Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The drug pricing debate in the United States has created plenty of smoke. Now for the fire.

The Centers for Medicare and Medicaid services (CMS) this week proposed a pilot pricing model to cut spending on expensive drugs. The rules apply to Medicare Part B, which covers infused or injected drugs administered to older Americans in doctors' offices and hospitals. It would reduce payments to doctors for more-expensive drugs while boosting reimbursements for cheaper options. The industry and some doctors are, unsurprisingly, unthrilled.

This is a pilot program that may get weakened before implementation, and it doesn't cover most drugs. But it will hurt some drugmakers and might create a blueprint for broader action that could really dent spending. Drugmakers have mostly shrugged off the idea of government action on prices as election-year demagoguery. And these aren't the sort of price controls that haunt executives' more lurid nightmares. But it's a step in a direction they don't like.

The government's motivation is obvious. There's tremendous political pressure to reduce drug prices -- evidenced by the issue's prominence in the Presidential campaign and high-profile and repeated congressional hearings spotlighting everyone from Martin Shkreli to Gilead. The U.S. electorate broadly supports government action to rein in prices. And there's the grating fact that the U.S. spends more on, and pays higher prices for, drugs than any other country. 

A report from the Department of Health and Human services released this week projects that drug spending will make up 16.7 percent of overall health spending this year, up from 15.3 percent in 2013. Specialty drugs, which include treatments covered by this rule, have driven much of that gain. The agency projects drug spending to grow 7.3 percent from 2013 to 2018, compared to 5.2 for health care generally.

Proscriptive Prescriptions
The U.S. Department of Health and Human Services projects rising prescription drug spending
Source: HHS
*projected

Currently, Medicare reimburses doctors for the price of a drug, plus six percent of the drug's average price. The pricier the drug, the bigger the additional payment to doctors. When amplified by marketing, paid speaking gigs, and the myriad other ways pharma tries to influence doctors, there's a clear (and arguably perverse) incentive to go with expensive branded drugs over cheaper options. 

The new regime would change the added payment to 2.5 percent of the drug's cost, plus a $16.80 flat fee. The intended effect is to reduce incentives to prescribe the most expensive medicines:

Shifting
Here's how a (theoretical) drug would be reimbursed under a changed Medicare Part B pricing regime
Source: CMS

The agency also wants to try smaller tests of other cost-cutting approaches, including some potentially radical (for the U.S., anyway) drug pricing schemes that focus on value. 

One is "indication based pricing," which varies a drug's price based on how effective it is on a given disease. Some drugs work well in certain conditions, but not as well in others. Another is reference pricing, a practice popular in Europe that sets a benchmark payment rate for similar groups of drugs. And the final is having the CMS enter agreements -- as some manufacturers are already trying with private groups -- linking drug prices to how well a medicine works for an individual patient. 

At the top of the list of companies affected by the pilot program announced Tuesday is Regeneron. Its drug Eyelea is covered by Medicare Part B and treats a disease (wet age-related macular degeneration) that says all you need to know about its demographics in the name. The drug has other possible uses, but that's the big one. Eyelea accounted for 65 percent of Regeneron's revenue last year. In 2014, Medicare spending alone accounted for more than 40 percent of the company's revenue. It's no surprise Regeneron shares fell more than 5 percent on Wednesday.

Stockular Degeneration
A proposed Medicare pricing model took a bite out of Regeneron's stock price Wednesday.
Source: Bloomberg
Intraday times are displayed in ET.

Roche, Amgen, and Johnson & Johnson all also make drugs that get a lot of their sales through Medicare Part B. 

Blockbusters
A number of major drugmakers depend on Medicare Part B to drive sales of their medicines.
Source: CMS

This is just a test. But it is a sign the government is getting proactive about drug pricing. If the rule changes doctor behavior and saves money, then such policies might be adopted more broadly or stringently, which would be a blow to drugmakers. 

At the very least it's a finger-wagging rebuke for those in the industry who have dismissed pricing pressure as mere "noise." And comeuppance stings a bit more when delivered by the stamp-wielding fist of bureaucracy. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net