and also to alter existing incentives for Part D plans and manufacturers. Currently, there is no out-of-pocket cap for Medicare beneficiaries in Part D; once patients reach the “catastrophic phase” of the benefit, they can be asked to pay 5 percent of the cost of their drugs, without limit, which can total many thousands of dollars per year. For the first time, the IRA not only eliminates this 5 percent cost-sharing in the catastrophic phase (a benefit taking effect in 2024), but also caps patients’ out-of-pocket costs in Part D at $2,000 (taking effect in 2025). This should benefit not only the millions of Part D enrollees who have incurred spending in the catastrophic phase over the last several years, but also millions of seniors who have spent more than $2,000 per year over the last several years but who may not have spent enough to move into the catastrophic phase (an out-of-pocket threshold not met until $7,050 in 2022).

Additional elements of the Part D redesign provide extra financial protection for seniors. The IRA caps Medicare beneficiaries’ out-of-pocket spending on insulin at $35 per month (taking effect in 2023), assisting the millions of Part D beneficiaries using insulin. It also contains provisions smoothing patients’ costs over a year (rather than requiring patients to incur them all at once), protecting seniors on fixed incomes. Finally, it limits premium growth in Part D to no more than 6 percent per year from 2024-2029.

But the Part D redesign goes farther. Under the current benefit, in addition to patients’ 5 percent exposure in the catastrophic phase, Medicare itself is responsible for 80 percent of costs, with plans picking up the last 15 percent and manufacturers bearing no responsibility. Over time, spending in this phase has grown significantly: 20 percent of Part D spending was in the catastrophic phase in 2010, but over 40 percent was in 2018. Policy experts, including MedPAC, have argued that this allocation of responsibility reduces plans’ incentives to manage spending on drugs and can even “contribute[] to the inflationary trend in drug prices.”

In the newly-designed Part D, beyond the $2,000 spending cap, Medicare’s responsibility will drop from 80 percent to 20 percent, with plans’ responsibility rising from 15 percent to 60 percent and manufacturers taking on a new 20 percent share. This large allocation of spending away from Medicare and patients and toward plans and manufacturers should provide new incentives for the moderation of price growth in Part D more generally, as plans may pursue tougher bargaining strategies and pharmacy benefit manager rebate strategies may be less attractive to plans. .

The IRA’s Part D restructuring is highly similar to both H.R. 3 and the PDRPRA. Like H.R. 3, it is more protective of patients, capping out-of-pocket costs at $2,000 (compared to the PDPRA’s $3,100) and includes the additional benefits described above. But like the PDPRA, it increases plans’ responsibility to 60 percent, rather than the 50 percent in H.R. 3, and assigns the last 20 percent (rather than 30%) to manufacturers.

The interaction between the restructuring of Part D and the Medicare negotiation/inflationary rebate provisions matters. If the IRA simply capped patients’ costs in Part D, it would likely increase, not decrease, prices and spending, because it would have the (desired) effect of increasing access and utilization but would not impact prices themselves. Those lower prices are achieved through both the inflationary rebate and negotiation elements of the IRA.  

What’s In The IRA–And What’s Not

Even though its negotiation provisions have been narrowed from previous versions of the Democrats’ proposals, the IRA is likely to be transformative for the Medicare program, both in its protections for patients and in its elements designed to lower prices over time. But it will have a much smaller impact on patients needing high-cost drugs who are not eligible for Medicare. Two examples here are instructive.

First, as noted above, the IRA as initially written required manufacturers to pay rebates back for price increases outpacing inflation in both Medicare and in the private market. However, the parliamentarian ruled that the inflationary rebates could not apply to private market sales under reconciliation, and as such manufacturers will not owe additional rebates for raising the prices of drugs in the private market, reducing the size of the rebates obtained and the potential direct benefits to privately insured patients. It is important to clarify, though, that the inflationary rebates are likely to still have some impact in discouraging manufacturers from raising private market prices, because those prices factor into how the Medicare inflationary rebates are calculated.

