Proposals to control drug costs

The prices of drugs for which Medicare spends the most money have increased substantially more than the rate of inflation—in some cases by more than nine times.

In 2016-17, the Kaiser Family Foundation reported that 60 percent of all drugs covered by Medicare had list prices that increased more than the rate of inflation. 

Medicare enrollees who did not receive low-income subsidies spent, on average, about $500 out of pocket on prescriptions. More than 1 million enrollees who needed specialty drugs or other expensive drugs spent more than $3,200 per year out of pocket.

With the mounting burden of drug prices, pressure grows on lawmakers and candidates to ease the burden. The main proposals are as follows.

Allowing Medicare to negotiate prices

The Medicare Modernization Act of 2003 prohibits Medicare from negotiating prices of drugs paid by Medicare.

Several bills before Congress would change that. House Resolution (H.R.) 3, introduced by Rep. Nancy Pelosi (D. Calif.), would repeal the noninterference provision and direct the secretary to negotiate prices on at least 25, but no more than 250, brand-name drugs without generic competitors.

The drugs initially subject to negotiation would include the ones on which the government spends the most money. The Congressional Budget Office projects that this measure would save the government $345 billion over a six-year period.

Using international benchmarks

H.R. 3, along with several other proposals, would direct the government to set prices with reference to the prices paid by leading industrialized countries. H.R. 3 specifies six countries: Australia, Canada, France, Germany, Japan and the United Kingdom.

In general, the “maximum fair price” for a drug under the act would not be more than 120 percent of the average price for the drug in the six designated countries. Other proposals use different reference points, such as the average price for the drug in other countries or the lowest price paid by any of the designated countries.

A variation on using prices charged to other countries would be to restrict price increases to the rate of inflation. Some proposals also would lower costs by allowing consumers to purchase drugs from other countries, provided the FDA has certified the source is safe.

Taxes on excess profits

To help enforce the new price regime, H.R. 3 and other proposals would place a tax on drug company profits if the companies charge in excess of the benchmark price. Such taxes could be up to 95 percent of the “excess” profits. 

In addition, civil monetary penalties could be imposed up to 10 times the difference between the “maximum fair price” and the price that was charged. Related proposals would eliminate or limit tax deductions by drug companies for expenditures on marketing.

Caps on out-of-pocket payments

Another way to ease the burden on patients is to limit their out-of-pocket payments. 

Currently, the amount a patient would have to pay for drugs under Medicare is open-ended, although catastrophic coverage reduces the burden after the patient has paid approximately $8,500. (The precise amount varies with the health plan and types of drugs purchased.)

H.R. 3 would limit out-of-pocket expenses to $2,000. Bernie Sanders’ Medicare-for-All would set the limit at $200.

Loss of patent protection

Rep. Lloyd Doggett (D. Texas), Sen. Sherrod Brown (D. Ohio) and more than 100 other Democrats are sponsoring bills to alter patent protections for pharmaceutical companies in the event drug prices are not considered fair to Medicare beneficiaries and taxpayers (H.R. 1046 & S. 377). 

The Secretary of Health and Human Services would be authorized to issue licenses to companies other than the original manufacturers to allow manufacture of generic versions. This presumably would have the effect of dropping prices for the drugs.

Panel with power to limit prices

Another proposal is to create a federal panel with the power to set drug prices. 

Factors the panel would consider in setting drug prices include: research and development costs, costs of production, size of the market, and availability of alternatives for the drug.

Major reform of drug policies is unlikely in 2020. Results of the election will determine the likelihood of future legislative reforms.