The Problem With Current Proposals to Address High Medicare Part B Drug Prices

Summary of the IPI Model

Key components of the IPI model:

Phasing down the amount Medicare Part B pays for single source drugs and biologicals to more closely align with international prices. Creates a Target Price based on an “International Price Index” that accounts for the price paid for the same drugs in select foreign countries;

Schulthess et al conducted an empirical analysis and highlighted several flaws in the proposal that could result in unintended negative impacts on R&D budgets, external investment in firms, and ultimately availability of innovative therapies for patients. Their focus was on the price determination component rather than the other aspects of the proposal such as incorporating vendors in lieu of “buy and bill” and changing the physician add-on to a fixed payment.

Impact of the IPI Model on R&D, Prices, and Innovation

The first flaw highlighted includes more than the suggested negative impact on company R&D budgets. According to the analysis by Schulthess et al, decreased revenues as a result of the IPI model when rolled out beyond the 5-year test would double the expected impact on R&D budgets. In fact, for companies that have multiple implicated products, the impact would near 10% of the company’s R&D budget. One big unknown about the ultimate impact on a company’s R&D budget is the impact on revenues outside of Medicare Part B, such as in the Medicaid programs as well as the commercial sector. While some have suggested that companies will just make up the revenue reduction caused by the IPI model by simply increasing prices offered to commercial insurance plans or prices offered in Europe, both seem to be very unlikely. Schulthess et al are clear that the likely impact in the US commercial market is further price erosion through negotiation when the much lower Part B price is publicly known. They suggest a reduction of 5 times Secretary Azar’s estimated 1% impact reduction in R&D. Others further argue that by default of the Medicare Drug Rebate Program, if IPI sales in the Medicare Part B program weren’t exempted, then the “best price” requirement for state Medicaid programs would automatically trigger a larger rebate that manufacturers would have to offer state Medicaid programs. ³ Further compounding the net impact on innovation, Schulthess et al highlighted results from an empirical analysis that suggests that decreased R&D resulting in decreased likelihood of FDA approval success translates to less investments from across the ecosystem including acquisition partnerships, private equity investments, public offerings, and venture capital financing, which are significant for small start-up firms.

Other challenges raised include more longer-term impacts such as companies choosing to not invest in drugs that would fall into Medicare Part B or choosing not to sell drugs to the foreign countries that are the reference countries for the IPI—both of which would directly result in less availability of needed therapies for patients.

Beyond the Schulthess critique, more promising elements of the IPI model include introduction of market competition through adding vendors to negotiate prices with manufacturers. However, it is unclear as to whether the vendors would choose to enter the market if the price they are ultimately reimbursed through the IPI Model is set lower than what they will be able to negotiate from the companies. This is because the IPI Model would only determine the prices that CMS pays to vendors, not the acquisition cost that vendors would pay manufacturers. Also, moving away from physician practice “buy and bill,” and changing the payment to physicians for the administration to a fixed fee holds promise to remove incentives to use more expansive therapies than would otherwise be needed.

Other Recent Proposals

Both chambers of Congress are also working in parallel on high drug price proposals. Speaker of the House Nancy Pelosi released her version in September 2019, the “Lower Drug Costs Now Act of 2019” (H.R. 3). ⁴ This bill would not only permit the HHS to negotiate drug prices, it would set a maximum price cap for a minimum of 25 and maximum of 250 per year of the most expensive brand name drugs with limited competition. The price cap will be based on foreign country prices (120% of the average of Australia, Canada, France, Germany, Japan, and the United Kingdom). It also has a provision to limit price increases once a drug is on the market through and inflationary rebate. While this bill doesn’t address any of the concerns with the Administration’s IPI model, and in many ways goes even further to penalize innovation, there are laudable components. Most importantly, the bill would help with patient out-of-pocket costs by capping the amount of Medicare Part D patient expenses at $2000. On the Senate side, the Senate Finance Committee approved the Grassley-Wyden bill “Prescription Drug Pricing Reduction Act of 2019,” which also addresses out-of-pocket expenses for Medicare beneficiaries and penalizes drug manufacturers that raise prices faster than inflation. ⁵ Notable is that this bill refrains from government price setting tied to international prices.

The Problem With These Proposals

Fundamental principles that should be part of any comprehensive package to address the problems of high drug prices should include improved access for patients, including protections against high out-of-pocket costs for needed therapies without reducing or limiting strong incentives for innovation and R&D in high-risk clinical areas. In addition, polices that provide strong incentives for “high-value” innovation and support for continued real-world evidence collection to better measure quality and value outcomes will be critical. While some of the proposals have included provisions that limit patient out-of-pocket costs, none have addressed drug prices in a way that will incentivize high-value innovation that considers the value that the therapy brings to patients, the health care system, or society.

One approach that could begin to bring in the value that the therapy brings and patient priorities into the equation is known as “evidence-based” or “value-based” pricing. More transparent and methodologically justified prices that are tied to the benefits and value a product brings to a patient population might offer a more reasonable approach. For example, the Institute for Clinical and Economic Research (ICER) develops models that aim to help payers better understand what value-based prices might be for a given technology and anticipated use. While not broadly embraced (and also heavily criticized), health economic analyses or value assessment approaches like these more generally could—depending on implementation—become an important first step toward tightly tying the price of the drug to the potential value it brings. Criticisms of these approaches include lack of generally accepted approaches for truly reflecting the patient’s perspective, not yet being inclusive enough of patient priorities, and that models tend to be heavily influenced by assumptions about the use of the product, patient populations, and the potential impact the drug will have on meaningful outcome measures. Further, while using methods based on randomized clinical trial data or real-world evidence to set a price late in clinical development could possibly challenge early investment decisions to pursue product development based on an assumed price. That said, instead of adopting a single method or model, embracing general principles for the uses of value assessment techniques, approaches for including patient priorities, approaches for conducting sensitivity analyses, and approaches for updating models with real-world evidence by the pharmaceutical industry, could facilitate the drug pricing debate in a much more productive way that could ultimately serve patients and access to the therapies they need in a better way. Beyond more transparent value- or evidence-based pricing, actually tying the payments for drugs to the actual observed outcomes in the patient populations, or value-based payment (VBP) approaches can also help improve access for patients. VBP approaches can help address issues such as remaining payer uncertainty regarding how well a specific drug works in their actual covered population and help ensure that the payments provide good “value for money”. Also highlighted by the Trump Blueprint for drug prices, a recent whitepaper by the Duke-Margolis Center for Health Policy addressed this issue in a proposed set of VBP arrangements for transformative gene therapies. ⁶

Proposals from the House and the Administration target the most innovative (and expensive) therapies in the pipeline by setting prices, not based on the benefits these therapies bring to patients, but simply based on how much foreign governments are paying. This will have an impact on future development of treatment that address significant unmet needs for patients. The pharmaceutical industry and stakeholders across the health care system should more proactively consider a broad set of approaches that bring more transparency and rigor to how prices payments reflect patient priorities and value.