Drug price controls are coming

There’s increasing momentum for some kind of legislation or agency ruling to cap prescription drug prices. According to our contacts in DC, with the 2016 departure of senior Senate Democrats who were not in favor of drug price legislation, and with a couple of GOP Senators ready to break ranks and pass something, there’s a window that might be seized upon before the 2020 election. Potential policy options partially explain why large cap pharma and biotech stocks have underperformed the S&P 500 by 12%-18% this year. New studies from Health & Human Services and Johns Hopkins on US prescription drug prices vs other industrialized countries help explain why this issue is gaining momentum in Congress.

The first chart using HHS data shows the ratio of US Medicare Part B drug prices to average international prices; a US premium of 2x-4x is common. Most of these drugs are cancer-related given the Medicare Part B population. A study just released from the Johns Hopkins School of Public Health did the same for a basket of 79 Medicare Part D drugs with the largest spending, and also found US drug prices that are 3x-4x higher than in three comparable high-income countries. This study follows a 2017 Commonwealth Fund report with similar results. In both Part B and Part D studies, prices reflect estimated discounts and rebates received by insurers from drug manufacturers. Competition from generics has since narrowed some premiums included in the Commonwealth study, but the point stands that large premiums can exist before prescription drug patents expire. What’s notable about the Johns Hopkins study: many Part D drugs with higher relative prices were not new innovations, and have already been on the market for 9-10 years.

Cost savings estimates

• Medicare accounts for 31% of all drug spending; of this amount, 75% is Part D and 25% is Part B
• HHS estimates that If Medicare Part B drug prices declined to international averages, there could be a 50% decline in Part B drug spending, amounting to $8 bn per year
• Johns Hopkins estimated $40-$80 bn in potential annual savings if Medicare Part D drug prices converged to international averages.  However, as explained below, legislation would be required to empower the Federal government to influence Medicare Part D drug prices

Michael Cembalest, JP Morgan Asset Management

End Notes

It can be hard to get good data on US drug prices vs other countries, since in the US, private insurers negotiate directly with drug companies to set prices (i.e., there are multiple prices for the same drug depending on the insurer-drug company permutation), and given rebates/discounts which obscure what is actually paid. Medicare essentially acts as a payment conduit between private firms, and there’s a “non-interference” clause preventing the Federal government from using its negotiating power to influence Medicare Part D drug prices. A 2017 poll by the Kaiser Foundation found 90%+ public support across both political parties for legislation allowing the Federal government to negotiate drug prices, a proposal also endorsed the National Academy of Sciences, Engineering and Medicine.

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