Five New and Five Old Reasons to Oppose the Senate’s Rx Drug Legislation

Senate Democrats have opened up the post-July 4 working session of Congress with a new agreement establishing new prescription drug price controls in Medicare. Negotiators have made some minor adjustments to the last major update to Democrats’ drug pricing efforts – which lawmakers released in November 2021, ahead of a successful House vote on the Build Back Better Act (BBB). However, the new text has the same harmful provisions that could chill prescription drug development in America, threaten patient access to treatments, raise costs for taxpayers, and lay waste to a landscape that over decades of bipartisan work has nurtured new innovations and robust competition in the U.S. prescription drug market.

Below are five new reasons lawmakers should be opposed to the new reconciliation agreement, as well as five reasons that lawmakers should still be opposed to prescription drug price controls.

The New

1. Lawmakers are turning the screws on future HHS secretaries

One major change in the July 2022 version of the drug pricing legislation, relative to November 2021 language, is that the HHS Secretary is now required to negotiate the price for a minimum of 10 drugs in 2026, escalating up to a minimum of 20 from 2029 on. The November language only asked HHS to negotiate up to 10 drugs in 2025, escalating to up to 20 drugs in 2028.

Roll Call framed this change as “[preventing] what the summary calls a ‘rogue secretary’ from watering down the provisions.” What it really amounts to is Congress dictating the negotiation process to HHS, requiring any future HHS secretary to follow a rigid procedure where almost every term – from the maximum drug price (and occasionally the minimum price) to the pricing factors HHS considers to the number and type of drugs the secretary must negotiate – is fixed from the start. Though lawmakers claim their efforts are about Medicare engaging in “fair” negotiations on drug prices, the stringent requirements the new agreement places on HHS show what this proposal is really about: the government determining what a drug is “worth” to the patient who benefits from it, the provider who prescribes it, and the manufacturer who spent years bringing the product to market.

2. No injunctive relief options for manufacturers subject to the tax

A new and troubling provision of the legislation in the July 2022 agreement prevents manufacturers from obtaining relief from the courts before they have to pay the up-to-95-percent gross sales tax for refusing to accept the government’s price for their product.

The provision states that “[n]o suit or proceeding shall be maintained in any court for the recovery of any tax imposed under section 5000D until payment has been made by the taxpayer in an amount equal to the full amount of the tax imposed under such section.” (Emphasis added.)

This is a ‘guilty until proven innocent’ approach from lawmakers that would force manufacturers into a non-deductible, gross sales tax nearing 100 percent, all for refusing to accept a government-dictated price for their product. Policymakers have not grappled with all the potential consequences of this provision, including that manufacturers may choose to pull their sometimes life-saving products from the Medicare program or the market rather than face a tax obligation for which they can obtain no injunctive relief.

3. New Part D redesign will push even more costs on taxpayers

As discussed in further detail below, by November 2021 Democratic negotiators had effectively neutralized any taxpayer and deficit savings prior iterations of Medicare Part D redesign could offer. However, their July 2022 iteration could pile even more costs onto taxpayers, because the legislation limits the rate at which Part D plan sponsors can increase premiums to six percent per year.

A key trade-off in prior versions of Part D redesign was that shifting burdens from taxpayers to plans might lead to modest increases in premiums. In this sense, Part D would work more like the private sector landscape for health coverage – all would pay a little bit more upfront (think a few dollars per month) so that everyone, and especially beneficiaries with high drug costs, could benefit from the first ever out-of-pocket cap in the program. More resource-strapped beneficiaries would continue to benefit from existing subsidies in the program that reduce premiums and out-of-pocket expenses for low-income seniors.

By limiting the amount by which all plans can increase premiums in a given year – even as inflation accelerates at historic paces – the July 2022 language will naturally push more costs for running the Part D program onto taxpayers. We await a CBO report, but are troubled by the implications of the premium increase cap on America’s taxpayers.

