Whether it's mere political posturing or a genuine prescription to control U.S. drug prices, a Democratic plan taking shape in the House provides an idea of what direct government negotiation might look like.

A summary of H.R. 3, which is still under development, focuses on measures giving Health and Human Services (HHS) the power to directly negotiate some drug prices – not just for Medicare, but for private insurers and other government programs as well. To ensure drug manufacturers come to the table, the plan proposes a noncompliance fee equal to 75% of the gross sales of the drug the previous year.

"This steep, retroactive penalty . . . gives the HHS Secretary leverage without resorting to a restrictive formulary and without the interruptions of contracting, building and approving a whole new production line," according to a summary of the initial proposal that's circulating on Capitol Hill this week.

Once a drug's price is negotiated, subsequent price increases would be limited to the rate of inflation. However, either the manufacturer or HHS could request a renegotiation if new information became available.

If, after agreeing to a price, a drug manufacturer were to overcharge Medicare or failed to offer the negotiated price to other payers, the manufacturer would be subject to a civil monetary penalty 10 times the difference.

Incorporating one of the Trump administration's suggestions, the House Democratic plan would use an international price index to set a maximum price for a negotiated drug. That upper limit would be no more than 1.2 times the volume-weighted average of the drug's price in Australia, Canada, France, Germany, Japan and the U.K.

In negotiating a price, the plan calls for HHS to consider the drug's R&D and production costs, alternative treatments and the value of the drug, and domestic and international sales information. What wouldn't be considered is a manufacturer's R&D costs for the many promising drugs that fail in development. The biopharma industry often cites the cost of failure as a big factor in drug pricing.

The rough draft of H.R. 3 proposes HHS negotiate "as many as possible of the most costly 250 drugs each year." It defines those drugs as the ones with "the greatest total cost to Medicare and the entire U.S. health system without competition from at least two generic, biosimilar or interchangeable biologics on the market."

Of course, that number and definition could be subject to change, as some Democratic lawmakers have been pushing for direct HHS negotiation of all drug prices. Others would like to see negotiations prioritized for a fewer number of drugs that have the heaviest toll on the system.

Currently, 150 drugs covered by Part D account for nearly half the spending in that program, and 50 drugs account for 82% of the spending in Medicare Part B, according to the summary.

Ambitious proposals, recurring themes

Calling some of the negotiating proposals in Title I of the draft "extremely ambitious," Evercore ISI analyst Umer Raffat said, "The sheer ambitiousness of the proposals does make one wonder: was it intended to get something done? Or was it intended to provide armor in an election year?"

The weight of the proposal depends on whether President Donald Trump gives it any momentum, Raffat said. "It is my understanding that although [the] White House has engaged with [House Speaker Nancy] Pelosi on drug pricing initiatives, it was mostly to stay in the loop – rather than to form a joint front of sorts," he added.

As of press time, Trump had not commented on the House Democrats' plan and others in his administration also appeared to be focused on other issues.

Title II of the draft deals with what Raffat described as "recurring themes" that would continue to put pressure on the pricing of Part D drugs. That part of the bill is intended to simplify the benefit design of Part D and realign incentives to encourage more efficient management of drug spending.

The draft would eliminate the Part D coverage gap and establish a 25% cost-sharing between the annual deductible and the catastrophic threshold. It also would eliminate cost-sharing during catastrophic coverage. Additionally, Title II would reduce federal reinsurance payments, making Medicare responsible for 20%, with insurers and manufacturer being responsible for the remainder of total drug spending during catastrophic coverage. The draft doesn't specify the insurer/manufacturer split.

The provision would sunset the current coverage gap discount program in which manufacturers pay 70% of drug costs, replacing it with a new discount program in which manufacturers would provide discounts from the negotiated prices in both initial and catastrophic coverage. The discounted prices would be provided at the point of sale.

Inflation rebate

Title III of the bill would subject all Part B and D drugs to a new inflation rebate, using 2016 as the base year. Manufacturers that have increased the price of their drugs above the rate of inflation since 2016 would have to lower the price or rebate the difference to the U.S. Treasury.

"Setting the base year of inflation as 2016 would wipe out the last three years of price hikes in Medicare Part B & D, lowering prices further and for more drugs than the Senate Finance inflation rebate," according to the House summary, which referenced a rebate included in a drug pricing package that passed the Senate Finance Committee in July on a vote of 19-9. (See BioWorld, July 26, 2019.)

Some of the Republican senators who voted against the Finance bill specifically opposed the inflation rebate. In offering an amendment to remove the provision from the bill, Sen. Patrick Toomey (R-Pa.) called the rebate, which also would apply to Part B drugs, a "sledgehammer of a universal price control imported from Medicaid."

Sen. James Lankford (R-Okla.) raised another concern about the perverse impact an inflationary rebate could have. Currently, not every drug gets a price increase. "If we put a cap, every drug will go up by that amount because they can," he said.

The Pharmaceutical Research and Manufacturers of America criticized the Senate inflation rebate for another reason, noting that rebates paid to the government do nothing to lower drug costs for patients.

Although most of the Republicans on the Senate committee supported Toomey's amendment to strike the inflation rebate from the bipartisan pricing package, a few voted against it. As a result, the amendment failed on a 14-14 tie vote, signaling that there might be enough support to get such a rebate passed in the Republican-controlled Senate.

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