Should The Government Impose Price Controls On The Pharmaceutical Industry

Editor's Note: This assay is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between Economical Studies at Brookings and the University of Southern California Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national wellness intendance debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings. The Democracy Fund has provided a grant to the Brookings Institution to support the work on which this post is based.

Americans pay much college prices for brand drugs than practice people who live in other industrialized nations. Most Americans—79 pct—consider U.S. prescription drug prices to exist unreasonable, with almost iii in ten reporting they get without prescribed medications because of toll. With 70 percent of Americans reporting that lowering drug costs is their highest wellness intendance priority, the Congress and the Biden Administration are considering how to lower Usa drug prices.

Having the federal regime lower drug prices directly—whether by negotiating with manufacturers or unilaterally setting prices—would save money for governments, employers, and consumers, but establish a major policy initiative that turns away from reliance on market forces. Because of loftier U.Southward. prices, drug companies generate an estimated three-quarters of worldwide drug company profits in the United States. That means not only that U.S. consumers pay a lot, only besides that reducing U.Southward. drug prices would lower manufacturer revenue and return on investment, likely cut funding for development of new drugs, with a slowing of innovation.

Members of Congress have introduced several bills to adjourn drug prices. The most important, in our view, is H.R. 3, the Elijah Due east. Cummings Lower Drug Costs Now Deed, which passed the House in late 2019 only was non taken up by the Senate. It sharply expanded the boundaries of drug pricing reform discussions by authorizing the Secretarial assistant of Health and Human Services (HHS) to set drug prices for both government and commercial payers through a combination of formulas and negotiation and imposed prohibitive revenue enhancement penalties on pharmaceutical manufacturers that did not take the government price. Importantly, H.R. 3 would take the government control what manufacturers tin can charge for their drugs—regulated prices—which deviates from the more than traditional approach of establishing what public payers similar Medicare will pay for drugs—administered prices. Reflecting the expanded scope of drug pricing reform issues, this blog explores six key policy choices that whatsoever measure to rein in drug prices direct would take to address, either through legislation or regulation.

What process should HHS use to set the price for a drug?
Will the new system prepare prices merely for a limited number of high-toll drugs that lack therapeutic alternatives or more broadly by including drugs that compete with other medicines?
Does the specified price stand for the bodily price for all sales of a drug, or is it a "ceiling" price, with payers retaining the ability to negotiate lower prices?
Will drug prices set past HHS apply to a narrow or wide population (e.thou., merely Medicare Part B or Part D beneficiaries or all patients, regardless of their insurance coverage)?
How would HHS assess and incorporate the value of a drug when establishing its acceptable toll?
How should HHS select drugs for lowered prices?

#1. Process and Authorisation for HHS When Setting the Toll for a Drug

Legislation directing HHS to negotiate drug prices with manufacturers needs to specify what happens if the parties neglect to agree. Without this potency, negotiation is unlikely to lead to lower prices. Three dissimilar approaches can be used to set lower prices for loftier-priced drugs when negotiation does not produce an understanding: (i) HHS could unilaterally ready prices, (two) HHS could plant prices through discover and comment rulemaking, or (iii) an independent arbitrator could set prices. Although frequently characterized as establishing negotiation, H.R. three finer empowers HHS to set permissible prices between a floor and ceiling, where the floor equals the lowest-price among the vi specified countries and the ceiling equals 120 percent of the boilerplate charge per unit across the six countries. Negotiation tin occur, simply only within that range, with the penalization for not accepting the HHS-established price causing the manufacturer to "pull a particular drug out of the U.South. market entirely."

Unilateral HHS Authority to Set Prices

The simplest, least complicated approach to setting a regulated cost would empower HHS to unilaterally make up one's mind without requiring a formal process or imposing specific criteria. The Secretary would accept the discretion to consider, as appropriate, the information and positions exchanged during the initial negotiation stage, besides every bit any proficient assay HHS might choose to consider. HHS would have broad discretion, including whether to institute procedures for public comment by stakeholders such every bit manufacturers, casher organizations, insurers and employers. In addition, the legislation could provide guidance to HHS, potentially limiting its discretion by specifying factors which might fence for a higher or lower price within the permitted range.

