No, Negotiating for Lower Drug Prices Won’t Hurt Innovation or Seniors

The Build Back Better bill gives Medicare the power to buy drugs cheaply. No wonder Big Pharma is trying to smear it.

While Americans are famously divided, there’s nearly universal despair over the high price of prescription drugs. Last year, the United States spent more than two and a half times the amount on drugs per capita spent by other wealthy countries. More than eight out of 10 Americans say prescription prices are unreasonable.

Medicare, one of the biggest purchasers of drugs in the world, pays high prices for medicines because it is barred by law from negotiating with pharmaceutical companies on behalf of its 62 million beneficiaries. Manufacturers set prices, and Medicare drug plans, despite the government’s enormous purchasing power, pretty much pay what’s asked. By contrast, the Veterans Health Administration (VHA), which covers far fewer people than Medicare, gets better prices because it’s allowed to negotiate.

Mercifully, Congress might finally give Medicare the power to bargain with the pharmaceutical industry. This authority is part of the Build Back Better Act, which is being debated in Congress and lies at the center of President Joe Biden’s domestic agenda. The bill incorporates much of H.R. 3, the Elijah Cummings Lower Drug Costs Now Act, named for the late Maryland representative. The Congressional Budget Office (CBO) estimates that enacting the Cummings bill would save Medicare alone an estimated $456 billion over 10 years and provide $45 billion in revenue. That’s about what passage of the Build Back Better Act would do. For some drugs, the prices negotiated by Medicare would apply to private insurance plans and Medicaid, which is run by the states. Medicare beneficiaries would save an estimated $114 billion in out-of-pocket costs over 10 years and $3 billion in lower Medicare premiums. The bill caps the price Medicare would pay for the most expensive prescription drugs at no more than 20 percent above the average price paid by other wealthy nations.

While Medicare price negotiation has strong support among congressional Democrats, some holdouts could tank the plan. These include Arizona Senator Kyrsten Sinema, whose pharmaceutical industry contributions to her campaigns total more than $500,000 since 2014. To be fair, the freshman senator has proven to be recalcitrant on a range of issues surrounding the Build Back Better Act. Her precise demands around Medicare drug price negotiations have been shrouded in secrecy. Still, Politico has reported that she won’t budge unless the legislation is scaled back to only $200 billion in price concessions from pharmaceutical companies over 10 years, far less than the $1 trillion in the original bill.

Another Democratic holdout is Senator Joe Manchin from West Virginia, who supports giving the feds more authority to negotiate drug prices, so long as the Build Back Better Act includes a tax on opioids, which have ravaged his home state. Such a tax is opposed by the pharmaceutical industry, which is facing a barrage of litigation over the opioid crisis and could wreck the fragile deal. New Jersey Senator Robert Menendez, home to a number of leading drug manufacturers, has also come out against some forms of Medicare price negotiation.

Meanwhile, the public overwhelmingly favors allowing Medicare to negotiate drug prices. Multiple polls over the summer found that as many as 96 percent of Democrats support it while more than 70 percent of Republicans do, too.

In September, the Pharmaceutical Research and Manufacturers of America, or PhRMA, the industry’s trade group, announced a seven-figure ad campaign designed to sour public support for giving Medicare the ability to drive down drug prices. The campaign follows two playbooks used by the pharmaceutical industry when this issue has come up before, most notably during the debate over the Affordable Care Act in 2010. One set of television and newspaper ads insists that any loss of revenue for the industry will stifle innovation and yield fewer lifesaving drugs. The other set of ads aims to scare Medicare recipients into thinking the government will deny them access to medicines. The industry is also using “AstroTurf” nonprofits, organizations that look like patient advocacy groups but that have extensive ties to PhRMA, and run campaigns that promote the industry’s interests.