4. New carve-outs for biosimilars don’t offer enough space for a growing market

The July 2022 agreement includes a new carve-out option for biosimilars, which can offer generic competition to brand-name biologics. In an apparent acknowledgement that HHS selecting a drug for Medicare price “negotiations” might chill generic and biosimilar competition for that drug – which, can lead to greater consumer savings than price controls – the new language allows a biosimilar competitor to ask HHS to hold off on selecting a biologic for price controls for up to two years (a one-year initial period, which can be extended for one additional year).

However, biosimilar developers face numerous challenges that make the two-year timeframe contemplated by the July 2022 language grossly inadequate:

• Academic and industry stakeholders indicate it can take anywhere from five to nine years, and sometimes tens of millions of dollars, to develop biosimilars; compare this to potentially only $1 million to $4 million to bring certain generics to market;
• As one expert shared in 2021 on a Festival of Biologics panel, “the pharmacokinetics of these products are extremely difficult to match precisely with originator products”;
• As other experts on that same panel argued, scaling up manufacturing of biosimilars is an additional problem; one expert stated “it is not easy to produce insulins of high purity at extremely large scale.”

            The two-year pathway in the July 2022 agreement is extremely inadequate.

5. There are less harmful ways to reduce deficits

Some deficit hawks have leaned on the prescription drug pricing provisions outlined here as a promising pathway to reducing the scourge of record-level federal debt and deficits.

NTU cares deeply about the nation’s fiscal challenges, and we acknowledge that these provisions may reduce deficits on net (though not by the $300 billion Democrats may claim or CBO scoring conventions may indicate; more below). However, there are numerous ways for policymakers to reduce spending and deficits that do not lay waste to a carefully constructed prescription drug landscape that offers innovative products and, for most products, robust generic competition.

NTU Foundation and the U.S. Public Interest Research Group (U.S. PIRG) Education Fund’s 2020 “Toward Common Ground” report contains more deficit reduction ($800 billion) than Sen. Joe Manchin’s (D-WV) entire $500 billion BBB deficit reduction goal. Even extremely modest discretionary spending caps for the next five or ten years could meaningfully reduce deficits by hundreds of billions of dollars. NTU has encouraged lawmakers to tackle hundreds of billions of dollars in spending on programs popular with Democrats (such as education and pension spending) and Republicans (such as defense and military spending). We have even encouraged Congress to roll back (or extend limitations on) wasteful, inefficient, and/or regressive tax expenditures like the state and local tax (SALT) deduction and various tax extenders.

In short, there’s a wealth of spending reduction options available to Members of Congress interested in reducing the deficit that won’t hollow out and devastate a sector of the economy that has brought economic, societal, and fiscal benefits to Americans for decades.

The Old

1. Mandatory top-down negotiations could chill incentives to innovate

As NTU has mentioned before, calling the first plank of Democrats’ proposal Medicare “negotiation” is something of a misnomer. In this bill and prior iterations of the proposal (see the summary table at the bottom of this page), the negotiation “game” is rigged against pharmaceutical manufacturers from the start. The Department of Health and Human Services (HHS) would have a strict ceiling on the “maximum fair price” they are “negotiating” with manufacturers over, as low as just 40 percent of the average manufacturer price (from non-Federal government sources) for the drug in 2021 (adjusted for inflation) if it’s been 16 or more years since the drug’s approval.

Manufacturers who don’t like the price offered by the government have three options: 1) make a counteroffer, but one that can’t be higher than the ceiling price above and that the government could still reject, 2) withdraw their product from the market, which could threaten patient access to life-saving treatments, or 3) pay an up to 95-percent gross sales tax on the drug. This is not a negotiation. The low, low price ceilings would significantly eat into manufacturers’ revenue from sales to Medicare, and could also impact revenue from sales to Medicaid and providers participating in the 340B program. Less revenue to manufacturers would translate into less resources available for research and development into the treatments and cures that could define the 21st century. The average drug takes 12 years to go from pre-clinical testing to approval. Only 1 in 1,000 potential drugs make it to human clinical trials, and of those that make it to human clinical trials only 1 in 10 pass the human testing phase. The odds for a potential drug are long, and manufacturers typically experience many, many failures for each successful, FDA-approved drug. Government price controls that siphon hundreds of billions of dollars away from the industry will make it even more difficult for new products to come to market.

