ISSUE BRIEF APRIL 2020 The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work, How It Would Affect Prices, and What the Challenges Are Paul B. Ginsburg Steven M. Lieberman Leonard D. Schaeffer Chair in Health Nonresident Fellow Policy Studies at the Brookings USC-Brookings Schaeffer Initiative for Institution Health Policy ABSTRACT TOPLINES ISSUE: The Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3) promises a H.R. 3 represents a fundamental shift in efforts to lower the cost of prescription drugs in the United fundamentally new approach to States. A key provision is a requirement for the government to establish prices for lowering the cost of prescription selected drugs that have little competition and account for substantial spending. The drugs in the U.S., particularly bill would require a drug’s price to be set between the lowest price in six high-income in requiring the government to countries and 120 percent of the average price across those countries. establish prices for key drugs GOALS: Describe how H.R. 3 would change current drug pricing, assess that have little competition. manufacturers’ likely responses, and examine challenges of using prices set in other countries. Drug prices could fall KEY FINDINGS AND CONCLUSIONS: Drug prices would fall significantly, although significantly under H.R. 3, the effect on prices would depend on: 1) the specific choices implemented in although the magnitude would detailed federal regulations, which could vary significantly based on a presidential depend on several factors. administration’s policy preferences; 2) the measures instituted by other countries to constrain increases in their prices; and 3) the actions of pharmaceutical Because constraining drug manufacturers intended to minimize the reduction in their revenues. revenue would reduce Because constraining drug revenue would lessen expected profitability of new manufacturers’ profitability, drugs, H.R. 3 is likely to reduce incentives for research and development. A key policy H.R. 3 is likely to reduce consideration involves weighing the societal trade-off between fewer new drugs incentives to fund R&D. coming to market versus the increased affordability of existing drugs. U.S. drug prices could be lowered either by pegging them to prices in other countries — as specified in the legislation — or by instituting a new regulatory process to set prices in the U.S. While utilizing prices in other countries is likely to achieve savings sooner, the approach may be more problematic over the long term due to efforts by other countries to avoid paying higher prices to benefit U.S. consumers. In addition, people in the U.S. may have a lower tolerance for regulation or for policies that limit access to new therapies. Initially pegging U.S. prices to those in other countries could provide a transition period for creating a U.S. regulatory regime to lower drug prices without tying our drug prices directly to those in other countries. The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work2 INTRODUCTION the patient to pay a large part of the bill is tantamount to The Elijah E. Cummings Lower Drug Costs Now Act denying access, despite federal rules for both employer (H.R. 3), passed largely along party lines in December 2019 coverage and individual insurance that require annual by the Democrat-controlled U.S. House of Representatives, limits capping patients’ out-of-pocket costs for covered represents a fundamental departure from prior initiatives services. to lower prescription drug costs. Instead of attempting to As prescription drugs have become much more expensive, constrain prices by attempting to increase competition, demand constraints have become even less effective Title I of the act requires the Department of Health and in controlling prices. Recognizing the limited effect of Human Services (HHS) to negotiate prices for selected high drug prices on demand in the context of insurance, drugs that have little competition and account for insurers rely on administrative actions to constrain substantial spending. These prices would apply not only utilization, such as requiring prior authorization or step to Medicare but to private insurance and (indirectly) to therapy, which apply to many high-priced drugs. Medicaid as well. Negotiations between HHS and drug manufacturers Lack of Competition would set prices, which would have to fall between the Taken together, the drug patent system and U.S. Food lowest price in any one of the six high-income countries and Drug Administration grants of market exclusivity specified in H.R. 3 and 120 percent of the average price pose important additional barriers to competition’s across those six reference countries. Manufacturers’ effectiveness in controlling prices. To foster innovation, compliance would be enforced through a substantial manufacturers of newly approved drugs receive a excise tax. monopoly for their product for a substantial period.2 This issue brief discusses: how H.R. 3 would But there is no consensus on how much exclusivity is fundamentally change current drug pricing rules; how enough, and concerns have been raised about drug prices might vary under different administrations; the makers’ creativity in lengthening the periods of exclusivity potential responses by manufacturers and affected beyond what the law contemplated when enacted. For countries to the proposed reform; and the challenges manufacturers of drugs with government-granted