The seemingly unstoppable pharma lobbying force has lost its charm. With the passage of a new bill, the U.S. Senate is opening the door to major drug pricing reform, leaving the drug industry licking its wounds.
The U.S. government will be able to negotiate drug prices for the Medicare program if the sweeping climate and tax reforms bill that the Senate passed over the weekend becomes law.
Although the scope of the bill is limited to a few of the costliest drugs under Medicare and only for products that have been on the market for a long time, it still marks a serious setback to the pharma industry. But as SVB Securities analysts see it, pharma companies may have a few tools to fight the new plan.
The new bill allows the federal government to directly negotiate with pharmas the prices of 10 most costly prescription drugs in Medicare Part D in 2026, expanding to another 15 drugs in 2027. Failure to comply would draw pharma companies financial penalties.
Products from companies such as AstraZeneca, Amgen, Eli Lilly an AbbVie are among those at high risk to fall under the government’s price controls, SVB Securities analysts recently said.
“They say this is ‘negotiation,’ but the bill gives the government unchecked authority to set the price of medicines,” PhRMA CEO Steve Ubl said in a statement Sunday. He argued that the drug pricing scheme is based on “a litany of false promises,” and that it will hurt innovation while providing “almost no relief” to patients.
Pharmas have long argued that government price controls would bring a chilling effect on drug R&D. In a commentary piece published in November in Stat, RA Capital managing partner Peter Kolchinsky said price controls “will deter investors like me from backing certain research projects, skewing the kinds of drugs patients will eventually have access to.”
But an analysis by the Congressional Budget Office estimates that about 15 out of 1,300 drugs would not come to market over the next 30 years under the bill, suggesting the effect will be limited.
“The system we have right now is a price control—pharma unilaterally controls prices and consumers are forced to pay,” Sarah Kaminer Bourland, legislative director at Patients For Affordable Drugs Now told Fierce Pharma. “These reforms finally even the playing field and allow the federal government to come to the table and use its purchasing power.”
The bill's reforms aren't only centered on Medicare pricing negotiations. Starting from 2023, the bill requires drugmakers pay rebates if their prices in Medicare rise faster than inflation, except for some low-cost products. In a setback to Democrats, the inflation curb will only apply to Medicare after the Senate parliamentarian struck down the inclusion of private insurance plans.
And in a direct benefit for seniors, the bill also limits annual out-of-pocket cost for Medicare patients at $2,000. About 1.2 million Part D members spent more than $2,000 out of pocket in 2019, a Kaiser Family Foundation analysis found.
The out-of-pocket cap will shift the pressure of limiting expenses onto payers, driving them to “apply more utilization management and extract greater rebates from manufacturers,” SVB analysts previously said.
Outside of the U.S., markets such as Europe, Japan and China have various drug price control policies, including government-led price negotiations and mandatory price cuts. But a relatively free pricing environment—and high drug prices—has made the U.S. the most attractive market for innovative therapies.
Democrats immediately touted the bill as a historic win. Drug pricing activists such as the nonprofit group Patients For Affordable Drugs Now also celebrated the bill's Senate passing.
“For too long, Medicare has been forced to contend with Big Pharma with one hand tied behind its back—that ends when this bill is signed into law,” Senate Finance Committee Chair Ron Wyden said in a statement, adding that the Senate has “begun to redefine the relationship between Medicare and Big Pharma.”
But its exact effects on drug prices remain to be seen.
For one thing, the bill initially only covers 10 drugs that have been on the market for a long time without any copycat competitions. It focuses solely on Medicare, leaving the large private health insurance market untouched.
At least the inflation cap will translate into some savings for the commercial market because it will generally dissuade some drugmakers from hiking list prices above inflation rate to avoid paying Medicare additional rebates, Loren Adler, an expert of health policy at the Brookings Institution, told Fierce Pharma.
Nevertheless, while the bill caps drug price increases at inflation rate, it doesn’t control initial prices, so companies can launch their drugs at higher list prices, the SVB team said.
What's more, “biopharma companies are going to ‘game’ the new law by authorizing limited competition to products—so drugs will be multi-source and avoid price controls,” SVB analysts said in a Sunday note.
Editor's Note: The story has been updated with additional comments from Sarah Kaminer Bourland and Loren Adler.