Search This Blog

Thursday, June 5, 2025

Medicare’s Drug Price Negotiation And Innovation: What’s Off The Table

 

The Inflation Reduction Act of 2022 marked a significant shift in US health care policy, granting the Centers for Medicare and Medicaid Services (CMS) the authority to establish a program to negotiate Medicare drug prices with manufacturers. The goal is to make prescription drugs more affordable and accessible for patients, and to maintain the sustainability of the Medicare program. In August 2023, CMS identified the first 10 drugs for price negotiation. In August 2024, CMS announced the new prices for these drugs, which are slated to take effect in 2026.

The pharmaceutical industry has voiced concerns over CMS’s negotiation program. Specifically, some critics believe that the potential reduction in revenue from new drug prices would curtail investment in research and development (R&D) and restrict patient access to novel treatments. This apprehension is not new. The impact on innovation is a common refrain against policies to affect pharmaceutical profits. Although profitability has a direct impact on drug innovation, marginal change in revenue is not necessarily proportional to marginal change in R&D spending for individual pharmaceutical companies, given the complex dynamics between drug development and investment.

The relationship between the new drug negotiation program and likely future pharmaceutical innovation is further complicated by the fact that a long list of drugs is exempted from the program. This is not the case in other countries that have long practiced drug price negotiation. This article examines the potential impact of these exemptions on future drug innovation.

First and foremost, drugs with total annual spending under Medicare Part B (which covers drugs that are administered in a medical setting) and Part D (which covers retail drugs) combined of less than $200 million are exempted from the price negotiation. The program targets high-expenditure prescription drugs that have a considerable market presence and have been without generic or biosimilar competition for a substantial period following approval by the Food and Drug Administration (FDA) (nine years for small-molecule drugs and 13 years for biologics). The first 10 drugs selected for negotiation have been on the market for an average 16.8 years, ranging from 11 to 28 years. The total cost of these drugs was $56.2 billion, accounting for 20 percent of CMS Part D spending in 2023. Spending on individual drugs ranged from $2.57 billion to $16.48 billion between June 2022 and May 2023. That same year, patients paid `1234 for these drugs. To put these numbers into context, the average R&D costs from drug discovery to launch were estimated at $2.3 billion.

With current eligibility criteria, 80 percent of the 250 drugs with the highest 2022 US domestic net revenue would not be eligible for negotiation. Viewed another way, if the program had started in 2012, only $43.2 billion, representing 4 percent of $1.14 trillion in 2022 global pharmaceutical industry revenue, or 6 percent of $742 billion in global revenue for the affected companies, would have been subject to negotiation.

In August 2024, CMS announced the Maximum Fair Prices (MFPs) negotiated for the 10 drugs and estimated that net Part D spending would have decreased by 22 percent had the new prices been in effect in 2023. Discounts ranged from 38 percent (Imbruvica) to 79 percent (Januvia). While some of the negotiated prices appear to have steep discounts compared with list prices, such a comparison is misleading. This is because the list prices presented by CMS are wholesale acquisition costs (WACs). WACs do not include discounts and rebates, and therefore do not reflect the actual price Medicare paid for a drug—which is considered confidential and proprietary. In a testimony before the US Senate, Merck CEO Robert Davis reported that the weighted average net price (post-discount/rebate) for Januvia is 90 percent less than its list price. While there may be differences in rebates among Medicare, Medicaid, and other programs, many of the drugs selected for the first round of negotiation are older products nearing the end of their patent exclusivity (for example, Stelara, Eliquis) and would likely already have deep discounts. Together with the exemption, this dynamic helps limit the actual impact of the negotiations on revenue received by manufacturers.

Small Biotech Exemption

second exemption, which could impact innovation in as-yet unknown ways, is for small biotech drugs with less than or equal to 1 percent of Part D spending (and eventually Part B) and 80 percent or more of the Medicare program expenditures for the drug’s manufacturer. This is probably in recognition of the fact that small biotech companies are often a driving force for developing groundbreaking therapies that are later marketed by big pharmaceutical companies. Between 2011 and 2016, 65 percent of 170 new molecule entities approved by the FDA originated from small or mid-size biotech companies. Large companies tend to either partner with or acquire smaller companies that developed the drug. There is speculation that few small biotech companies would be eligible for this exemption. To date, CMS has approved four drugs originating from small biotech.