market of basing prices in the United States on those in other exclusivity and no therapeutic alternatives, high prices countries. (While beyond the scope of this brief, the other cannot be undercut by a competitor unless the FDA titles of H.R. 3 contain many other significant changes.1) approves a new product. RATIONALE FOR H.R. 3 High Social Costs High drug prices have real social costs. For patients who By Lowering the Cost to Patients, Health face high out-of-pocket deductibles and cost-sharing — a Insurance Constrains the Role of High Prices in situation that is exacerbated when their insurance, such Limiting Demand as Medicare, does not include catastrophic protection — The process by which consumer price sensitivity high prices can seriously impair access to the most constrains prices in competitive markets does not work effective treatments. High drug prices raise insurance as well for health services. Health insurance plays an premiums for individuals and employers, which in turn important role in both protecting patients from the can lead to lower take-up of health coverage. Governments financial consequences of expensive care and by assuring feel the impact as well, both directly as public insurers and access to medically necessary treatments. Importantly, indirectly as subsidizers of private insurance through the because the prices of some drugs are so high, requiring tax system. commonwealthfund.org Issue Brief, April 2020 The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work3 Government can pass legislation effectively compelling would impose extensive, detailed requirements intended manufacturers to lower drug prices, which is what the to lower the prices of single-source drugs and biologics sponsors of H.R. 3 propose. Lower prices would lead for patients covered by Medicare, Medicaid, fully insured to some reduction in future investment in new drug health plans, and self-insured plans (ERISA plans). Its development, but the level of change in investment and comprehensive reforms would require manufacturers to the productivity of those changes in investments in agree to maximum prices acceptable to the government research and development are highly uncertain. As a and direct the HHS Secretary to identify an annually result, it is hard to assess whether, at the margin, the level increasing number of drugs with the highest potential for of innovation associated with current rules compared to savings. the level under the lower prices expected under H.R. 3 is Two major provisions would give the government strong large enough to offset the social costs they create. bargaining power and substantially erode the ability of manufacturers with effective monopolies to command HOW H.R. 3 WOULD FUNDAMENTALLY high prices. First, the tax provisions of H.R. 3 would CHANGE CURRENT DRUG PRICING RULES impose prohibitive financial penalties on sales of a specific Two federal agencies grant pharmaceutical manufacturers drug if a manufacturer fails to agree to prices acceptable market exclusivity. Patents are awarded by the Patent and to the HHS Secretary. Second, the bill sets the maximum Trademark Office, and drugs and biologics are approved or “ceiling” price for a drug at 120 percent of the average of to enter the market by the FDA after extensive testing prices in Australia, Canada, France, Germany, Japan, and showing safety and efficacy. Despite being a significant the United Kingdom (the average international market, regulator of private insurance and directly paying for 35 or AIM, price). However, the Secretary has the authority percent of all health consumption (for example, through to mandate that the U.S. price for a drug equals the Medicare, Medicaid, and other programs), the federal lowest price in any of the six countries, which could be government currently plays a quite limited role in setting substantially below the maximum of 120 percent of the drug prices. 3 six-nation average. Manufacturers set the list prices of their drugs, but list Manufacturers effectively have to accept the price dictated prices frequently have little bearing on the actual or “net” by the Secretary, which may range between the statutory prices negotiated by manufacturers and payers (such as ceiling and the lowest price in any of the six reference health insurers), which include discounts and rebates. countries — or risk not earning profits on U.S. sales of Negotiated prices reflect the clinical importance of a the specific drug. For these reasons, we characterize such treatment and the existence or absence of alternative prices as “administered” or “regulated,” notwithstanding treatments. Market exclusivity conferred by patents H.R. 3 characterizing them as “negotiated.” and FDA approval creates a meaningful monopoly when therapeutic alternatives do not exist for a drug. HOW MIGHT PRICES UNDER H.R. 3 VARY The absence of competing alternatives empowers UNDER DIFFERENT ADMINISTRATIONS? manufacturers to command high prices and undercuts the Drug prices would fall significantly under H.R. 3. However, negotiating power of payers.4 the extent to which prices would fall could vary under presidential administrations with different policy Giving Government a Direct Role in Setting Drug preferences and approaches to implementation. For Prices Based on Prices in Other Countries example, the HHS Secretary would have considerable Title I of H.R. 3 would reverse the current “hands off” role leeway in the number of