House Price 'Negotiation' Plan: It Is Even Worse Than It Sounds

The House Democratic leadership is pushing an international benchmark price for its 'negotiation' plan in the US. The summaries have focused on the maximum price, but the one-sided “negotiation” process suggests that the minimum is the more relevant number – and it is likely to be quite low.

The House Democratic leadership’s price negotiation plan proposes a very aggressive international reference pricing model to set maximum prices for top-selling brands in the US. And the plan is even more aggressive than the initial descriptions make it sound.

The formula was first unveiled when a draft of the proposal leaked at the start of September: US prices would be tied to a market basket of six international countries (Canada, Australia, the UK, Japan, Germany and France). And the price “negotiation” model would start at a maximum price of 120% of the weighted average price across those six nations.

In the version of the bill formally introduced 19 September, that weighted average price is known as the AIM (Average International Market price). (Also see "House Democrats Launch Price Negotiation Push: Extreme Plan Assures Strong Opposition" - Pink Sheet, 19 Sep, 2019.)

AIM is clearly going to be a low price relative to prevailing US market prices – though just how low will vary considerably from brand to brand. At this point, there are no published analyses of exactly how low the AIM price is on average compared to the US price.

However, it is worth noting that CMS’ analysis of the Trump Administration’s Medicare Part B international price indexing model (which included 16 countries) estimated that US prices were on average 1.8 times the basket price. So it is fair to assume that US prices could be cut by on the order of 33% if they all had to be cut to 1.2 times AIM.

That, however, would the maximum price permitted under the bill. Given the one-sided negotiation process, the minimum price is the more relevant number. Under the House plan, companies that decline to negotiate or fail to reach a pricing agreement will be subject to an excise tax that starts at 65% of sales in the US and rises quickly to 95%. That suggests that manufactures will have no choice to accept whatever price the US government proposes, unless it is more than a 95% reduction.

The good news, such as it is, is that the bill text itself does set a price floor that should be well above 5% of prevailing prices. The bad news is that the price floor (defined as the “target price” in the bill) is going to be significantly lower than 120% of AIM.

In outlining the “negotiation” process, the bill stipulates that the manufacturer can end the negotiation at any point by agreeing to the “target price,” which is defined as the lowest average price in any one of the six countries. So if the price in Japan is 50% of the US price and the price in the five other countries is something higher, the target price is a 50% discount. If Germany has the lowest price on a specific brand at 60% of US prices, then the target price becomes a 40% discount.

No matter what, the “target price” will never be higher than 100% of AIM (in the unlikely instance where the price is the same in all six countries). Generally, it will be much lower than AIM. Indeed, the entire AIM concept seems irrelevant, since the government has no real motivation to consider the average rather than hold out for the lowest individual country price.

The bill also includes stipulations for targets for drugs that do not have international sales that would generate an AIM calculation. In those case, the maximum price would be 85% of average manufacturer price, with the “target” price set at 80%. Again, there is little indication why the US government would settle for anything higher than 80% of AMP on those products.

The only other silver lining that emerges from the more detailed process outlined in the bill text is that there will be a relatively substantial gap between when product is selected for “negotiation” and when the price will actually be cut: 21 months.

Under the timelines used in the bill, HHS will publish its target list for negotiation (which will be for at least 25 products) on 15 April. Manufacturers will have until 15 June to enter the negotiation process – or else begin paying the excise tax. That tax starts at 65% of annual sales and increases by 10 percentage points per quarter to a maximum of 95%, so there seems to be no reason for companies to decline the offer to negotiate if only to put off the penalty.

Once negotiations begin, there is a deadline of 31 March of the following year (almost a full year after the initial notice) for a price “agreement” to be reached – or else the aforementioned tax kicks in. Again, given the one-sided nature of the negotiation, it seems likely that most manufacturers will simply accept the “target price” on 31 March, unless they have somehow found a way to “negotiate” (“beg for” may be the better term) a higher price. The new price then takes effect in January of the following year, or just about 21 months after the initial notice of the negotiation plan.

If the bill becomes law, the first negotiation cycle would begin on 15 April 2021, and the first price reductions would come on 1 January 2023. Those prices would be significantly lower than they are today.