The intent of the exemption is to allow these small biotech companies to maintain higher revenue compared to large pharmaceutical companies and ensure they are not disproportionally affected by the new pricing policy. However, many small companies responsible for initial drug development may not have the infrastructure necessary for commercialization as they are often dealing with a single product instead of an entire portfolio. It may be in their best interest to sell the new product to a larger company that can commercialize it more efficiently. Yet, qualifying single source drugs are not eligible for the exemption if they are acquired by a large drug manufacturer after 2021. This removes a major source of revenue for small companies oriented toward drug discovery. To this end, the “small biotech” exemption potentially disincentivizes innovation among small biotech firms.

For small biotech companies that decide to commercialize, the criteria of the single source drug consisting of “80 percent or more of the Medicare program expenditures for the manufacturer” may cause further disincentive for innovation. These companies likely do not have another blockbuster drug, and having a single product is a vulnerable time for them. They may seek to build their portfolio in other ways. Approximately one-third of therapies originating from large pharmaceutical companies are later sublicensed to small firms for production. This is especially common for therapies for rare diseases. The gain in revenue by licensing an existing product for a small patient population may not offset the cost of losing the price negotiation exemption for their qualifying drug. Thus, the exemption could also disincentivize small companies seeking to build their portfolio and ultimately compete with large companies to create a more diverse and competitive ecosystem. As the pharmaceutical industry is in a transitional period (due to the upcoming patent cliffchanges in the regulatory environment, and so forth), more research on the impact of this exemption on innovation among small biotech is required.

Orphan Drug Exemption

A third exemption is for drugs that are designated for only one rare disease or condition and approved for an indication (or indications) only for that disease or condition. This exemption includes drugs that have been FDA-approved for multiple indications within the same disease (for example, for children, adults, or other subgroups). It does not, however, include drugs that have indications for multiple diseases. Drugs for single indication, rare disease are generally not subject to price negotiation, making them attractive to investors. For instance, there has been significant deal activity around antibody drug conjugates (ADCs). These drugs are designed to target specific types of cancers, rather than being used for multiple indications. The number of ADC trials has risen in recent years, accompanied by increased acquisitions.

Nevertheless, of the 282 orphan drugs approved by the FDA between 2003 and 2022, 63 (23 percent) had at least one follow-on indication. One potential impact of this exemption is that it may disincentivize pharmaceutical companies from conducting the additional trials required to obtain follow-on indications. Pharmaceutical companies have long been criticized for making R&D decisions based on financial considerations, not unmet need. However, if a large pharmaceutical company decides not to pursue an additional indication for financial reasons related to the CMS negotiation program, it may open doors for small biotech, government or patient groups interested in developing other therapies in these areas with a high unmet need.

Some stakeholders have also questioned whether this exemption is even necessary given the original intent of the Orphan Drug Act, which is to provide incentives to develop drugs for conditions affecting fewer than 200,000 individuals in the US that have “no reasonable expectation” that revenues will offset development costs. Yet, drugs approved for rare diseases earn similar revenues to drugs for common conditions. From 2012 to 2021, total Medicare Part B and Part D spending on the 95 high-spending Orphan Drug Act–designated drugs was $517 billion (25 percent of Medicare drug spending). The median sole orphan drug in this cohort was projected to earn revenues of $21.9 billion, which far exceeds published estimates of drug development costs. When it comes to these financially successful orphan drugs (that is, achieving greater than $200 million in spending), CMS is leaving a significant amount of savings (for themselves and patients) off the negotiating table.

Conclusion

The future of health care hinges on striking a delicate yet crucial balance between ensuring affordability for payers and incentivizing innovation within the pharmaceutical industry. The CMS drug price negotiation program represents a pivotal shift in US health care policy, promising to lower prescription drug prices. However, the anticipated reduction in revenue from lower prices for drugs that already have a considerable market presence may not significantly hinder drug innovation, while the orphan drug exemption could leave significant savings off the table. The exemption on small biotech companies could have unintended consequences as these companies, as a key driving force in drug innovation, are often engaged in distributed partnerships with large pharmaceutical companies, leading to a more profound impact on the pharmaceutical ecosystem.

https://www.healthaffairs.org/content/forefront/medicare-s-drug-price-negotiation-and-innovation-s-off-table-matters-too

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.