drugs that could be subject to of the federal government in setting drug prices. The bill negotiated price ceilings. H.R. 3 requires initially selecting commonwealthfund.org Issue Brief, April 2020 The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work4 “at least 50 negotiation-eligible drugs,” but HHS could robust innovation — could also result in opposing target up to 125 drugs plus any single-source insulin pressures for limiting price reductions versus seeking to products not included among those drugs. maximize price cuts. Similarly, a Secretary would have discretion to allow prices to equal the statutory maximum of 120 percent of CHALLENGES OF USING PRICES FROM the AIM price or to find acceptable only negotiated prices SELECTED COUNTRIES that were substantially below the ceiling price, which The incentives created by H.R. 3 will likely adversely could include the lowest price in any of the six countries. affect drug prices and access in the six listed countries HHS would also retain substantial discretion in assessing (as well as potentially others). Affected countries, along how to implement the multiple considerations listed in with pharmaceutical manufacturers, can be expected to H.R. 3, such as research and development costs, costs of devise approaches to minimize the adverse effects to them production, and the comparative therapeutic value of a drug. associated with tying U.S. prices to international prices. Although minimizing the connection between lower H.R. 3 allows the Secretary to determine the required U.S. prices and prices in the six reference countries might information from manufacturers that “may be needed somewhat mitigate the adverse effects for other countries, to carry out the negotiation and renegotiation process,” the reduction in U.S. revenues is likely to be a key driver of including the extent to which information used in manufacturer behavior. assessing prices would be net of all price concessions, or whether higher prices that excluded some price Countries with low prices can be expected to facilitate concessions would be used. The ability to gather accurate strategies intended to minimize adverse effects or create information is likely to depend to some extent on the work-arounds that allow reported (but not actual) prices willingness — and authority — of a Secretary to require to rise. As one example, each of the six countries listed detailed reporting about domestic and international in H.R. 3 would have incentives to allow manufacturers prices by companies doing business in the U.S. to exclude rebates and other price concessions from the Furthermore, the willingness to invest in resources and (high) prices reported for incorporation into the AIM personnel to implement the provisions of H.R. 3 could price. The six countries would each benefit by concealing vary significantly by administration. the much lower net prices they would actually pay. In addition to being in their national interest, such rules also would benefit manufacturers and limit drug savings in the COMPETING POLITICAL PRESSURES U.S. by increasing reported AIM and target prices. These One of the most significant variables affecting the likely responses will create significant challenges for HHS. aggressiveness with which price cuts are pursued relates to conflicting political pressures from differing stakeholders. Pharmaceutical companies can be Anticipating Manufacturers’ Response expected to vigorously pursue efforts to mitigate the Pharmaceutical manufacturers also can be expected to financial impact of H.R. 3, which is likely to include invest heavily in developing creative legal strategies to court and other challenges intended to constrain price organize their businesses and sales to reduce revenue loss. cuts. Alternatively, consumer groups like AARP and To minimize the impact on U.S. prices, they are likely to organizations representing employers would be expected raise reported international prices or restrict sales. Lower to favor policies that maximize price reductions for revenues may not only prompt manufacturers to lower drugs. Although difficult to disentangle from stakeholder investments in research and development, but H.R. 3 also politics, differing views about the innovation-spurring may cause drug makers to change decisions regarding role of higher prices — along with the importance of whether, where, and at what prices to launch new commonwealthfund.org Issue Brief, April 2020 The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work5 products, potentially delaying or not entering markets reasons. Title II of the bill would impose new rebates to where AIM or target prices would adversely affect U.S. offset prices that increase faster than inflation. In addition, revenues. the bill limits gross prices to 85 percent of average manufacturer price (AMP). A manufacturer’s gain from Similarly, they may choose to cease selling existing drugs a higher launch price would last at least until the drug is in some or all of the six reference countries to avoid having chosen for negotiation and the AIM price is established — low prices available for inclusion in the AIM or target which could be many years, especially for drugs that are prices. Deciding to withdraw products from existing neither “blockbusters” nor exceptionally high-priced. markets would be economically rational where the revenue loss from suspending sales would be less than the U.S. pricing for those drugs in