“This will not only lower the cost of prescription drugs and health care for families, it will reduce the deficit and help fight inflation.”
— President Biden, in a statement on health-care provisions in pending Senate bill, July 15
After months of negotiations, the president’s expansive “Build Back Better” plan has shrunk to a handful of items, principally in the area of health care. In particular, the emerging bill would achieve a long-sought Democratic goal of allowing Medicare to begin to negotiate the price of certain prescription drugs.
With overall inflation raging at 9 percent, the White House is eager to portray any action as an element to bring price inflation down. But how likely is it that the prescription-drug provision in this bill will make a difference?
It’s a surprisingly complicated question. Let’s take a look.
On the face of it, the latest U.S. government report would suggest prescription-drug costs are not a big part of the inflation problem.
The Bureau of Labor Statistics reported the consumer price index for All Urban Consumers (CPI-U) increased 1.3 percent in June — and over the last 12 months; the all-items index increased 9.1 percent.
Buried in the report it shows the index for prescription drug prices grew just 0.1 percent in June and 2.5 percent over the last 12 months. That’s much lower than the overall inflation rate.
These numbers reflect the fact that generic drugs now make up 90 percent of the prescriptions in the United States, according to the Congressional Budget Office. Brand-name drugs — with no generic equivalent — make up a significant portion of the spending.
In Medicare Part D, which helps cover cost of prescription drugs, the 250 top-selling drugs with one manufacturer and no generic competition amount to only 7 percent of the covered drugs but 60 percent of net total spending, according to an analysis by the Kaiser Family Foundation? Meanwhile, in Medicare Part B, which provides medical insurance, the top 50 drugs covered under Medicare Part B represent 8.5 percent of covered drug but 80 percent of Part B drug spending, the analysis said.
A separate KFF study released in February found that one-third of Medicare-covered drugs had price increases of 7.5 percent or more — which at the time was the annual inflation rate.
“Generic prices are low and falling, and brand-name prices are high and rising,” said Benjamin Rome, who teaches at Harvard Medical School and who recently co-authored a study in the Journal of the American Medical Association (JAMA) on prescription drug costs. “The combination of these two trends means that overall drug inflation is low.”
The JAMA study examined 95 percent of the drugs first marketed in the United States between 2008 to 2021 — a total of 548 — and found that average prices grew by 20 percent per year. “Prices increased by 11 percent per year even after adjusting for estimated manufacturer discounts and changes in certain drug characteristics, such as more oncology and specialty drugs (eg, injectables, biologics) introduced in recent years,” the study said.
There’s often a big difference between a drug’s list (gross) price and a drug’s net price. That’s because of a variety of rebates to commercial payers, Medicare and Medicaid, discounts provided to hospitals because of the 340B Drug Pricing Program and manufacturers’ payments to pharmacy benefit managers and so forth.
Brian Newell, a spokesman for Pharmaceutical Research and Manufacturers of America (PhRMA), pointed to data on net prices by a variety of organizations to argue “the trend on drug prices is not skyrocketing.” For instance, SSR Health, an independent organization that collects and reports data on pharmaceutical prices, found that brand medicine net prices fell 0.7 percent between the first quarter of 2021 and the first quarter of 2022. And, he said, in 2020, CVS reported net drug prices grew just 1.2 percent in 2020 for their commercial clients.
Newell said there were “significant flaws” in the JAMA study, including an “apples to oranges” comparison of medicines launched recently versus those launched more than a decade ago. He said study “completely ignores savings that are generated within the system as a branded medicine overtime become generic or biosimilar products that lead to lower costs for patients and society.”
“The problem is that PhRMA is using generic/biosimilar savings to defend price increases on new brand-name products,” Rome responded in an email. “But the generic savings only occur after drugs have period of market exclusivity. The fact that we pay less for statins and blood pressure medications now than we did in the 1990s and 2000s really has nothing to do with the brand-name price trends.”
The Senate version of the bill backed by Biden contains two elements designed to stem price inflation by brand-name drugs. One empowers the Health and Human Services secretary to negotiate prices for selected drugs — 10 at first, with the number growing to 20 over time — that have little competition and account for substantial spending. So that likely would not have much of an impact on prices now, especially since government negotiation could take two years with manufacturers and negotiated prices would not begin until 2026.
Separately, the bill would require drug manufacturers to pay a rebate to Medicare for a drug if the price increased faster than the rate of inflation (CPI-U). The measure would apply to drugs covered under Medicare Parts B and D, and to private insurance. This would take effect in 2023.
That “could potentially dampen drug price increases starting next year,” said Tricia Neuman, senior vice president of KFF and executive director of KFF’s Program on Medicare Policy.
One wrinkle is that inflation is already pretty high. The KFF study on Medicare drug prices found that only 17 percent had price increases that exceeded 7.5 percent. So if inflation remains as high as 9 percent, not many rebates may be offered.
“Reducing drug costs helps with inflation in two ways,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget. “At the microeconomic level, it directly reduces the prices in the economy. And at the macro level, it reduces total spending in the economy. Both effects should be disinflationary.”
He acknowledged that “not much of the effects of this particular bill take effect in the near-term. So over the next couple of years, it’s probably doing more to help prevent inflation from bleeding into drug prices (and then bleeding back into inflation) than from cutting inflation outright.” Over time, he added, the bill “will modestly reduce the risk of persistent inflation.”
The Senate bill also would eliminate the 5 percent coinsurance for people on Medicare with very high drug costs after they reach a certain threshold in 2024. It would provide a $2,000 cap on out-of-pocket spending for Medicare Part D enrollees starting in 2025. The CBO projects the package would modestly reduce the federal budget deficit, which could also mitigate inflation.
“President Biden supports empowering Medicare to negotiate down the cost of drugs with big pharmaceutical companies,” said White House deputy press secretary Andrew Bates. “His biggest priority is to lower costs for families, and Americans are often paying 2 to 3 times as much as their peers in other countries for medicines. Undoing this special protection for Pharma would not only save consumers’ money, but taxpayers as well – reduce the deficit, which helps to counter inflationary pressures.”
The Pinocchio Test
Inflation is a top concern of Americans these days and the Biden administration is eager to show it is addressing the problem. At least one provision of this bill might begin to lower the cost of some expensive drugs next year, but a plan for the government to directly negotiate prices of some drugs will not begin until midway through the next presidential term. Given the complex debate over whether drugs costs are climbing as much as many believe, we will leave this unrated. But readers should be aware that any inflation impact of this bill would not be instantaneous.