Decoding Health Care

Substack 41 (part two): State of the Union (drug pricing continued)

The Trump administration has embraced IRA negotiations and in fact has bragged that they have gotten much better deals than the last administration. But they aren’t satisfied. At the very end of President Trump’s first administration he introduced the concept of Most Favored Nation (MFN) pricing. This was an approach to controlling the high cost of drugs based on a much more “populist” theme. It is well known that the US pays a lot more for drugs than any other country. To President Trump this was unacceptable. He felt the US should get the best price. The US is, after all, the biggest market. So he proposed indexing US prices to prices in other high income nations (so called MFN).

The proposal came out late in President Trump’s first term and the administration attempted to bypass some regulations. The proposal didn’t get out of the starting gate. President Biden shut it down in the first 100 days of his administration. But President Trump has reintroduced the idea. The idea is basically the same as originally proposed. Some details are still a little sketchy. But earlier this year, the Center for Medicare and Medicaid released proposed demonstration projects to implement MFN pricing for both oral (GUARD) and intravenous drugs (GLOBE) (https://www.cms.gov/priorities/innovation/innovation-models/guard and https://www.cms.gov/priorities/innovation/innovation-models/globe).

MFN pricing is important because it doesn’t introduce these discounted prices in a phased in fashion as IRA does. Although details are still being worked out, it appears essentially all drugs could be subject to global price indexing. And this indexing is based on prices in G7 (or in the Organization for Economic Co-operation and Development, or OECD, countries).

It is important to recognize that the prices that other countries pay are arrived at by a process called Health Technology Assessment (HTA). HTA defines an appropriate price that links price to benefit. Although each country has their own specific process, this is distinctly different from price setting in the US which can be charitably called arbitrary. In many countries, benefit is defined by a process called incremental cost effectiveness research (ICER) and the unit of “benefit” is a QALY (quality adjusted life year gained). Because the MFN price will be at or below these HTA based prices, MFN is by extension an HTA price.

This approach in the US is revolutionary. For years, HTA in drug pricing has been radioactive. But now President Trump is putting it front and center. And the pharmaceutical industry is going nuts. For years the pharmaceutical industry has been waging a war against HTA. The closest thing to HTA in the US is the Institute for Clinical and Economic Review (ICER), a non-profit based in Boston that examines the prices of drugs in the context of the benefits these drugs bring. ICER has often been targeted by the pharmaceutical industry; industry has successfully blocked any explicit use of ICER data in drug pricing in Medicare (though it is widely believed ICER may influence the IRA negotiations). MFN indirectly brings the ICER approach to US drug pricing.

How much will this lower drug costs? Since the details of how the program is going to be implemented are unclear, there are lots of estimates. It has been suggested that the MFN price could be 1/3 less (or even lower) than the current price for these expensive drugs (https://www.ispor.org/publications/journals/value-outcomes-spotlight/vos-archives/issue/view/preventive-medicine/international-reference-pricing-comes-to-america--the-mfn-policies-explained). That is real money.

In response, manufacturers have stated that this revenue decrease will mean less research and development. And that means potentially fewer cures. The Congressional Budget Office has estimated that as a consequence of this lost revenue, there will be 8-15 fewer new drugs approved over the next decade (https://www.bentley.edu/centers/center-integration-science-and-industry/drug-reduction-dashboard). Manufacturers have also argued that because the US price will be determined by ex-US prices, they will consider not marketing a drug in countries that do not pay them enough. So let’s pretend that Germany doesn’t give the manufacturer the price they want and the German price would create a drag on the US price; that manufacturer will in turn not allow cancer patients in Germany to get that drug. Too bad for the patient. I know you may think I am exaggerating but I was at a meeting last week and a fairly prominent market access person from one of the largest manufacturers said exactly that.

In summary, in order to preserve profitability, the manufacturers of these life saving drugs will cut research and limit access. It is clear that they care a lot about patients. Not. Someone needs to tell them to find a different strategy.

Doctors who prescribe physician administered drugs are also apoplectic. If the IRA is bad for physician practice profitability, this could be worse. The administration has tried to calm them by suggesting the mechanism by which the MFN discount will be realized by the government will be a post payment rebate and therefore will not impact the ASP (for details you can read the GLOBE proposal; it may help you catch up on some sleep). This needs a little more thought because it still seems ASP will be impacted. All of this puts the entire system of physician “buy and bill” in jeopardy, and that is how we pay for cancer care in the community.