therapeutic classes not reduction in U.S. revenue that would result from having selected for negotiation would likely not be changed, AIM or target prices for the product. because the market forces would generally remain the same and the provisions of H.R. 3 would not incorporate As an alternative to exiting markets entirely, their prices. Over time, additional existing drugs would be manufacturers would likely seek higher prices abroad, identified for negotiation, but there does not appear to be especially in the six reference countries. With limited an advantage to raising prices in anticipation of that (and opportunities for reimportation, manufacturers have Title II of the bill imposes inflation-related rebates). been free to set prices in each country according to relative price elasticities. The classic economists’ model of price discrimination explains this pattern well. The Effect on Research and Development U.S. has the least resistance to higher prices because Constraining the profitability of future drugs will of the minimal government role in pricing. For drugs reduce resources for research and development. Drug without therapeutic alternatives, the key resistance to development occurs primarily in the private sector, with higher prices is the affordability of patient cost-sharing. private funding accounting for more than three-quarters However, requirements for out-of-pocket maximums of health research and development. By reducing the for individual and employer-based coverage (along with expected profits spurred by bringing a new drug to “copay coupons” financed by manufacturers) have sharply market, lower prices would reduce incentives to invest in reduced this constraint. development. In most other advanced countries, the government The key issues are, first, the size of the reduction in private typically sets price ceilings. Under H.R. 3, manufacturers investment capital and, second, the value of drugs that will may be more willing to forgo sales, especially in the six not be developed as a result of reduced investment. To the reference countries, in order to achieve a higher price in extent that the current availability of investment capital the U.S. The willingness to withdraw from markets would (predicated on current pricing) is viewed as permitting be greatest in those countries with smaller populations projects of relatively limited value to be funded, like Australia and Canada, especially if they had low constraining the pool of capital might be expected to lead prices. How other countries would address the risk of to only limited loss of important new drugs. Alternatively, losing access to new drugs is uncertain. But overall, prices if one believes either that greater societal investment in these countries would likely increase should this in drug development is needed or that uncertainty in legislation be enacted. predicting potential breakthrough drugs undermines a “diminishing marginal return” hypothesis, reducing the pool of investment capital could have significant Effect on Launch Prices negative implications. The issue of diminishing returns to Launch prices for new drugs introduced into the U.S. additional investment in research and development has would likely be higher than under current law for several commonwealthfund.org Issue Brief, April 2020 The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work6 not gotten a lot of attention in the highly charged policy the Institute for Clinical and Economic Review (ICER) environment. is the best-known independent research organization that conducts this type of analysis, applying it not only As a result of this uncertainty, the Congressional Budget to prescription drugs but also to medical tests and Office (CBO) has limited itself to projecting changes in the procedures. number of new drugs and has not speculated about their value. CBO has estimated that between eight and 15 fewer To date, initiatives to have the federal government use drugs would be developed during the next decade if H.R.3 cost-effectiveness analysis have been unsuccessful and was implemented. Since the development periods for new strongly opposed by pharmaceutical manufacturers. But drugs tend to be very long, arguably the most critical CBO pressure to constrain drug prices is much greater now estimate is the long-term percentage reduction in new than in 2010 when the Affordable Care Act precluded drugs coming to market, currently estimated at 10 percent, using cost-effectiveness analysis. Indeed, manufacturers or 30 drugs per decade. A key challenge for policymakers might be more receptive to a U.S. process that weighs is to weigh this reduction in new drugs against the effectiveness rather than adopting prices from other substantial savings and increased access to drugs that countries that assume less cost per QALY. Although the H.R. 3 would achieve. U.S. has no experience in comparing effectiveness and costs in the Medicare program, organizations such as ICER have been honing their analytical methods and strategies REGULATING DRUG PRICES WITHOUT USING to engage stakeholders for many years now. Legislation PRICES IN OTHER COUNTRIES directing HHS to set a ceiling on what Medicare will Compared with establishing a new regulatory process in pay for a particular prescription drug on the basis of the U.S., relying on drug prices in other countries would effectiveness analysis could authorize the agency to likely lead to savings more quickly. Yet for a