Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
On January 17, the Biden administration announced the list of the next 15 drugs that Medicare will set prices for, with the prices set to take effect in 2027. The Biden administration faced a statutory deadline of February 1 to select the drugs. The drugs chosen this year have a few things in common that will contribute further to bad incentives for manufacturers: They’re all small molecule drugs, many of them are oncology and chronic disease drugs with large development costs and risk, and they were all chosen based on the Centers for Medicare and Medicaid Services (CMS) 2023 decision to change the agency’s traditional definition of “total gross costs.” As Paragon has previously written, these are not actual negotiations, but administrative price setting and they will lead to many harmful effects, including both a loss of pharmaceutical innovation and patient harm.
The second round of “negotiated” prices was announced three days shy of President Trump’s inauguration on January 20. It is highly unlikely that the Trump administration would be able to make changes to this list by the February 1 statutory deadline, as key HHS and CMS officials are not yet in place.
The deadlines for the annual “negotiation” process are sealed in statute and are as follows:
All 15 of the chosen drugs selected for “negotiation” are small-molecule drugs. As the chart below shows, they include GLP-1s (weight loss and diabetes drugs like Ozempic), cancer drugs, and treatments for type 2 diabetes, arthritis, asthma, bipolar disorder, and rare diseases like Huntington’s.
CMS chose these drugs based on the agency’s definition of “total gross costs”, which they redefined as excluding rebates and discounts in their April 2023 rule implementing the IRA’s Part D “negotiation” process. The problem: Most of these drugs are heavily discounted and rebated but CMS is ignoring all discounts and rebates already being applied to the drugs. The Part D program has historically defined total gross costs as including rebates and discounts (and Congress had assumed that definition would remain consistent after passage of the IRA), but looking at the more meaningful net costs rather than gross costs would produce “savings” that weren’t as large to promote on the campaign trail.
CMS’ definition change, which occurred after the passage of the IRA, produces a much bigger, albeit less meaningful, number to promote. CMS claims these drugs accounted for $41 billion in total gross costs to Medicare, but in reality, they cost the program much less since net costs, those that reflect rebates and discounts, are what actually matter.
Benedic Ippolito of the American Enterprise Institute noted that the “negotiated” prices of the 10 drugs chosen last year were not much lower than the discounts and rebates that Part D plans had already obtained on those drugs. Adam Fein pointed out that seven of those 10 drugs were already available at very low cost (less than $52 in out-of-pocket costs per prescription to beneficiaries), and the other three were used by a very small number of Medicare enrollees.
The second round of “negotiated” drugs on average account for 64 percent fewer Part D enrollees per drug than the first list. According to CMS, 5.3 million people with Part D coverage – or about 10 percent of total enrollees – used the 15 proposed drugs for this year’s “negotiation”. Total spending for some of these drugs is less than $1 billion, and seven of the drugs are used by less than 35,000 Part D enrollees.
The inclusion of many cancer and chronic disease drugs, both of which are extremely expensive to develop, may discourage new treatments in this area. Medicare only just recently approved GLP-1s for coverage, despite federal statute banning coverage of them for weight loss. Current GLP-1 treatments have demonstrated their ability to significantly reduce weight, but many patients must continue maintenance dosing to maintain their desired weight. The GLP-1s on the list include three separate drugs in that class – the “total gross spending” amount is based on the active ingredient, not the individual drug.
The active ingredient is not the only part of a drug that matters – different drugs with the same active ingredient will contain different compounds that will affect how the drug is administered and absorbed by the body as well as the side-effects experienced by the patient. Price-setting based on the active ingredient is essentially a direct disincentive to produce more drugs of the same class or improve upon a drug once its active ingredient is on the market. CMS said in its June 2023 guidance that the goal of this policy was to stop manufacturers from making minor modifications to drugs to evade being eligible for negotiation, but in reality, this is likely to reduce incentives for manufacturers to create modifications that will help patients.
CMS’ decision to select small molecule drugs for all 15 of the drugs for “negotiation” will likely compound the inherent flaws in the IRA, specifically the problem of small molecule drugs being eligible for “negotiation” earlier than biologics. In the IRA, small molecule drugs (e.g. typically pill-based, such as a standard blood pressure medicine) are eligible for “negotiation” nine years after approval by the Food and Drug Administration (FDA). However, biologics (new drugs derived from living organisms that are typically administered through infusion or injection) are only eligible for “negotiation” 13 years after FDA approval. This has obvious consequences: Manufacturers have begun to divest from small molecule drugs, even pulling the plug on some in development. It’s not just that this “pill penalty” incentivizes less investment in small molecule drugs, it inherently incentivizes more investment and development of high-cost biologics to replace existing small molecule drugs that would otherwise be cheaper.
Given the February 1 statutory deadline and the normal time it takes to set up a policy process in a new administration, this list of 15 drugs will almost certainly be the list of drugs “negotiated” this year. What the Trump administration does have, however, is control over the “negotiation” process. This means there is an opportunity to factor in the actual value of these drugs to their recipients, and not just the nonsensical definition of “gross cost” that the Biden administration preferred. The Trump administration may want to consider including the current value of discounts and rebates as it goes back and forth with manufacturers to try to ensure that we don’t end up discouraging (at least by as much) the development of more and better treatments.
Additionally, policymakers should look holistically at the process for next year and start making reforms. Some in Congress are considering a repeal of the drug price “negotiation” provisions of the IRA. While the political barriers may make repeal difficult, Congress can still take steps to reduce the harms produced by the IRA, including basing the drug list off total net spending that includes existing rebates and discounts, harmonizing the time periods after which small molecule drugs and biologics are eligible for “negotiation,” and factoring the number of generics available or awaiting approval for a given drug. Doing so would likely provide better value to beneficiaries and taxpayers and diminish perverse incentives that harm pharmaceutical innovation. Meanwhile, the Trump administration could stick to the statutorily required MFP as the largest discount required while they determine how to modify the “negotiation” process going forward.
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