On Tuesday morning, the Biden administration released the list of first 10 Part D drugs subject to negotiation by the Centers for Medicare and Medicaid Services (CMS). That’s a big deal, so let’s talk about it.
A a little background: The Inflation Reduction Act (IRA), passed in 2022, instituted a price control scheme (described as negotiation in the law) for Medicare. The scheme starts with a maximum fair price (MFP), i.e., as high as Medicare is willing to go for drugs that are in the top 50 single-source drugs (excluding existing branded competition or impending generic competition) with the highest total expenses. Depending on how long the drug has been on the market, the MFP can be between 40 and 75 percent of the non-federal average manufacturer price (AMP), with larger discounts applied to drugs that have been around longer. Manufacturers can counter-bid, but ultimately, if they don’t act, they will be hit with a 95% excise tax or be forced to take their drug out of Medicare coverage.
CMS chose Eliquis, Jardiance, Zarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara and several variations of an injectable insulin as its 10 drugs subject to negotiation. Eliquis, a stroke prevention drug, is considered the most expensive by a large margin, apparently costing CMS nearly $16.5 billion for use by some 3.7 million Part D enrollees. cost Medicare so much. CMS decided to use full Part D brute covered prescription drug costs from June 2022 to May 2023. It is important to note that brute costs are the costs for Medicare before standard discounts are applied, which means that the liquid the cost was probably much less. Doing some extremely rough math using Bristol-Meyers Squibs (BMS, maker of Eliquis) 10K forms, with Medicare Eliquis spending representing 23.7% of BMS’ total gross sales and BMS’ total Medicare and Medicaid rebates at $11.3 billion, and assuming that BMS’s discount percentage from Medicare is approximately equal to Medicare’s percentage of its gross sales, this author estimates that BMS gave Medicare a discount of at least $2.9 billion to the Eliquis in 2022. For context, I estimate that BMS made a net profit from the Eliquis of just $1.85 billion from Medicare. Considering the number of Part D users, there is an estimated profit of $500 per patient for stroke prevention. In contrast, a stroke costs a combined average total of $44,929 for Medicare and the beneficiary.
The exact number is not the point; simply focusing on gross expenses is a flawed metric. It does not capture actual Medicare spending on a drug and does not capture the value of those expenditures. CMS knows what your net spend is after factoring in all the rebates and other recoveries, and Congress should get those numbers to get a better idea of how much these drugs really cost. One is tempted to think that the CMS considered gross spending in its calculations for purely political purposes. After all, bigger numbers always make bigger headlines.
Ultimately, whether the CMS uses gross or net expenditures has little consequence compared to the overall cost of the IRA to the physical and fiscal health of the country. Price controls on Medicare will mean rising costs in the private market as drug makers try to recoup losses, potentially through lower discounts. Also, the inflationary penalty on the IRA means higher list prices at launch, meaning consumers can see higher premiums. It is higher direct costs at the pharmacy counter. Even worse, based on evidence to look for of the University of Chicago predicts that the impact of the price control scheme amounts to somewhere around $663 billion less in research and development spending, resulting in 135 fewer new drugs and the loss of 331.5 million years of life in the United States through 2039. Gross indeed.
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