Feb 1, 2024 - Health

The challenge for Medicare drug negotiators: How to value a medicine's benefits

Illustration of three prescription pill bottles made from stacks of coins, organized by ascending height.

Illustration: Annelise Capossela/Axios

New Medicare drug pricing negotiations, which kick into high gear Thursday, for the first time will allow the federal government to tie a medicine's price to how well it works compared with similar treatments.

Why it matters: Other countries already make these kind of value assessments, but it's a fundamental shift for the U.S. government to wade into a process that involves making challenging — and sometimes politically sensitive — calculations about how to value the benefits drugs provide.

Driving the news: Medicare on Thursday will send its initial offers to the manufacturers of the 10 drugs it selected for price negotiations last fall, a key milestone in the implementation of Democrats' new drug pricing law.

  • It sets off a monthslong back-and-forth with drugmakers before final prices are revealed in September — all while the industry fiercely contests the negotiations in court.
  • "For the first time in history, Medicare is making offers on the fair price for ten of the most widely used and expensive drugs. Medicare is no longer taking whatever prices for these drugs that the pharmaceutical companies demand," President Biden said in a statement.

The big picture: The Inflation Reduction Act — the law Democrats passed allowing Medicare to negotiate the price of certain drugs — requires the federal government to take several factors into account when determining its pricing offer to drugmakers.

  • Until now, drug manufacturers in the U.S. have been able to set their own prices while their product enjoys market exclusivity, before competition typically pushes down the price.
  • The point of the IRA was to provide a different mechanism for lowering the prices Medicare pays for older drugs before competition comes onto the market.
  • "The fact that America is in a sense joining the rest of the developed world in realizing they can't assume the market will fix everything with value, price and access — that's a big deal," said Steve Pearson, who founded the Institute for Clinical and Economic Review (ICER), an independent organization that assesses the value of medical treatments.

Details: The law is explicit about factors that Medicare has to consider when coming up with that price, including how much it costs to manufacture or distribute the drug and the manufacturer's research and development costs.

  • But it also requires Medicare to take into account information about the drug's "therapeutic alternatives," including how well the drug works compared with other options — a much squishier metric.
  • How to make these assessments is left up to the government.
  • "The law says they should look at all these different factors, but the law does not tell them how to put it all together," said Pearson, who's now an adviser to ICER.
  • That means it's unclear, at least for now, how much Medicare will factor in drugs' comparative value.
  • "There's no single factor that was more important than any other" when determining the initial offers to drugmakers, a senior Biden administration official told reporters.

Between the lines: If the government decides to lean heavily into a value-based approach, it will have a series of complicated decisions to make.

  • "One of the things that really is important here is what you're comparing to ... because that can make the math look really different," said Stacie Dusetzina, a professor at Vanderbilt University School of Medicine who studies drug pricing.
  • For example, Medicare could just choose to compare the blood thinners up for negotiation — Eliquis and Xarelto — to other brand drugs. Or it could also choose to compare them to warfarin, an older generic that is much cheaper but requires more monitoring than the newer brand drugs.
  • From there, the government has to decide how to measure the difference the drugs have on a patient's quality of life, and how much money those differences are worth.
  • "When you compare them, how do you pull it all together? What if the drug is a little bit better in one way and a little bit worse in another way?" Pearson added.

The other side: A spokesperson for PhRMA, which is among the groups suing to block negotiations, said a lack of transparency about how Medicare decides on a price will have "lasting consequences for patients long after this administration is gone."

  • "Government bureaucrats are operating behind closed doors to set medicine prices without disclosing for months how they arrived at the price or how much patient and provider input was used," said Alex Schriver, senior vice president of public affairs at PhRMA.

Zoom out: Other countries already do a version of this.

  • A study published last year in JAMA found that of the 50 top-selling Medicare drugs in 2020, more than half were deemed by assessment organizations in Canada, France, and Germany to offer little to no therapeutic benefit over existing therapies.

The bottom line: "Even after this is done, we still may not really know what mattered to [Medicare] most, what counted to them most," Pearson said.

  • "The one thing that I think is the overarching paradigm of where we are is uncertainty," he added. "Nobody knows."
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