A new executive order signed Tuesday by President Trump directs Congress to change a key provision of the law allowing Medicare drug price negotiations, a move that would fix one of the drug industry’s biggest complaints.
The order applies to what the industry calls the Inflation Reduction Act’s “pill penalty,” where small molecule drugs—typically pills—face Medicare drug price negotiations sooner than more complex biologic drugs.
Small molecule drugs are eligible for selection to the drug price negotiation program seven years after Food and Drug Administration (FDA) approval. After a two-year negotiation period, the new price takes effect in year nine.
Biologics are eligible for selection 11 years after FDA approval, followed by a two-year negotiation period, with the new price taking effect at year 13.
“This imbalance exacerbates incentives that already too often push companies to invest in large molecule drugs over small molecule alternatives, which often apply to broader populations and impact different types of conditions,” an administration official told reporters Tuesday during a press call.
Industry groups similarly argue the law sends a signal to researchers that developing small molecule drugs is not worth the risk.
The change isn’t something the administration can do on its own, so it directed Health and Human Services (HHS) Secretary Robert F. Kennedy Jr. to work with Congress to facilitate it. Legislation already exists in the House and Senate that would accomplish that goal.
Drug industry lobbyists have been trying to change the “pill penalty” ever since the law was passed.
The directive, contained within a lengthy executive order that touched on numerous health care issues, confirms that Trump will keep one of the Biden administration’s signature health policies. While light on specifics, officials said the order will result in more savings for Medicare beneficiaries.
In addition, Trump’s order aims to revive elements of his first-term health agenda, including encouraging states to import prescription drugs from Canada, and discounts on insulin and epinephrine for low-income people.
The order also seeks to align payment rates for prescription drugs with hospitals’ cost to acquire them. Hospitals often get heavily discounted drugs, officials said on the call, sometimes as low as 35 percent below what Medicare is paying.
Aside from prescription drugs, the order instructs HHS to investigate a policy known as site-neutral payments, which would require Medicare to pay the same rate for the same service, regardless of where the service is delivered.
The idea is to stop hospitals from getting more money from Medicare for procedures that can be done in less expensive settings, like a physician’s office or an ambulatory surgical center.
It’s unclear if HHS can implement a site-neutral policy through rulemaking without legislation. Congress has been looking into site-neutral payments for years, but hospitals have long fought off any attempts to equalize payment rates, arguing such a move would hurt rural providers and those that rely on a high proportion of Medicare and Medicaid reimbursement.