PhRMA’s plan seems to be working. A news release by PhRMA states that when Americans see arguments for and against drug price negotiations (with PhRMA supplying the “against”), “public opinion dips by as much as 51 points.” A recent poll by the Kaiser Family Foundation found that although a majority favors price negotiation, that support has somewhat softened—though less than PhRMA claims. A third of respondents now express concern that allowing the government to negotiate prices would lead to “fewer new drugs being available in the future.” Supporters of the Biden legislation, such as AARP and Patients for Affordable Drugs Now, have launched their own campaigns, and it’s anyone’s guess what will happen to the Biden plan.

What’s not in dispute is that the pharmaceutical industry claims are, at best, dubious. Lowering prices means more access to drugs for Medicare beneficiaries, not less, because right now millions of seniors can’t afford their prescription medications, skipping doses or not filling prescriptions at all. Medicare negotiation could save the lives of an estimated 94,000 Americans over the age of 65 annually as prices decline and patients take their prescribed medicines in their entirety, according to an analysis from the Council for Informed Drug Spending Analysis.

In addition, Build Back Better would not touch a long-standing regulation requiring Medicare to cover all medicines in six disease categories, such as cancer and seizures. The program must also ensure that at least two drugs are covered for patients with other diseases. In cases of “sole source” drugs, or drugs that have no competitors, Medicare will be required to set a price that falls between the lowest price paid for the drug in one of six wealthy countries and 120 percent of the average price paid by those six countries. Drugmakers would face a steep excise tax were they to walk away from negotiations with an empowered Medicare.

Not that they would want to walk away. Big Pharma is doing just fine negotiating with the VHA, which passes significant discounts on to vets. The Government Accountability Office (GAO) reports that among 399 brand-name and generic prescription drugs, the VHA paid an average of 54 percent less than Medicare does for the same drugs. Yet big pharmaceutical companies seem perfectly happy selling to the VHA because they still profit, even if it’s a little lower than they would like. With its 62 million beneficiaries, Medicare represents an even bigger market than the 9 million veterans enrolled in the VHA prescription program, so it’s not surprising that the drug companies are fighting to sell to Medicare at whatever price they themselves choose.

The PhRMA ad campaign also claims that lower drug prices will kill innovation. One full-page ad in The Washington Post asserted that the legislation would lead to a “90% reduction in new medicines” and would “sacrifice future treatments and cures.” The AARP’s $4 million ad buy, announced in September, includes ads denouncing the “Big Pharma scam.” PhRMA’s implied threat is that lower profits will force companies to spend less on research and development, which is the wellspring of new treatments.

There is a modicum of logic here. R&D spending is a source of innovation, and unfettered prices put more money in the coffers of pharmaceutical companies. The U.S. market accounts for 60 percent of pharmaceutical profits. Developing and producing new drugs can be risky and expensive since many experimental drugs never make it to market. Some 90 percent get pulled in clinical trials. Yet pharmaceutical companies remain incredibly profitable and their stock prices are high because everyone knows that at least some drugs will pay off handsomely. But if drug companies see a smaller return on the medicines that make it to market, goes the argument, they might be less willing to invest in the R&D that leads to new ones.

From there the connection between overcharging Americans and miracle cures becomes tenuous at best. Even if drug companies’ revenues were dramatically reduced by Medicare price bargaining, the industry would still rank among the most profitable. Between 2000 and 2018, the pharmaceutical sector reported a gross profit margin of 76.5 percent on $11.5 trillion in revenue. That’s trillion, with a T. All other non-drug S&P 500 companies had gross profits of 37.4 percent. Even if pharmaceutical companies see a reduction in revenue on the order of 20 percent—the amount the Congressional Budget Office estimates the industry will lose over 10 years with the enactment of the Cummings bill—investors will continue to buy their stock and companies would still be able to invest in new products. For patients, the impact of the drop in revenue would be negligible. The CBO estimates that the act’s passage would reduce the number of new drugs by 2 to 5 percent over a decade. That’s a total of eight fewer drugs out of more than 300 expected to be produced over the next decade, which is the duration of the Build Back Better Act.

