The Good, The Bad, and The Ugly of Nancy Pelosi’s Drug Pricing Proposal

During the midterm election campaign, Democrats pledged to help lower prescription drug prices. Since regaining the House majority in January, the party has failed to achieve consensus on precise legislation to accomplish that objective.

However, on Monday a summary of proposals by House Speaker Nancy Pelosi (D-CA)—which became public via leaks from lobbyists, of course—provided an initial glimpse of the Democrat leadership’s policy approach. Party leaders claimed the leaked document describes an old legislative draft (they would say that, wouldn’t they?).

The Good: Realigning Incentives in Part D

Among other proposals, the Pelosi proposal would rearrange the current Part D prescription drug benefit, and “realign incentives to encourage more efficient management of drug spending.” Under current law, once beneficiaries pass through the Part D “doughnut hole” and into the Medicare catastrophic benefit, the federal government pays for 80 percent of beneficiaries’ costs, insurers pay for 15 percent, and beneficiaries pay for 5 percent.

This existing structure creates two problems. First, beneficiaries’ 5 percent exposure contains no limit, such that seniors with incredibly high drug spending could face out-of-pocket costs well into the thousands, or even tens of thousands, of dollars.

The Pelosi proposal follows on plans by MedPAC and others to restructure the Part D benefit. Most notably, the bill would institute an out-of-pocket spending limit for beneficiaries (the level of which the draft did not specify), while reducing the federal catastrophic subsidy to insurers from 80 percent to 20 percent. The former would provide more predictability to seniors, while the latter would reduce incentives for insurers to drive up overall drug spending by having seniors hit the catastrophic coverage threshold and thus can shift most of their costs to taxpayers.

The Bad: Price Controls

The Pelosi document talks about drug price “negotiation,” but the policy it proposes represents nothing of the sort. For the 250 largest brand-name drugs lacking two or more generic competitors, the secretary of Health and Human Services would “negotiate” prices. However, Pelosi’s bill “establishes an upper limit for the price reached in any negotiation as no more than” 120 percent of the average price in six countries—Australia, Canada, France, Germany, Japan, and the United Kingdom—making “negotiation” the de facto imposition of price controls.

Drug manufacturers who refuse to “negotiate” would “be assessed an excise tax equal to 75 percent of annual gross sales in the prior year,” what Pelosi’s office called a “steep, retroactive penalty creat[ing] a powerful financial incentive for drug manufacturers to negotiate and abide by the final price.” Additionally, the “negotiated” price would apply not just to Medicare, but would extend to other forms of coverage, including private health insurance.

But the solution to that dilemma lies in trade policy, or other solutions short of exporting other countries’ price controls to the United States, as outlined in both the Pelosi and Trump approaches. Price controls, whether through the “negotiation” provisions in the Pelosi bill, or related provisions that would require rebates for drugs that have increased at above-inflation rates since 2016, have brought unintended consequences whenever policy-makers attempted to implement them. In this case, price controls would likely lead to a significant slowdown in the development and introduction of new medical therapies.

The Ugly: New Government Spending

While the price controls in the drug pricing plan have attracted the most attention, Democrats have mooted some version of them for years. Price controls in a Democratic drug pricing bill seem unsurprising—but consider what else Democrats want to include:

With enough savings, H.R. 3 could also fund transformational improvements to Medicare that will cover more and cost less—potentially including Medicare coverage for vision, hearing, and dental, and many other vital health system needs.

In other words, Pelosi wants to take any potential savings from imposing drug price controls and use those funds to expand taxpayer-funded health care subsidies. In so doing, she would increase the fiscal obligations to a Medicare program that is already functionally insolvent, and relying solely on accounting gimmicks included in Obamacare to prevent shortfalls in current seniors’ benefits.

This post was originally published at The Federalist.

Three Obstacles to Senate Democrats’ Health Care Vision

If Democrats win a “clean sweep” in the 2020 elections—win back the White House and the Senate, while retaining control of the House—what will their health care vision look like? Surprisingly for those watching Democratic presidential debates, single payer does not feature prominently for some members of Congress—at least not explicitly, or immediately. But that doesn’t make the proposals any more plausible.

Ezra Klein at Vox spent some time talking with prominent Senate Democrats, to take their temperature on what they would do should the political trifecta provide them an opportunity to legislate in 2021. Apart from the typical “Voxplanations” in the article—really, did Klein have to make not one but two factual errors in his article’s first sentence?—the philosophy and policies the Senate Democrats laid out don’t stand up to serious scrutiny, on multiple levels.

