Want Lower Obesity Drug Costs? Medicare Holds the Key

Dana Goldman, PhD, and Peter Kolchinsky, PhD
Dana Goldman, PhD, and Peter Kolchinsky, PhD
9 Min Read

Goldman is an expert in health policy and economics. Kolchinsky is a biotechnology investor and a scientist.

People struggling with obesity have found hope in new injectable drugs. Clinical trial participants using semaglutide (Wegovy) safely lost 15% or more of their body weight, with similar results for other injectable glucagon-like peptide-1 receptor agonist (GLP-1) medications like tirzepatide (Zepbound). Since more than 40% of adults in the U.S. are obese, another third are overweight, and the disease kills 300,000 Americans annually, these therapeutics have immense potential to improve the nation’s health.

But right now, Medicare doesn’t cover these drugs and many private insurers point to high list prices to limit access. Not everyone who could benefit from these treatments can get them.

There is a way forward. The federal government can open the door to market forces by being willing to pay for these new, brand-name products. That possibility is already boosting stock prices for manufacturers of GLP-1 obesity medications and roiling stocks of companies that might be adversely affected, such as dialysis companies.

But would Medicare coverage blow up the federal deficit? Or could the drugs indirectly improve health in other parts of Medicare, like cardiac care, such that overall costs would remain flat or even drop significantly? For some potential insight, take a look at one new study showing that one of the drugs cut the risk of heart attack, stroke, or death by 20% among obese people with heart disease.

The government’s objective should not only be to minimize its costs — after all, Medicare could save billions if more people would die earlier from smoking more cigarettes. But allowing Medicare to start paying for anti-obesity treatments now has the potential to kick off a true weight-loss revolution that can save lives and dramatically drive down the cost of these drugs.

How would this work?

The path from expensive innovative drugs to cheap generic medications is well known. Fifty years ago, diet and exercise were the predominant means of controlling hypertension. The discovery of multiple agents to combat the condition, beginning with diuretics and beta blockers, proved transformative. A similar story emerged for elevated cholesterol. About half the decline in U.S. deaths from coronary heart disease can be attributed to medical therapies that now typically cost a few dollars a month, merely several percent of what they cost when they were novel and branded. And they’re a significant contributor to the flattening of Medicare spending over the past 20 years.

The key to drug price declines is robust competition among producers. Competition comes for nearly every drug eventually, and particularly the small molecule treatments we take as pills.

We believe the signs suggest that if Medicare offered coverage, the competition in anti-obesity medications would be robust due to an expanded market, more investors in search of better drugs, and more competitors. These injectable GLP-1s were originally developed to treat diabetes. The FDA has now approved three of the drugs for treating obesity, and scores of other obesity drugs are in the pipeline, notably GLP-1 pills. These oral treatments can be more readily scaled than the current injectables, enabling greater price elasticity of coverage (i.e., allowed demand); they would eventually “go generic” more easily.

Prices are already wobbling. An analysis at the American Enterprise Institute found that net prices for the new diabetes/obesity treatments are 48-78% below listed prices, meaning insurers have effectively negotiated reduced prices for their customers even with few competitors on the market (those customers could enjoy those savings if insurers decided to pass them through). Eventually, Medicare would also likely subject these treatments to negotiation under the Inflation Reduction Act, which would leverage federal buying power, though currently there’s no rule that requires Medicare drug plans to share negotiated savings with beneficiaries.

The need for the medications is undeniable. Obesity is a major contributor to preventable death in the U.S. It can lead to diabetes, heart disease, stroke, several forms of cancer, mental illness, difficulty with physical function, kidney failure, and many other maladies. It is stubbornly resistant to behavioral and dietary changes in many people.

Obesity and its myriad consequences cost the healthcare system a quarter trillion dollars in 2020. An economic/demographic microsimulation from the USC Schaeffer Center estimates that the cumulative social benefits from solving obesity (e.g., zero obesity rate) would reach almost $1 trillion over the next 10 years, or roughly $100 billion per year. Savings to Medicare alone could be as much as $245 billion in the first 10 years of coverage.

But the benefits and savings don’t stop there.

Over 20 years, a period in which we can likely expect both the launch of oral GLP-1s and their eventual genericization, the prices of these medicines would likely spiral down by 80% or more and savings would compound spectacularly. Indeed, calculations based on the Schaeffer model show that the U.S. healthcare system would save $7 trillion over 30 years, on top of all the benefits due to improved quality of life and productivity.

In that context it’s easier to see how government spending on branded weight loss drugs in the near term will result in a remarkable, lasting bargain for society.

But will the federal government reach that conclusion?

The nonpartisan Congressional Budget Office (CBO) will soon weigh in on pending legislation that would authorize Medicare to pay for these drugs. The CBO recently reported that current evidence suggests that “the amount of potential savings on cardiac care and other healthcare would be less than the current net federal cost” of anti-obesity medications over the next 10 years, which is the timeline Congress has given it. That echoes the shortsighted view CBO took toward Medicare prescription drug coverage in 2003, when it assumed the drugs would not reduce hospitalizations at all. CBO eventually backtracked.

We hope the CBO will not repeat past errors. The agency has called for new research on the obesity medications, including their cost and clinical impacts, a sign that it is still trying to gauge the longer-term effects that leaner, healthier Americans would have on the budget. It should also keep in mind that those healthier Americans would benefit society in untold ways, and that competition is the fastest route to making that possible.

Dana Goldman, PhD, is dean of the USC Price School of Public Policy and co-director of the USC Schaeffer Center for Health Policy & Economics in Los Angeles. Peter Kolchinsky, PhD, is a biotechnology investor and a scientist. He co-founded and runs the Boston-based investment firm RA Capital Management and is the author of The Great American Drug Deal.

Disclosures

Goldman disclosed that the USC Schaeffer Center for Health Policy & Economics receives funding from foundations, government agencies, individuals, and corporations, including Eli Lilly & Company and other companies, that may have interests in obesity treatments. Kolchinsky disclosed that RA Capital Management investors include companies working on many different diseases, such as obesity, including Rivus Pharmaceuticals, Carmot Therapeutics, Structure Therapeutics, and Wave Life Sciences.

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