Fighting the Prescription Drug Cost Crisis: How the New Medicaid Drug Price Negotiation Guidelines Measure Up to European Strategies for Controlling Costs

By: Claire Reynolds-Peterson

The Inflation Reduction Act (IRA) passed on August 16th, 2022, introduced a novel and historic power to the Centers for Medicare and Medicaid Services (CMS): the ability to negotiate prices of covered prescription medications directly with pharmaceutical companies.[1] This landmark legislation aims to address one of the underlying causes of the healthcare cost crisis that has raged in the United States for many years, the exorbitant cost of name-brand prescription medications. The first ten drugs selected for price negotiation were announced on August 29th, 2023, targeting therapeutically unique drugs and biologicals that have been licensed for at least 7 or 11 years respectively.[2] The selected drugs represent the highest contributors to covered prescription drug costs under Medicare Part D.[3] All of the affected manufacturers have agreed to participate in negotiations, though many of them are challenging the constitutionality of the IRA in ongoing litigation.[4]

The pharmaceutical giants challenging the legislation argue government interference in drug pricing will stifle innovation and curtail their ability to invest in novel drug development.[5] However, federal investigation of drug pricing revealed that revenue targets have often been tied to increasing executive pay, with companies spending more on stock buy backs than research and development.[6] Furthermore, pharmaceutical companies rarely perform basic scientific research, instead relying on taxpayer-funded academic research to identify drugs likely to produce commercial success based on extant preliminary data.[7] This argument is also undermined by the staggering discrepancy between prescription drugs costs in the United States versus other wealthy nations.

The United States spent $11,702 per capita on healthcare in 2020, a stunning 18.82% of the national gross domestic product (GDP).[8] Germany, France, and the United Kingdom, countries that negotiate pharmaceutical drug prices, put 12.82, 12.21, and 11.98 percent of GDP respectively to healthcare spending in 2020.[9] Approximately one in seven dollars of US healthcare spending goes to prescription drugs alone, leading to the highest per capita spending on drugs of any country— and US drug prices continue to rise rapidly.[10] Between 2016 and 2020, branded prescription drug prices rose 36%, four times the rate of inflation.[11] Germany, France, and the UK all impose control over drug price increases by prohibiting cost increases without additional regulatory review and government approval, in addition to negotiating starting prices immediately upon drug licensing.[12]

As a case study of the effects of price negotiation and capping, the cost of the multiple sclerosis drug Gilenya® was compared between these countries.[13] In the US, the drug costed approximately $84,461 per person per year (in 2022 adjusted dollars), which rose to $116,193 by 2022.[14] In Germany, France, and the UK, the drug costed $43,450, $40,899, and $39,120 US dollars per person per year, with statutory measures preventing price increases over time.[15] This result is on-par with the general trend of US brand-name drugs costing 256% of the average price other countries pay for the same medications.[16] If Medicare had been able to pay the French negotiated drug prices for the six individual drugs that incurred the greatest expenditures in 2017, the government would have saved an estimated $5.1 billion dollars.[17]

As it stands, the IRA negotiation procedures are unlikely to produce results comparable to these other countries. While the European countries set prices upon licensing, the IRA only begins negotiation after a protected period of seven or eleven years during which the pharmaceutical company may set their own price.[18] The IRA then sets a price ceiling based on average non-government manufacturer price from 2021 adjusted in accordance with the increase in the consumer price index, or the first full year after market entry if licensed after 2021.[19] This ceiling price is then reduced by a flat percentage based on how long the drug has been on the market.[20]

The IRA does not reference drug prices in other countries to aid in establishing a fair price, instead relying on domestic free market competition to control the starting price.[21] In contrast, Germany, France, and the UK do not rely on free market pricing. Instead, they look to measures including pricing in other countries (sometimes specifically excluding the US), pricing of alternative treatments, of other treatments in the same therapeutic class, and the actual cost-effectiveness of the treatment in terms of quality-adjusted life-years.[22] Given the common use of anticompetitive strategies to suppress competition and the general failure of market competition to adequately control prices, this appears to be a losing strategy for addressing unreasonable US drug costs.[23]

