J. Scott Applewhite/AP Photo
Senate Majority Leader Chuck Schumer spoke about the drug pricing agreement following a Democratic policy meeting yesterday at the Capitol in Washington.
Nearly a week after the alleged “framework” for the Build Back Better Act was introduced, two new agreements that were not part of that framework were added in. First, Senate Majority Leader Chuck Schumer announced a modest drug pricing reform deal, which while certainly a step down from more expansive Medicare negotiation proposals, would cut some out-of-pocket costs for patients and save hundreds of billions of dollars for the government. Separately, several congressmembers from high-tax states in the Northeast touted progress in getting a five-year repeal of the state and local tax (SALT) deduction cap into the final legislative package, which would deliver money mostly to the top 5 percent of income earners.
These two items are linked. Many of the same members of Congress who are holdouts on drug pricing are the ones pushing for the SALT cap repeal. And the budget savings from the drug price reform will be canceled out by the cost of repealing the SALT cap. This deal, months in the making according to my sources, means that we’re getting a social-policy bill where the largest single program could be a tax cut for upper-middle-class households.
Maybe that was necessary to get the votes for the more significant achievements in Build Back Better. But it doesn’t make it less distasteful. And it does reflect badly on Congressional Progressive Caucus chair Pramila Jayapal’s decision on Monday to endorse a vote for both Build Back Better and the bipartisan infrastructure bill, which she previously vowed could not happen without assurances that the Senate would pass the former. By doing so, Jayapal and the progressives gave up whatever role they had to play in this final round of negotiations. She cut the deal before it was deal-cutting time, in other words. And we’re now seeing the results.
Many of the same members of Congress who are holdouts on drug pricing are the ones pushing for the SALT cap repeal.
Let’s look at these two deals. As far as I can tell, the drug pricing deal is largely the concept favored by a small band of industry-funded holdouts—Scott Peters (D-CA), Kurt Schrader (D-OR), Kathleen Rice (D-NY), Stephanie Murphy (D-FL), Lou Correa (D-CA), and Josh Gottheimer (D-NJ) in the House, and Bob Menendez (D-NJ), Tom Carper (D-DE), Chris Coons (D-DE), and (maybe) Kyrsten Sinema (D-AZ) in the Senate.
The agreement does allow for Medicare price negotiations within Parts B (drugs used by hospitals) and D (prescription drugs sold at pharmacies). But it would only apply to drugs outside their FDA exclusivity period, the time in which medications have guaranteed monopolies over the market. This varies between nine years for certain small-molecule drugs to 12 years for biologics, which are more complex and typically higher-cost. Orphan drugs, which treat rare illnesses, would be exempt from any negotiation. These are also usually expensive. “Small biotech” companies are also exempt from negotiation until 2028, and drugs from those companies with less than $200 million in Medicare spending are exempt permanently.
So in some cases, the drugs most in need of price negotiation wouldn’t have them for over a decade. And no drug could get a negotiated price at launch, which is likely to lead to higher launch prices.
Peters put out a competing reform bill in September that included exactly this feature. He wanted it only to apply to Part B; the agreement got him to add Part D, but doesn’t make the rates accessible to private insurance, limiting their scope. H.R. 3, the template bill used by most of the caucus, allowed for 25 drugs to be negotiated in the first year and 50 each subsequent year. This agreement delays negotiation to 2025, and only starts with ten drugs, rising to 20 by 2028.
The reference price for negotiations, unlike an international index used in H.R. 3, is a percentage of the 2021 average manufacturer price; as those prices are already high, that ensures that the result of negotiations will still be a relatively expensive drug. And the enforcement mechanism for drug companies that refuse to participate in negotiations is unclear; there’s an excise tax, but a deal sheet on the agreement says that it’s assumed “never to be levied.”
