The Democrats are trying to ram a long list of non-infrastructure elements into potential “infrastructure” legislation, including “negotiating the price of prescription drugs”. Spokeswoman Nancy Pelosi, D.-Calif., Set a marker for “drug negotiation” in HR 3, a House bill passed December 2019. Senate Finance Committee Chairman Ron Wyden, D.-Ore., Recently incorporated the concept into a document setting out the principles of drug pricing legislation
The process wouldn’t be real negotiation, any more than Medicare has anything to do with traditional infrastructure. Fortunately, however, procedural obstacles in attempting to enforce drug pricing legislation in a party line vote could leave the “bargaining” regime on the cutting room floor.
How the bill would work
As approved by the last House of Representatives Congress and reintroduced in April, HR 3 would create a process for the Secretary of Health and Social Affairs to “negotiate” the prices of a minimum of 50 and up to 250 prescription drugs. But the term “negotiation” is a misnomer, as legislation would dictate the outcome of such discussions.
Specifically, the result of the “negotiation” according to HR 3 was not allowed to exceed 120 percent of the average price of a drug in six countries: Australia, Canada, France, Germany, Japan and Great Britain.
If a pharmaceutical company chooses not to participate in the process for a drug selected by HHS for “negotiation”, the company would pay an excise duty on that drug. The excise tax would start at 65 percent for the first 90 days in which the company does not “negotiate” and increase steadily to 95 percent after nine months.
Effects of excise duty
The Democrats’ excise taxes, as they are currently drafted, would prove to be far too effective, which would create procedural problems if legislators were to attempt to incorporate them into an infrastructure bill passed through a budget balancing measure. The Congressional Budget Office (CBO) made the following observation regarding penalties for companies that fail to “negotiate” in its analysis of HR 3 from the time the House of Representatives considered the measure in Fall 2019:
[Drug] Manufacturers would be prohibited from deducting excise tax payments when determining their income tax. Thus, the combination of income taxes and excise taxes on sales could result in the drug manufacturer losing money if the drug is sold in the United States.
The CBO and the Joint Committee on Taxation (JCT) concluded that the threat of ruinous taxes would effectively force pharmaceutical companies to participate or to collapse: “Given the potential financial implications of the excise tax, JCT expects all manufacturers to either participate or enter into the negotiation process to withdraw a certain drug completely from the US market. “
As a result, the CBO and JCT did not estimate “any significant increases in excise tax revenues”. Budget Scorekeepers went further in December 2019, stating that they did not estimate “any increase in excise tax revenue”.
The procedural problem
The wording of the CBO estimate poses a particular problem for Democrats attempting to tie HR 3 or some other version of the “Prescription Drug Negotiation” to a broader package of spending that is being considered through a budget reconciliation.
The reconciliation process involves procedural constraints, including a six-part test called the “Byrd’s Rule,” which is aimed at maintaining the integrity of the legislative filibuster. Named after former Senate Majority Leader Robert Byrd, this rule prohibits the inclusion of “foreign” material unless 60 Senators (the number normally required to overcome a filibuster) agree to waive the Senate rules and that Maintain material in the bill.
One of the six tests under the “Byrd Rule” would address any provision that “does not change expenses or income” – a description that applies to the excise duty as it stands, meaning that it is likely to result from a Compensation calculation would be deleted. Even a consumption tax that generates modest revenue could conflict with a separate part of the Byrd rule test, which “casually raises tax-impacted provisions to the non-budgetary components”.
But if the excise tax were lowered for non-compliance with the Byrd Rule, the savings from “negotiations” would collapse. CBO has consistently held for years that without some sort of bargaining stick (like the ability to set a prescription in Medicare that excludes some prescription drugs), HHS ‘permission or obligation to negotiate prices doesn’t mean much more savings As the private rebates, insurers already purchase the Medicare Part D prescription drug program from drug manufacturers.
The Catch of the Democrats-22nd
The Democrats have a political and procedural conundrum. They need to keep excise duty in any version of HR 3 that they want to include in a draft budget adjustment in order to have a credible threat against pharmaceutical companies that do not “negotiate”.
But to keep the tax in the bill, it has to generate a significant amount of revenue. When this happens, at least some companies will opt out of the HHS process – thereby reducing the extent of the potential savings from the “negotiation” regime.
At the very least, Democrats will likely have to rewrite their “bargaining” legislation from scratch to address procedural concerns. But like the minimum wage hike the Biden administration sponsored earlier this year for its “COVID relief package,” the problems of the “Byrd Rule” could thwart attempts by the Democrats to import socialist drug price controls into the United States.