On September 15, 2021, three Democrat Congresspeople in the House Energy and Commerce Committee voted with Republicans to block a proposal that would allow the Medicare program to negotiate with drug manufacturers to lower prescription drug prices. If approved, this language would have been included in the Biden administration’s $3.5 trillion spending bill, currently being negotiated in the House of Representatives. This individual committee vote was inconsequential in the greater healthcare reform debate; the House Ways and Means Committee later approved the same language, advancing it to negotiation on the House floor. The real importance of this vote is what it signals: the Democrats will likely remain unable to pass a desperately needed and wanted prescription drug price reform.
A Pricing Crisis
The extreme price of pharmaceuticals in the U.S. is a reality many Americans are all too familiar with, as almost one-quarter of all U.S. adults report finding it ‘difficult’ to afford their prescription. It’s not only at the pharmacy counter that Americans are paying exorbitant prices for their pharmaceuticals. Only 50 drugs account for 80% of all drug spending under Medicare Part B, receiving 71% of its $305 billion annual budget from general revenue collected from federal taxes. Compared to other developed and wealthy nations, Americans pay heavily for access to healthcare.
The debate has moved far beyond whether or not prescription prices are an issue among the American public. A POLITICO-Harvard poll from September 2021 found that a staggering 89% of Americans rate federal prescription price negotiation as ‘very/extremely important’ to include in the $3.5 trillion spending bill, making it the number one priority among the 20 proposals surveyed. Now, the debate focuses on what is the solution, as the problem is painfully clear.
The Democrats’ Plan: Reference Pricing
The current Democratic reform goal is practically identical to what has been proposed in the past, most recently by Speaker of the House Nancy Pelosi (D-CA) in 2019. The primary provision in this proposal would allow the Department of Health and Human Services (HSS) to negotiate the prices of the 250 drugs with the highest cost to Medicare. Specifically, fees would be capped at 1.2 times the International Price Index, the average price of similar medications taken from six other wealthy nations. In addition, manufacturers must offer the negotiated price to non-Medicare payers and would be disallowed from increasing the cost of these drugs beyond the inflation rate.
Germany is a fantastic example of a nation that was able to use reference pricing to lower its pharmaceutical prices successfully and is a good comparison point for potential reform in the U.S. When a new drug is introduced to the market, Germany’s non-governmental Institute of Quality and Efficiency in Healthcare (IQWiG) begins a comprehensive review of said drug’s incremental effectiveness and price. During this review, the drug manufacturer can charge what they choose to the public, with Germany’s public healthcare completely covering the cost to citizens over a preset amount based on drug class. This process ensures that companies can still profit from their drugs, thus retaining pharmaceutical companies’ incentives to innovate. The ‘comparator drugs’ used to help determine a new treatment’s effectiveness are selected by the Federal Joint Committee (GBA), a healthcare professionals’ self-governing and publicly accountable organization. Once a drug has been evaluated and has its efficiency ranked based on a set framework, Germany’s public insurance providers directly negotiate with pharmaceutical companies to decide a fair price based on the reference drugs selected by the GBA. The results of this process are fantastic: In 2015 alone, Germany saved over $1 billion on new medications and discounted prices by an average of 21% while also retaining a high rate of drug innovation. While Germany’s system has many differences from any proposed US healthcare reforms, it proves that the fundamental idea of reference pricing is viable for a large nation to implement successfully.
The Democrats’ proposal is modest compared to plans that aim to enact single-payer healthcare or generally expand the Affordable Care Act (ACA or Obama Care). Still, it would nonetheless have a significant impact on Medicare. The nonpartisan Congressional Budget Office estimates that an estimated $456 billion in federal spending would be saved over a decade, including billions of dollars of out-of-pocket and premium savings from those eligible for Medicare: those over 65, under 65 with disabilities, and those with End-Stage Renal Disease.
Reference Pricing: Rebuttals
The primary counterpoint to reference pricing is that price limitations would diminish pharmaceutical profits, thus decreasing available funds for further research and development, stifling innovation in U.S. drug technology. Drug development is an enormous task: pre-market research must take place over 10-15 years. For every approved drug, hundreds of thousands are abandoned during the research process. Some estimates suggest that new treatments might increase by 10% over ten years if current price restrictions were raised and Biopharma companies were free to charge at their discretion. However, the degree to which innovation would be stifled with further price controls is questionable. Moreover, there are still many profit protections for Biopharma companies (e.g., patent protections) and public investment in life sciences.
Moving Forward: Securing Reform
The current healthcare reform debate seems to be split along partisan lines: almost exclusively, the GOP has historically opposed government action on healthcare reform. However, healthcare reform can still be bipartisan. For example, the Trump administration proposed a form of Medicare reference pricing in 2018, albeit significantly more limited and ambiguous in scope than the Democratic proposal. This plan would have specifically reformed Medicare Part B, which covers pharmaceuticals administered in clinical settings but not those purchased at pharmacies. There would also be no price negotiation as in the Democratic plan, merely set prices that Medicare would agree to pay manufacturers. Going beyond reforms like this, many opponents to reference pricing proposals still support alternative reforms to curb price-gouging in the Pharmaceutical industry, such as forcing Pharmacy Benefits Managers (third-party organizations who organize private healthcare plans) to be transparent in their current opaque pricing negotiations with drug manufacturers.
Given these points of agreement across the political spectrum, the question remains: why will Congress not pass a drug pricing reform that Americans desperately need and want? The answer, rather unsurprisingly, is pushback from pharmaceutical companies themselves. Pharmaceutical companies spent $306 million lobbying politicians in 2020 alone, almost double that of the next highest-spending industry. Unfortunately, the pure size and power of these companies give their anti-reform arguments undue credibility. With this, they can wield their money and power in ways that prevent measures that could benefit all Americans.
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