Biotech Drug Prices Under Scrutiny

Efforts to cut spending on healthcare will focus on outlays for prescription drugs by Medicare and other health programs.
Feb 01, 2009
Volume 22, Issue 2

Jill Wechsler
To reform the nation's healthcare system to make quality care more available and affordable, new strategies are needed to tackle the ever-rising cost of health services and products. The Congressional Budget Office (CBO) and the Centers for Medicare and Medicaid Services (CMS) estimate that the nation will spend $2.6 trillion for healthcare in 2009, 17% of the gross domestic product (GDP). Without any policy changes, that amount will rise to 20% of GDP by 2017 and nearly 50% in 2082, according to a CBO report on "Key Issues in Analyzing Major Health Insurance Proposals".1

Annual spending will increase from $8,300 per person today to $13,000 by 2017, and federal outlays for Medicare and Medicaid will grow from $720 billion in 2009 to about $1.4 trillion by 2019. The number of uninsured, moreover, will rise from 45 million today to about 54 million in 10 years because health insurance premiums will increase much faster than income, making coverage more difficult to afford.


One bright spot in the health spending picture is a slowdown in expenditures on prescription drugs to a 45-year low in 2007, according to the CMS Office of the Actuary. Outlays for drugs rose only 4.9% to $227.5 billion, the slowest rate of growth since 1963. And prescription drug prices increased a paltry 1.4% in 2007, even less than the 3.5% price rise in 2006.2

Still, the portion of the economy devoted to healthcare continued to expand as outlays for hospitals, physicians, and other healthcare services grew faster than inflation. Spending on prescription drugs is projected to total $264 billion this year, with about $100 billion coming from government coffers. The Medicare drug budget is slated to exceed $50 billion this year, an amount that attracts attention from budget cutters on all sides.

One prime target of reformers is to promote generics competition for costly biotech therapies. The CBO estimates that the federal government could save $9.2 billion over 10 years by establishing an abbreviated pathway for the Food and Drug Administration (FDA) to approve follow-on biotech therapies (FOBs) for market. For its analysis, the CBO assumes a 12-year exclusivity period for brand-name products plus limits on requirements for duplicating innovator clinical trails. The resulting lower-priced FOBs would save Medicare and Medicaid about $8.1 billion over the 2010–2019 period, while other government health programs would see costs drop by another $1 billion during that time.

The savings would be even greater—about $12 billion over 10 years—if the government also revised billing codes for biologics dispensed by physicians under Medicare Part B. Placing an FOB in the same billing code as a brand-name counterpart would provide a strong incentive for physicians to prescribe the biosimilar because CMS would reimburse physicians based on a weighted average of the prices paid to manufacturers for all drugs in the same billing code. Consequently, a physician dispensing the less expensive FOB would be able to retain the difference between the product cost and Medicare payment, while those providers dispensing the brand-name product would face a financial penalty.

Manufacturers object that such incentives risk dispensing biosimilars that raise concerns about patient safety and therapeutic efficacy. And the CBO acknowledges that authorizing FOBs could cut revenues to biotech companies and reduce R&D in new therapies. But the analysts point out that these losses would be offset by larger gains for private health insurance plans, which would translate into lower insurance premiums, higher wages, and a parallel boost in federal tax revenues.

Medicare drug plans already are lowering outlays for expensive drugs covered under Part D by revising formularies to have four or more tiers, including a top tier for specialty drugs that cost more than $600 a month. Specialty tier drugs now routinely carry coinsurance rates up to 33%, compared to a median 25% three years ago, according to an analysis presented to the Medicare Payment Advisory Committee (MedPAC) in December, requiring patients to shoulder a larger portion of the cost.


Another promising strategy for cutting drug expenditures, according to the CBO, is to mandate rebates on medicines purchased for Medicare beneficiaries, an idea championed by Rep. Henry Waxman (D-CA), newly named chairman of the House Energy and Commerce Committee. Waxman believes that manufacturers are raking in big profits from Part D caused by the elimination of rebates previously paid to state Medicaid programs for drugs delivered to low-income seniors now covered by the Medicare drug benefit.

The CBO says that a mandatory 15% rebate of the average manufacturer price beginning in 2011 would save the government $33 billion over five years and $110 billion over 10 years (2011–2019). Manufacturers would have to pay the rebates or lose sales to Medicare Parts B and D, as well as to Medicaid, the Veterans Health Administration, and other government health programs. Although the envisioned policy is similar to the Medicaid drug rebate program, it would drop the best price provision to avoid affecting prices negotiated by private purchasers.

The downside is that manufacturers would try to offset the added rebates by charging higher prices initially and developing new strengths and dosage forms for existing drugs that could command higher prices. If manufacturers cannot recoup some of the lost revenues, the policy could curb industry investment in R&D.

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