Problem 1: Politics

The first problem comes in the form of a dilemma articulated by none other than Ezra Klein, just a few weeks ago. Just before the last Democratic debate in July, Klein wrote that liberals should not dismiss with a patronizing shrug Americans’ reluctance to give up their current health coverage:

If the private insurance market is such a nightmare, why is the public so loath to abandon it? Why have past reformers so often been punished for trying to take away what people have and replace it with something better?…

Risk aversion [in health policy] is real, and it’s dangerous. Health reformers don’t tiptoe around it because they wouldn’t prefer to imagine bigger, more ambitious plans. They tiptoe around it because they have seen its power to destroy even modest plans. There may be a better strategy than that. I hope there is. But it starts with taking the public’s fear of dramatic change seriously, not trying to deny its power.

Democrats’ “go big or go home” theory lies in direct contrast to the inherent unease Klein identified in the zeitgeist not four weeks ago.

Problem 2: Policy

Klein and the Senate Democrats attempt to square the circle by talking about choice and keeping a role for private insurance. The problem comes because at bottom, many if not most Democrats don’t truly believe in that principle. Their own statements belie their claims, and the policy Democrats end up crafting would doubtless follow suit.

Does this sound like someone who 1) would maintain private insurance, if she could get away with abolishing it, and 2) will write legislation that puts the private system on a truly level playing field with the government-run plan? If you believe either of those premises, I’ve got some land to sell you.

In my forthcoming book and elsewhere, I have outlined some of the inherent biases that Democratic proposals would give to government-run coverage over private insurance: Billions in taxpayer funding; a network of physicians and hospitals coerced into participating in government insurance, and paid far less than private insurance can pay medical providers; automatic enrollment into the government-run plan; and many more. Why else would the founder of the “public option” say that “it’s not a Trojan horse” for single payer—“it’s just right there!”

Problem 3: Process

Because Democrats will not have a 60-vote margin to overcome a Republican filibuster even if they retake the majority in 2020, Klein argues they can enact the bulk of their agenda through the budget reconciliation process. He claims that “if Democrats confine themselves to lowering the Medicare age, adding a [government-run plan], and negotiating drug prices, there’s reason to believe it might pass parliamentary muster.”

Of course Klein would say that—because he never worked in the Senate. It also appears he never read my primer on the Senate’s “Byrd rule,” which governs reconciliation procedures in the Senate. Had he done either, he probably wouldn’t have made that overly simplistic, and likely incorrect, statement.

Take negotiating drug prices. The Congressional Budget Office first stated in 2007—and reaffirmed this May—its opinion that on its own, allowing Medicare to negotiate drug prices would not lead to any additional savings.

That said, Democrats this year have introduced legislation with a “stick” designed to force drug companies to the “negotiating” table. Rep. Lloyd Doggett (D-Texas) introduced a bill (H.R. 1046) requiring federal officials to license the patents of companies that refuse to “negotiate” with Medicare.

While threatening to confiscate their patents might allow federal bureaucrats to coerce additional price concessions from drug companies, and thus scorable budgetary savings, the provisions of the Doggett bill bring their own procedural problems. Patents lie within the scope of the House and Senate Judiciary Committees, not the committees with jurisdiction over health care issues (Senate Finance, House Ways and Means, and House Energy and Commerce).

While Doggett tried to draft his bill to avoid touching those committees’ jurisdiction, he did not, and likely could not, avoid it entirely. For instance, language on lines 4-7 of page six of the Doggett bill allows drug companies whose patents get licensed to “seek recovery against the United States in the…Court of Federal Claims”—a clear reference to matter within the jurisdiction of the Judiciary Committees. If Democrats include this provision in a reconciliation bill, the parliamentarian almost certainly advise that this provision exceeds the scope of the health care committees, which could kill the reconciliation bill entirely.

But if Democrats don’t include a provision allowing drug manufacturers whose patents get licensed the opportunity to receive fair compensation, the drug companies would likely challenge the bill’s constitutionality. They would claim the drug “negotiation” language violates the Fifth Amendment’s prohibition on “takings,” and omitting the language to let them apply for just compensation in court would give them a much more compelling case. Therein lies the “darned if you do, darned if you don’t” dilemma reconciliation often presents: including provisions could kill the entire legislation, but excluding them could make portions of the legislation unworkable.

Remember: Republicans had to take stricter verification provisions out of their “repeal-and-replace” legislation in March 2017—as I had predicted—due to the “Byrd rule.” (The provisions went outside the scope of the committees of jurisdiction, and touched on Title II of the Social Security Act—both verboten under budget reconciliation.)

