Health care update (Medicare/drug pricing)

Recent/upcoming developments… In the days just before President Trump took office, CMS and the outgoing Biden administration released the names of the 15 Part D drugs subject to the second round of the Medicare drug price negotiation program established under the Inflation Reduction Act (IRA).  Separately, Congressional Republicans are beginning to assemble the partisan “budget reconciliation” legislation they will enact this year to extend expiring tax cuts, which will be offset by spending cuts.  Among the provisions they are evaluating for inclusion in that bill are various changes to Medicare drug pricing program.

* The 15 Part D drugs selected for the second round of negotiations include Ozempic/Rybelsus/Wegovy (Novo Nordisk), Trelegy Ellipta (GSK), Xtandi (Astellas/Pfizer), Pomalyst (BMS), Ibrance (Pfizer), Ofec (Boehringer Ingelheim), Linzess (AbbVie), Calquence (AstraZeneca), Austedo (Teva), Breo Ellipta (GSK), Tradjenta (Boehringer Ingelheim), Xifaxan (Salix), Vraylar (AbbVie), Janumet (Merck), and Otezla (Amgen).

* The companies that manufacture these drugs now have until 2/28/25 to sign the agreements to participate in the negotiation process for plan year 2027.  Initial price offerings from the federal government will then be issued to the companies by 6/1/25, at which point “negotiations” will commence (running through 10/15/25).

* As a reminder, according to CMS, the first round of negotiations conducted last year resulted negotiated prices 38% to 79% below list price.  However, the headline savings touted by CMS were somewhat misleading, as the negotiated prices represented a more modest drop from the net prices (in aggregate, a 22% reduction to net price, which is the more appropriate figure to consider).  Moreover, three drugs accounted for >50% of the aggregate savings captured by CMS in the first round of negotiations, suggesting that some drugs will see net prices that are little changed from current levels.  And the actual net savings to the government in that first round of negotiations might be lower than the 22% figure, as some impacted drugs (i.e., Fiasp, NovoLog) had their prices reduced for 2024 (price reductions which were not reflected in last year’s negotiations).

* Last week, press reports highlighted a menu of policy options assembled by the House Budget Committee for consideration as part of the reconciliation legislation that Republicans are planning to pass this year.  Included on that list was (1) a proposal from the House Ways & Means (W&M) Committee to “Reform the IRA’s Drug Policies” to “discourage price setting on innovative drugs treating rare patient populations” and (2) a proposal from the House Energy & Commerce (E&C) Committee for “Unspecified Proposals to Address IRA Drug Pricing Policies” aimed at mitigating “innovation killing parts of IRA.”  The former likely refers to the Orphan Cures Act, which would ensure drugs with an orphan designation are excluded from negotiations.  The latter is open-ended but could refer to reforms like the EPIC Act, which would extend the “time on market” requirements of the IRA to ensure that small molecule drugs receive the same treatment as biosimilars (the latter of which is spared negotiation for 13 years, while the former is set at nine).

Our outlook… At the regulatory level, implementation of the IRA’s drug price negotiation program now falls to Trump, who has long touted his desire to lower drug costs (albeit through different mechanisms).  Industry is pressing the administration for pause on the negotiation program, but we believe Trump will want to be responsive to voter sentiment and continue implementation (setting aside the fact that a pause is not doable under the IRA).  Trump and key nominees (i.e., CMS Administrator nominee Oz) have been tight-lipped as to how they may put their mark on the program, but closely aligned think tanks (i.e., Paragon, AAF) and former advisors (i.e., Grogan) have suggested Trump may – driven by concerns around drug innovation – take steps to soften the program’s financial impact on industry.  At the legislative level, there is a 65% probability reforms to the drug negotiation program are enacted, 20% that the program is eliminated, and 15% probability there is no action.  Republicans remain antagonistic to the IRA, but the drug price negotiation program is popular among voters, and Republicans have not previously succeeded on healthcare repeal efforts (e.g., ACA).  The political risk associated with eliminating the program is reflected in the emerging discussion around the upcoming tax/spending legislation Republicans will pursue this year, where early proposals are focused on reforming rather than eliminating the program.

* While the IRA sets many of the parameters governing the drug price negotiation program (i.e., aspects that cannot change through regulation, such as the ceiling price for negotiations, when negotiated prices take effect, etc.), Democratic lawmakers left other implementation decisions to CMS.  As such, there are a variety of ways the Trump administration could alter the program such that it still yields savings but the impact to drugmakers is somewhat mitigated.  While speculative, options suggested by conservative groups include narrowing the universe of drugs eligible for negotiation (i.e., not grouping multiple drugs by active ingredient, as done with Ozempic/Rybelsus/Wegovy), selecting drugs for negotiation based on different criteria (i.e., focusing on volume or per beneficiary spend vs. aggregate spending), adjusting how the ceiling price is calculated (i.e., shifting inputs into non-federal average manufacturer price), offering drugmakers the ceiling price and not pushing to go lower, giving counteroffers from drugmakers greater consideration (i.e., rather than the current take-it-or-leave-it style of “negotiation”) and assuring drugmakers penalties for noncompliance will not be enforced (though this is risky for industry given possibility of future administrations trying to collect in the out-years).

Watch for these developments… With respect to regulation, we are watching for comments from Trump or Oz as to whether they believe the negotiation program is harming innovation or if they believe Biden failed to get a “good deal” during the first round of negotiations, as this will clarify their thinking as to whether the program should be softened or pushed in a more aggressive direction (there are, to date, no indications of the latter).  In Congress, as the Republican reconciliation bill develops over the coming weeks, we are watching for (1) calls for repeal of the drug price negotiation program becoming more pronounced than calls for reform and (2) indications there is less sensitivity around deficit impact than is currently the case, as both developments would increase the probability of Republicans moving in an even more favorable direction for drugmakers (i.e., not just softening the program, but eliminating or replacing it).