HHS Sets Prices through Notice and Annotate Rulemaking

To administer Medicare, HHS routinely uses notice and comment rulemaking to set prices for specific categories of hospital admissions, physician services, and those provided by many other providers. The rule-making arroyo would impose procedural requirements based on the Administrative Procedures Deed (APA) that govern how HHS exercises its decision-making authority. Formal rulemaking provides for input past multiple stakeholders and others through comments on the proposed dominion, and HHS must reply to submitted comments in its final rule. Should this approach be chosen, the legislation could require publishing the proposed and final drug prices either in the Federal Register or be issued past CMS on its website, as is currently the case for the almanac proposed and terminal payment notices for Parts C and D, involving Medicare Reward and prescription drug plans. To speed upward the process, the public comment period could be shortened to less than the typical 60 days used for Medicare.

The statute could require HHS to issue regulations establishing an overall framework, programmatic goals and decision criteria that would guide decisions and constrain how the Secretary exercises discretion. Although courts typically defer to the Executive Branch in rulemaking, the APA requires HHS to justify its proposal, limiting arbitrary and capricious actions. In its initial notice, HHS would specify the proposed price for each designated drug along with the relevant data and analysis. The HHS terminal announcement would publish the drug prices subsequently considering public comments, equally required by the APA. The White House Office of Direction and Budget (OMB) would review proposed and last deportment. In drafting the legislation, the Congress should decide whether to exempt these cost decisions from judicial review, a provision adopted in past payment reform legislation that would limit the ability of manufacturers to challenge (and delay) implementation of the regime-set prices.

Independent Arbitrator Sets Prices

If legislation requires that prices be set up through arbitration, information technology could specify who arbitrates: whether the arbitrators are federal employees or private parties, whether there is a single arbitrator or a console, and how arbitrators are chosen. In add-on, the arbitrator could be authorized to set up the price anywhere inside the ranges proposed by the government and pharmaceutical companies or required to decide which political party prevails and select the price that party proposed (called "final offer arbitration"). An reward of the latter is that information technology motivates both sides to submit reasonable bids, which, information technology is hoped, narrow the differential in proposed prices.

Either way, legislation should list factors that arbitrators should consider in making their conclusion. This was washed in the contempo legislation addressing surprise medical billing, which established a norm—median in-network payment rate in the area—and indicated what factors might be considered by arbitrators to justify a higher or lower rate.

Arbitrators could be federal employees who are charged with acting independently or they could be professional person (not-federal) arbitrators. Two potential federal models are the Medicare Provider Reimbursement Review Lath (PRRB) and Authoritative Police Judges (ALJs). PRRB members are appointed by the Secretary to a three-year term, accept appropriate didactics and professional person expertise, and are subject to federal ideals rules. Created by the APA in 1946, ALJs serve "as independent impartial triers of fact in formal proceedings requiring a decision on the record later the opportunity for a hearing" and must laissez passer a competitive examination every bit well as meet instruction and experience requirements. Manufacturers might have concerns that, despite safeguards intended to protect their independence, federal employees would tend to favor HHS.

The private sector relies heavily on "alternative dispute resolution" approaches, including a variety of arbitration organizations, such as the American Mediation Association. Every bit a matter of public policy and accountability, objections could ascend about having private individuals brand decisions that are arguably inherently governmental, including determining spending by taxpayers in programs like Medicare and Medicaid. In addition, the advent of conflicts of involvement and perceived bias might ascend because private arbitration organizations, whether not-for-profit or for-profit, and the individuals they utilize or contract with accept an involvement in securing hereafter arbitration assignments. For example, if the federal government were to create a roster of approved arbitrators and private parties had a hand in selecting them, repeat business concern could be steered to arbitrators perceived as being more sympathetic to one side or the other.[1]

#2. Scope of HHS Pricing: Types of Drugs

Drugs and biologics autumn into one of three categories:

Medicines currently without competition, which occurs when an innovator has both market exclusivity and at that place are no therapeutic alternatives.
Medicines where multiple products compete past providing therapeutic alternatives for treating a condition (notwithstanding marketplace exclusivity for each innovator).
Generic drugs with robust competition.