If Republicans had to give up on provisions designed to ensure illegal immigrants couldn’t receive taxpayer-funded insurance subsidies due to Senate procedure, Democrats similarly will have to give up provisions they care about should they use budget reconciliation for health care. While it’s premature to speculate, I wouldn’t count myself surprised if they have to give up on drug “negotiation” entirely.

1994 Redux?

Klein’s claims of a “consensus” aside, Democrats could face a reprise of their debacle in 1993-94—or, frankly, of Republicans’ efforts in 2017. During both health care debates, a lack of agreement among the majority party in Congress—single payer versus “managed competition” in 1993-94, and “repeal versus replace” in 2017—meant that each majority party ended up spinning its wheels.

To achieve “consensus” on health care, the left hand of the Democratic Party must banish the far-left hand. But even Democrats have admitted that the rhetoric in the presidential debates is having the opposite effect—which makes Klein’s talk of success in 2021 wishful thinking more than a realistic prediction.

This post was originally published at The Federalist.

What You Need to Know about President Trump’s Drug Pricing Plan

On Friday, President Trump gave a Rose Garden speech outlining his plan, entitled “America’s Patients First,” to combat rising drug prices. The plan incorporates policy ideas included in the president’s budget earlier this year, new proposals, and additional topics for discussion that could turn into more specific ideas in the future.

What’s the Problem?

Surveys suggest public frustration with the cost of prescription drugs. While such costs represent a small fraction of overall spending on health care, several dynamics help the prescription drug issue gain disproportionate attention. First, in any given year, more Americans incur drug costs than hospital costs. Whereas only 7.3 percent of Americans had an inpatient hospitalization in 2013, more than three in five (60.7 percent) had prescription drug expenses.

With more Americans incurring drug costs, and paying a larger percentage of drug costs directly from their pockets, the issue has taken on greater prominence. The rise of coinsurance (i.e., paying a percentage of drug costs, rather than having those costs capped at a set dollar amount) for pricey specialty drugs exacerbates this dynamic.

What Are the Proposed Solutions?

In general, ways to address drug prices fall into three large buckets.

Controlling costs through competition: These solutions would involve bringing down price levels by encouraging generic competition, or substituting one type of drug for another.

Shifting costs: These solutions would alter who pays for drugs among insurers, pharmaceutical benefit managers (PBMs), or consumers. While they may make drugs more “affordable” for consumers, they will not change overall spending levels. In fact, if done poorly, these types of proposals could actually increase overall spending, by encouraging individuals to increase their consumption of costly brand-name drugs.

Drug company and PBM stocks went up Friday following the blueprint’s release, largely because the plan eschews actions in the second bucket. The president’s plan includes a few tweaks to the system of “rebates” (de facto price controls) the Medicaid program uses, but includes none of the major Democratic proposals to use blunt government action to drive down prices.

In fact, the plan criticizes foreign price controls, attacking the “global freeloading” by which other countries gain the research and development benefits of the pharmaceutical industry without paying their “fair share” of those R&D costs. While the plan frequently mentions the disproportionate share of costs American consumers pay, it includes few specific proposals to rebalance these costs to other countries. It also remains unclear whether, if successfully implemented, any such rebalancing would successfully lower prices in the United States.

Other competitive proposals include giving Medicare Part D plans more flexibility to adjust their formularies mid-year to respond to changes in the generic drug marketplace, and prohibiting Part D plans from including “gag clauses.” These clauses prohibit pharmacies from telling consumers that they would actually save money by paying cash for certain drugs, rather than using their insurance.

In the cost-shifting bucket lie several of the proposals incorporated into the president’s budget. For instance, a cap on out-of-pocket expenses for the Medicare Part D prescription drug benefit would provide important relief to seniors with very high annual drug costs. However, to the extent that such a proposal would encourage seniors to over-consume drugs, or purchase more costly brand-name drugs, once they reach such a cap, this proposal could also increase overall Part D spending.

In a similar vein lie proposals about PBMs passing drug rebates directly to consumers at the point of sale. In most cases, PBMs had previously passed on those savings indirectly to insurers in the form of lower premiums. Giving rebates directly to consumers—a practice some insurers have begun to adopt—would provide relief to those with high out-of-pocket costs, but could raise premiums overall, particularly for those with relatively low prescription spending.

What’s Next?

The plan raises more questions than it answers—quite literally. The last and longest section of the blueprint includes 136 separate questions about how the administration should structure and implement some of the proposals discussed in the document.