As if the IRA and MFN aren’t enough, there is a third leg of the Trump drug pricing strategy. As a component of the Trump administration tariff policy, prescription drugs were targeted for tariffs. Over many years, a lot of pharmaceutical manufacturing left the US. Labor was cheaper and there were favorable tax incentives overseas. Ozempic is a great example. Ozempic is made by Novo in Denmark. It is the primary driver of Denmark’s economy. Novo’s market capitalization is greater than Denmark’s GDP. Novo investment in manufacturing has spurred biotech development in Denmark. Good for Denmark. Not so good for the US.

In keeping with the “America first” theme, the Trump administration has entered into agreements with 16 of the biggest global pharmaceutical firms. The details of these agreements are confidential. In every case, the companies agree to take steps to build up US manufacturing capabilities to avoid tariffs. In every case there are some price concessions, usually to Medicaid (NOT Medicare or commercial insurers) and to a discounted direct to consumer price (so called TrumpRx). These direct to consumer (DTC) prices are significantly discounted. For example, Ozempic’s sticker price has been over $1000 a month; on TrumpRx is $200 a month.

But a closer look at Ozempic tells you that the emperor isn’t wearing too many clothes. To start with, Ozempic already had a discounted DTC price (about $500 a month). Plus Ozempic has had a lot of competition from other GLP1 drugs, so the price has been coming down. And the TrumpRx price is only for the starting dose. If you have insurance, you pay a lot less than that OOP price tag. So TrumpRx prices are a nice story but don’t really move the needle. The president did get Mark Cuban’s seal of approval for what that is worth. But these price negotiations do tell you a lot about how drug pricing is the land of make believe. Exactly where these direct manufacturer negotiations will land is anybody’s guess.

There has been a lot going on in the drug pricing world in this second Trump administration. As someone interested in health care policy and payment I find it interesting. And some of it is actually pretty good, implementing long overdue accountability for the high cost of drugs. But what will it actually mean to people? This is a much harder question to answer.

Defenders of the IRA and MFN will argue that reducing Medicare expenditures is a good thing for America. If we spend less money on drugs, that could reduce every Medicare beneficiaries’ part B or part D premium, but I doubt that will happen. As it stands, most of the money Medicare spends on drugs comes from your tax dollar. Will we be able to spend those saved dollars on other stuff, like health care for the poor? I doubt it. Or will we enjoy another tax break? Maybe, but again I doubt it.

There is a lot of hand wringing about the fact that we spend close to 20% of GDP on health care. Is that too much? If so, what is the right number? Comparing us to other OECD countries doesn’t really tell the story. We clearly spend a lot more. And we are constantly reminded that we get less for our money than other countries, but that is a very complicated discussion (about poverty and obesity) that we won’t take up here. So what if we spend so much? It is true that employer health spend is a drag on wages, so saving money for employers is a good idea. But Americans don’t actually spend a disproportionate amount out of pocket on health care (about $1600 per adult per year exclusive of health care premiums). Nonetheless, 4 out of every 10 Americans are in debt due to medical expenses (https://www.kff.org/health-costs/health-policy-101-health-care-costs-and-affordability).

This need to reduce medical spend should be counterbalanced with the fact that health care is a very important sector of our economy. When we say that health care is 20% of the GDP that isn’t entirely a bad thing. Those are dollars plowed back into the economy. Health care is the single biggest employer in the US. And for many years, health care hiring has been “recession proof”. Even in times of high unemployment health care hiring has been preserved. This explains why health care legislation is so hard to get through Congress. In many Congressional districts, the hospital is the biggest employer and anything that hurts the hospitals hurts the constituents.

I regret never being formally trained in economics. But it seems that the argument about drug pricing revolves around whether or not those savings would be better used elsewhere. I don’t think many people would disagree with the conclusion that it COULD be used in a better way. Whether or not that becomes a reality is, to some extent, dependent on our government.

That is a nice transition to the third and final part of the state of the union, the changes brought by HHS. Unfortunately I cannot say that these policies bring me a lot of comfort as I contemplate how the government is going to use any savings drug price negotiations will bring. But hope springs eternal