Regulators on the Verge of Bungling Drug Price Reform, Advocates Say

The starting point for negotiations with drug companies on prescription prices could end up being the too-high prices patients already live with.

by David Dayen

May 11, 2023

5:30 AM

Tom Williams/CQ Roll Call via AP Images

People rally outside the Department of Health and Human Services building in Washington to call on Secretary Xavier Becerra to help lower drug prices, October 6, 2022.

Early preparations for the historic Medicare price negotiations with drug companies, which Democrats have lauded as fulfilling one of their most long-held promises, have advocates concerned that the much-hyped goals will not be met, and prices will remain high.

The Centers for Medicare & Medicaid Services (CMS), which is setting up the guidelines for the negotiations, has proposed to use as a starting point for negotiations the price of alternative therapeutics to the drug being negotiated. That would mean that drug prices from the current dysfunctional, high-cost system would be used as a reference to set prices in the new system. Advocates see this as misguided and circular.

"The current baseline is coming from the system that everyone agrees is so broken it required this legislation to fix it," said Alex Lawson of Social Security Works, which has signed on to letters urging CMS to change course.

The situation reveals the difficulties of taking an exceedingly worthwhile concept—lowering prescription drug prices—through the meat grinder of implementation, especially with a chief regulator that is relying far too much on rigid bureaucratic procedure, amid persistent industry lobbying.

MEDICARE PRICE NEGOTIATION, which was passed in the Inflation Reduction Act, will not affect seniors or the government's bottom line until 2026. The interim time period is being spent preparing the ground rules for negotiation and choosing the initial ten drugs that will be negotiated; that rises to 15 and then 20 drugs per year by 2029. In mid-March, CMS released its initial guidance on implementation and invited public comment, which closed in mid-April. The final guidance will be released this summer.

The initial guidance addresses a number of issues about the negotiation process, including what factors will go into the initial price determination. The drug manufacturer must submit data in advance of the negotiation, including the research and development costs for the drug, whether those costs have been recouped in the years since the drug went on the market, the current unit cost for producing the drug, whatever federal support went into developing the drug, sales volume and revenue data, market share, any pending patent applications, and the average price charged to payers outside the federal government.

But the IRA also says that CMS should consider "evidence about alternative treatments to the selected drug, as available." That means that, if there are other medications on the market that compete with or intend to deal with the same illnesses as the drug under negotiation, their price should be taken into account. CMS says it will get that information from the manufacturer and other stakeholders, as well as review existing literature and consult subject-matter experts.

Section 60.3 of the guidance, detailing CMS's methodology for developing its initial offer, has triggered the concern of advocates. This is where CMS has some leeway, because while the IRA does require a specific methodology for determining a first offer, it does not specify how the methodology should be developed.

CMS opted to use the therapeutic alternatives for the selected drug as the basis for this initial offer. If it's a monopoly drug and there are no therapeutic alternatives, CMS will consider whether the drug fills an unmet medical need based on relevant information, and estimate price from there.

More from David Dayen

Under the current system, from which these therapeutic alternatives would come, drug companies have virtually no barriers to set prices as they see fit, which is why pharmaceutical profit margins are among the highest of any sector. Medicare in particular pays much higher costs for drugs than Medicaid or the Veterans Affairs health care system, to say nothing of other countries that bulk-purchase and negotiate drug prices.

"CMS acknowledges that the therapeutic alternative(s) for a selected drug may not be priced to reflect its clinical benefit," the guidance reads. "However, using net prices … enables CMS to start developing the initial offer within the context of the cost and clinical benefit of a group of drugs that treat the same disease or condition."

Advocates reacted with alarm. "It's beyond belief why they’re negotiating using those prices," said Steve Knievel with Public Citizen's Access to Medicines program. He alleged that using existing high prices as a starting point isn't consistent with arriving at the "lowest maximum fair prices," a phrase used frequently in the statute.

A comment letter signed by Public Citizen and 19 other groups argues that negotiating maximum fair price through other methods "could help reduce the prices of the alternative therapies, since the manufacturers of the alternatives may try to compete on price with that of the negotiated product." Indeed, this is what we’re seeing today in the context of insulin, where changes to the Medicaid rebate rules not only triggered Eli Lilly—which was most at risk for owing Medicaid large sums of money in clawbacks—to reduce list prices, but led to its competitors doing the same. Competition in action!

But using therapeutic alternatives as the baseline forecloses that possibility. "It would be a huge misstep and really unfortunate," Knievel said.

CMS did say in the guidance that it would consider R&D costs and recoupment status, unit costs of production, prior federal support, and the other data collected from manufacturers, which could subsequently move the starting point up or down. "They don't just use therapeutic alternatives and call it a day," Knievel acknowledged. However, using the prices of alternatives as the initial benchmark could set prices artificially high.

A request for comment from CMS was not returned. [UPDATE: After publication, a CMS spokesperson said: "CMS is committed to collaborating and engaging with the public in the implementation of the Medicare Drug Price Negotiation Program... this initial guidance is one tool, among many, that CMS will use to ensure interested parties know when and how they can make their voices heard on implementation of this new drug law."]

THE DEVIL IS IN THE DETAILS of how else to determine a first offer. Knievel offered that R&D and unit costs should be the primary factors, modified by whether the medication is a therapeutic advancement. The pitfall is that this would have to be informed by some level of effectiveness data. "Why should the price of some poison that doesn't work be the cost of its R&D?" asked Lawson. So you’d ideally want to negotiate a price that in some way builds in the value of the drug.

But as soon as you do that, you wander into the minefield that is quality-adjusted life years (QALYs), which are often used to exclude people with disabilities who need the drugs the most. For this reason, the IRA specifically prevents CMS from using clinical evidence that "treats extending the life of an individual who is elderly, disabled, or terminally ill as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill." While absolutely legitimate, this approach limits the possibility of augmenting an R&D or unit cost approach.

Another option, of course, would be an international reference point, where prices are often several times less. That would bring the perspective of systems that base prices on public health rather than profit-taking. But international reference pricing was not included in the statute.

The least-worst alternative, advocates say, would be to look at a variety of data, which CMS is sort of doing. But baking in prices of alternative therapeutics from the jump severely damages that approach.

The pharmaceutical industry, of course, is comfortable with the idea of basing negotiations on their already high prices. In industry trade group PhRMA's comment letter, it offered little pushback on the alternative therapeutics approach. Mainly, it sought to elongate the process, by suggesting that CMS get public comment for its initial offer, and that drug industry officials get to meet three times with CMS before making a counteroffer.

PhRMA also wants manufacturers to be the primary resources to decide what a therapeutic alternative is, and asked that a "greater weight" be placed on the benefits of medications, clearly hoping to have the price offers increase on those terms. And of course, the industry lobby says, "cost cannot play a role in determination of a selected drug's therapeutic alternative or clinical comparator."

The decision on this wonky reference point could determine whether Medicare price negotiation is a triumph or an ineffective nothingburger. Given how much weight the Biden administration and Democrats in Congress have put on the historic nature of passing legislation that takes on the drug companies, they cannot afford to blow it in implementation.

David Dayen is the Prospect's executive editor. His work has appeared in The Intercept, The New Republic, HuffPost, The Washington Post, the Los Angeles Times, and more. His most recent book is ‘Monopolized: Life in the Age of Corporate Power.’

May 11, 2023

5:30 AM

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