Some proposals, while eye-catching, seem ill-advised. For instance, the proposal to “evaluate the inclusion of list prices in direct-to-consumer advertising” raises potential First Amendment concerns—government dictating the content of drugmakers’ communications with patients. Moreover, with many Americans viewing health care as a superior good, some consumers may view a more expensive product as “better” than its alternative. In that case this proposal, if ever implemented, could have the opposite of its intended effect, encouraging people to consume more expensive drugs.

The plan did not include the heavy-handed approaches to the prescription drug issue—Medicare price “negotiation” and drug reimportation—that Democrats favor, and that President Trump endorsed in his 2016 campaign. The document also makes clear the iterative nature of the process, with additional proposals likely coming after feedback from industry and others.

But to the extent that Washington has become consumed by the midterm elections fewer than six months away, the high-profile event Friday allowed Republicans and the president to say they have a plan to bring down drug prices—an important political objective in and of itself.

This post was originally published at The Federalist.

Just the Facts on Drug Negotiation

Congressional hearings often serve as elaborate theatrical productions. Members ask pre-written questions, receive formulaic answers, and in many cases use witnesses as props to engage in rhetorical grandstanding. The grandstanding element was on full display Tuesday during the confirmation hearing for Alex Azar, the Health and Human Services Secretary-designee. Sen. Claire McCaskill (D-MO) wanted to beat up on “evil” drug companies, and she wasn’t going to let facts get in her way.

McCaskill spent two minutes attacking pharmaceutical advertisements, including a reference to “the one for erectile dysfunction where they have them in two bathtubs,” before she tackled the issue of Medicare “negotiating” prices with drug companies. At this point she demonstrated ignorance on several issues.

Second, McCaskill failed to grasp that Medicare drug plans already negotiate with pharmaceutical companies, and that the discounts they obtain have helped keep overall premiums for the prescription drug Part D plan low. It may sound radical to McCaskill, who has spent practically her entire adult life working in government, but the private sector can negotiate just like the government, and probably do so more effectively than a government entity.

Third, McCaskill refused to believe that getting the government involved in “negotiating” drug prices would not save money. When Azar explained that removing a provision prohibiting federal bureaucrats from “negotiating” prices wouldn’t save money, McCaskill called his explanation “just crazy” and “nuts.”

It isn’t nuts, it’s economics. Even though McCaskill tried to lecture Azar on economics and markets at the beginning of her questioning, her queries themselves showed very little understanding of either concept. In a negotiation, the ability to drive a hard bargain ultimately derives from the ability to seek out other options. If Medicare must cover all or most prescription drugs, such that it can’t walk away from the proverbial bargaining table, it will by definition be limited in its ability to put downward pressure on prices.

But don’t take my word for it. As Azar pointed out to McCaskill, none other than Peter Orszag, who directed the Office of Management and Budget (OMB) under President Obama — said as much in an April 2007 Congressional Budget Office letter:

By itself, giving the Secretary broad authority to negotiate drug prices would not provide the leverage necessary to generate lower prices than those obtained by PDPs and thus would have a negligible effect on Medicare drug spending. Negotiation is likely to be effective only if it is accompanied by some source of pressure on drug manufacturers to secure price concessions. The authority to establish a formulary, set prices administratively, or take other regulatory actions against firms failing to offer price reductions could give the Secretary the ability to obtain significant discounts in negotiations with drug manufacturers.

Only the ability to limit access to drugs by setting a formulary or imposing  administrative prices, i.e. “negotiating” by dictating prices to drug companies, would have any meaningful impact on pricing levels. But this truth proved inconvenient to McCaskill, who admitted she “refuse[d] to acknowledge it.”

Instead, McCaskill continued haranguing him about the evils of drug companies. She pointed out that one congressman who helped negotiate the prescription drug benefit, Rep. Billy Tauzin (R-LA), “went to run PhRMA after he finished getting it through.”

Indeed he did. And as the head of PhRMA, he bragged about the “rock-solid deal” he cut with the Obama administration to help his industry. Big Pharma’s “deal” as part of Obamacare encouraged seniors to purchase costlier brand-name drugs instead of cheaper generics, which the CBO concluded would raise Part D premiums by nearly 10 percent. And who voted for that “rock-solid deal?” None other than Claire McCaskill.

As the old saying goes: If you have the facts on your side, pound the facts. But if you don’t, pound the table.

The facts indicate that McCaskill voted for a “rock-solid deal” with Big Pharma that raised premiums on millions of seniors, which actually makes her part of the problem, not part of the solution. Of course, that also makes her willingness to grandstand at Tuesday’s hearing, and her unwillingness to face facts she now finds politically inconvenient, less “crazy” than it first seemed.

This post was originally published at The Federalist.