Obama Budget Part 2: Reducing Drug Prices

By Alan M. Kirschenbaum –

Last week we reported on the Obama Administration’s 10-year budget proposal, focusing on the Department of Health and Human Services budget.  As noted, the budget establishes a reserve fund of over $630 billion over 10 years to finance health care reform. 

$316 billion of this reserve fund would be financed by health care savings, some of which would result from significant changes in the regulatory landscape for prescription drugs.  First, under the Medicaid Rebate Program, the minimum rebate for innovator drugs would increase from 15.1 percent to 22.1 percent of average manufacturer price (“AMP”).  Also, Medicaid rebates would be payable for drugs dispensed by Medicaid managed care plans, which are currently exempt from rebates under the statute.

Second, a “regulatory, scientific, and legal pathway” would be established for the approval of generic biologicals.  The budget document assures that a period of exclusivity would be guaranteed for the innovator biological product, consistent with principles in the Hatch-Waxman provisions applicable to non-biological new drugs, but it does not indicate the proposed length of the exclusivity period.  Brand biological manufacturers would be prohibited from “ever-greening” – i.e., reformulating existing products in order to restart the exclusivity process.

Third, the budget "supports the Food and Drug Administration’s (FDA’s) new efforts to allow Americans to buy safe and effective drugs from other countries . . . ."  This cryptic statement appears to refer to the importation of finished pharmaceuticals, though the reference to FDA's "new efforts" is puzzling since FDA to date has prohibited such imports.  The budget does not provide any detail on what imports would be permitted, or how importation would be reconciled with FDA's efforts to "make . . . medical products safer" – – a goal identified in the very next sentence of the budget.

Fourth, drug companies would be prohibited from blocking the approval of generic drugs through anticompetitive agreements and collusion between brand name and generic drug manufacturers.  As we recently reported, such “pay for delay” arrangements are the subject of a recent Federal Trade Commission complaint and legislation introduced in the U.S. Senate. 

In addition to these drug-specific provisions, the reserve fund would be financed through savings from a number of payment reforms under Medicare and Medicaid, including reducing Medicare subsidies to Medicare Advantage plans by changing to a competitive system where payment is based on an average of plans’ submitted bids; reducing overpayments and fraud under Medicare (including Part D) and Medicaid; introducing pay-for-performance incentives into Medicare hospital inpatient payment; reducing hospital readmissions through incentives and penalties; and reforming the Medicare physician payment system to incentivize quality and efficiency.