Just like in the Peters bill, the agreement has an annual cap on out-of-pocket spending for Medicare recipients; it appears to be a flat $2,000, whereas Peters’s started lower for poorer seniors and rose higher. A smoothing proposal allows seniors to pay for their drugs in monthly installments instead of when getting specific drugs. And individual drug prices would not be allowed to rise above the rate of inflation, beginning in 2022. However, the inflation cap references 2021 as the base year, limiting the benefit relative to using a year in the past as the base and restricting increases above that inflation-adjusted level. This will delay real improvements on prices in the short term, which as a political matter is just insane.
Lowering drug prices isn’t only good policy in itself; it adds possibilities for everything else you can do.
Insulin, a notoriously high-cost drug given that it’s been around for a century, is also incorporated into the agreement. (Peters’s bill had a $50-per-month out-of-pocket cap for insulin; Schumer said that the agreement would drop that to $35 per month.) The cap applies to patients on Medicare and in private insurance.
House leadership praised the agreement, and importantly it got endorsements from Sinema and Menendez. It’s obviously a pale imitation of legitimate drug pricing reform. But the drug industry was opposed to doing anything, and they oppose this proposal.
The underlying question to me about drug pricing reform was always what Congress would do with the budget savings. There’s no actual score here, but it’s likely to save between $200 billion and $300 billion over a decade for the government. You could put that toward making pre-K or child care permanent, increasing the likelihood of red-state take-up. You could extend the Child Tax Credit another year. Lowering drug prices isn’t only good policy in itself; it adds possibilities for everything else you can do.
But pretty obviously this became a way to find money for the SALT cap. What’s being discussed now is a five-year suspension of the cap, from 2021 to 2025. This would cost roughly $475 billion, and the giveaway is wildly regressive; $400 billion goes to the top 5 percent of income earners.
Some gimmickry may allow Democrats to say it doesn’t cost anything. The cap was scheduled to roll off in 2026, so if they do a five-year suspension that comes back in 2026, technically they can argue that there’s no net change in revenue. Realistically that’s absurd, but if called on it, Democrats can point to the drug pricing money, arguing that they have plenty of cushion to absorb the tax cut.
The biggest proponents of SALT cap repeal are in high-tax states like New Jersey, New York, and California, where wealthy residents who itemize their taxes would benefit the most. Gottheimer in particular (seen in the Capitol on Tuesday wearing a “No SALT, No Dice” pin) has been vocal about demanding something on SALT. So he, and Menendez, and Peters, and others in high-tax states can agree to modestly lower prescription drug prices in exchange for a tax cut for their residents. In some cases, it’s precisely the same pharmaceutical executives whose companies lose some profits but who will gain a massive tax break.
This weds several wavering Democrats to pass Build Back Better, though it doesn’t do much for Sinema and Manchin, who represent low-tax areas. And the deal is not a slam dunk. Sen. Bernie Sanders (I-VT) is already out with a statement noting that, under the SALT cap suspension, “the top 1% would pay lower taxes after passage of the Build Back Better plan than they did after the Trump tax cut in 2017. This is beyond unacceptable.”
But there were other options here. A high-income tax proposed by the Institute for Taxation and Economic Policy (ITEP) would have given the relief to the type of people Gottheimer and others have put in the forefront: somewhat upper-middle-class people who were carrying most of the burden of paying for a share of the Trump tax cuts. But it would have eliminated all deductions above the $400,000 earnings threshold and made the rules equal throughout the country, regardless of state tax policy.
This idea never got out of the policy shop. Jayapal’s Progressive Caucus could have taken a stand on it as a solution to the SALT problem. And they could have engaged in the drug pricing debate, as the caucus did in 2019 when they hammered out an agreement with Speaker Pelosi. That would have put them on the playing field with an actual proposal as these elements were being negotiated.
Instead, Jayapal cut her deal and took off. Maybe she took the perspective of Ted Kennedy, whose theory of progressive politics was to fight like hell to secure the left edge of the possible, and then agree to the terms. But with the terms now being set, I’m not sure that giving up early was the most advantageous strategy.