Big Pharma makes it sound like drug innovation is all owing to the private sector. Oh, please. The federal government, not Big Pharma, pays for a great deal of the research that leads to new medicines. The COVID-19 vaccines are just the most recent example. Between a quarter and a third of new drugs brought to market between 2010 and 2016, the last years for which numbers are available, owe their origins to federally funded studies. Nine out of 10 of the biggest pharmaceutical companies spend less on R&D than they do on marketing, advertising, and overhead, which includes massive CEO salaries. (Pay among CEOs at the top 15 pharmaceutical company ranges from $18 million to $135 million.) Even Alex Azar, secretary of health and human services during the Trump administration and himself a former pharmaceutical company executive, called the claim that lower drug prices will lead to less innovation a “tired talking point.” As President Biden noted in August, “according to one study, from 2016 to 2020, pharmaceutical companies spent $577 billion in stock buybacks and dividends—$56 billion more than what they spent on all research and development over that same period of time.”

It’s also important to keep in mind that for every miraculous lifesaving drug or vaccine these companies produce, there are plenty that provide only minimal benefit to patients. Take Aduhelm, the Alzheimer’s drug now being marketed by Biogen, despite two large clinical trials that failed to show it did anything to improve memory or cognition

Medicare is deliberating on whether to cover Aduhelm. Under the Biden plan, the federal government could negotiate prices based, in part, on the drug’s effectiveness. It might choose to pay for Aduhelm, for example, but only at a steep discount from the approximately $56,000 per patient per year Biogen is now charging. According to the Institute for Clinical Effectiveness Research, a nonprofit organization that assesses medical treatments and their cost-effectiveness, insurers should pay no more than $2,600 to $8,300 per year for Aduhelm, if they cover it at all.

No longer able to command gargantuan sums for minimally useful drugs, the industry would have a bigger incentive to focus on innovation that would truly help patients. Plus, the GAO estimates that the drug industry will find a way to charge overseas buyers more if Medicare parleys for lower prices—which is the way it should be. There’s no reason Americans should pay higher costs for Lipitor or Zoloft than, say, the French do. They probably still will, but this should help.

But Biden’s bill and the lower drug prices that come with it are in danger. The Cummings bill was blocked from progressing out of the House Energy and Commerce Committee by three “moderate” House Democrats, in addition to the caviling senators. Shortly after that, the three were joined by six other Democrats who signed a letter to House Speaker Nancy Pelosi, repeating the industry claim that the bill would stifle innovation. One coauthor of the letter, California Democrat Scott Peters, has received $88,550 from the pharmaceutical industry this year, more than any other House member, according to OpenSecrets.org.

That committee defeat didn’t kill the Build Back Better Act, but it is a sign that the mammoth plan is in peril. And with its demise would go new health benefits including dental, vision, and hearing benefits for Medicare patients and subsidies for the Affordable Care Act that would help uninsured persons, who are disproportionately Black and live in the South, where many states did not expand Medicaid. This and other benefits in the bill, including paid family and medical leave, are dependent on Medicare getting the power to negotiate drug prices or another source of revenue—which is unlikely to happen.

If Congress fails to give Medicare the power to negotiate drug prices, it won’t be the first time a special interest has derailed a popular measure. Researchers at Princeton and Northwestern compared 20 years of congressional actions to contemporaneous public opinion polls and found almost no correlation between the two. Corporations and wealthy individuals (but not the general public) were able to stop bills they didn’t like. Stopping or even diluting negotiating drug prices would be a massive blow to the Biden domestic agenda and to American seniors, who now spend their golden years making big pharmaceutical companies even richer.

Jakob Cansler provided reporting assistance.

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Shannon Brownlee and Jeanne Lenzer

Shannon Brownlee is a lecturer at George Washington University School of Public Health. Jeanne Lenzer is the author of The Danger Within Us; America's Untested, Unregulated Medical Device Industry and One Man's Battle to Survive It.