Friday, June 25, 2021

How Democrats’ Drug “Negotiation” Gambit Could Fall Apart

Democrats are trying to ram a long list of non-infrastructure items into a potential “infrastructure” bill, including prescription drug price “negotiations.” Speaker Nancy Pelosi, D.-Calif., laid down a marker for drug “negotiation” in H.R. 3, legislation passed by the House in December 2019. Senate Finance Committee Chairman Ron Wyden, D.-Ore., recently included the concept in a document outlining principles for drug pricing legislation.

The process wouldn’t constitute real negotiations any more than Medicare has anything to do with traditional infrastructure. Thankfully, however, the procedural obstacles of trying to ram through drug pricing legislation on a party-line vote could leave the “negotiation” regime on the cutting room floor.

How the Bill Would Work

As approved by the House last Congress and reintroduced in April, H.R. 3 would create a process for the secretary of Health and Human Services to “negotiate” the prices of at least 50, and up to 250, prescription drugs. But the term “negotiation” is a misnomer, since the legislation would dictate the outcomes of such discussions.

Specifically, under H.R. 3 the result of the “negotiation” could not exceed 120 percent of the average price of a drug in six countries: Australia, Canada, France, Germany, Japan, and the United Kingdom.

If a pharmaceutical firm chooses not to engage in the process for a drug selected by HHS for “negotiation,” the company would face an excise tax on that drug. The excise tax would start at 65 percent for the first 90-day period in which the company fails to “negotiate,” rising steadily to 95 percent after nine months.

Effects of the Excise Tax

As currently drafted, Democrats’ excise tax would prove far too effective, leading to procedural problems if lawmakers try to include it in an infrastructure bill passed via a budget reconciliation measure. In its analysis of H.R. 3 from when the House was considering the measure in fall 2019, the Congressional Budget Office (CBO) included the following observation about the penalties for companies that fail to “negotiate”:

[Drug] manufacturers would be prohibited from deducting the excise tax payments in determining their income taxes. Thus, the combination of income taxes and excise taxes on the sales could cause the drug manufacturer to lose money if the drug was sold in the United States.

CBO and the Joint Committee on Taxation (JCT) concluded the threat of ruinous taxes would effectively force drug companies to participate or bust: “Given the potential financial impact of the excise tax, JCT expects, all manufacturers would either participate in the negotiation process or pull a particular drug out of the U.S. market entirely.”

As a result, CBO and JCT did not “estimate any significant increases in revenues from the excise tax.” The budget scorekeepers went further in December 2019, stating that they did not “estimate any increase in revenues from the excise tax” at all.

The Procedural Problem

The wording of the CBO estimate presents a particular problem for Democrats trying to attach H.R. 3, or some other version of prescription drug “negotiation,” to a broader spending package considered via budget reconciliation.

The reconciliation process includes procedural strictures, including a six-part test called the “Byrd rule,” designed to preserve the integrity of the legislative filibuster. Named for former Senate Majority Leader Robert Byrd, that rule prohibits the inclusion of “extraneous” material, absent the agreement of 60 senators (the number normally needed to overcome a filibuster) to waive Senate rules and keep the material in the bill.

One of the six tests under the “Byrd rule” would strike any provision that “does not produce a change in outlays or revenues” — a description that applies to the excise tax as currently drafted, meaning it would likely get axed from a reconciliation bill. Even an excise tax that produces a modest amount of revenues could fall afoul of a separate part of the Byrd rule test, which nixes provisions with a fiscal impact “merely incidental to the non-budgetary components.”

But if the excise tax gets cut for not complying with the Byrd rule, the savings from “negotiation” would fall apart. CBO has consistently held for years that, absent some type of negotiating “stick” (like the ability to set a formulary in Medicare that excludes some prescription drugs), permitting or requiring HHS to negotiate prices would not generate significantly more savings than the discounts private insurers already obtain from drug manufacturers in the Medicare Part D prescription drug program.

Democrats’ Catch-22

Democrats have a policy and procedural conundrum on their hands. They need to retain the excise tax in whatever version of H.R. 3 they want to attach in a budget reconciliation bill, to have a credible threat against drug companies that fail to “negotiate.”

But to keep the tax in the bill, it must raise a significant amount of revenue. If that happens, at least some companies will opt out of the HHS process — lowering the magnitude of the potential savings from the “negotiation” regime.

At a minimum, Democrats seem likely to have to rewrite their “negotiation” legislation from scratch to address the procedural concerns. But as with the minimum wage increase the Biden administration supported for its “COVID relief” package earlier this year, “Byrd rule” problems could end up thwarting Democrats’ attempts to import socialist drug price controls into the United States.

This post was originally published at The Federalist.