With lawsuits from six pharmaceutical companies and two industry groups ongoing, the longevity of the IRA provisions for Medicare drug price negotiation remains to be determined.[24] The pharmaceutical companies argue the potential reduction in their profits will stifle innovation and lead to the development and licensing of fewer new drugs in the future.[25] On the other hand, Americans across the political spectrum approve of the new negotiation power and view industry challenges to the legislation very unfavorably.[26] Based on the Congressional investigation into factors underlying drug pricing, including corporate expenditures, the threatened decrease in pharmaceutical innovation could be offset by directing a higher proportion of revenue towards research and development in the future.[27] If reining in astronomical drug prices in the US truly does have the catastrophic drawbacks threatened by the pharmaceutical industry, it may be time to question why the burden of paying such disproportionate costs in support of pharmaceutical innovation falls uniquely on American consumers.

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Citations:

  1. Inflation Reduction Act of 2022, Pub. L. No. 117–169, 136 Stat. 1818 (codified as amendments to one hundred thirty-eight different U.S.C sections); Price Negotiation Program to Lower Prices for Certain High-Priced Single Source Drugs, 42 U.S.C.A. § 1320f (Westlaw through Pub. L. No. 118-13).
  2. Medicare Drug Price Negotiation Program: Selected Drugs for Initial Price Applicability Year 2026, CTRS. FOR MEDICARE & MEDICAID SERVS., (Aug. 2023), https://www.cms.gov/files/document/fact-sheet-medicare-selected-drug-negotiation-list-ipay-2026.pdf.
  3. Id.
  4. Sydney Lupkin, All in: Drugmakers say yes, they’ll negotiate with Medicare on price, so reluctantly, NPR (Oct. 4, 2023, 5:00 AM), https://www.npr.org/sections/health-shots/2023/10/04/1203417818/medicare-drug-price-negotiations-begin.
  5. Id.
  6. STAFF OF H.R. COMM. ON OVERSIGHT AND REFORM, 117TH CONG., REP. ON DRUG PRICING INVESTIGATION, at 40–42, 164–67 (Dec. 10, 2021). https://oversightdemocrats.house.gov/sites/democrats.oversight.house.gov/files/DRUG%20PRICING%20REPORT%20WITH%20APPENDIX%20v3.pdf
  7. Id. at 175.
  8. Global Health Expenditure Database, WORLD HEALTH ORGANIZATION (Oct. 10, 2023), https://apps.who.int/nha/database/country_profile/Index/en (select United States of America from drop down menu).
  9. Global Health Expenditure Database, WORLD HEALTH ORGANIZATION (Oct. 10, 2023), https://apps.who.int/nha/database/country_profile/Index/en (select Germany, France, and United Kingdom respectively from drop down menu); Leah Z. Rand & Aaron S. Kesselheim, Getting the Price Right: Lessons for Medicare Price Negotiation from Peer Countries, 40 PHARMACOECONOMICS 1131, 1131 (2022).
  10. Rand, supra note 9, at 1131.
  11. H.R. COMM. ON OVERSIGHT AND REFORM, supra note 6, at iii.
  12. Rand, supra note 9, at 1134, 1135, 1138.
  13. Id. at 1136.
  14. Id.
  15. Id.
  16. ANDREW W. MULCAHY ET. AL., INTERNATIONAL PRESCRIPTION DRUG PRICE COMPARISONS XV (RAND Corporation 2021)(eBook)
  17. Rand, supra note 9, at 1135.
  18. Id. at 1139; CTRS. FOR MEDICARE & MEDICAID SERVS., supra note 2.
  19. 42 U.S.C.A § 1320f-3(c) (Westlaw through Pub. L. No. 118-13).
  20. Id.
  21. Rand, supra note 9, at 1139.
  22. Rand, supra note 9, at 1132, 1134–35, 1137–38.
  23. H.R. COMM. ON OVERSIGHT AND REFORM, supra note 6, at i–ii, 80, 94–95, 173.
  24. Joshua Cohen, Lawsuits to Block Medicare Drug Price Negotiations are Unpopular Among Voters, FORBES (Oct. 1, 2023), https://www.forbes.com/sites/joshuacohen/2023/10/01/lawsuits-to-block-medicare-drug-price-negotiations-are-very-unpopular-among-american-voters/?sh=6f589a932d28.
  25. Id.
  26. Id.
  27. See H.R. COMM. ON OVERSIGHT AND REFORM, supra note 6.