Congressional Democrats this week proposed an addition to U.S. President Joe Biden's climate and social spending legislation that would allow Medicare, the federal government's health care program for older Americans, to negotiate with drugmakers over the cost of certain prescription medications.

U.S. consumers pay higher prices for prescription medications than almost any of their peers in the developed world, a fact that generations of politicians and advocates have struggled in vain to change. If passed, the proposal working its way through Congress would make a dent, though a relatively small one, in that long-standing problem.

The plan being discussed would give Medicare officials the ability to negotiate pricing on a sliver of the thousands of prescription medications on the market in the United States, beginning with about 10 drugs and capped at 20. Liberal members of Congress at first had hoped to grant Medicare authority to negotiate the prices of up to 250 costly drugs every year.

Though small, the number of drugs that would be covered by the proposal represents a disproportionate amount of the annual "spend" on drugs by Medicare patients.

A study by the Kaiser Family Foundation released this year determined that the 10 top-selling drugs covered under Medicare Part D accounted for 16% of net total spending in 2019. The top 50 drugs - representing just 8.5% of all drugs covered under the program - accounted for 80% of spending.

The top 10 drugs, according to the Kaiser Family Foundation include "three cancer medications, four diabetes medications, two anticoagulants and one rheumatoid arthritis treatment."

Confusing system

Unlike many countries outside the U.S., where the government is able to negotiate drug prices and bring down the cost for a single national health care system, the landscape in the U.S. is highly fragmented. Most Americans with health insurance are covered by policies issued by for-profit companies in the private sector.

Americans 65 years and older are eligible for Medicare, which takes the place of a private insurer, but with some critical differences. For many years, Medicare did not offer prescription drug coverage, forcing Medicare patients to pay for medications out of pocket or seek third-party insurance coverage for their medications.

In 2003, Congress created Medicare Part D, under which private insurers offered medication coverage that met minimum requirements established by the federal government. While that program reduced costs for many seniors, cost-sharing provisions and design flaws mean that many recipients continue to face financially crippling bills for medication. A key reason is that each insurance provider must negotiate prices with drug companies individually, rather than using the bargaining power of the entire Medicare population to insist on lower costs.

'Subsidizing R&D for the world'

For years, advocates for change have pointed out that drug companies set prices in the U.S. far above those in other countries in which they sell the same drugs. A study by the Rand Corporation this year comparing the U.S. with 32 other countries found that drugs cost on average 256% more in the U.S.

"American consumers are subsidizing the R&D for the world," said Lovisa Gustafsson, vice president of the Controlling Health Care Costs program at the Commonwealth Fund, a think tank in Washington, D.C.

Compounding the problem is that Americans also shoulder a much greater share of the cost for their prescription medications.

"Patients in the U.S. face far higher cost-sharing than in a lot of other countries. So, just because they have insurance doesn't mean that patients can actually afford the drugs that they need currently," Gustafsson said. "There's survey after survey showing that 20% to 25% of Americans can't afford the drugs they're prescribed by their physician, or split pills, or don't get the prescription filled, because they just can't afford it. And that's even when they have insurance."

Putting a lid on costs

An important element of the proposal before Congress is that it would place an annual cap of $2,000 on the co-payments that Medicare patients can be charged for their medications.

The prospect of a cap on out-of-pocket costs was well-received by many calling for reforms, such as AARP, a large advocacy group for older Americans.

"There's no greater issue affecting the pocketbooks of seniors on Medicare than the ever-increasing costs of prescription drugs," AARP CEO Jo Ann Jenkins said in a statement. "For decades, seniors have been at the mercy of Big Pharma. Allowing Medicare to finally negotiate drug prices is a big win for seniors. Preventing prices from rising faster than inflation and adding a hard out-of-pocket cap to Part D will provide real relief for seniors with the highest drug costs."

Drug firms unhappy

PhRMA, a powerful trade group representing the pharmaceuticals industry, reacted unhappily to news of the proposal.

"If passed, it will upend the same innovative ecosystem that brought us lifesaving vaccines and therapies to combat COVID-19," PhRMA President and CEO Stephen J. Ubl said in a statement. "Under the guise of 'negotiation,' it gives the government the power to dictate how much a medicine is worth and leaves many patients facing a future with less access to medicines and fewer new treatments."

"While we're pleased to see changes to Medicare that cap what seniors pay out of pocket for prescription drugs, the proposal lets insurers and middlemen like pharmacy benefit managers off the hook when it comes to lowering costs for patients at the pharmacy counter," Ubl continued. "It threatens innovation and makes a broken health care system even worse."

Industry claims exaggerated?

Numerous supporters of allowing the government to negotiate on drug prices claim that the industry's insistence that it will stymie innovation is exaggerated.

One piece of evidence they point to is a study released by the Congressional Budget Office in August. The CBO created a model in which pharmaceutical companies were faced with the following scenario: A policy is put in place that reduces the return on their most profitable drugs by 15% to 25%.

The agency estimated that the impact would be a reduction of the number of new drugs coming onto the market by only one-half of 1% over the first 10 years of the new policy. That would increase to as much as an 8% reduction in the first three decades of the program.

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