Joe Biden’s assault on the $900 child-eczema cream

BUYING PRESCRIPTION DRUGS in America can feel a bit like being a tourist haggling at a street market. First, a ludicrous “retail price” is mentioned (for your correspondent recently, $902 for eczema cream for a child). Then, insurance is applied, followed by a layering-on of coupons (often printed by the pharmacist and then handed to themselves), discount cards and rebate claims. And yet even after all that, the amount of cash you pay out of pocket is still steep by international standards (the cream ended up costing $273).

Americans agree on few things, but lowering the price they pay for medication is the most popular policy position in American politics, tied with support for Social Security. Nine in ten say this should be an important or top priority for Congress. In his State of the Union address Joe Biden spent a full three minutes on the topic. Yet just over one in four say they are aware of President Biden’s attempts via the Inflation Reduction Act (IRA) of 2022 to reduce prices—something he is trying to rectify ahead of the presidential election in November. At least as interesting as the direct effect of Mr Biden’s landmark law is the question of what the indirect effects might be.

Americans spend twice as much on prescription medication per person as comparable countries, according to Peterson-KFF, a health-research group. This spending is heavily skewed by branded drugs with no competitors, so-called non-generic drugs. These make up 10% of prescription drugs but 80% of spending. Adjusted for inflation, spending on prescription drugs has increased from $101 per person in 1960 to $1,147 in 2021. Unsurprisingly, that scale of increase has an effect on care: nearly one in three Americans say they sometimes skip taking medication as prescribed because of the price tag.

The IRA, which was mainly a climate-change and industrial-policy law, did actually have some provisions designed to bring down inflation (although not in the short term). One politically important one relates to Medicare, the public-health insurer for the elderly which covers prescription drugs for 50m people.

The IRA empowered Medicare administrators to negotiate prices with drugmakers, which they had long been forbidden from doing. This should eventually reduce the price consumers pay, though probably not until a few years after the next presidential election. In the near term, the IRA also capped some out-of-pocket drug costs. The first to feel the effects of these measures are people with diabetes who need insulin, a drug for which Americans pay several times what Europeans pay. A national out-of-pocket cap of $35 per insulin prescription per month has meant that, since January 2023, millions enrolled in Medicare can now get insulin at a reduced price.

Another tangible result is an annual cap on out-of-pocket spending. Doug Hart, a 77-year-old from Arizona with heart disease, previously spent about $7,000 per year on prescription medication. Under the new cap, which is being phased in, he will be on the hook only for the first $3,300 this year, before Medicare foots the rest of the bill. From next year, the cap will be lowered to $2,000. “The way I see it, Biden is saving me $5,000 in out-of-pocket drug costs [and] I can go and see my grandkids in Chicago instead,” he adds. Both measures have brought substantial relief to people on Medicare, says Juliette Cubanski, at KFF, noting that the average annual income for participants is less than $36,000.

These first measures have been relatively easy to implement because they enjoy bipartisan support and the pharmaceutical industry does not mind them—if anything, it welcomes them, because they make drugs cheaper for consumers while the government picks up the difference. The second half of Mr Biden’s law, which gives Medicare a mandate to negotiate drug prices directly with manufacturers and penalises drug companies that raise prices above inflation, has been met with more hostility from the industry. Yet it is this part that will make a difference for taxpayers (and the deficit): without it, the price caps for consumers will just push high drug bills on to the government.

Negotiations between the government and Big Pharma are under way behind closed doors. Drug companies are keen to reassure shareholders that the government’s proposals are not as outlandish as feared. Yet at the same time they have filed several lawsuits challenging the legislation. One way or another the federal agency that administers Medicare will publish a list of the “maximum fair price” for each of the first ten negotiated drugs by this September, with the intention of introducing these discounts by 2026. The list includes Eliquis, a blood-thinner used by around 3.5m Medicare patients, including Mr Hart and “half the people” he knows. Medicare spending on these ten drugs more than doubled between 2018 and 2022.

Mr Biden’s claim that he has already saved American taxpayers $160bn thanks to these negotiations is misleading, because it relies on projections of future government savings. No doubt the price negotiations, which will ramp up to cover at least 20 drugs per year by 2029, will be good for the public purse. Ozempic, a diabetes and weight-loss drug, is an obvious candidate for the next tranche. The impact could be substantial: gross Medicare spending on such weight-loss drugs for a growing number of conditions has increased from $57m in 2018 to $5.7bn in 2022. Ozempic alone was the sixth most expensive drug for Medicare in 2022.

There is also the question of what the knock-on effects of the IRA will be, both for other drugs and beyond Medicare. “Now that the government has these new tools, there are huge opportunities to go beyond it [the IRA],” says Richard Frank, at the Brookings Institution, a think-tank. Benedic Ippolito, at the AEI, another think-tank, says that the real question is how the law will evolve in the future. “If you can suddenly negotiate more drug prices, earlier in their life cycle, or these prices apply to the entire private market, then suddenly this is not an incremental change—this is a sea change.”

Mr Biden has said he will try both to increase the number of drugs subject to negotiation and expand the $2,000 out-of-pocket cap to people with private insurance. Expanding the negotiations to 500 drugs over ten years would be “transformative”, says Merith Basey, from Patients For Affordable Drugs, an advocacy organisation. And once the prices that Medicare pays for expensive drugs are published, this might increase the bargaining power of private insurers too.

Over eight in ten Americans support the idea that the federal government should be able to directly negotiate with Big Pharma on drug prices and nine in ten believe price increases should not outpace inflation. “Any elected official who aligns themselves with pharma and against the will of voters will do so at their own political risk,” warns Ms Basey. The president’s campaign team will be hoping that enough people notice the new, reduced Medicare drug prices, which will be announced in September—just in time for the election.

Another scenario is just as likely: Mr Trump wins and claims credit for Mr Biden’s achievement, because the price reductions would not actually come into force until 2026. That would be the Trumpiest move. Either way, patients should benefit.

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