Tax Penalty, Patient Market Weigh on Pharma’s Price-Cut Decision

As the deadline to enter Medicare’s price negotiation program inches closer, drugmakers are scrambling to gather product-specific data that will help determine their drug’s maximum fair price.

It’s a pivotal week for the Biden administration’s plan. Drugmakers with one of the first 10 drugs selected by the Centers for Medicare & Medicaid Services for price negotiations have to decide by Oct. 1 if they are going to enter agreements. If they do, they have to send data about their products to the government by Oct. 2.

It’s possible, but unlikely, all selected drugmakers will publicly announce their decision before the Oct. 1 deadline. For one thing, some manufacturers are waiting on court rulings that could halt the program.

A government shutdown anticipated to occur at the end of the week also could rattle the program, after Health and Human Services Secretary Xavier Becerra said it’s inevitable that a shutdown would throw off the negotiation timeline.

Assembling the required information is a heavy lift for drugmakers and government employees. AbbVie has more than 30 employees gathering data on its drug Imbruvica to meet the Oct. 2 deadline to submit information to Medicare, an attorney said during oral argument in the US Chamber of Commerce case against the Biden administration.

No one really expects drugmakers to turn away from the program. Medicare’s vast market of beneficiaries and a hefty tax penalty are the main incentives keeping companies from rejecting negotiations, legal experts agree.

“The costs of not participating are so excessive that it’s really not a choice,” said Michael Abrams, managing partner of Numerof & Associates. “Roughly half of the country is covered by Medicare or Medicaid.”

“There isn’t any pharmaceutical manufacturer that can afford basically to suddenly give up half the population into which it sells,” he said.

Graphic: Jonathan Hurtarte/Bloomberg Law

Cost of Rejecting

More than half of the first 10 Medicare Part D prescription drugs selected for negotiation by the CMS treat diabetes or prevent blood clots. Manufacturers of some of the selected medicines include Merck & Co. Inc., Bristol-Myers Squibb Co., and Johnson & Johnson. The CMS said over 8 million people under Medicare use the drugs on the list.

The chances of drugmakers saying no to the negotiations is low because of the large patient market, said Melissa Wong, an attorney for Holland & Knight’s Boston office.

“These are for therapeutic conditions that are really common amongst the Medicare population,” Wong said. “There could be potential big impacts to patients just by the nature of the drugs that were selected.”

Companies that choose to end price talks before or after both parties agree to a maximum fair price will have to pull all of their products from all federal health programs and face an excise tax that starts at 65% of the US sales of a product, with fines increasing by 10% every quarter, with a maximum of 95%.

Bristol-Myers said in its complaint it could incur in excess of $150 million in excise tax penalties on the very first day it declines to enter an agreement for its drug Eliquis, escalating to $1.5 billion per day after a few months of resistance.

But if the company, along with Merck, does agree to cutting its costs, they could “eat into billions of dollars in revenue,” according to Bloomberg Intelligence analysts Holly Froum and Duane Wright.

Bristol-Myers’ Eliquis could face a 3% hit to its revenue in 2026, and Merck’s Keytruda could undergo a 5% cut from its possible $19 billion income in 2028, Bloomberg analysts say. Analysts predict Keytruda, which treats certain cancers, could be selected for a future round of price negotiations.

Jeffrey S. Bucholtz, a partner at King & Spalding LLP and the lead attorney representing the US Chamber, told a judge that AbbVie and its subsidiary Pharmacyclics LLC “will have to submit a ton of information to CMS that is very difficult and time consuming and expensive to gather.”

The CMS agency “recognized that if manufacturers waited until September when they knew for sure their drug would be selected to start that process, they wouldn’t be able to finish in time and then they’d be subject to millions of dollars in civil penalties,” Bucholtz said.

Sarah Ryan, a spokesperson for Pharmaceutical Research and Manufacturers of America, said even if manufacturers were to consider rejecting negotiations, the option wouldn’t be easy.

“The withdrawal process would take 11 to 23 months, during which the manufacturer would be required to disclose proprietary information and ‘agree’ with CMS actions,” Ryan said.

Patient Market Talks

The CMS will host a series of patient-focused listening sessions beginning Oct. 30 on the 10 selected drugs. The session are meant to provide patients, beneficiaries, caregivers, consumer and patient organizations, and other interested parties the chance to share input relevant to drugs selected for the first cycle of negotiations.

Drugmakers agreeing to negotiate drug costs would be a game changer—and life saver—for patients struggling to afford expensive treatment, according to Rob Davidson, an emergency room physician in west Michigan and executive director of the Committee to Protect Health Care. If there’s an incentive for drugmakers to enter and stay in the program, it’s the patients, he said.

One of Davidson’s elderly patients was unable to afford the blood thinner Eliquis, which resulted in blood clots starting in the patient’s leg and later spreading to their chest.

“She went to fill the prescription for Eliquis and found that it was in the thousands of dollars range and simply just couldn’t afford it. She just sort of walked away, was waiting to get in to see her doctor to come up with another plan,” Davidson said.

Eliquis’ list price starts at $561 for a 30-day supply. The drugs Medicare selected for negotiation accounted for $50.5 billion in total Part D gross covered prescription drug costs between June 1, 2022, and May 31, 2023, according to the CMS. The agency said Medicare enrollees paid a total of $3.4 billion in out-of-pocket costs in 2022.

“This is the reality of high drug costs,” Davidson said. “It’s people choosing between food and drugs. Rent and drugs.”

The agency is also allowing the public to submit written input to the CMS until Oct. 2 about selected drugs and evidence about alternative treatments.

“After all the wailing and gnashing of teeth, it’s hard to imagine that the drug companies will pull out of the Medicare market,” said Robin Feldman, a law professor at the University of California, San Francisco. “They make a lot of money with these drugs. If they make a little less, it still brings significant dollar flow to the bottom line.”

—With assistance from Celine Castronuovo