Drugs differ from biologics in that the onetime are small-scale molecules produced by chemical synthesis, while biologics are big, circuitous molecules produced by living organisms. The size and complexity of biologics typically limits the Food and Drug Administration (FDA) to approving biosimilars as like simply not identical to innovators, which requires a prescriber to substitute a biosimilar for a biologic. In dissimilarity, FDA approval of generics as equivalent ("therapeutic substitutes") to make drugs allows substitution past pharmacists.

Medicines without Competition

Dissimilar other nations, the U.Due south. lets manufacturers of drugs and biologics set any price they choose. For drugs with market exclusivity and without therapeutic alternatives, the dearth of contest and the pervasiveness of insurance mean that lowering U.S. prices significantly requires regime intervention. U.S. drug prices for brand drugs boilerplate most 3.5 times prices in OECD countries overall and averaged near twice prices in Canada, United Kingdom, Frg, or France. Examples of high-priced U.S. drugs that lack meaningful price contest include many biologics, oncology treatments (including immunotherapies), and "orphan drugs" which receive longer periods of exclusivity in exchange for targeting narrow patient populations.

Brand Medicines with Therapeutic Alternatives

Many of the well-nigh 400 1000000 almanac outpatient prescriptions for brand medicines are subject to some contest from therapeutic alternatives, which are clinically similar but not chemically identical products (unlike generics). Therapeutic alternatives can range from unlike molecules that yield clinically similar treatments, making them broadly substitutable, to dissimilar molecules that treat the aforementioned condition but differ in clinically significant ways.

Having HHS limit prices for drugs with therapeutic alternatives would substantially increase the number of medicines impacted by the price limits. An important function of the gap between U.South. prices and those in other high-income countries involves drugs with therapeutic alternatives, equally shown with drugs that cure hepatitis C infections (see box).

Drugs that cure hepatitis C constitute a true clinical quantum for a serious disease with a large infected population, but advise the limits of market-based contest. Hepatitis C treatments quickly became multi-billion blockbusters for Gilead Pharmaceuticals and, despite significant declines in U.S. prices since 2014, treatments remain costly, with much college prices than in other countries. Fifty-fifty afterward the introduction of five non-Gilead therapeutic alternatives starting in 2017, U.S. prices for a course of treatment remain substantially higher than in other OECD countries, including Nihon, Korea, Britain, and Germany. In 2017, the price of the drugs ranged from $94,000 (a list cost, with net prices possibly averaging about one-half) to a low of about $l, with reported costs of $5,000 in Korea simply $300 in Japan and Republic of india.

Generic Drugs

#three. Price Set by HHS for a Drug: a Price for All Sales or Can Payers Negotiate Lower Prices?

If allowed to negotiate lower-than-ceiling prices, insurers and pharmacy do good managers (PBMs) would steer patients and prescribers to preferred drugs through restrictive formularies, differential cost-sharing, and utilization management tools like prior authorisation and stride therapy. Dissimilar requiring drugs to be sold at a compatible toll, assuasive drug prices to exist at or below the ceiling would permit payers to negotiate lower prices with manufacturers. Manufacturers would probable trade-off lower prices for increased volume when that boosts net revenues, only deeply cut permissible prices would constrain the range betwixt manufacturers' almost and least discounted prices.

