Many politicians promise to do it, but none, so far, have been able to make a meaningful dent in prescription drug prices. Congressional Democrats are now signaling this may be the year something happens.
Democrats need funding for the huge spending plans President Biden hopes to pass later this year. New revenue sources getting the most attention are proposed increases in the corporate tax rate, and higher income and capital gains taxes on the wealthiest Americans.
But Congress is considering many other moves, including ones that would fulfill other Democratic priorities, including more affordable medicines. And there’s already a template for lowering some drug prices: the “Lower Drug Costs Now Act,” which the House of Representatives, controlled by Democrats, passed in 2019.
That bill would let Medicare negotiate drug prices with pharmaceutical firms, which could save the government nearly $50 billion per year, according to the Congressional Budget Office. House Speaker Nancy Pelosi mentioned the idea on March 23, when she said, “We would be missing an opportunity if we did not include lowering the cost of prescription drugs. If we were able to do that, we could save almost half a trillion dollars.” That’s the estimated savings over 10 years, the typical budgeting window in Washington. In the Senate, Bernie Sanders (I., Vt.) has introduced a bill similar to the House legislation.
Can they do it? The battle between Democrats and the powerful pharmaceutical lobby could end up being one of the epic political brawls of modern times. Since Congress expanded prescription drug coverage to Medicare in 2006, Medicare has been the single-biggest purchaser of drugs, by far. The Veterans Affairs and Defense Departments also purchase billions of dollars of drugs each year. Budget hawks and patient advocates argue the federal government should use its purchasing muscle to demand much lower prices, especially on the costliest drugs that have patent protection and no competition.
The 2019 law would let Medicare negotiate prices for up to 250 drugs per year under its Part D program, which provides coverage for outpatient drug purchases. Medicare would target the drugs the program spends the most money on. Prices would be benchmarked against drug costs in six other advanced nations where the governments largely control prices. Drugmakers could decline to negotiate, but they’d have to pay penalty fees as high as 95% of their gross sales of the drug in question. That would be so punitive that drugmakers would probably pull the drug from the U.S. market instead of paying the penalties, the CBO estimates.
Yahoo Finance analyzed the 50 drugs Medicare spends the most on under Part D, to estimate which drugmakers might suffer the most financially. Gilead Sciences (GILD) makes three of the top 50 drugs, with Medicare spending $9 billion on those three in 2019. AstraZeneca (AZN) makes four the top 50 drugs, worth $6.7 billion in Medicare spending. Sanofi-Aventis (SNY) earned third most, at $4.4 billion for two drugs. Here are the 10 drugs Medicare Part D spends the most on:
The CBO estimates Medicare would be able to cut drug prices by 57% to 75% if it were able to negotiate with manufacturers. Applying that estimate to the three Gilead drugs—Harvoni, Sovaldi and Truvada—would cut the firm’s Medicare revenue by more than $5 billion per year. Gilead’s total revenue is about $25 billion per year, so a newly empowered Medicare could represent a painful hit to revenue and profitability.
Gilead stock has underperformed the market this year, with shares down about 1.5%, compared with a 5.5% gain for the S&P 500. Many factors are buffeting pharmaceutical stocks, however, and it’s not clear the market has yet accounted for a new law letting Medicare push prices down. “I think it isn’t priced in yet,” says analyst Chris Meekins of Raymond James. “There has been a lot of confusion on drug pricing.” Biden's new public works program, for instance, calls for a corporate tax rate hike, but no changes to Medicare. Another Biden proposal is coming after that, however, and that will focus on social welfare, including health care changes.
In addition to possible pricing changes at Medicare, there’s some concern in the industry that the Food and Drug Administration under President Biden could tighten the rules for new drug approval. There could also be a tougher stance toward mergers at the Justice Department and Federal Trade Commission. On the plus side, the fast rollout of Covid-19 vaccines by a few firms has aided the industry’s spotty reputation and could represent a marginal revenue source if they’re needed indefinitely.
The new drug tradeoff
Big Pharma won’t roll over, and it may manage to outflank the many Democrats who would love to see Medicare force down drug costs. The industry spends more than any other on lobbying in Washington and counts some important Democrats as allies, including Sen. Bob Menendez of New Jersey, home to Johnson & Johnson and other pharma heavyweights.
Industry defenders frequently claim that cutting drug prices would force a cutback in drug research and lead to fewer breakthrough treatments. The CBO concurred, in part, finding that lower prices under Medicare would likely kill the introduction of about 40 new drugs during the next 20 years.
Other research suggests big pharma could absorb a financial hit and keep on humming. A 2020 study by West Health Policy Center and the Johns Hopkins Bloomberg School of Public Health found that big pharmaceutical companies have a higher return on invested capital than any other industry. If profit fell 10% it would still be the most profitable industry. That suggests drugmakers would still have plenty of money to invest if profits dipped, and they’d still offer stellar returns that would attract and reward shareholders.
If Congress does give Medicare the power to negotiate drug prices, it wouldn’t immediately put more money in consumers wallets because Medicare and private insurance companies would be the ones saving the money. It’s possible the move would lower insurance costs for employers that cover their workers, leaving more money those firms could funnel to workers through higher wages. It’s also possible drug companies could push prices even higher for new drugs offered outside of Medicare, to compensate for revenue lost to government drug sales.
The Sanders legislation in the Senate would go much further than allowing Medicare to negotiate drug prices. It would essentially set prices for all brand-name drugs, using international standards as a benchmark. That could cut brand-name drug prices by 50% on average, which would remake the entire industry. Sanders often pushes for implausible legislation, but that can sometimes help push more modest alternatives over the finish line.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
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