Yesterday, the President issued an executive order (EO) on drug pricing for pharmaceuticals covered under Medicare parts B and D. The EO, in essence, proposes a form of price controls for drugs covered under Medicare parts B and D. We first discuss key provisions of the EO, then provide helpful context and analysis.

The EO

The EO starts with a justification, which in part, states:

Americans pay more per capita for prescription drugs than residents of any other developed country in the world. It is unacceptable that Americans pay more for the exact same drugs, often made in the exact same places. Other countries' governments regulate drug prices by negotiating with drug manufacturers to secure bargain prices, leaving Americans to make up the difference—effectively subsidizing innovation and lower-cost drugs for the rest of the world.

The EO also asserts:

In addition to being unfair, high drug prices in the United States also have serious economic and health consequences for patients in need of treatment. High prices cause Americans to divert too much of their scarce resources to pharmaceutical treatments and away from other productive uses.

Next, the EO enumerates a policy position that Medicare should not pay more for costly Part B or D prescription drugs or biologic products than the most favored nation (MFN) price. The EO defines the MFN price as:

the lowest price, after adjusting for volume and differences in national gross domestic product, for a pharmaceutical product that the drug manufacturer sells in a member country of the Organisation for Economic Co-operation and Development (OECD) that has a comparable per-capital gross domestic product.

In essence, under the EO, Medicare would not pay any more for drugs than prices paid by other developed nations.

The EO instructs the Secretary of Health and Human Services to "immediately take appropriate steps to implement a rulemaking plan to test a payment model pursuant to which Medicare would pay, for certain high-cost prescription drugs and biological products covered by Medicare Part B, no more than the most-favored-nation price." The EO also orders that the model "should test whether, for patients who require pharmaceutical treatment, paying no more than the most-favored-nation price would mitigate poor clinical outcomes and increased expenditures associated with high drug costs."

It is worth noting that this EO comes several months after an earlier EO of the exact same name of July 24, 2020, that was signed but held back as a negotiating tactic with pharmaceutical companies.

Is the EO's Policy Justification Correct?

Are U.S. drug prices too high? The answer is complex.

On one hand, there are many patients who have difficulty affording their medications. For those patients, arguably, drug prices can place drugs, including life-saving drugs, out of reach. And for these patients, this is a serious problem which many stakeholders are working to address. From the perspective of patients who need but cannot afford their medications, drugs can be overpriced.

On the other hand, drugs are unique because they eventually go generic. Generic drug prices, especially when there are multiple generics competing in the marketplace, can result in a 79 percent reduction in the prices of branded drugs. And 90 percent of all drugs in the U.S. are generic. Compare this, for example, to prices for hospitals and healthcare. These services never go generic and prices for hospitals and healthcare trend up over time. Also, less than 10 percent of the total U.S. annual health expenditures are spent on drugs (amounting to less than 2 percent of U.S. gross domestic product, or GDP). And lower drug costs result in healthcare cost savings elsewhere.

Blood pressure medications and statins decrease cardiovascular morbidity and mortality and result in patients avoiding costly surgeries and hospital visits. Drugs like Sovaldi® effectively cure hepatitis C in many patients, saving millions of dollars for many patients, who without treatment, would progress to liver failure and a transplant or death. The cost for a liver transplant can be up to $1 million, and subsequent anti-rejection drugs must be used for a lifetime. These costs are not often accounted for by the consuming public when discussing drug prices.

On balance, do U.S. patients pay more for drugs than citizens in some other countries? Yes. Are dugs overpriced in the U.S.? The answer is complex.

Our Analysis

What effect might this have on innovation in the U.S.? What effect might this have on patients? How likely is the EO to be challenged? How likely will any challenge be successful? Are there better solutions?

At the outset, EOs do not live forever. They can expire, be withdrawn, or overturned by the courts. So, any impact of this EO, in the intermediate to long term, is uncertain.

Further, the EO appears to be an attempt to skirt notice-and-comment rule making, and at least on that basis will likely be challenged in the courts. Because courts tend to favor the due process that arises from notice-and-comment rule making, a challenge could have a reasonable chance of succeeding.

Price controls historically lead to shortages—and in this case could lead to drug shortages. In general, U.S. patients likely would prefer to have access to new, breakthrough medications when the medications are needed and as soon as the medications are approved or licensed. Price controls are likely to hamper this. As such, attempts to implement the EO may result in significant pushback from at least some constituents.

Further, because the EO proposed to tie U.S. drug prices to drug prices paid in other nations, the EO indirectly could give other nations a say in what U.S. patients and the government pay for drugs. That raises significant policy considerations.

Earlier, we wrote about H.R. 3, a drug price control bill introduced by Speaker Nancy Pelosi. In that article, we noted that:

Recently, Stat+ reported that a group of prominent venture capitalists (VCs) issued a strong warning to Congress. The warning: H.R. 3, the newly introduced Lower Drug Costs Now Act, if enacted, will "severely constrain" the VC's ability to invest in future biomedical innovation, "thus crushing the hopes of millions of patients waiting for the next breakthroughs."

Entrepreneurs and VCs make a significant number of new drugs possible, but VC investment in drug research and development is economically feasible only when the return on investment on the one-out-of-ten drug candidates that make it through the clinic justify the losses on the other nine that do not. The EO, like H.R. 3, if implemented, could have a chilling effect on investment in the biotech industry which is an important engine for developing new drugs to treat life-threatening diseases and conditions. Thus, we would expect significant lobbying in opposition to the EO.

And, there are better solutions. We present three of these possible solutions.

First, encourage the development of fast follower drugs. For example, Sovaldi®, when it first came to market, was priced at about $80,000 for a course of therapy. Because of fast follow drugs which accomplish in essence the same clinical result, the price to be treated (cured) for hepatitis C, using competing medications, has dropped significantly.

Second, Congress should consider insuring all Americans for drugs such that Americans pay little, to no, out-of-pocket costs for drugs. Remember that all drug spending amounts to less than 2 percent of U.S. GDP. An insurance program for just drugs would not break the bank.

Finally, reform PBM rebates. We recently wrote about the role that pharmacy benefit managers (PBMs) play in increasing in drug prices. Briefly, PBMs drive up the price consumers pay for drugs by incentivizing drug makers to charge higher list prices for drugs, by charging insurance companies to negotiate on the insurance company's behalf with drug makers for rebates on purchased drugs, and by keeping a significant portion of those rebates (that is, not passing the rebates along to patients). This EO does nothing to change PBM behavior.

Conclusion

The EO, if implemented, will likely be challenged in the courts. We predict significant pushback from the investment community and significant lobbying efforts against the EO. If enacted, the EO could significantly harm to the pharmaceutical and biotechnology industries, create drug shortages, and significantly curtail the development of new medications. For all of these reasons, the path outlined in the EO is uncertain. Interested parties are encouraged to contact the White House and their elected representatives and make their views known.