Shifting tides
On drug pricing and Medicare reform
The Inflation Reduction Act is now officially law and with it a number of prescription drug-related reforms including Medicare Part D redesign, imposition of price negotiations (arguably demands) on a select number of high spend drugs, and mandatory rebates for price increases above inflation. The full set of drug-related provisions and when they kick in is nicely summarized in this graphic by KFF.
Some initial thoughts and questions on the bill below:
The Medicare out-of-pocket (OOP) cap of $2,000/year is a huge win for patients. There have been far too many patients in this segment that have faced unmanageable OOP costs, often foregoing medications altogether due to cost. Without the ability to use copay cards like those covered by Commercial plans, this segment (particularly those not qualifying for low income subsidy [LIS]) had the highest burden when it came to OOP cost. The new cap of $2,000 is still a large amount and arguably should be brought down much lower, but this change will help over a million patients annually and provide positive insurance value to many more.
In line with the above, the $35/month OOP cap for insulin in Medicare is a much needed change (although, here is a case where there should not be any OOP cost at all given the need and low likelihood for abuse). A sizable portion of patients with Medicare faced challenges here, especially if not qualifying for LIS or specifically enrolled in plans participating in the Senior Savings Model program that offered $35 OOP cost insulin products.
The expansion of the LIS for Part D to 150% of the Federal Poverty Line is another large relief and will bring OOP costs substantially lower than before (and much lower than even the $2,000 cap) for those now eligible.
Regarding Medicare price negotiations, what will be the mechanism by which HHS chooses what drugs will be subject to negotiation, how will a fair price be determined, and when will guidance be provided to the industry on these points? This is a large uncertainty and at least some clarity on the process could have a noteworthy impact on investment decisions today.
Some in the academic HEOR community see this as a potential window for cost effectiveness analysis to come into the picture, whether it means adoption of ICER’s recommendations or de novo analysis. One thing we know is that QALY-based measures likely cannot be utilized in diseases where mortality benefit is at play as the bill specifies: “the Secretary shall not use evidence from comparative clinical effectiveness research in a manner that treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill”. That is not to say that something like an equal value of life year gained (evLYG) measure could not be used in determining cost effectiveness for drugs used in these settings, while potentially keeping QALY-based measures for drugs focused primarily on quality of life (and not mortality benefit).
Also to be seen is how “sticky” these policies become once set and how interpretation and execution may change in Republican v. Democrat administrations.What are the long-term political implications for pharma? This is definitely outside of my area of expertise, but a lot of very smart people have suggested this legislation is the leak that could break the dam - in other words, this will be the first of a set of changes that will further push the provisions in the bill to worsen conditions for biopharma. It also seems that implicitly this is what PhRmA and BIO believe when they frame essentially any change that could have a negative impact on pharma business opportunities as an “end of the world” scenario. This seems to be the general modus operandi of all trade organizations (not just those in healthcare) from what I can tell though and there must be good reason for it (if you have references on why, please share!). At the same time, provisions like the Medicare OOP caps could potentially reduce political pressure for future reform as we see a reduction in the negative news/PR and general frustration with getting access to drugs that come with the status quo. Could this reform actually reduce the chances of future reform rather than increase it?
Similarly I wonder if the above-inflation price hike rebates will reduce negative PR enough so as to improve the political landscape for the industry.
From a profitability perspective, this policy will likely lead to a haircut for pharma, as fully increasing the launch price to makeup for later deficits (compared to the status quo) is likely not possible, although some shift could be possible depending on demand forecasts.Overall though, I think this could be a net positive for the industry again due to the reduction in negative press.
The discrepency in years until negotiation between small molecules and biologics is disappointing as it favors the more complicated (and inherently more expensive to produce) biologics. I wish this was something that could have been tweaked to make the number of years equal while keeping the bill budget neutral (as Peter Kolchinsky proposed). Unfortunately, the push for this type of change seemed largely from pharma and pharma-adjacent people, and even independent and thoughtful intellectuals seemed to have had enough of the hardlined “world is ending” dialogues to not make much of it, even though they might have agreed with the shift when directly asked.
What will PhRMA and BIO’s strategy be moving forward? It will be interesting to see how they shift messaging if at all as the bill’s provisions start to come into effect. I am particularly curious how they and member companies use potential litigation to try to thwart parts of the bill as well. I am hoping that there is at least some realization that maybe the political analysis and strategy were not completely optimal and maybe the hardlined strategy may not be the best to stick with. But time will tell.
Overall, there are a lot more questions than answers at this point and a lot of things to keep an eye out for. Net-net, to me the jury is still out in terms of what this bill means for the long term. There are parts I clearly think are counterproductive, but also others that make a lot of sense. My hope is the less productive elements can be refined and improved later, while still maintaining the gist of the broader bill that may even help improve the longer term sustainability of the drug development ecosystem.