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Drug Pricing Plan Faces Industry Gripes as Senate Reconvenes

July 11, 2022, 9:15 AM

An attempt on Capitol Hill to reduce skyrocketing US drug costs may undercut its own goal by stripping pharmaceutical companies of incentives for producing blockbuster drugs and their lower-cost counterparts, industry groups and analysts warn.

Congress returns this week to begin weighing in earnest a retooled reconciliation package that would need buy-in from every Democratic senator before advancing. Key to that package is a legislative proposal to drop prescription drug prices, a move that would revive a major piece of President Joe Biden’s Build Back Better agenda.

That proposal would require government health plans, including Medicare, to negotiate the prices of medicines with the manufacturers that produce them.

Sens. Joe Manchin (D-W.Va.) and Chuck Schumer (D-N.Y.) agreed to a modified version of provisions in the Build Back Better budget bill (H.R. 5376) previously passed by the House. It would allow Medicare to negotiate drug costs and cap seniors’ out-of-pocket costs at $2,000 a year.

The plan has drawn sharp criticism from the pharmaceutical industry, which says the legislation injects a dose of uncertainty into an innovative marketplace that’s high in incentives for investors and companies.

“The bill will no doubt have disproportionate consequences for small biotech companies, which are responsible for the lion’s share of medical innovation” and “rely on a healthy investment environment to stay afloat and bring lifesaving therapies to patients,” Michelle McMurry-Heath, president and founder of the Biotechnology Innovation Organization, said in a statement.

The legislation creates “billions of dollars in market distortions” for the companies behind complex, difficult to manufacture drugs known as biologics, an industry that “relies on 90 percent of its funding from private investors,” McMurray-Heath said.

It “would drastically slow critical investments in future research and development, stalling drug innovation, and ensuring the next generation of groundbreaking therapies remains out of reach for American patients,” she said.

‘Reasonable Gripes’

Unlike the drug-pricing bill passed by the House last November, the Senate’s language has a provision for delaying price negotiations on biologic drugs, as long as a viable lower-cost version—known as a biosimilar—is at an advanced stage of development.

Nevertheless, the climate for drugmakers looking to cash in by producing biosimilars or cheaper, generic versions of traditional drugs will face a shift under the Democrats plan, industry experts say.

“Biosimilar and generic manufacturers may have very reasonable gripes and complaints about this setup, as it arguably pours cold water on their opportunities to compete, which have already been somewhat constrained,” said Antonio Ciaccia, CEO of Ohio-based drug pricing data firm 46brooklyn Research.

According to Ciaccia, allowing the government to select drugs from the marketplace for direct negotiations can “create uncertainty and pessimism” for investors, particularly for generic and biosimilar products. That’s because investors often determine the value of those products, he said, meaning the government has eroded the investors’ role.

Ciaccia called the proposal “one of the more thoughtful approaches that we’ve seen” but noted that the benefits of competition more broadly could be hindered.

He also noted that trying to “rein in discrete parts” of the drug marketplace through government negotiations could make “other products more expensive to off-set the potential savings associated with these negotiations.”

Observers point to other flaws in the legislation.

“The bill risks penalizing valuable products because they treat large numbers of patients, as opposed to having prices that are hard to justify,” said Benedic Ippolito, senior fellow in economic policy studies at the American Enterprise Institute.

Drugs eligible for rate negotiations are those among the highest expenditure drugs in Medicare Parts B and D. That means that drugs could be subject to regulated prices simply for being high volume.

“These are the types of products we want to tilt incentives towards. Ideally, drug market reforms should emphasize products whose prices diverge most from a plausible measure of their value,” Ippolito said.

“Rate regulation is less costly when industry is given clear incentives about what will be rewarded. I worry that the current, relatively vague guidance for setting prices doesn’t do that,” Ippolito said. “Uncertainty is costly.”

Next Steps

Senate Democrats want to include the drug-pricing proposal in their budget reconciliation package, a move that would allow lawmakers to pass the measures with a simple majority that wouldn’t need the votes of their Republican colleagues.

The Congressional Budget Office said Friday the drug plan would reduce the deficit by about $287.6 billion over 10 years.

It’s one piece of the package that is also expected to include tax and energy proposals. Democrats hope to pass it by the time of the August recess. While it has the support of Manchin, his spokesman, Sam Runyon, said last week in a statement that suggestions that a broader reconciliation deal is close are false.

House Energy and Commerce Chairman Frank Pallone (D-N.J.), whose committee has jurisdiction over drug-pricing legislation, on Twitter referred to the bill as “an encouraging sign” that the Senate is ready to take action.

Meanwhile, Rep. Scott Peters (D-Calif.), who voted against a drug pricing measure in the E&C committee, would vote in favor of the Senate Democrats’ plan despite its lacking a policy for controlling insulin costs, according to his press secretary, Daniela Contreras.

To contact the reporter on this story: Ian Lopez in Washington at ilopez@bloomberglaw.com

To contact the editors responsible for this story: Cheryl Saenz at csaenz@bloombergindustry.com; Alexis Kramer at akramer@bloomberglaw.com