Despite strong conservative opposition, the Senate Finance Committee recently approved the Prescription Drug Pricing Reduction Act (PDPRA), legislation that would impose another price-setting mechanism on the U.S. healthcare system.
While supporters continue to call for full Senate consideration of this proposal, lawmakers should reject the PDPRA. The bill disrupts the existing structure of Medicare Part D and does nothing to directly help seniors.
The PDPRA imposes an inflationary rebate penalty on Medicare Part D drugs. This provision would force manufacturers to pay the government a 100 percent fee when the list price of a drug increases faster than inflation.
This provision is problematic because Part D is a system that relies on competition between several stakeholders, namely pharmacy benefit managers (PBMs), insurers, and drug manufacturers. The penalty is imposed on one Part D stakeholder, the drug manufacturer, after the price has been negotiated between several stakeholders. Essentially, the government is handcuffing the ability of manufacturers to negotiate on a level playing field with insurers and PBMs.
The Proposal Undermines Part D Competition
Some PDPRA supporters claim that this policy is nothing more than the government placing a cap on the subsidies that manufacturers receive. This is misguided –– the federal government does not pay subsidies to drug manufacturers.
The government makes payments to insurers based on the negotiated price of a drug which includes substantial discounts off the list price. In actuality, this policy will disrupt existing negotiation in Part D. In fact, as noted by Doug Badger, this policy is “at odds with the Part D program’s reliance on private entities to negotiate discounts on behalf of seniors.”
Instead of having the government directly provide care, Medicare Part D leverages competition between pharmacy benefit managers (PBMs), pharmaceutical manufacturers, plans, and pharmacies to provide coverage to seniors. This lowers costs and maximizes access for seniors.
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.
This structure has been successful in driving down costs. 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.
Existing Part D Negotiation Already Protects Against Price Increases
“Price protection rebates” negotiated between PBMs and manufacturers are an example of existing Part D negotiation. Today, almost 100 percent of medicines are subject to these rebates.
Under these agreements, any price increase past a predetermined threshold results in increased rebates from the manufacturers to the PBM.
In effect, this establishes a private sector ceiling or cap on the amount by which the price of a medication can increase.
On the other hand, the inflationary rebate penalty could create a perverse incentive for manufacturers to automatically increase the list price of their drugs each year to keep pace with inflation.
There is Strong Opposition from Conservative Groups and Senators
While supporters of PDPRA claim that the bill is bipartisan, there is significant opposition on the right.
An amendment to strip out the inflationary rebate penalty – the key provision of PDPRA – was supported by 13 out of 15 Republican Senators on the Finance Committee when it was offered in July.
The amendment was offered by Senator Pat Toomey (R-Pa.) and supported by Senators Mike Crapo (R-Idaho), Pat Roberts (R-Kan.), Mike Enzi (R-Wyo.), John Cornyn (R-Texas), John Thune (R-S.D.), Johnny Isakson (R-Ga.), Rob Portman (R-Ohio), Tim Scott (R-S.C.), James Lankford (R-Okla.), Steve Daines (R-Mont.), and Todd Young (R-Ind.)
There is also strong opposition from conservative groups. Almost 20 conservative groups including ATR wrote in opposition to PDPRA when the legislation was released in July.
The Rebate Penalty Does Nothing to Directly Help Seniors
Not only is the proposal unpopular and disruptive to Part D, it would do little to directly help reduce seniors drug costs. Any revenue generated from this penalty goes directly into government coffers, not to seniors that may need help affording their medicines.
The proposal may actually have the opposite effect of crowding out the existing rebates and discounts which flow through to patients.
In sum, the inflationary rebate penalty imposes a price-fixing mechanism into the Medicare Part D system by forcing manufacturers to pay a 100 percent fee if the list price of a drug increases faster than inflation. The revenue generated from this penalty would go straight to the government, and would do nothing to directly reduce drug costs. Congress should reject the PDPRA.