Issue Brief: Protecting Medicare Drug Price Negotiations
Policymakers must avoid policies that would keep prices high and reduce savings by expanding negotiation exemptions and delays
Issue Brief: Do Not Undermine Medicare Drug Price Negotiations
Background
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA), which for the first time empowers Medicare to negotiate drug prices directly with pharmaceutical manufacturers. The Congressional Budget Office (CBO) has estimated that in the first six years negotiated drug prices are available through Medicare, the government will save nearly $100 billion. Savings are projected to increase with time, reaching $25 billion in 2031 alone. Medicare enrollees will save billions more through lower premiums and reduced out-of-pocket costs stemming from negotiations.
In response to the new law, prescription drug corporations are suing to stop its implementation and lobbying for changes to undermine the ability of the Medicare drug price negotiation program to lower prices. This brief will explain why lawmakers should oppose proposals to exempt or delay negotiations for some drugs.
The bottom line is that lengthening negotiation delay periods and widening loopholes to exempt more drugs from negotiations would keep prices higher for longer, reducing savings for patients and taxpayers.
An overwhelming majority of Americans support Medicare negotiating prices for more drugs, not fewer. Policymakers should reject proposals to weaken Medicare drug price negotiation and instead build on the law to combat more pharmaceutical price gouging and increase savings for patients and taxpayers.
Negotiation Delay Periods
The IRA establishes strict and narrow parameters to determine what prescription drugs are eligible for negotiation, and of those eligible drugs, which and how many CMS is required to select for price negotiations each year.
One such limitation restricts eligibility for Medicare price negotiations to single-source drugs approved at least seven or 11 years ago, for small-molecule drugs and biologics, respectively. Negotiated prices become available through Medicare plans at least nine or 13 years after a product first receives marketing approval. Some policymakers have proposed legislation that would increase the negotiation delay period of small-molecule drugs by four years, while others are seeking to invent a new category of drugs in the Medicare drug price negotiation law that similarly would lengthen the delay period for some small-molecule drugs by four years.
Members of Congress should reject proposals[1] to lengthen the period that Medicare is prohibited from negotiating prices of expensive, high-spend drugs. Instead, policymakers should eliminate negotiation delay periods, or at the very least shorten them.[2]
The prescription drug lobby has argued that the delay period for small molecule drugs should be lengthened by four years to match that of biologic drugs. But studies have shown that small molecule drugs typically enjoy market exclusivity for around 12–14 years before generic competitors enter the market. If the negotiation delay period was increased to 13 years for all or some small molecule drugs, as some legislators have proposed, it would effectively exclude many of these medicines from negotiations entirely, or shorten the period patients have access to lower negotiated prices to only one or two years before generics enter the market, blunting the impact of the law.
While the IRA empowers Medicare to negotiate prices of some older drugs with high Medicare spending, its negotiation delay periods prohibit the government from negotiating lower prices for drugs newly on the market. Meanwhile, drug corporations are spiking drug launch prices to new heights year after year. Drug corporations set the median list price for newly launched drugs in 2023 at $300,000, up from $220,000 in 2022, and $180,000 in 2021. From 2008 to 2021, drug companies increased drug launch prices exponentially by 20% per year. Further reforms that build on the progress of IRA to address prescription drug prices at launch are needed.
Before the passage of IRA, an overwhelming majority of congressional Democrats supported the Elijah E. Cummings Lower Drug Costs Now Act, H.R. 3, which would have enabled Medicare to negotiate prices for high-spend prescription drugs regardless of how long ago they were approved. Through allowing Medicare to negotiate prices of more drugs without negotiation delay periods and through other improvements, the Medicare drug price negotiation system proposed under H.R. 3 was projected to save $456 billion over ten years – more than four times as much money as that passed into law under the IRA.
