There isn’t much in the new health care law dealing with prescription drugs, mostly thanks to a deal the Obama administration made with PhRMA, the drug industry’s lobbying group. The details are a little unclear, but in general the drug companies agreed to $80 billion in cuts over the next ten years, but no more. In exchange for this limit on the amount they’d have to cough up in the health care bill, the drug industry agreed to support reform.
Most of the $80 billion got eaten up in the Medicaid and Medicare sections of the bill:
- Medicaid: The government will get a bigger rebate from drug companies for prescriptions filled under Medicaid- before health reform the rebate for brand name drugs was 15%, now it’s 23.1%.
- Medicare: Drug companies will also provide a 50% discount on brand name drugs sold to seniors who fall into the Medicare Part D coverage gap (otherwise known as the donut hole).
And so in section of the law dealing with pharmaceutical companies, there are really only two major provisions:
1. A pathway for generic versions of biologics
The term biologics refers to anything used to treat patients that is created by biological processes- vaccines, blood, tissues, things like that. That includes new drugs, like recombinant DNA technology (building DNA sequences to create hormones, antibodies, proteins, etc. to target specific diseases), which are being manufactured using living tissues and microorganisms.
These new biologic drugs involve larger, more complex molecules than the simpler “small-molecule drugs” we usually think of when we talk about medication. The manufacturing process is also more complicated, making the creation of generic biologics much more difficult.
For example, if you want to make a generic version of a traditional Aspirin, you mix some chemicals–in this case acetyl chloride with sodium salicylate– and you’ve got the exact same product that Bayer sells. But let’s say you want to create a generic version of a hybridoma (a type of biologic made by fusing a B-cell with a cancer cell to produce a specific type of antibody). Even if you figure out a way to make it, your generic version might be less safe or perform differently than the original.
Because they aren’t exactly the same as the drugs they’re replacing, generic biologics are usually called “biosimilars” or “follow-on biologics” (FOB’s). The creation of biosimilars could help save some of the $40 billion that consumers spend on biologic drugs every year, but until now there has been no way to get approval from the FDA. The new health reform law finally lays out strict new regulations for the creation of these generic drugs.
However, the new law also grants original manufacturers a 12 year period of exclusivity. The exclusivity period for a new drug is kind of a reward to drug companies for innovating- the drug company gets to make a ton of money as the only manufacturer for a limited time, then generics can step in so there’s market competition to keep costs down.
The Federal Trade Commission thinks that the 12 year period of exclusivity for biologics is much too long, because:
- The substantial costs to obtain FDA approval, plus the substantial costs to develop manufacturing capacity, will limit the number of follow on biologics (FOB) competitors;
- Since FOB’s aren’t exactly the same as the original drug, it will slow the rate at which FOBs can acquire market share;
- An FOB drug also may have difficulty gaining market share due to concerns about safety and efficacy compared to the original biologic drug;
- Biologic drugs currently are not reimbursed according to strategies that insurers often use to encourage the use of lower-priced drugs.
In other words, the FTC is saying that drug companies won’t need that long 12 year exclusivity period as an incentive to innovate. They’ll still make plenty of money by dominating the market for that drug– the competition from generics will just force them to keep prices reasonable.
2. Extending discounts on drugs to hospitals that serve low income patients
Even before the reform law passed, clinics and hospitals that serve low income populations got a discount on prescription drugs. The new law expands that discount to more hospitals, particularly those in rural areas.
What’s Not In the New Law
Here are some ideas for saving money on prescription drugs that were not included in the new health care law, as a result of the Whitehouse-PhRMA deal:
- Allow Medicare to negotiate directly for lower drug prices. Just like Walmart uses its enormous size and market share to negotiate for lower prices from its suppliers, Medicare could negotiate for much lower prices on prescription drugs. The Veterans Administration already negotiates drug prices for its hospitals and is saving a lot of money- it currently pays only 42% of the suggested list price for brand name drugs. Unfortunately, the 2003 Medicare prescription drug law specifically prohibited Medicare from negotiating with drug companies. Rep. Peter Welch (D-VT) and 61 cosponsors have introduced a separate bill that would allow Medicare to negotiate for lower drug prices- they estimate that it could save the government $156 billion over the next ten years.
- Allow for drug re-importation. People in every other industrialized country pay less for prescription drugs than the United States- for example U.S. drug prices are 67% higher than Canada’s. Senator Byron Dorgan (D-ND) introduced an amendment to the health care bill that would have allowed the importation of medication from Canada, Europe, Australia, New Zealand and Japan. That amendment was killed.
- However, it’s worth noting that when the CBO analyzed a similar proposal back in 2004, it found that allowing imports of drugs from other countries would only reduce total drug spending in the U.S. by $40 billion over 10 years, as foreign governments and drug companies would make it harder to export drugs from those countries.
- Prohibit “pay for delay” deals. We’ve talked about these deals before on the What If Post– manufacturers of a brand name prescription drug will often pay other manufacturers to hold off on releasing generic version of their drug. The longer generics are held off the market, the longer consumers have no alternative to paying the high brand-name prices. There’s currently a separate bill making its way through Congress that would ban these deals.
The Obama administration has argued that the PhRMA deal only applied to the comprehensive health reform bill, and that they can pursue these other ideas in separate pieces of legislation. Hopefully they will.