Back in March, the nation gathered to hear President Biden’s State of the Union address. Among the topics covered in the hour-long speech—which included the conflict in Ukraine, the COVID-19 pandemic, and rampant inflation—was prescription drug pricing.
Specifically, the president urged lawmakers to grant Medicare the ability to negotiate prices with drug manufacturers. How would this help beneficiaries? Can we expect to see this proposal gain traction in 2022?
Here’s what you need to know.
First of all, what is drug price negotiation?
It’s the process in which private insurance companies work with drug manufacturers to set the prices of prescription drugs. Currently, in order to promote competition and prevent tampering within the private market, the federal government isn’t allowed to interfere.
How does Medicare tie into it, then?
First, through Medicare Part D, Americans over 65 receive coverage for their outpatient prescription drugs—basically, anything they’d go to a pharmacy to purchase. Medicare contracts with private plans in order to provide this coverage, and the private plans negotiate prices with drug manufacturers on behalf of beneficiaries. However, the aforementioned “non-interference clause” prevents Medicare from directly intervening in these negotiations.
Second, through Medicare Part B, beneficiaries receive coverage for physician-administered drugs. Currently, Medicare does not negotiate prices for these drugs and instead pays for them based on the "Average Sales Price."
Why does the president want to change that?
Rising drug prices have been a key driver of high health care costs over the last few decades. A jump in the price of a single drug can increase Medicare spending significantly, which poses problems for beneficiaries who have to pay higher premiums and for the program as a whole.
For example, the Medicare Part B premium increased by nearly 15% in 2022. The main reason? To prepare for the spending increases caused by expensive new drugs hitting the market, such as aducanumab for Alzheimer’s disease.
It’s important to note that President Biden’s proposal isn’t brand-new. Advocates have long claimed that allowing Medicare to negotiate prescription drug prices would lower costs for recipients.
Over the past several years, there have been numerous calls to repeal the non-interference clause. It was even a key component of the president’s Build Back Better Act (BBBA) which failed in the Senate last November. But notably, the BBBA didn’t allow Medicare to negotiate prices for all drugs—just the 10 to 15 most expensive ones. According to advocates, even that minor change would improve affordability for millions of beneficiaries.
“The story ultimately comes down to market power,” says Dr. Julius Chen, an assistant professor and health economist at Columbia University and policy advisor at Free the Facts. “Private insurance plans do not have nearly the same level of bargaining leverage as the federal government, as Medicare is a large, powerful public payer for medical services. Thus, the final price for a drug depends on who is doing the negotiation and how much market power they have.”
So is Medicare drug price negotiation actually on the table in 2022?
As with all policy proposals, Medicare drug price negotiation has its advocates and opponents.
The President and his administration face opposition from within their own party, from across the aisle, and from pharmaceutical and insurance companies. Opponents of the proposal say that allowing Medicare to negotiate prices will hinder the pharmaceutical industry’s ability to innovate and develop new drugs. They have voiced their support for the non-interference clause that keeps the government out of the private market.
Meanwhile, supporters are encouraging lawmakers to separate drug price negotiation from the rest of the Build Back Better agenda in order to improve its chances of passing. Democrats in Congress have also set their sights on smaller reforms while they try to build a moderate consensus on the larger bill. For example, the House recently passed legislation capping out-of-pocket insulin costs at $35.
The bottom line on Medicare drug price negotiation? It’s proving very difficult to pass.
After hearing President Biden’s affirmation that it will remain a top priority this year, we’ll be keeping a close eye on its movement through Congress. But as of now, the proposal largely appears to have stalled.
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