Wednesday Lunch: Walking the Drug-Pricing Tightrope

Event Context & Introductions

• The Milken Institute's Future of Health Summit concluded with a panel titled "Walking the Drug Pricing Tightrope," moderated by Dan Diamond.
• Original speaker Nancy Pelosi was unable to attend due to a scheduled national security briefing; she expressed regret for her absence and affirmed strong support for the Institute's health work.
• The panel comprised Dan Leonard (National Pharmaceutical Council), Seema Verma (CMS Administrator), Matt Iles (AHIP CEO), and Mark McClellan (Duke Margolis, former CMS Administrator).

Current Drug Pricing Landscape & Data

• In 2019, the FDA approved the most expensive drug in history, yet overall drug trend growth slowed to less than 0.5%, the lowest rate in over 25 years.
• CMS projects that by 2026, healthcare spending will consume one in every five dollars of U.S. GDP, driven significantly by rising costs.
• Approximately 50 new therapies are currently in the pipeline with price tags ranging from $500,000 to $2 million.
• Dan Leonard noted that Part D premiums have dropped by 11%, reaching the lowest levels in seven years.
• The "gross-to-net" bubble—money changing hands between manufacturers, PBMs, and plans without reaching patients—is estimated at up to $160 billion annually.
• A recent Kaiser Family Foundation poll indicates 88% of Americans support allowing the federal government to negotiate drug prices for Medicare beneficiaries.
• The Congressional Budget Office (CBO) analyzed a House Democratic drug pricing bill, estimating it could save money but potentially result in 15 fewer new drugs developed over a decade.

Key Disagreements & Policy Debates

• Innovation vs. Affordability:
  • Matt Iles argued that cutting revenue (and thus R&D budgets) would inevitably reduce the number of new drugs, specifically affecting "hard to crack" treatments like those for Alzheimer's ($368 billion annual burden).
  • Mark McClellan and Dan Leonard countered that while innovation is vital, the current system encourages excessive pricing on existing products without generic competition, and that value-based models can align costs with outcomes.
• Government Negotiation vs. Market Competition:
  • Matt Iles opposed direct government price setting, arguing it creates a "one-size-fits-all" approach and prefers private sector competition to drive down costs.
  • Seema Verma and Mark McClellan acknowledged the risk of government "omnipotence" but highlighted the necessity of addressing monopolies where no competition exists, particularly in Part B (physician-administered) drugs.
• Payment Models:
  • There is consensus on the need to shift from fee-for-service models to value-based contracts, though Verma warned that such arrangements might lead to higher initial launch prices if manufacturers build in "risk premiums."
  • Panelists identified perverse incentives in the current Part B system (Average Sales Price + percentage add-on), which encourages the prescription of higher-priced drugs.

Specific Sector Concerns

• Antibiotics: Seema Verma described current incentives as "perverse," noting that low reimbursement rates discourage investment; CMS recently increased reimbursement for FDA-approved antimicrobials for the first two years to stimulate development.
• Value-Based Contracts: While AHIP supports value-based arrangements, CMS is currently working to resolve statutory issues regarding how these contracts interact with Medicaid "best price" requirements.
• High-Cost Therapies: Panelists agreed the current payment structure forces high-cost, curative treatments (e.g., gene therapy) to be paid within a single fiscal year, whereas the financial benefit spans a lifetime.

Legislative & Forward-Looking Statements

• Bipartisanship Requirements: Matt Iles and Mark McClellan outlined three "litmus tests" for future legislation: it must be bipartisan, it must not harm patient access to cures, and it must not negatively impact long-term innovation.
• Legislative Action:
  • A potential "21st Century Cures 2.0" is being discussed by Rep. Fred Upton and Rep. Diana DeGette, focusing on innovative payment systems that align with science.
  • Administrator Verma indicated that if Congress fails to pass a comprehensive package, the administration is prepared to move forward with unilateral proposals.
• International Pricing Index (IPI): The status of the IPI was described as "sitting at OMB," with no further public details available due to the bureaucratic review process.
• Part D Reform: Panelists identified the "catastrophic phase" of Part D, where the federal government pays a high share of costs without negotiation, as a critical area requiring reform to lower out-of-pocket expenses for seniors.

Consensus on Future Direction

• The panel agreed that while the majority of chronic disease patients receive good value, the system is unsustainable for high-cost, curative, and orphan drugs.
• All panelists expressed support for transitioning toward value-based payment arrangements and increasing competition, though they differed on the mechanism (private sector choice vs. government negotiation).
• Mark McClellan and Seema Verma emphasized the need to track patient outcomes rather than clinical trial labels to truly assess drug value.