Drug Pricing in the US: What Reforms Are on the Table?

By Patricia Van Arnum - DCAT Editorial Director

February 26, 2020

Drug pricing is a major policy issue in the US with both Congress and the Trump Administration offering proposals for reform, but state governments are also moving forward with their own plans. What are the latest developments?

Federal proposals on the table

As the US gears up for a Presidential election in November 2020, both the US Congress and the Trump Administration are highlighting measures to address the cost of prescription drugs in the US with proposals to lower the cost of prescription drugs.

On a Congressional level, the key challenge for drug-pricing reform would be to gain consensus in both houses, the US House of Representatives and the US Senate, on an agreed-to bill, something which may be difficult to achieve, particularly in an election year. Both bodies, however, are moving forward with drug-pricing bills.

US House of Representatives. Within the US House of Representatives, a key milestone occurred in December 2019, when the US House of Representatives passed a drug-pricing plan (H.R.3, The Elijah E. Cummings Lower Drug Costs Now Act ). The bill, which was first introduced in the House in September 2019, would establish a fair price negotiation program, put in protections from excessive price increases under the Medicare program (the US healthcare program for people over the age of 65), and establish an out-of-pocket maximum for enrollees of Medicare Part D (the prescription drug program under Medicare). The plan has been criticized by industry trade groups, such as the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Innovation Organization (BIO), which say the bill among other things, would reduce pharmaceutical innovation.

Under the bill, the US Health and Human Services Secretary would be required to select and negotiate the prices of at least 25 negotiation-eligible drugs per year and would be authorized to negotiate prices for up to 250 negotiation-eligible branded drugs per year by directly negotiating with manufacturers to establish a maximum price. Those branded negotiation-eligible drugs would be those that have been identified by the US federal government as costing the most to the federal government and for which there is no generic or biosimilar competition. The maximum negotiated price would be capped at 120% based on international pricing from the average price paid by Australia, Canada, France, Germany, Japan and the UK. If there is no international price, which is often the case with a new drug, under the bill the maximum fair price negotiated for a selected drug would generally be 85% of the average manufacturer price. The negotiated prices would be available to all purchasers not just Medicare beneficiaries.

The proposed legislation would also impose non-compliance fees on companies that do not enter into negotiations by implementing a tax on the manufacturer’s annual gross sales beginning with 65%, plus an additional 10% for every quarter the manufacturer does not comply, to a maximum of 95%.

US Senate. Meanwhile, the US Senate has its own drug-pricing plans. One such measure is the Prescription Drug Pricing Reduction Act (S. 2543), which was initially introduced by Senators Chuck Grassley (R-IA), the Senate Finance Committee Chairman,and Ron Wyden (D-OR), the Ranking Member of the Senate Finance Committee. The bill, which was first introduced in 2019, seeks to lower prescription drug prices in the Medicare and Medicaid programs, improve transparency related to pharmaceutical prices and transactions, lower patients' out-of-pocket costs, and ensure taxpayer accountability. In December 2019, Senators Grassley and Wyden released an updated version of the Prescription Drug Pricing Reduction Act of 2019. The updated bill makes improvements that the chairman, ranking member and other committee members discussed when the committee reported the bipartisan bill in July 2019.

The changes build off of the $25-billion reduction in beneficiary Medicare Part D cost-sharing (over a 10-year period) generated by the committee by further reducing beneficiary costs on out-of-pocket spending. Specifically, the Medicare Part D redesign section of the bill is improved by changes that reduce the amount of spending that beneficiaries are responsible for during the initial phase of the benefit from 25% to 20%, thereby lowering costs for beneficiaries who have expenses above their deductible. It also requires drug companies to provide a new discount of 7% on brand-name drugs in the initial phase of the benefit and resets the brand catastrophic discount to 14%, thereby maintaining the overall liability for drug companies from the original bill while spreading it across the broader benefit to avoid a disproportionate impact on small, innovative companies.

