Medicare Drug price control in the Inflation Reduction Act Moves Forward Except for Insulin

JAMA NetworkHow Do Commercial Insurance Plans Fare Under Proposed Prescription Drug Price Regulation?” Rena M. Conti, Richard G. Frank, Len M. Nichols

December 2021, this article came out detailing Medicare negotiating directly with pharmaceutical companies and the impact of the negotiation on people insured by commercial plans. That is if commercial insurance plans were included in the price reductions given to Medicare. We are going to see how this will playout with all negotiation discounts applying to Medicare alone. More on this past the quote.

Republicans nixed the discount Medicare will have with Insulin applied to Commercial Insurance plans. The expected result is a potential increased cost resulting from Medicare discounts being passed on to Commercial Healthcare plans to cover.

This is called cost-shifting.

Cost shifting occurs when a private firm acts to offset losses in revenue from regulations establishing lower prices in Medicare (etc.) by increasing drug prices on unregulated payers. While this might have some intuitive appeal, the contention in the US prescription drug market is inconsistent with standard economic models of profit-maximizing firms.

Pharmaceutical companies set the price of their products at the point which maximizes their profits, given the demand they face and the marginal costs of production. These are generally accepted to be very low compared with current prices.

Price regulation applying to Medicare only, splits demand for a drug into 2 purchasing streams: the first, the purchaser for which regulation has made them more price sensitive (Medicare), and the second, the purchaser with the same price sensitivity as before the regulation (commercial plans).

The price charged by the profit-maximizing pharmaceutical company for their drug to Medicare is expected to fall. However, this change should not have any effect on the price charged for the drug to commercial plans and their beneficiaries because their demand remains unchanged. (edited)

My point would be, we do not know the real costs for manufacturing a drug, pharmaceutical device, etc. as opposed to profits. Costs are not readily made known as can be seen in EpiPens. EpiPens are a device which was costed out to be approximately $10 per pen. Initially, Mylan’s increases prices to $600/set of two. Mylan then was offers up generically a ~$300/set of two. Mylan was purchasing both versions from a Pfizer facility.

According to JAMA under the Inflation Reduction Act, there should not be impact on costs. Of course profits will be slightly less, but not less than costs. We all know, Humalog for type 1 Diabetes was marked up like EpiPens were. Humalog is also just like EpiPens.

A bit of history. January 1, 2012, Alex Azar became the president of Lilly USA, LLC, the largest division of Eli Lilly and Company. He was responsible for the company’s entire operations in the United States. Drug prices rose under Azar’s leadership, including the tripling of the price of the company’s top-selling drug Humalog (insulin). Eli Lilly was one of three companies accused in a class-action lawsuit of exploiting the drug pricing system to increase profits for insulin. Eli Lilly was also fined in Mexico for colluding on the price of insulin.

Commercial insurance contends cost shifting is the norm necessitated by underpayments by federal programs. It also contends cost shifting is supported by empirical evidence drawn from the experiences of hospitals in the face of reductions in price paid by Medicare. Economists and policy makers take a different view of the industry claims of large-scale cost shifting due to lower pricing for existing drugs. In this case, the argument would be costs not covered by Medicare would be absorbed by commercial insurance.

The counter to this being:

  • drugs targeted for price negotiation are sold by pharmaceutical companies acting as monopolies, while  
  • hospitals typically operate in relatively competitive markets.

With new drugs, Medicare regulations also prohibits price from being considered in the decision making to cover those drugs. There are differences between drug and hospital business besides government protections for new drugs.

In the presence of high price levels, pharmaceutical companies selling drugs without competitors do raise prices higher over time. Price increases for many drugs each year exceed the Medical Pharmaceutical CPI, the general inflation rate, or the growth in labor and material costs. This conflicts with the belief of drug price optimizing for profit maximization in the beginning. This is also born out in a recent article “Drug price control in the Inflation Reduction Act.”

The second type of price response to Medicare-only negotiation relates to setting the prices of new drugs. Drug companies prefer to launch new drugs in the US first. In the US, new drugs receive the highest prices and are the most profitable in the US. It is not believed (JAMA) a Medicare-only negotiation could disrupt companies raising prices of new drugs in European Union member countries to make up for the US Medicare revenue shortfall.

So what is going on in Congress? The parliamentarian ruled the bill extending drug price controls to the private sector can not be passed under Reconciliation (Byrd Rule). This rules out commercial healthcare insurance, covering much of America’s workers and their families under age 65. In this particular instance, it involves insulin at the same price it would be for Medicare enrollees under the Inflation Reduction Act. In a vote to pass the bill as is the Senate voted 57 to 43 to waive the procedural objection. Sixty votes were needed.

Senate Health Committee Chairwoman Patty Murray;

“Thirty-seven million people in our country have diabetes, and it’s absolutely wrong that many of them cannot afford the Insulin they need to live,” she said. “I’ve heard from people in my state who risk their life and ration insulin to make ends meet, all the while drug companies are jacking up prices.”

In which case not having the required 60 votes, US citizens using commercial healthcare insurance could pay moore and Democrats lost the vote on this issue. While not a substitute or a consolation for having less costly Insulin, the Republicans are on record for opposing actions to lower a drug price on a widely used by US citizens.

Just politics, everyone can go home now . . .

“JAMA Health Forum – Health Policy, Health Care Reform, Health Affairs| JAMA Health Forum | JAMA Network

GOP Hands Big Pharma a Get-Out-of-Jail-Free Card” | Washington Monthly

POLITICO Playbook: Senate parliamentarian kills key policy in Dem reconciliation bill”- POLITICO

Prices Increased Faster Than Inflation for Half of all Drugs Covered by Medicare in 2020″ | KFF

How BLS Measures Price Change for Medical Care Services in the Consumer Price Index: U.S. Bureau of Labor Statistics