Orphan Drug Exemption
In addition to the single-source requirement, long delay periods noted above, and other limitations, the IRA excludes from negotiation all prescription drugs approved solely for one rare disease or condition, which is known as the orphan drug exemption (ODE). Now, pharmaceutical corporations are seeking to pass legislation to widen this loophole even further, (1) by expanding the ODE to drugs approved for more than one rare disease or condition, and (2) lengthening the delay period before drugs first approved for an orphan indication may be negotiated.
Members of Congress should reject any proposal to exempt and delay price negotiations for even more expensive medicines by widening the ODE loophole. Instead, Congress should pass legislation to allow price negotiations on all costly medicines.
While the proponents of the ODE argue it is needed to preserve innovation for rare disease treatments, the reality is that the United States already provides robust support for research and development of treatments for rare diseases, and this loophole is shielding from negotiations expensive drugs on which Medicare spends billions of dollars annually.
To support and provide incentive for rare disease treatments, currently the FDA grants prescription drug companies developing products to prevent, diagnose or treat a rare disease or condition with orphan drug designation, which qualifies the sponsors of such products with tax credits covering up to 25% of eligible clinical trial expenses, an exemption from user fees, and the potential to receive seven years of marketing exclusivity for orphan indications after approval.
Additionally, the IRA includes a series of measures to restrict and prioritize negotiations of only the costliest medicines for Medicare. The IRA limits Medicare drug price negotiation eligibility exclusively to prescription drugs on which Medicare spends more than $200 million annually and CMS is required by statute to select for negotiations the eligible drugs on which Medicare spends the most.
Even before being radically expanded, the current ODE loophole is exempting drugs representing billions of dollars in annual Medicare drug spending from negotiations. In 2021, Medicare spent $10 billion on drugs with a single orphan indication, which are exempted under current law. Drugs with a single orphan indication that would have otherwise been eligible for negotiation were it not for the ODE had the law been effect from 2012-2021 accrued a median of $11 billion in cumulative global revenues. The authors of the orphan drug Medicare spending study noted:
By virtue of the $200 million per year in Medicare spending requirement, it is likely that any drug eligible for the sole orphan exemption is among the most financially successful of all drugs treating a single rare disease. These results suggest that exempting sole orphan drugs from Medicare negotiation will offer generous benefits for a small handful of products that have already achieved meaningful financial success.
Expanding the loophole would exempt drugs which accrue tens of billions of dollars from Medicare negotiation, and further delay negotiations for drugs representing tens of billions more. Analysts found that of the $2.1 trillion Medicare Part B and D spent on drugs from 2012 through 2021, $77 billion was spent on sole orphan drugs, $108 billion on drugs with multiple orphan indications, and $75 billion on drugs first approved with an orphan indication and subsequently approved for a non-orphan indication.
Conclusion
Medicare drug price negotiation represents an important step forward in regulating drug prices in the United States, but loopholes and restrictions included in the law already impose limits on savings for patients and taxpayers.
Instead of building more roadblocks to Medicare and patients receiving fair prescription drug prices, members of Congress should eliminate the orphan drug exemption and negotiation delay periods entirely, allow price negotiations on all costly medicines, and expand access to negotiated prices beyond Medicare.
Please feel free to reach out to Public Citizen Access to Medicines Advocate, Steven Knievel (sknievel@citizen.org), with any questions or to discuss Medicare drug price negotiation further.
[1] The EPIC Act (H.R. 1492 / S. 832) would lengthen the negotiation delay period for small molecule drugs by four years. The MINI Act (H.R. 1672) would lengthen the negotiation delay period for a subset of small molecule drugs. The ORPHAN Cures Act (H.R. 946) would exempt prescription drugs with multiple orphan indications from negotiation and delay negotiations for drugs first approved for non-orphan indications.
[2] The SMART Prices Act (S. 1264, 118th Congress), sponsored by Sen. Klobuchar and cosponsored by 29 senators, proposed to reduce both small molecule and biologic exclusivity periods to three years, making negotiated prices available five years after a product enters the market, consistent with a Biden Administration budget proposal.