Aug 15, 2022 - Health

The coming public-private drug pricing divide

A drug pill half-filled with money.

Illustration: Rebecca Zisser/Axios

Democrats are on the cusp of their most significant health policy victory since passage of the Affordable Care Act, but the legislative wrangling it took to get here came at a steep cost: The prescription drug pricing reforms included in the health, tax and climate package are limited to Medicare and exclude the millions of Americans with private insurance.

Why it matters: At best, this sets up a two-tiered pricing system for certain drugs, in which employers and enrollees in the commercial market will pay a significantly higher rate than the government in the years to come. And at worst, some employers and experts warn, it could cause drug prices to actually rise in the private market.

State of play: House Democrats cleared the legislation on Friday, sending it to President Biden's desk.

  • Once signed, the law will fulfill Democrats' decades-long promise to allow Medicare to negotiate prescription drug prices.
  • It also penalizes drug companies that raise prices faster than inflation, forcing them to pay a rebate on their Medicare sales, and limits seniors' out-of-pocket costs for insulin to $35 a month.

Flashback: But excluding the commercial market from the law's reach was dictated by political necessity and arcane Senate rules.

  • Although House Democrats' original drug pricing bill would have made Medicare-negotiated rates available to private insurance, that provision was dropped in order to get enough votes to pass both chambers.
  • Even a compromise version would have extended the inflation cap penalty to the private market, giving the measure more teeth. But the Senate parliamentarian struck down provisions regarding the commercial market.
  • That also included an extension of a cap on insulin costs to the commercial market. Although Democrats tried to enlist Republican votes to add that measure back in, it ultimately failed.

Between the lines: There's already academic and ideological debate over whether drug companies will try to recoup from the private market the revenue they lose in Medicare when a drug is subject to price negotiations.

  • "If drugmakers must give Medicare steep discounts on certain drugs, they will compensate by increasing prices in the commercial market," the WSJ editorial board wrote last week.
  • "If prices are reduced in Medicare with no corresponding protections for commercial markets, working families may well foot the bill as costs will rise to recoup losses from Medicare drug sales," the Employers' Prescription for Affordable Drugs recently warned.

The intrigue: The argument hinges largely on whether drug companies are already charging the maximum price that the market will bear, or whether there's room for that price to grow.

  • Several economists are skeptical of the employers' argument.
  • "We'd have to believe that big, for-profit drug companies are willingly limiting their own profits at present," Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy, wrote in an email responding to the WSJ editorial.
  • And commercial prices are still tied to the inflation cap, because the Medicare penalty is calculated based on market-wide drug prices. That means "there's good reason to believe that the [legislation] will still reduce the drug prices paid by employers and ACA plans somewhat," Adler added.

The drug industry has worked hard to strike a balance between price and market uptake, "so the idea that they’re going to be able to raise prices and increase profits — I get why people intuitively gravitate to that argument, but it doesn't have validity," said Craig Garthwaite, a professor at Northwestern University.

  • Many experts do, however, expect drug companies to launch new drugs at a higher price than they would otherwise to compensate for negotiated prices down the road.
  • They also may do so to make up for limits on how fast they can raise prices post-launch.

The big picture: Arguments over cost-shifting and a two-tiered pricing system aren't new to American health care — they've been the status quo within hospital markets for years.

  • Employers and private insurers pay multiple times the Medicare rate for hospital services, and hospitals have long argued that those higher commercial rates are necessary to offset too-low government rates.
  • That private-public split is now likely to become the norm for many drugs, too, although it's still unclear how wide it will be.
Go deeper