The Senate Finance Committee is reportedly making strong progress toward finalizing bipartisan drug pricing legislation.
This is a positive step forward toward lowering healthcare costs and follows recent action by the Senate Health, Education, Labor, and Pensions (HELP) Committee in proposing surprise billing legislation designed to protect patients and make the healthcare system less opaque.
While the interest of lawmakers in reforming the healthcare system is a positive, recent press reports suggest that the Finance Committee is considering including an inflationary rebate penalty to Medicare Part D in their proposal.
Under this plan, a manufacturer would be required to pay a penalty in the form of a rebate if the price of a medicine rises faster than inflation.
This proposal is misguided and threatens to erode the existing, market-based structure of Medicare Part D. Part D works because it facilitates negotiation between pharmacy benefit managers (PBMs), pharmaceutical manufacturers, and pharmacies.
At the core of this program is the non-interference clause which prevents the secretary of Health and Human Services (HHS) from interfering with the robust private-sector negotiations.
An inflationary rebate would undermine non-interference and could disrupt incentives for negotiations between stakeholders. Manufacturers would be on the hook for any price increase in a way that would limit leverage in negotiations.
Private sector negotiations already lower costs for patients and promote access through existing rebates and discounts. These may be crowded out by this new rebate at the expense of consumers. In addition, PBMs already negotiate price protection rebates that establish a private sector cap on the increase of medicines.
The Part D program has a record of success. Since it was first created, federal spending has come in 45 percent below projections – the CBO estimated in 2005 that Part D would cost $172 billion in 2015, but it has cost less than half that – just $75 billion. Monthly premiums are also just half the originally projected amount, while 9 in 10 seniors are satisfied with the Part D drug coverage.
Moving forward, lawmakers should enhance market-based competition in order to put downward pressure on costs and promote increased access. An inflationary rebate penalty would distort the incentives to negotiate efficiencies and would allow the government to set arbitrary prices.