Second, and more explicitly, the IRA was drafted to include a $35 out-of-pocket cap on insulin not only for Medicare beneficiaries, but also for privately insured patients. The parliamentarian ruled that the application of this out-of-pocket cap to privately insured patients did not comply with the reconciliation rules. Rather than unilaterally remove this provision (as the Democrats did with the inflationary rebate provision), Democrats chose to advance the bill with the provision included. Republican Senators then chose to challenge its inclusion, and 43 Republicans voted to strip the $35 out-of-pocket cap for privately insured patients from the bill, enough to result in its removal. (Although seven Republicans voted with all 50 Democrats to keep the cap, the provision needed 60 votes to remain in the bill.)

Accomplishing A Long-Sought Goal

The IRA would represent the accomplishment of a goal Democrats have sought for nearly 30 years, if not longer. The proposed Clinton Administration health care plan, in the early 1990s, would have provided health insurance for all Americans, but also would have allowed Medicare to negotiate for the prices of prescription drugs. Contemporaneous media accounts, noting the President’s denunciation of “high prices that force some sick and elderly Americans to skip meals to pay for medicine,” could have been written today, with 26 percent of Americans and 20 percent of seniors reporting that they have difficulty affording their medications. But the Clinton plan did not become law, though that result is commonly attributed to the insurance industry, rather than to pharmaceutical companies.

Ten years later, during the 2003 passage of Part D under the Bush Administration, the Republican-controlled Congress resisted Democratic versions of the proposal that would have enabled HHS to negotiate the prices of the drugs to be purchased for seniors. The Obama Administration opted to strike a deal with the pharmaceutical industry, avoiding structural reforms to pharmaceutical reimbursement (though imposing some smaller changes) to win industry’s support for the Affordable Care Act’s substantial expansions of insurance in both Medicaid and the private market.

President Trump came into office in 2017 promising to crack down on pharmaceutical companies who were “getting away with murder,” yet he was unable to implement any of his more ambitious proposals on the topic. The Trump Administration’s most-favored-nations rule was enjoined by three federal district courts on procedural grounds, and no states have received approval to establish programs under the Administration’s importation rule (and if one does, a pending lawsuit may create roadblocks). The last substantial proposal, the rebate rule, was projected by CBO to cost (rather than save) the government roughly $177 billion over a decade. Congress has delayed the rebate rule and used the resulting “savings” to fund the passage of the bipartisan infrastructure bill, the bipartisan gun safety deal, and now the IRA. (The rebate rule was subject to a separate lawsuit, which may have created problems for its implementation in any case.)

The Biden Administration is now on the verge of accomplishing this long-sought policy goal. Even as the scope of the negotiation provisions remain limited, from a precedential perspective, this is a significant change in drug pricing policy.

Looking Ahead

The expected passage of the IRA by the House this week would be just the beginning, rather than the end, of developments over Medicare drug price negotiation. The pharmaceutical industry has suggested that they are likely to sue to challenge the law. The industry is also likely to attempt to influence the rulemaking process and to sue to challenge CMS’ implementing regulations. Finally, the industry is likely to attempt to “game” the negotiation process itself, and analysts have begun offering strategies they expect industry to use to do so.

Importantly, none of this is a surprise, nor are many of the grounds on which the industry is likely to sue. The pharmaceutical industry has been highly litigious in efforts to defeat even the most moderate price transparency laws, and companies have even gone on the offense in an effort to limit existing laws that may affect their ability to maintain high prices. The industry has also engaged in a decades-long effort to identify strategies that would allow its members to maintain their monopolies, including the establishment of patent thickets, pay-for-delay agreements, product hopping, restricted distribution networks, and other strategies. It would be surprising if this behavior stopped with the enactment of drug price negotiation legislation.

Despite their limitations, the drug pricing reform provisions of the IRA have the potential to transform the ways in which Medicare pays for drugs, and to provide financial benefits to millions of seniors who have difficulty affording their medications.


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