Potential Impact of Pelosi’s Bill on the Pharmaceutical Industry

October 16, 2019

On Sept. 19, U.S. House Speaker Nancy Pelosi introduced legislation aimed at lowering the cost of prescription drugs. This article discusses the bill and notes key differences between Pelosi’s plan to address drug pricing, and other bills working their way through the legislative process. Further, this article discusses the potential impact on drug manufacturers and the pharmaceutical industry. The bill is still in the beginning phases and was presented to the House Energy & Commerce subcommittee Sept. 25. It will need to pass through the House before it is introduced to the Senate. The penalty components of the bill have sparked debate, despite presidential and bipartisan support for reducing drug prices.

Pelosi’s bill would allow the Secretary of Health & Human Services to directly negotiate prices for those drugs that the secretary determines contribute toward the greatest total cost to Medicare and are without competition, to establish a maximum fair price for each. Additionally, the bill aims to modernize Medicare Part B and Part D by reducing out-of-pocket costs and creating discount programs for eligible beneficiaries. Drug manufacturers who opt out of accepting the secretary’s negotiated rates would incur steep penalties, beginning at 65 percent of the drug manufacturer’s gross sales of the drug from the prior year. For every quarter the drug manufacturer elects not to participate, the penalty would increase by 10 percent, with a maximum penalty of 95 percent of a drug’s gross sales. This steep penalty is meant to incentivize drug manufacturers to accept the fair price.

Importantly, Democrats and Republicans have proposed several other bills targeting prescription drug prices, including separate bills introduced by Sens. Chuck Grassley (R-Iowa) and Ron Wyden (D-Ore.), Rep. Ro Khanna (D-Calif.) and Sen. Bernie Sanders (D-Vt.), and Rep. Lloyd Doggett (D-Texas) and Sen. Sherrod Brown (D-Ohio). This issue has attracted bipartisan support, as well as support from the Trump administration and from the current Democratic presidential candidates. It is likely that some version of Pelosi’s proposed bill or the other working legislative proposals will be seriously debated and passed into law.

I. Fair Price Negotiation Program and Medicare Parts B and D Reform

Under Pelosi’s bill, the secretary would determine the drugs that contribute the greatest cost to Medicare and are without competition from at least two generic, biosimilar or interchangeable biologics on the market. The secretary would then select at least 25 drugs, but no more than 250, to be subjected to negotiations to set what the secretary determines is a maximum “fair price” for each. That fair price would be available to all purchasers, not just Medicare beneficiaries. Currently, the secretary is prohibited from negotiating prescription drug prices that are covered by Medicare.

When a drug is selected to be subjected to negotiation, it would remain on the list until it is determined there is adequate competition (i.e., more than two generic, biosimilar or interchangeable biologics) in the market. The secretary would then be permitted to negotiate with drug manufacturers to establish a maximum fair price. The specifics of how these negotiations would proceed have not been addressed, though the bill provides that the secretary would consider the following factors when determining the fair price:

  • Research and development costs
  • Market data
  • Unit costs of production and distribution
  • Comparison to existing therapeutic alternatives

The bill further seeks to reduce overall drug costs by implementing measures to reduce drug prices that have increased above inflation rates. Drug manufacturers would be required to either reduce prices of Part B and Part D drugs that rise above the rate of inflation, or rebate to the Treasury the entirety of those price increases since 2016. Additionally, the bill seeks to modernize Medicare Part B and Part D by enacting the following measures:

  • Reducing out-of-pocket costs for Medicare Part D beneficiaries, including adding a $2,000 out-of-pocket cap on prescription drugs for Medicare beneficiaries and the disabled
  • Establishing a manufacturer discount program for Part B and Part D beneficiaries by requiring manufacturers to provide certain beneficiaries access to discounted prices
  • Reducing the amount the federal government pays toward Part D and increasing the costs endured by insurers and drug manufacturers
  • Establishing limits on price increases for Medicare Part B and Part D drugs

In addition, the bill would allow Medicare Advantage and Part D plans to negotiate even lower prices than what the secretary is able to achieve. Further, drug manufacturers would be required to offer the fair price to private insurers, the Veterans Affairs (VA) system and TRICARE. If a drug manufacturer charges Medicare more than the fair price or fails to offer the fair price to other payors, the secretary could impose civil monetary penalties equal to 10 times the difference between the price charged and the fair price.

Pelosi’s bill differs from several other bills that have been proposed by Democrats and Republicans to target prescription drug prices. A proposal by Rep. Doggett and Sen. Brown similarly would allow the secretary to negotiate drug prices with manufacturers, but instead of manufacturers receiving steep monetary penalties for failing to accept the negotiated rate, the secretary would be able to offer another manufacturer a competitive license to produce a generic version of the drug at the negotiated lower price, regardless of whether the drug is under an active patent. Additionally, bills by Rep. Khanna and Sen. Sanders would not allow the secretary to directly negotiate prices. Instead, the secretary would be permitted to label a drug as “excessively priced” when compared to the value of other drugs in countries such as Canada, the United Kingdom and Germany. As a result, the manufacturer would lose its patent protections, thus allowing new competitors to enter the market to develop generics. This proposal has raised concerns that too many drugs will be labeled as “excessively priced” and lead to reduced market competition.

II. Overall Impact

Critics of Pelosi’s bill have voiced concerns that allowing the secretary to set prices would inhibit treatment innovation and impede competition by slowing drug development. Though it is too soon to tell, since the U.S. is responsible for a large portion of pharmaceutical research and development, depending on how successful the secretary is at setting the fair price, this could lead to fewer manufacturers spending money on developing new therapies if they are unable to recoup their losses. Further, critics note that the bill does not address ways to reduce monopoly power over prescription drugs and worry that the 25 drug minimum does not go far enough.

If the bill is enacted, it would largely impact manufacturers who produce drugs that are reimbursed by Medicare Part B and Part D. As stated above, drug manufacturers may also decide that investing resources in developing competing drugs is not worth the time and money spent, depending on the rates established by the secretary and the length of time they are listed as bound by a negotiated fair price.

Though the penalties associated with Pelosi’s bill are meant to incentivize drug manufacturers to accept the fair price, such penalties may have the opposite effect of causing drug manufacturers to stop producing and investing in drugs that are reimbursed by Medicare Part B and Part D. Additionally, drug manufacturers may seek to shift the costs toward private payors who are not bound by the negotiated rates, therefore leading to fewer private payors covering these drugs as well.

Finally, the bill does not account for rare and orphan drugs that are often costly to produce and emerge with little to no competition available on the market. These drugs, which tend to be set at higher prices to allow drug manufacturers to recoup money spent on research and development, could theoretically be included automatically on the list of top 250 drugs and stay on the list until competitors are produced. However, as these drugs are new, it would be difficult to determine their “total cost to Medicare,” as required when determining which drugs will be included on the list. Therefore, this may provide some comfort that these drugs may not be subjected to the fair price immediately upon entry. Ultimately, drug manufacturers that produce drugs that do not have adequate competition on the market will need to assess the business risks associated with the bill and decide whether to continue producing Medicare Part B and Part D drugs, or shift toward other drugs that are not typically reimbursed by Medicare.

Please reach out to one of the authors or your regular McGuireWoods attorney if you have any questions about this bill.

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