2. Mandatory top-down negotiations could present smaller savings to consumers than competition

Food and Drug Administration (FDA) research has demonstrated that the most promising pathway to robust consumer savings on prescription drugs is by encouraging and fostering increased competition for brand drugs whose patents are expiring or have expired. A 2019 FDA study, based on data from 2015 through 2017, found that a single generic competitor to a brand-name drug will be priced between 30 percent and 40 percent lower than the brand price before competition.^[1] When two competitors enter the market, generic prices are between 44 percent and 54 percent lower than the pre-competition brand price. When six or more competitors have flooded the market, generic prices are astounding 95 percent lower than the pre-competition brand price.

Notably, some of these savings from drug competition are greater than the savings promised by the legislation’s price controls. The lowest “ceiling” price for HHS – for drugs that have been approved for 16 or more years – is 40 percent of the non-federal AMP. Even two competitors to that brand drug could present greater on average savings (44 percent to 54 percent) for consumers than the government price control. If, instead, a drug is selected for government price controls under this legislation, would-be generic competitors could refuse to invest the time, money, and effort to bring competition to market. A new carve-out in the legislation attempts to address this competitive disincentive specifically for biosimilars (as noted above), but it is a weak carve-out at best.

3. Inflation rebates are blunt measures not appropriate for drug reimbursement

As NTU has previously written: “To peg the allowable price Medicare will pay for a prescription drug to a broad measure of price increases like the Consumer Price Index (CPI) is to effectively attempt to set the price of the drug. While there are obvious examples of abusive price increases that are clearly not tied to market conditions, such as Martin Shkreli increasing the price of malaria and HIV medicine from $13.50 to $750, manufacturers can and do weigh more than just CPI in setting the price of drugs. Private payers in Part D should be able to push back on what they deem to be excessive price increases in negotiations with manufacturers, and private payer negotiations also affect the price of drugs in Part B because Part B reimbursement is based on average sales price.

But it makes little sense to tell manufacturers they will pay a penalty for increasing the price of their drug even a penny beyond a blunt and market-wide measure of inflation, just as it would be absurd for the government to try to set the price of lumber by demanding forest landowners pay a penalty for prices that rose beyond CPI. Federal policymakers should trust the market to guard against excessive price increases, and should instead be focused on protecting the patients most exposed to high drug costs…”

Additionally, attempting to peg the price of prescription drugs to a broad measure like CPI is particularly foolhardy in a time of historic inflation, when the economy-wide consumer price index is actually accelerating at a much faster rate than prescription drug prices (even if that was not the case in years before the pandemic).^[2]

4. Part D redesign no longer a win for beneficiaries and taxpayers

As noted above, earlier and bipartisan iterations of Part D redesign promised to decrease federal spending by around $35 billion over 10 years, reducing federal deficits. Unfortunately, some lawmakers insisted on spending all the taxpayer savings that could be achieved by Part D redesign, such that the November 2021 BBB version of Part D redesign only reduced deficits by around $1.6 billion over 10 years – an effectively deficit-neutral proposal in the context of multi-trillion dollar BBB legislation.

The November version of Part D redesign still offered benefits to Medicare Part D beneficiaries, as did prior bipartisan versions of the legislation – the first-ever out-of-pocket cap in Part D, $2,000 per year in BBB. NTU supports an out-of-pocket cap in Part D when – and only when – it is paired with benefit design changes that shift burdens in the catastrophic phase of the benefit (where most drug spending occurs) from the nation’s taxpayers to the private insurers participating in the Part D program. That is where bipartisan versions of redesign were able to potentially save taxpayers $35 billion. Democrats negotiating BBB have taken away the wins for American taxpayers in Part D redesign, unnecessarily spending all the savings.

5. Rebate rule remains a shameless gimmick

Given Sen. Manchin has been focused on reducing deficits with any reconciliation legislation, lawmakers have framed the drug pricing part of the bill as a deficit reduction tool. Unfortunately, a significant portion of the projected deficit reduction – potentially almost half of the possibly $300 billion Democrats could yield in projected ‘savings’ from drug pricing provisions – is due to a shameless and deceptive gimmick.