Manufacturers negotiate post-auction discounts—rebates—based on a payer's ability to shift utilization to their drug and away from therapeutic alternatives fabricated by competitors, with financial terms typically linked to payers coming together book targets. For some drugs, rebates are a large percentage of list prices, which poses a problem because patient toll sharing is commonly based on published listing prices rather than lower, after-rebate prices. As a result, patients using highly-rebated drugs pay a disproportionate share of the actual cost because Medicare Office D and many employer-based plans apply rebates to reducing monthly premiums charged all enrollees instead of linking what patients pay to cyberspace prices. Unless HHS bans rebates or limits the use of tools to steer utilization, list and actual (cyberspace) drug prices would go along to diverge. In Medicare Function D, to assure patients share proportionately in rebates, legislation would have to link cost-sharing to approximations of net prices.

Requiring authorities-set prices to be uniform prices at which drugs are sold would limit reliance on tools such as prior dominance and multi-tiered formularies, potentially reducing the practice of managing drug utilise for economic (rather than clinical) reasons. Discouraging such practices would reduce provider hassle and lower administrative costs of health plans and physicians, which are currently estimated at $33 billion annually. Limiting the ability of plans and PBMs to steer volume in exchange for negotiated discounts would enable manufacturers to maintain high prices on drugs without regulated prices unless the government establishes uniform prices for many more drugs than if HHS sets ceiling prices. Unfortunately, distinguishing utilization management intended to lower prices versus clinically-based interventions (e.g., to avoid inappropriate prescriptions or minimize use of low-value drugs) promises to prove hard in practice.

#four. Scope of HHS Pricing: Types of Patients

A critical policy choice is whether regulated prices apply narrowly (e.g., to Medicare) or broadly (e.g., to all payers and patients)? To state the obvious, narrowly imposing regulated prices would not lower drug prices for those who pay for private insurance and non-Medicare consumers paying a portion of drug costs at the betoken of auction, but it would besides limit the revenue loss for drug companies. Conversely, applying regulated prices broadly across the population would lower drug costs for most Americans and payers, while magnifying the revenue loss for manufacturers. Arguably, the precedent of regulating drug prices, even if imposed relatively narrowly, might take a chilling effect on innovation and private investment in drug evolution.

The federal authorities has established rebate-based administered toll programs that steeply discount reimbursement received past manufacturers for drugs dispensed to low-income patients and safety-net providers. While intended to reduce burdens on states and providers that care for many low-income patients, these policies skew drug prices for other payers and misconstrue incentives for manufacturers and some providers. The rationale for maintaining the Medicaid rebate, "best price" and 340b programs is open to question if regulated prices directly lower drug prices.

#five. Footing for Valuing a Drug when HHS Sets its Toll

A government program could set the price of a drug based on either the significantly lower prices in other loftier-income countries or the "value" of the drug, based on health benefits or treatment-cost savings in relation to the drug price. Given the complexity and uncertainty of setting prices or establishing value, a legislatively specified range for HHS prices would simplify implementation and speed savings for patients, payers, and taxpayers.

Linking U.Due south. Prices to Ex-U.Southward. Prices

If the U.S. regime sets prices based on currently lower prices abroad, drug manufacturers would accept an incentive to raise prices in the comparison countries because the U.Due south. market place, with 330 million potential customers, dwarfs the number of customers in other private high-income countries. Manufacturers would have incentives to enhance prices in those countries whose prices were used equally a reference to diminish the potential for lower ceilings for prices in the U.Due south. This is most pronounced for those drugs without therapeutic alternatives. For those with alternatives, incentives to no longer discount prices in reference countries could be essentially weaker. In those cases, substantial increases in prices would lead to substantial losses of volume since competitors whose brands had non been chosen for a review of their prices would have no reason to change prices.

Determining what foreign prices actually are poses additional challenges. To avoid having their prices rise, countries might let manufacturers to increase nominal—but non actual—prices, further complicating the ability of HHS to acquire the actual level of prices. In addition to raising either actual or reported prices, manufacturers could limit revenue loss in the U.S. marketplace past delaying launch or not selling drugs in selected countries. Notwithstanding, to foreclose dumb admission to of import medicines, nations will human action to protect the health of their residents, which could potentially include assuasive other manufacturers to produce brand drugs, vitiating patent protections. Many of these problems could be avoided by using past prices rather electric current prices away to set ceilings in the United States. Rather than rebasing the link to prices away in time to come years with more recent sales data, the historical prices could be updated using a suitable index of drug price inflation, which might reduce or eliminate incentives to seek higher prices abroad or to end sales to selected countries.

