Congress is on the verge of passing historic drug pricing legislation that would allow the government to restrict prices for drugs covered by Medicare, but experts disagree on whether drugmakers will shift those costs to the private market.
The reconciliation package the Senate passed Sunday includes drug pricing provisions that Democrats have been pushing for decades, including a framework for Medicare to negotiate prices directly with manufacturers, limit price increases to inflation and cap out-of-pocket drug costs for consumers.
The bill received no Republican votes in the Senate and isn’t expected to when the House votes on it on Friday.
The bill wouldn’t directly impact the 211 million people with private insurance, but some experts say its provisions about pricing for drugs under Medicare could cause drugmakers to try to recoup some lost revenue in the private market.
Health insurers and employers are among those worried that lower prices in Medicare will lead drug companies to turn to the private market to offset losses, a theory known as cost-shifting. The concern is particularly high for insulin and other drugs that would trigger a penalty if prices rise faster than inflation.
“We are grappling with the fact that the employers are left behind in this package and think the cost shift is going to occur,” said Alan Gilbert, vice president of policy for Purchaser Business Group on Health, a coalition of large employers that buy health insurance for their workers.
“It is inevitable that when you squeeze one end of the balloon, you see the bubble on the other side,” Gilbert said.
But some experts question the cost-shifting theory, which they argue means drug companies are currently leaving money on the table.
“For this to be possible, it would have to be the case that drug companies possess the ability to increase profits in the commercial market today but choose not to do so,” said Loren Adler, associate director of USC-Brookings Schaeffer Initiative for Health Policy.
Inflation penalties and insulin caps
The Senate voted to remove a $35 monthly cap on copays for insulin in commercial plans, and the Senate parliamentarian rejected a provision factoring commercial prices into a penalty on drugmakers that raise Medicare prices faster than inflation because it ran afoul of budget reconciliation rules.
Democrats instead had to accept limiting those two provisions to Medicare. Seven Republicans voted in favor of the private-sector insulin cap in floor action that ran from Saturday to Sunday, but that still fell short of the 60 votes needed.
Senate Majority Leader Charles E. Schumer, D-N.Y., said on MSNBC Monday night the chamber would revisit the policy.
“We’re going to come back and make them vote on that again,” he said of Republicans.
The Pharmaceutical Care Management Association, which represents pharmacy benefit managers, said commercial insulin copays currently average $23. But a Kaiser Family Foundation analysis illustrates considerable variation across the private sector, with the highest costs concentrated in the individual and small group markets.
People with high-deductible plans or no insurance coverage at all are suffering the most, KFF Medicare Policy Deputy Director Juliette Cubanski noted.
“An average is an average, right?” she said. “So some people pay less and some people pay more.”
Medicare Part D insulin copays, by contrast, average $54 — more than 50% above the $35 cap Democrats are seeking.
It’s hard to see how drugmakers, pharmacy benefit managers and insurers would take that hit, said Jackson Hammond, a health care policy analyst at the American Action Forum.
“Those expenses are going to be recouped in the private market,” he said.
Cubanski said the bill’s inflation penalty for Medicare prices also runs the risk of introducing a “wrinkle” into pricing dynamics for drugs more broadly.
The original language calculated the penalty based on prices in the Medicare and commercial markets, which would have created a financial disincentive for drugmakers to raise private sector prices.
But the new language excludes private sector prices from the calculation. Drugmakers might therefore be more willing to hike prices on products with low Medicare uptake and absorb the penalty if the private sector profits eclipse the loss, Cubanksi said.
“It still seems more complicated than straightforward in terms of how exactly this will play now that it no longer applies to the commercial market,” she said. “But I think on balance, there’s still some effect we can expect from the inflation provision on constraining price growth in the commercial market because of the way that the measure of price is calculated.”
About 12% of private health insurance spending in 2020 was on retail prescription drugs, on par with the past five years, according to the Centers for Medicare and Medicaid Services’ National Health Expenditure data.
Studies on the impact of inflation penalties in other drug programs show they help slow price increases for other payers, said Sean Dickson, director of health policy for West Health Policy Center, and the provisions in the reconciliation bill will likely have the same “positive spillover effect.”
“We found that even when an inflation penalty was only for a portion of drug sales, it did end up reducing the size of price increases for everyone,” Dickson said.
But Spencer Perlman, managing partner at investment advisory firm Veda Partners, agreed that drugmakers could still raise commercial prices with “relative impunity” if the drug has low Medicare market share. All told, he said in an investment note, the bill is the “second-best outcome for industry.”
“While it is undeniably worse than the status quo and will disproportionately impact specific drugs and manufacturers, in aggregate we believe the reforms are relatively modest, adaptable, and manageable, allowing for substantial growth in coming years for national prescription drug spending, and profitability.”
