Will ‘Build Back Better’ Spell Disaster for Pharma Innovation?

  • The House of Representatives on Nov. 19 passed Democrats’ hard-fought, $1.7 trillion social spending bill, bringing it significantly closer to becoming law and ushering some of the most ambitious drug pricing reforms ever attempted.

    With the fate of the Build Back Better Act now in the hands of the Senate, the debate over how its drug pricing provisions will impact innovation in the life sciences industry has never been hotter — especially now that the Congressional Budget Office (CBO) has weighed in.

    To some industry observers, the bill’s most controversial attempts to rein in drug prices — including allowing Medicare to negotiate the price of drugs with manufacturers and penalizing drugmakers if their list prices rise faster than inflation — are tantamount to sabotage of the pharmaceutical sector.

    “Efforts to dismantle the pharmaceutical industry — one of the crown jewels of U.S. industry — moved another step closer to fruition,” Numerof & Associates President Rita Numerof, Ph.D., writes in a statement emailed to AIS Health. “The consequences of this ill-considered plan to give HHS enormous, unchecked power to unilaterally reduce Medicare drug costs will have far-reaching and devastating ramifications: reduced investments in life-saving drug R&D, slower economic growth and reduced health care quality for U.S. patients, to name just a few.”

    The Pharmaceutical Research & Manufacturers of America took a similar position, with PhRMA President and CEO Stephen Ubl writing in a Nov. 19 statement that “the consequences of this heavy-handed drug pricing plan will make a broken insurance system worse and throw sand in the gears of medical progress. It will stifle continued innovation after a medicine is first approved, discourage the introduction of generics and biosimilar treatments and undermine the robust competition that has made the Medicare Part D program a success for millions of seniors.”

    In addition, “the bill doesn’t address perverse incentives in the system that are leading to higher costs for patients,” Ubl added. “This is a disappointing day for patients, and I hope the Senate will reject this flawed drug pricing plan and deliver the more balanced approach patients deserve.”

    The CBO estimated in its Nov. 18 report that the drug pricing reforms included in the Build Back Better Act will result in 10 fewer drugs entering the market over the next 30 years, out of an expected 1,300 new drugs. Regarding projected savings, the CBO estimated that over the next decade:

    • Allowing Medicare to negotiate drug prices will save the federal government about $79 billion;
    • Requiring rebates if drug list prices aren’t capped at inflation would save about $84 billion;
    • Repealing a never-implemented rule that would have restructured the Part D rebate system will save about $143 billion; and
    • Redesigning the Part D benefit — such that manufacturers and payers share a greater amount of costs in the catastrophic phase of coverage, and seniors’ out-of-pocket costs are capped at $2,000 — would save approximately $1.5 billion.

    The $79 billion in savings predicted to result from allowing Medicare drug price negotiation is significantly less than the $456 billion that the CBO estimated the government would save if Congress passed H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act. As Democrats decided what drug pricing provisions to include in their social spending bill, H.R. 3 served as a starting point. The CBO had also estimated that the more-robust H.R. 3 would lead to 59 fewer drugs coming to market in the next three decades (compared to 10 fewer under the Build Back Better Act).  Unlike in H.R. 3, the Build Back Better Act would limit Medicare negotiation to drugs with the highest gross spending in Medicare Part B and Part D that are also single-source therapies and have been on the market for nine years or more (for small-molecule drugs) and 13 years (for biologics). All insulin products would be targeted for negotiation, and therapies produced by small biotech companies would be exempted until 2028.

    The Build Back Better Act also places stricter limits than H.R. 3 did regarding how frequently HHS will be allowed to engage in Medicare drug price negotiation. While H.R. 3 instructed HHS to negotiate for the prices of “at least 25” eligible drugs in the program’s first year and “at least 50” annually after that, Democrats’ revised drug pricing reforms will limit negotiation to “no more than 10” eligible drugs in the program’s first year, rising to a maximum of 20 drugs over time.

    Negotiated Prices Are Just for Medicare

    In the version of the Build Back Better Act passed by the House, the price-negotiation provisions do not apply to the private sector, but the inflation cap on prices does, according to Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy. However, it’s not clear what the Senate parliamentarian — who decides whether parts of legislation comply with budget reconciliation rules — will do about the inflation caps provision.

    Even though the Build Back Better Act represents a scaled-back version of H.R. 3, it’s not entirely unsurprising that PhRMA and other stakeholders are still crying foul over the potential impact of the legislation, Adler says. On the one hand, “I’m very confident that there is a substantial difference in the effects on new drug development from the full H.R. 3 proposal and this proposal,” he tells AIS Health, a division of MMIT.

    However, “I’m not sure that there’s an exact dollar amount related to how vociferously PhRMA will claim that these provisions will destroy the industry and all innovation to mankind,” he adds. “They’re lobbyists; it’s understandable. But there’s no distinction drawn between relatively small reductions in revenue and huge reductions in revenue.”

    Will Bill Become a Slippery Slope?

    Numerof, however, says it isn’t enough that the Build Back Better Act will have a more muted effect on the industry than Democrats originally envisioned.

    “Like much of the initially proposed ‘Build Back Better’ plan, the starting terms were too far reaching for them to have any chance of passage. In response, the terms of the current proposal are scaled back, but nonetheless create the infrastructure and establish the precedent for the radical changes it envisioned,” she tells AIS Health. “In doing so, this legislation sets the stage for incremental but continuing government incursion into an industry that has defined extraordinary results....Government almost never gives power back, and in this instance we expect nothing more than a continuing slide from the industry’s current heights.”

    Ultimately, the whole picture is complicated by the general lack of clarity into how the pharmaceutical industry’s business model actually works, Adler argues. “We know there is some relationship between the expected market size for a drug or the expected revenues that they’ll earn and whether the drug gets developed, but the magnitude of that relationship is highly uncertain.”

    Contact Numerof via Mallory McDonald at mallory.mcdonald@pinkston.co and Adler at ladler@brookings.edu.

    Click here for a pdf of the full issue

  • Leslie Small

    Leslie has been reporting and editing in various journalism roles for nearly a decade. Most recently, she was the senior editor of FierceHealthPayer, an e-newsletter covering the health insurance industry. A graduate of Penn State University, she previously served in editing roles at newspapers in Pennsylvania, Virginia and Colorado.

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