Other countries typically rely on a unmarried payer or decision-maker to set the price of a drug, oft reflecting an assessment of a drug's value. Pegging U.S. prices to prices away would accept the consequence of importing judgments made in other countries well-nigh the value of medications and the importance of patient admission, reflecting those citizens' preferences about option and spending. U.S. patients, political leaders, and payers such as employers might object, because their preferences regarding choice, access, and spending might differ from those of decision makers away, with Americans likely beingness willing to spend more than for improvement in wellness outcomes than those in the reference countries. But they might detect such reference pricing to exist useful temporarily as a short-term bridge, assuasive fourth dimension to develop a domestic procedure for assessing value and pricing.

Basing Drug Prices on Value

Incorporating value into drug pricing involves two distinct functions: researching effectiveness and costs, and using the findings to inform how much to pay for drugs. But differences between recent notions of value in wellness care and economists' utilize of the term generally could result in inaccurate or excessive prices (see box).

The term "value-based pricing" is currently used in many health care discussions without a precise definition of what the term means, oft relying on a vague notion of what the term means. The essence is in that location may exist a threshold at which comeback in outcomes are too pocket-sized to justify the expense for a particular handling. Different societies will come up upwards with different thresholds reflecting their willingness to cede other goods and services for improvements in wellness. Economists, on the other mitt, have adult very precise notions of value, which involve how much more a buyer would have been willing to pay for a adept or service than the market place toll. In a classic example, the first gallon of h2o per twenty-four hours that a person consumes would be extremely valuable (drinking to sustain life) but the 1000^th gallon per day, for example watering a lawn, washing a driveway or filling a swimming pool, would have value not much above the price. Markets fix prices on the basis of how value of the terminal units compare to marginal costs. At best, effectiveness research likely is capable merely of estimating the value on boilerplate for all of the units of a service or a drug combined. Under a system determining price on the basis of value, confusion almost the boilerplate patient versus the patient who gains the smallest improvement in outcomes could lead to inadvertent but substantial overpayments to manufacturers. A further complexity arises because of concerns about limitations associated with the nearly widely-used metric of value, quality-adjusted life-years (QALYs).

While federal employees, contractors, or a mix of intra- and extramural experts could conduct cost-effectiveness research, establishing the HHS price for a drug appears to be an "inherently governmental" function that needs to be decided by federal employees rather than private parties under contract. Drug pricing legislation directing HHS to base drug prices on price-effectiveness analysis could specify key parameters, including whether HHS would perform the analysis using federal employees or contract with private entities. With sufficient lead time, the federal government could develop the capability and perform cost-effectiveness analyses, despite constituting a precipitous departure from electric current policy prohibiting Medicare from using comparative clinical effectiveness inquiry by the Patient-Centered Outcomes Research Found (PCORI).

Since at to the lowest degree the "Reinventing Government" initiative in the 1990'due south, the federal government has increasingly relied on "contracting out" to individual organizations, such equally universities or contained research institutes, rather than hiring regime employees to carry in-business firm research and analysis. While the nature of cost-effectiveness analysis differs markedly from the scientific research funded by the National Institutes of Health (NIH), NIH combines extensive extramural and intramural research. Having a mix of in-firm and contracted researchers increases federal adequacy and flexibility, as well as enabling evaluating each approach over time. Given the importance of the analysis and its effect on federal spending, a robust in-business firm capability would seem essential to fix priorities and criteria, select vendors, and oversee the work of contractors. Government employees, working with practiced advisory panels, could determine which organizations to fund.

