IT’S BAKER versus drug companies, take two.
Gov. Charlie Baker, in his fiscal 2022 budget proposal, is reviving a controversial plan to penalize drug companies for charging too much for their drugs. The budget estimates that $70 million in overcharging penalties would be collected in the fiscal year beginning July 1, with $47.5 million earmarked for a trust fund that supports community health centers and community hospitals and the rest going to the general fund.
Baker’s proposal addresses a long-standing problem: the high cost of pharmaceutical drugs. But pushing for it during a pandemic, over the strong objection of drug companies, may also be politically risky at a time when the world is looking to the pharma industry to vanquish COVID-19. The industry is pounding home that theme in its fight against the proposal.
“As the industry continues to focus on developing vaccines and treatments for COVID-19, we need policies that support America’s collaborative research ecosystem, not hinder it,” the pharmaceutical industry trade association PhRMA said in a statement. “Gov. Baker’s shortsighted proposal could limit the availability of medicines to patients in the Commonwealth, and could have long-term harmful effects on innovation and the development of new, life-saving therapies.”
The proposal is identical to one Baker proposed in his health care reform bill in late 2019 and in his fiscal 2021 budget proposal. But legislators released their own versions of the health care bill, and as the focus shifted to COVID-19, Baker’s drug proposal was dropped.
Doug Howgate, executive vice president of the Massachusetts Taxpayers Foundation, who previously advised Senate President Karen Spilka on health care policy, said he expects that outside groups this time will look seriously at Baker’s proposal.
“Obviously, we want something that gives people access to lower-cost medications,” Howgate said. “At the same time, you don’t want to do things that will have unintended consequences in terms of drug costs, innovation, those sorts of things.”
Baker’s proposal would penalize drug manufacturers who increase the price of a drug by more than the consumer price index plus 2 percent in one year. If the consumer price index, a measure of inflation, is 1 percent, a drug maker could raise the drug’s price by 3 percent. If the price goes higher than that, the manufacturer would have to pay a penalty of 80 percent of the excess cost.
Zach Stanley, executive vice president of the Massachusetts Biotechnology Council, said the policy “is unnecessary and ignores the numerous, existing tools the Massachusetts state government has to reduce prescription drug spending.”
In a Boston Globe op-ed published in December, PhRMA president and CEO Steven Ubl and Massachusetts Biotechnology Council president and CEO Robert Coughlin said fewer drugs are available in countries that artificially set prices. Price setting can dry up investment and freeze research and development by giving drug companies less money. They say lowering drug prices will not necessarily trickle down to consumers, if insurance companies increase cost-sharing.
An ad PhRMA has been running in print and digital media since December, anticipating the proposal would resurface, warns that Baker’s proposal “puts government between you and your doctor.” The ads also state that “government price setting means politicians can arbitrarily decide that some patients and diseases are worth more than others.”
Pioneer Institute visiting fellow William Smith said pricing restrictions could harm innovative research in a CommonWealth op-ed in January 2020. Smith questioned the logic of, for example, capping a price increase if a drug is found to cure a new disease. He also questioned why drug prices should be controlled, but not insurance premiums.
No other state has capped prices this way. A bill to control drug prices nationally, which includes setting a maximum price increase based on inflation, was proposed in Congress by House Democrats.
MIT economics professor Jonathan Gruber, director of the health care program at the National Bureau of Economic Research and a former Obama health care adviser, said he questions how Massachusetts could implement a drug pricing policy, since manufacturers do not set drug prices at a state level. He also worried that if Baker curbs the price increase but not the drug’s base price, that would incentivize drug makers to price drugs higher from the beginning. “It makes a lot more sense to do it as part of a comprehensive plan than a one-off inflation regulation,” Gruber said.
Gruber said many other countries are experimenting with price controls, in part because there is concern that the prices people pay for drugs do not reflect their value. He said good price controls should be related to the quality of the drug, and the question then becomes how good a job government could do regulating prices relative to the drug’s quality.
The state already has some tools to lower drug prices, but only in a limited way.
In the fiscal 2020 budget, lawmakers gave MassHealth authority to negotiate prices with drug manufacturers. Since then, MassHealth finalized agreements on 36 drugs from 13 manufacturers with additional negotiations underway, according to the Executive Office of Health and Human Services. If MassHealth and the manufacturer cannot agree on a fair price, the dispute is referred to the Health Policy Commission. No drugs have yet been referred to the commission. Baker’s fiscal 2022 budget proposal would expand this policy, primarily by letting MassHealth negotiate prices for non-pharmaceutical medical supplies, like blood sugar test strips and oxygen equipment.
Baker previously sought authority to let MassHealth decide whether to cover drugs based on their cost and effectiveness – rather than having to cover all federally approved drugs – but the federal government rejected that request.
Lawmakers have also discussed requiring drug manufacturers to appear before the Health Policy Commission at its annual cost trends hearing, as insurers and hospitals must do.
Sen. Cindy Friedman, an Arlington Democrat who has led the Senate’s efforts on health care policy, said her first priority this session is to include the pharmaceutical industry under the Health Policy Commission’s auspices, so policymakers can better understand what is driving up the cost of drugs. Under that process, pharmaceutical companies would have to explain the reasons for their prices. The commission could potentially penalize drug companies for excessive cost increases, the way it can now for health care providers or insurers.
Through that process, Friedman said, “We can really understand what the true cost of those drugs are and what effect they have on overall health care spending and then require that they become part of the health care system that we try and manage.”
Now, Friedman said, policymakers have no idea how drug prices are set and whether prices correspond with value. “We want to make sure that we don’t get in the way of innovation and that we’re being told honestly what it costs and what the true value of these drugs are,” Friedman said.
Friedman said she does not oppose penalizing pharmaceutical companies for excessive price increases, but “it’s a little bit of a big hammer, and I don’t know what the size of the nail is.”