The changes also include the addition of two new sections that: (1) direct insurers to offer a cap on the amount of out-pocket-costs that a beneficiary has to pay in any one month and spreading high out-of-pocket costs over multiple months to protect against the burden of a one-time expense; and (2) require Medicare Part D plans and their pharmacy benefit managers (PBMs) to include concessions and fees they negotiate with a pharmacy in the price beneficiaries pay at the pharmacy counter, thereby reducing out-of-pocket expenses and prohibiting retrospective recoupment of payments to pharmacies  to provide more financial predictability.

Trump Administration. During his State of the Union Address earlier this month (February 2020), President Donald Trump also highlighted his Administration’s interest in working with Congress in lowering the cost of prescription drug prices. “And working together, Congress can reduce drug prices substantially from current levels,” he said. "I’ve been speaking to Senator Chuck Grassley of Iowa and others in Congress in order to get something on drug pricing done, and done quickly and properly. I’m calling for bipartisan legislation that achieves the goal of dramatically lowering prescription drug prices. Get a bill on my desk, and I will sign it into law immediately.”

States move forward with drug-pricing plans

At the same time that the federal government is advancing drug-pricing plans, so are US states. Thirty-seven states passed a total of 60 separate drug-pricing laws in 2019, said Jennifer Reck, Project Director for the National Academy for State Health Policy’s (NASHP) Center for State Rx Drug Pricing, who spoke in a panel discussion on prescription-drug pricing at the American Medical Association (AMA) State Advocacy Summit in Bonita Springs, Florida last month (January 2020) and as reported by the AMA. States are also targeting ways to curb costs, which included the passage of 33 laws regulating pharmacy benefit managers (PBMs) in 2019, along with six laws mandating more transparency, according to her presentation at the AMA meeting.

Other states are proposing additional measures. Last month (January 2020), California’s Governor Gavin Newsom proposed a new CalRx generic-drug program in his 2020–21 State Budget proposal that he submitted to California’s State Legislature, which would make California the first state to create its own generic-drug label.

The Newsom Administration said that the proposed new CalRx generic-drug program would also make the state’s generic prescription drugs available for sale to all Californians. “The Budget transforms Medi-Cal [California’s Medicaid program] to a more consistent and seamless system by reducing complexity and increasing flexibility and establishes a single market for drug pricing within the state,” according to a January 10, 2020 press release from the Governor’s Office.

Medi-Cal is a program that offers free or low-cost health coverage for Californian children and adults with limited income and resources. Medi-Cal covers low-income adults, families with children, seniors, persons with disabilities, pregnant women, children in foster care and former foster youth up to age 26. California also has Covered California, which is the state’s health insurance marketplace, where Californians can purchase health plans and access financial assistance if they qualify for it.

According to the Governor’s budget proposal, the Newsom Administration plans to propose two new initiatives: the Golden State Budget Drug Pricing Schedule proposal and the Generic Contracting Program proposal in the spring of 2020.

Under the Golden State Drug Pricing Schedule proposal, the Newsom Administration would establish a single market for drug pricing within the state. This proposal would enable all purchasers–Medi-Cal, California Public Employee’s Retirement System, Covered California, private insurers, self-insured employers, and others–to combine their purchasing power. Drug manufacturers would have to bid to sell their drugs–at a uniform price–in the California market. Also, under the proposal, California would invoke a most-favored-nation clause in the manufacturer price bid, which would require manufacturers to offer prices at or below the price offered to any other state, nation, or global purchaser if they wish to sell their products in California.

Under the Generic Contracting Program proposal, the Administration will negotiate partnerships to establish the state’s own generic-drug label. The state would contract with one or more generic-drug manufacturers to manufacture certain generic drugs on behalf of the state and participating entities. The Governor asserts in his proposal that such a measure would increase competition in the generic market and result in lower generic drug prices for all purchasers.