We’re excited to publish this special issue of HMPI focusing on the topic of pharmaceutical costs and benefits. The Inflation Reduction Act of 2022 provides a new pathway for direct negotiation of drug prices by the Medicare program. This is a change from the Medicare Modernization Act of 2003, which prohibited direct negotiation of drug prices by the government. Despite the rhetoric surrounding this law, the program itself is modest, with a small number of products subject to negotiations in 2024, with no changes to actual prices for these prices until 2026. The program will continue to add new products to the negotiation program each year.
There are significant questions about the program – will it really impact prices for consumers or is the benefit most likely to accrue to taxpayers (who pay 75% of the costs of Medicare Parts B and D)? Will the program impact innovation in terms of investment in new products or product categories? The industry appears to respond to financial incentives. For example, the portfolio of products under development leans heavily towards oncology, in part due to price inelasticity in this part of the market (and in part due to the advances in medical science in this field). Finally, will this effort have any carry-over to the private market? One can imagine that it might force prices upwards as manufacturers attempt to recoup lost revenue that was promised to investors. As Mark Pauly, our guest editor says, we’ll have to wait and see.
One interesting question not addressed in this issue is the mechanics of price negotiation. How should we negotiate these prices. First, we have to ask the question of whether price negotiation is based on gross price, Wholesale Acquisition Cost, or net price, or the amount actually received by the manufacturer. For Part D drugs, the difference between gross and net is explained by rebates and other potential transactions between pharmaceutical firms and Pharmacy Benefit Managers. For Part B drugs, the issue is the required price discounts of the 340B program, now impacting over 54,000 covered entity sites. Once this is determined, how could the government justify it’s price: economic analysis (like cost-effectiveness analysis), reference pricing to prices in other markets, competitive bidding, or maybe just a required discount based on number of years the product has been in the market. It will be a real challenge to develop an approach that can withstand public scrutiny and potential further court challenges.
We’re grateful to Mark Pauly and the authors of the papers in this special issue for helping to bring their perspectives to this fascinating topic.
Kevin Schulman, MD, MBA
Editor-in-Chief, Health Management, Policy and Innovation (HMPI)
President, Business School Alliance for Health Management (BAHM)
Professor of Medicine, Stanford University