Policy and Regulation News

Proposed Bill Permits HHS to Negotiate Drug Prices, Saves $345 B

Proposed drug pricing bill HR-3’s Title I, or the Lower Drug Costs Now Act of 2019, allows the HHS to negotiate drug prices based on international standards.

Drug pricing, HHS, drug manufacturers

Source: Getty Images

By Kelsey Waddill

- By allowing the HHS to negotiate drug prices tied to international standards, Title I of the Lower Drug Costs Now Act of 2019 (HR-3) would save the federal government $345 billion from 2023 to 2029, according to the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT).

HR-3 Title I empowers the Secretary of HHS to negotiate drug prices on behalf of Medicare and ties drug prices to other countries. In their negotiations, the price would not be allowed to rise above 120 percent of prices in six similar countries. Noncompliant drug manufacturers would pay a steep 95 percent sales excise tax.

CBO delineated both the long-term and short-term effects of the bill and the domestic and international impact it could have.

In the short term, the bill would instigate lower domestic drug prices. These would bump drug utilization and positively influence the nation’s overall health.

The drug prices would likely go into effect in 2023 and would yield immediate results. Drug manufacturers would immediately experience a decrease in revenue, altering some incentives so that setting lower prices becomes more attractive, and quickly changing the drug market landscape.

READ MORE: Prescription Drug Prices Set for 3.8% Increase in 2020

In the long term, however, the drug would fail to secure permanent change.

As a result of HR-3, drug manufacturers could pull back funding for research and development. With less money flowing into this area of the industry, the number of new drugs on the market would likely fall.

CBO estimates that the drug manufacturing industry would lose $0.5 trillion to $1 trillion in revenue and over the next ten years the number of new drugs introduced to the market would drop by eight to fifteen drugs.

To put this in context, the Food and Drug Administration would still approve approximately 30 new drugs each year, amounting to 300 approved new drugs over the course of the decade.

Under the current law, for prescription drug plans (PDPs), drug manufacturers offer plans a price rebate in exchange for a favorable placement in the plan’s preferred formulary. Plans can pass those rebate savings on to consumers.

READ MORE: Federal Judge Strikes Down New Drug Price Transparency Rule

In contrast, under HR-3, lower prices would come from capping the price. The HHS Secretary would set the list price at a fair price currently negotiated by prescription drug plans (PDPs). With an established standard price, plans would recognize and be more attracted to lower-priced drugs. Instead of adjusting the list price, manufacturers would offer additional discounts in order to bring down the prices to satisfy PDPs.

This stipulation in particular has drawn major criticism. Some claim that giving the HHS Secretary the power to control drug pricing violates free market ideals and company rights.

“It would fundamentally restructure how patients access medicines by giving the federal government unprecedented, sweeping authority to set medicine prices in public and private markets while importing price controls from other countries that restrict access to innovative medicines,” PhRMA objected when the plan was revealed in September.

“Instead, policymakers should pursue practical policy solutions such as sharing negotiated savings with patients at the pharmacy counter, lowering coinsurance in Medicare Part D, increasing transparency on patients’ costs, promoting value-based contracts, among other improvements to the system.”

But health insurance companies have a different view, suggesting that the model in HR-3 would break up drug manufacturer monopolies.

READ MORE: Employers Coalition Takes Up Drug Price Transparency, Price Caps

“For too long, Big Pharma has taken advantage of government-granted monopolies to set outrageous launch prices, eliminate competition and increase prices on the same products year after year,” America’s Health Insurance Plans (AHIP) countered.

“We encourage legislators to advance efforts that will reduce drug prices across the entire health care system – not just shifting costs to consumers, employers and taxpayers –while retaining the ability of health insurance providers to use market-based tools and private-sector negotiations to reduce the net price of drugs.”

Internationally, CBO predicted that foreign drug prices may rise, specifically in the six nations to which US drug prices would be tied. Drug manufacturers could refrain from introducing drugs in those countries as well.

“Over time, drug manufacturers might put in place mechanisms by which they can charge relatively high prices in other countries to avoid feedback that lowers U.S. prices while providing other forms of compensation that effectively reduce the net price of drugs in other countries,” CBO explained. “Those international effects would lessen the effectiveness of title I in reducing the level and growth of drug prices.”

Notably, the CBO estimates do not include the effects of the rest of Title II, “Medicare Parts B and D Prescription Drug Inflation Rebates”, or Title III, “Part D Improvements and Maximum Out-of-Pocket cap for Medicare Beneficiaries.” Still, with a preliminary estimate, CBO anticipates that these parts of the bill would likewise lower premiums and increase federal revenue.

However, the federal government should not expect significant revenue, or at least not from the excise tax penalty, the JCT cautioned. Drug manufacturers would not risk incurring such a high penalty for defying the new law. Instead, they would either comply with the maximum fair price or pull out of the US market.

HR-3 Title I is not the first proposal to suggest linking US and foreign drug prices. The International Pricing Index, recommended by CMS in 2018, would use drug pricing thresholds based on other nations’ markets to keep price negotiations lower. At the time, CMS estimated that the new model could save the federal government $17.2 billion over a five-year timeframe.

Alternatives to HR-3’s approach also included eliminating pharmacy benefit manager rebates. This approach never moved forward into legislation because of the potential costs associated with implementation.

Allowing the government to participate in drug price negotiations, reworking Part D to include certain spending thresholds on out-of-pocket spending or inflation, or revising the Part B payment model are just a couple of policies that have been introduced in the past year alone.