Democrats have proposed permanently repealing a Trump-era regulation that would have increased spending in Medicare. Congressional Budget Office (CBO) scoring conventions dictate that efforts to delay or repeal the rule – which realistically never would be put into effect by the Biden administration, because they did not support the regulation – will ‘save’ taxpayers money.

This is all a ruse by Congress. Previous efforts to delay implementation of the rule years into the future have been projected by the Congressional Budget Office (CBO) to reduce government spending, enabling lawmakers to ‘pay for’ new government spending. Congress has already delayed the rebate rule in the bipartisan gun law and the bipartisan infrastructure law.

The November drug pricing language would have repealed the rebate rule, and CBO projected that such language would reduce spending by an astounding $142 billion over a decade – almost half the total $296 billion in 10-year savings projected by CBO from the drug pricing title.

The estimate for the July 2022 agreement may be lower than in November, since in the intervening months Congress used rebate rule delay (not repeal) to yield false ‘savings’ for new spending in the gun law. Nonetheless, lawmakers should stop the games with the rebate rule.

Summary - What’s Changed

Here’s a comparison of the mandatory Medicare negotiation provisions of H.R. 3, the November 2021 agreement, and the new July 2022 agreement:

Mandatory Medicare Negotiations, H.R. 3 vs. November 2021 Drug Pricing Agreement vs. July 2022 Drug Pricing Agreement
	H.R. 3 (2021 version; source: Congress.gov)	November 2021 Democratic agreement on Rx drugs (source: House Rules Committee text, summary; Inside Health Policy story)	July 2022 Democratic agreement on Rx drugs (source: Senate Finance text)
Number of drugs negotiated per year	25 in 2024, 50 from 2025 on	Up to 10 in 2025, escalating to up to 20 from 2028 on	Minimum of 10 in 2026, escalating to minimum of 20 from 2029 on
Criteria for negotiated drugs	• Single-source drug • Brand-name • Among either 125 drugs that account for most national health spending or 125 drugs that account for most Medicare spending	• Single-source • 9+ years outside exclusivity period (small molecule drugs), 13+ years outside exclusivity period (biologics)  • Highest gross spending drugs in each of Parts B and D • Must contribute $200 million or more per year to Medicare spending	• Single-source • 9+ years outside exclusivity period (small molecule drugs), 13+ years outside exclusivity period (biologics) • Highest gross spending drugs in each of Parts B and D • Must contribute $200 million or more per year to Medicare spending
Price cap on negotiations	120% of average price in basket of six foreign countries (if info not available, 85% of U.S. average manufacturer price, or AMP)	• 75% of 2021 non-federal AMP for small molecule drugs 9-12 years past exclusivity • 65% of 2021 non-federal AMP for small molecule drugs 12-16 years past exclusivity • 40% of 2021 non-federal AMP for small molecule drugs 16+ years past exclusivity	• 75% of 2021 non-federal AMP for small molecule drugs 9-12 years past exclusivity • 65% of 2021 non-federal AMP for small molecule drugs 12-16 years past exclusivity • 40% of 2021 non-federal AMP for small molecule drugs 16+ years past exclusivity
Punishment for failing to agree to government- negotiated price	Excise tax on gross sales revenue of the drug, escalating up to 95% of sales revenue	Excise tax on gross sales revenue of the drug, escalating up to 95% of sales revenue	Excise tax on gross sales revenue of the drug, escalating up to 95% of sales revenue
Rule prohibiting relief in court until tax payment has been made in full?	No	No	Yes
Negotiated price applies to private sector plans?	Yes	No	No
Carve-outs for small biotech companies?	No	Yes: • Small biotechs not subject to price negotiation from 2025-27 • Negotiated price phased in for small biotechs over two years (2028-29)	Yes: • Small biotechs not subject to price negotiation from 2026-28 • Negotiated price phased in for small biotechs over two years (2029-30)
Definition of small biotech	N/A	Company where one drug makes up 80% or more of Medicare revenue and the drug comprises less than 1% of Medicare’s total drug spending	Company where one drug makes up 80% or more of Medicare revenue and the drug comprises less than 1% of Medicare’s total drug spending