Oct 14, 2022 - Health

New drug law attempts to marry prices to value

Illustration of a vial with price tags on it showing the cents symbol.

Illustration: Aïda Amer/Axios

Democrats' new law giving Medicare the authority to negotiate some drug prices attempts to do something critics say is often lacking in today's market: Tying what the government pays to the treatments' value.

Yes, but: The law lists multiple factors that will be used to determine a drug's price, but it's unclear how those factors will be defined and weighted, experts say.

The big picture: Medicare will be able to negotiate the prices of certain drugs that have been on the market for several years but don't have competition from generics. The law sets a ceiling for what those negotiated prices can be, but no floor.

  • Instead, it lists multiple factors for the government to consider when coming up with its negotiated price proposal. These include things like R&D costs, production and distribution costs and how the drug compares to alternative treatments.
  • That, in theory, will lead to a price reflecting the drug's intrinsic value. But how the process will work — or what metrics will be used to determine what society is willing to pay — is unclear.
  • "This comparative cost effectiveness could be used to figure out how much lower [the price] should be, but the details are not resolved yet as to how that process is going to work and what they are going to consider the appropriate clinical outcomes," said Joe Levy, a Johns Hopkins health economist.

Between the lines: Private insurers have ways of determining value, and experts disagree on how effective they are. But these payers certainly don't have the same negotiating heft that the federal government will under the new law.

  • The Institute for Clinical and Economic Review often issues suggestions on what a drug's price should be based on its value, and that price is often significantly less than what the manufacturer ends up charging. But ICER itself has no teeth — its suggestions are non-binding and may at best serve as a guideline for payers.
  • Although the federal government's formula will almost certainly differ from ICER's — the law literally prohibits use of one of the metrics ICER uses — the end result could be similar, and the government could decide drugs are worth much less than their initial launch prices.
  • Additionally, ICER usually issues its price suggestions around the time the drug is coming to market. In contrast, the government will negotiate prices after a drug has been on the market for several years, meaning it will be able to use real-world data.
  • But the time lag also means newer, more innovative drugs for the same disease may have come onto the market, decreasing the comparative value of the one that's subject to price negotiations. "Exactly how that should impact the price of the one we're negotiating today ... is going to be a big issue in the future," Levy said.

The bottom line: The way Medicare determines these prices could drastically impact the pharmaceutical industry.

  • "It's going to change the market," said Avalere's Michael Ciarametaro, one of the authors of a white paper on the topic. "The thing is, manufacturers are going to have to adapt to it. It's something that is going to start small, most likely, and will build over time."
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