nation that contract with ICER and other research organizations, is less tolerant of regulation and limits on access to new create an in-house staff for this analysis, or do both. products than many others are, doing so may not be the best approach over the long term. Still, using prices in other countries might provide a useful transition to a new CONCLUSION American approach to regulating drug prices. H.R. 3’s provisions on the federal government negotiating prescription drug prices with manufacturers reflects Should the U.S. develop its own regulatory mechanism, a major change in thinking in this country about how one likely component would involve comparative to make drugs affordable to patients and purchasers, effectiveness analysis — an approach to quantifying the although the approach is used in many other countries. benefits of a drug or therapy in terms of improved health. The potential to lower spending is substantial but comes A common measure of comparative effectiveness is the at the price of a reduction in spending to develop new quality-adjusted life year (QALY),5 although some analysts drugs of uncertain magnitude and impact on value. Tying have raised both technical and ethical concerns with it. prices to those in six other countries might be useful as a Adopting an approach that incorporates value would transition. But to continue such a policy, the U.S. should allow drugs that are particularly effective to have much develop its own ability to make decisions on the basis higher prices than those with only little effectiveness. This of each drug’s value, such as through cost-effectiveness approach is used in countries like the United Kingdom, analysis. which sets a maximum on the cost per QALY. In the U.S., commonwealthfund.org Issue Brief, April 2020 The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work7 NOTES 1. These changes include: a redesign of the Medicare Part D drug benefit; the imposition of inflation rebates on certain drugs; requiring drug manufacturers to publicly report detailed information on costs and profits for drugs with high or growing costs; expanding Medicare to cover dental, vision, and hearing services; and other provisions. 2. “Frequently Asked Questions on Patents and Exclusivity,” U.S. Food and Drug Administration, last updated Feb. 5, 2020. 3. “Table 3 National Health Expenditures by Source of Funds,” Centers for Medicare and Medicaid Services, last updated Dec. 17, 2019. Calculation by the authors for 2018. 4. Nine out of 10 prescriptions are for generic drugs (totaling 22 percent of spending on outpatient prescriptions). Competing manufacturers offer generics after the FDA approves a drug as being “therapeutically equivalent” to an innovator based on the intellectual property and data submitted for initial FDA approval but only after patent and other intellectual property protections have expired. Single-source innovator drugs, including biologics, account for the remaining 10 percent of prescriptions and 78 percent of outpatient drug spending. See Association for Accessible Medicines, The Case for Competition: 2019 Generic Drug & Biosimilars Access & Savings in the U.S. Report (AAM, 2019). 5. Peter J. Neumann and Joshua T. Cohen, “QALYs in 2018 — Advantages and Concerns,” JAMA 319, no. 24 (June 26, 2018): 2473–74. commonwealthfund.org Issue Brief, April 2020 The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work8 ABOUT THE AUTHORS For more information about this brief, please contact: Paul B. Ginsburg, Ph.D., directs the USC-Brookings Paul B. Ginsburg, Ph.D. Leonard D. Schaeffer Chair in Health Policy Studies at the Schaeffer Initiative for Health Policy; he is the Leonard D. Brookings Institution Schaeffer Chair in Health Policy Studies at the Brookings Director of the USC-Brookings Schaeffer Initiative for Institution; and he is professor of Health Policy at the Health Policy University of Southern California. Previously, he served University of Southern California as founding president of the Center for Studying Health paul.ginsburgusc.edu System Change. He is nationally recognized for his work in health economics and health policy, especially health care market changes and cost trends. Dr. Ginsburg previously served as executive director of the Physician Payment Review Commission and as deputy assistant director of the Congressional Budget Office. He received his Ph.D. in economics from Harvard University. Steven M. Lieberman is a nonresident fellow at the USC-Brookings Schaeffer Initiative for Health Policy and the president of Lieberman Consulting, Inc. He is an expert in health care policy, analyzing reimbursement, budgetary, economic, and strategic issues. Mr. Lieberman has previously held senior roles at the Congressional Budget Office, Office of Management and Budget, Centers for Medicare and Medicaid Services, and National Governors Association. Editorial support was provided by Laura Hegwer. commonwealthfund.org Issue Brief, April 2020 About the Commonwealth Fund The mission of the Commonwealth Fund is to promote a high-performing health care system that achieves better access, improved quality, and greater efficiency, particularly for society’s most vulnerable, including low-income people, the uninsured, and people of color. Support for this research was provided by the Commonwealth Fund. The views presented here are those of the authors and not necessarily those of the Commonwealth Fund or its directors, officers, or staff.