Proposed Medicare Overhaul Could Have Significant Impact on Drug Development

Generic Drugs_Compressed

A bill that aims to overhaul Medicare and provide it with the ability to negotiate prices for prescription drugs covered by the plan could significantly impact future research and development conducted by pharmaceutical companies.

An analysis conducted by the nonpartisan Congressional Budget Office on the Elijah E. Cummings Lower Drug Costs Now Act, which the U.S. House of Representatives passed in 2019, indicates that such a change in Medicare’s formulary will substantially affect new drug development, an argument also made by the industry over the past several years. The analysis shows that the bill would lead to a 15% to 25% reduction in expected returns for drugs in the top quintile of expected returns. And that means a decrease of new drugs entering the market in the following years.

The CBO said the Medicare overhaul under the Cummings bill, known as HR3, is associated with a 0.5% average annual reduction in the number of new drugs entering the market in the first 10 years if the legislation is signed into law. That increases exponentially to an 8% annual average reduction in the third decade. In all, the policy is estimated to lead to two fewer drugs in the first decade, 23 fewer over the next decade, and 34 fewer drugs in the third decade.

“For new drug development, CBO estimated that H.R. 3 would have reduced global revenue for new drugs by 19 percent, leading to approximately 8 fewer drugs introduced to the U.S. market over the 2020–2029 period (a 3 percent reduction) and 30 fewer drugs over the next decade (a 10 percent reduction),” the report shows. 

At the same time HR3 will curb drug development over the next three decades, the CBO estimated plan, if it becomes law, would save Medicare $456 billion over the next 10 years. 

The Biden administration supports a plan that provides Medicare the ability to negotiate. Earlier this month, the administration said Medicare’s ability to negotiate would lead to better prices for Americans. Biden included the call in his Build Back Better plan.

The Pharmaceutical Research and Manufacturers of America (PhRMA), a national trade association for the industry, has been opposed to the overhaul plan from the beginning. In a Twitter post this week, PhRMA head Stephen J. Ubl said the government’s ability to negotiate prices would “inevitably limit patient access to medicines.” He also noted that negotiations would not address structural problems that drive up the costs of drugs, which he said is a surprise to voters who have been seeking lower out-of-pocket costs. 

In an opinion piece on Barrons, Ubl commented that the Veterans Health Administration already uses a more restrictive formulary than Medicare, which has led to the agency covering 16% fewer drugs than Medicare Part D. 

While those opposed to the Medicare negotiation will undoubtedly seize on the CBO’s analysis, the report writers provided a caveat that there is uncertainty in drug discovery and how drug manufacturers could react to changes in the government’s ability to negotiate prices. The analysts also noted that changes to Medicare could lead to lower federal spending and lower out-of-pocket costs for drugs, and an increase in the use of drugs that are already available to patients.  

Back to news