The U.Southward. organization most experienced with this type of research is the Plant for Clinical and Economic Review (ICER). ICER studies effectiveness and makes recommendations almost which technologies (drugs or others) have enough effectiveness to justify their costs. Both insurers and manufacturers fund the arrangement'southward analyses, which oft involve cartoon on or conducting research to guess improvements in patient outcomes from particular treatments, using measures such as quality-adapted life years (QALYs), and comparing them with the costs of the treatment. ICER recommends coverage for treatments with depression costs per QALY and against those with high costs per QALY. Even though ICER may take the most experience with this type of analysis, the government would benefit from funding boosted private organizations, creating redundant capacity among competing entities that would strive to improve toll-effectiveness analysis.

An attractive alternative might involve creating i or more Federally Funded Research and Development Centers (FFRDC), which are nonprofit organizations with long term contracts with federal agencies to provide research and evolution services critical to its mission. The approach goes back at least equally far as the 1940s, when the U.South. Air Force created the RAND Corporation to carry long-term strategic studies. A wellness care instance is the CMS Alliance to Modernize Health Care (Health FFRDC), which is operated by Mitre, an organization that operates FFRDCs for the U.Due south. government in a wide range of areas. FFRDCs often farm some of the work to other private organizations to gain flexibility to answer to changing federal needs and to accomplish the scale needed to meet the agency's needs.

Creating and maintaining a robust capability to achieve large, sustainable reductions in drug prices requires adequate, predictable funding to sustain these activities. To avoid having this funding needing to compete in the annual appropriations process, drug pricing legislation could appropriate multi-year funding, similar to the funding for PCORI and the Centers for Medicare and Medicaid Innovation (CMMI).

#6. Drugs Selected past HHS for Setting Lower Prices

Choices concerning which drugs to review for the institution of ceiling prices have of import implications for the amount of money saved, patient outcomes, and effects on innovation. H.R. 3 would require HHS to select at least 25 drugs in 2024 and l in subsequent years from among the 125 drugs that account for the highest spending nationally or in Medicare. Even with potency to review more drugs, staffing, financial resources, and complexity of the procedure would constrain HHS capacity. As nosotros explained in Section #3, setting a ceiling price for one drug and allowing payers to steer volume would probable reduce internet prices for therapeutic alternatives substantially and could generate significant savings, while also limiting the number of drugs for which HHS would have to fix prices.

HHS could employ additional criteria in determining what drug prices to set. For example, information technology could target drugs that have had high prices for a long time and which face no meaningful competition. Focusing reviews on drugs that take been on the market past the normal periods of exclusivity would address extensions based on activities that accept been labeled as abuses of the patent system, such equally patenting pocket-sized changes in drugs or paying other manufacturers to delay generic entry. HHS might announce an intention not to regulate prices for some flow when future drugs provide pregnant clinical advances, a step that would encourage innovation and the development of breakthrough and novel drugs. In addition, investors in drug development might be more sensitive to expectations most pricing during the early on years that a drug is on the market than the later years. Some other potential benchmark for selecting drugs for cost setting would be if a drug'south price is very high in relation to its improvements in patient outcomes. Concentrating price cuts on low-value treatments while assuasive more than generous pricing for high-value drugs would encourage evolution of drugs that make a real departure in patients' wellness. In addition, HHS might focus on drugs with net prices well above prices abroad despite the existence of therapeutic alternatives or biosimilars. This criterion might lead to large toll reductions on some doc-administered drugs, facing market forces weaker than those facing drugs dispensed at retail pharmacies.

Footnotes:

[i] The upshot of referrals and influence could quickly go quite complicated, if drug price arbitrations were only ane line of business, with other arbitration referrals being driven by, for example, health plans or providers, also as pharmaceutical manufacturers.

Disclosures: The Brookings Institution is financed through the support of a various assortment of foundations, corporations, governments, individuals, too every bit an endowment. A list of donors can be found in our annual reports published online here . The findings, interpretations, and conclusions in this written report are solely those of its author(due south) and are non influenced by any donation.

Acknowledgments: The authors would like to thank Henry Aaron for his helpful comments.