Recent media reports indicate that lawmakers and the administration are considering imposing new price controls on Medicare and Medicaid as part of a deal to raise the budget caps and raise the debt ceiling.
House Speaker Nancy Pelosi (D-Calif.) has demanded any budget deal include spending increases with reports indicating that Democrats want at least $350 billion in increased spending over the next two years.
Fortunately, Republicans in the House, Senate and White House are standing firm against using tax increases to pay for this new spending.
However, in order to pay for her new government spending, Medicare cuts that include innovation-stifling price controls are being discussed.
One such scheme, the Inflation Cap, would undermine the competitive, market-driven model in Medicare Part D, and slow innovation without any patient benefit. ATR urges members to reject this proposal:
- Part D works because it facilitates negotiation between different stakeholders. The system puts downward pressure on costs through competition between pharmacy benefit managers (PBMs), pharmaceutical manufacturers, plans, 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. The Congressional Budget Office has even said that there would be a “negligible effect” on Medicare drug spending from ending non-interference.
- An inflationary rebate penalty will undermine this by instituting a price fixing mechanism. Conservatives have long opposed price controls because they utilize government power to forcefully lower costs in a way that distorts the economically-efficient behavior and natural incentives created by the free market. When imposed on medicines, price controls suppress innovation and can severely limit access to new medicine. Over the long term, price controls deter the development and supply of new life saving and life improving medicines to the detriment of consumers, patients, and doctors.
- An inflationary rebate penalty would do nothing to directly help seniors as there would be no tangible benefit in terms of bringing their own costs down. The federal government is the only direct beneficiary of these financial penalties. The revenue generated from this penalty would likely be used for other spending purposes rather than offsetting individuals’ drug costs. Undermining Part D with an inflationary rebate may also crowd out existing rebates and discounts which flow through to patients.
- Existing Part D negotiation already protects against price increases. Almost 100 percent of medicines are subject to “price protection rebates” negotiated by PBMs which effectively establishes a private sector ceiling or cap on the amount by which the price of a medication can increase.
- The market-based structure of Part D is popular and successful. 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.
Lawmakers are also reportedly considering proposals to raise to lift the existing Medicaid rebate cap for outpatient drugs.
The current 100 percent rebate cap is a reasonable safeguard for manufacturers to ensure the subsidies they pay Medicaid are no higher than the price of the drug. Lifting the cap is bad policy and ATR urges members to reject this proposal:
- This existing formula already results in manufacturers providing roughly $42 billion every year in discounts to state Medicaid programs, but also contains a cap that prevents the discount exceeding 100 percent of AMP, a situation where the product is free for Medicaid. There are currently over 2,500 drugs that are at 100 percent of AMP.
- Lifting the cap could result in higher prices in the commercial market because manufacturers would be incentivized to reduce rebates and discounts in order to avoid further decreasing “best price.” While this would reduce the Medicaid rebate, it would increase costs for plans and consumers. In turn, this would result in new medicines being launched at higher prices due to the subsidies required by Medicaid.
- Lifting the cap could also encourage gaming of the system by turning a product into a revenue stream for the federal government and the states.