Recent regulations designed to alter drug manufacturers’ relationships with PBMs may be just the tip of the iceberg when it comes to dissatisfaction with drug pricing practices. From proposals to require drug pricing transparency in patients’monthly explanations of benefits to caps on annual list price increases to expanded CMS’s negotiating power, there are a myriad of other regulatory and legislative proposals under consideration. The goal seems to be to drive drug manufacturers and PBMs to offer more up-front consumer discounts and reverse the trend toward annual price increases, particularly for costly specialty drugs.
On the one hand, to the degree that there is some validity behind these measures, manufacturers should consider taking a hard look at some of their pricing practices. On the other hand, moves toward pricing transparency could become catalysts for business model shifts that pharma companies should pursue regardless of regulatory mandates.
What Further Pricing Reforms Could Mean
Greater transparency. The lack of net pricing transparency could be viewed as one of the major contributors to high drug costs in the US market. Therefore, it is possible that regulators and legislators will introduce new measures compelling drug makers to report the discounts and other pricing deals they offer to different stakeholders. CMS has already proposed that, in 2020, Part D plans will have to start providing pricing transparency in patients’ monthly explanations of benefits (EOBs) and offer physicians real-time benefit checks (RTBC) so they can view costs at the point of prescribing. Further, proposed rules requiring drug prices to be disclosed in direct-to-consumer television advertisements and, to an even greater extent, in electronic medical records (EMRs) could become reality.
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Price growth caps. Recent proposed legislation suggests that the Federal government could institute policies that cap the amount any drug manufacturer can raise list prices in a given year. These types of policy changes could come in the form of annual price increase limits or overall caps on per-year drug costs within a given class or indication. Drug makers may still have discretion when it comes to setting initial prices, but would likely have fewer incentives to compensate for rebates with higher prices. Finally, there is also some discussion around a proposed rule to align US drug prices more closely with other countries using international reference pricing in Medicare Part B.
Enhanced negotiating power. Although a true single payer system in the US is politically unlikely in the current Congress, it is conceivable that policymakers could extend CMS’s ability to negotiate directly with manufacturers on price at launch and throughout a product’s lifecycle. While Medicare-covered lives would represent only one, albeit large, segment of this market, direct government pricing negotiations in Medicare would likely spill over to the commercial market, especially if the climate continues to shift toward greater pricing transparency.
How to Turn Reform into Advantage
As discussed, pricing reform is only one of many factors that are driving pharma manufacturers toward business model transformation. Following are some proactive strategies that manufacturers can take to turn pricing reform into competitive advantage:
- Double down on innovation. As the need for specialty drugs continues to grow, some pharma companies can increase their odds of selecting a winner by investing heavily in robust clinical datasets. This will require flexible and efficient R&D portfolio management that rewards the most promising drug candidates with clinical investment dollars. Other players may exit R&D all together, striving to be the highest bidders for innovations with superior clinical outcomes that are likely to convince even the most stringent payers to offer significant price premiums at launch.
As manufacturers face increasing disruption - from both potential new regulations and new entrants to the industry - it may be wise to consider not only product innovation, but new ways of interacting with consumers as well. This will require careful consideration of whether consumers are open to receiving drugs and medical management support services directly from manufacturers if it means lower overall out-of-pocket costs; whether and to what extent PBMs’ role in the pricing equation should evolve; and whether customers should be tiered according to criteria like illness severity and adherence.
- Strive for value. Most large pharmaceutical companies have already explored outcomes-based contracting that ties net price to real-world product performance and requires manufacturers to pay larger rebates when drugs underperform. If the new safe harbor proposals take effect in 2020 as written, some pharma companies may be reluctant to offer steep discounts for under- performance in order to secure favorable formulary positioning or exclusive preferred status within a class. Instead, they should explore newer forms of outcomes-based contracting, which will require them to collect longitudinal real-world evidence showing that products improve patients’ quality of life and/or lessen the burden of illness over time.
Looking forward, the healthcare industry will move toward convergence between the value derived through clinical care and the value derived through drug treatment. Therefore, pharma should start creating a roadmap toward an integrated service approach by: defining their role in helping health systems address inefficiencies and fragmentation; determining what data will be needed to conduct complex pricing analyses comprising diagnoses, hospitalizations, out-patient care and drug protocols; and identifying the technology tools they will need to track issues like patient adherence and outcomes.
- Counter with scale. If US government payers start to negotiate prices directly for individual drugs - or even hold competitive tendering processes within certain drug classes - some pharma players should consider scaling up in certain areas to ensure access to more of the best innovation. However, given that today’s innovation is often tomorrow’s old news, these players must also be nimble enough to know when and how to exit businesses before pricing pressures take hold. These types of biopharma leaders will be naturally acquisitive, looking for consolidation plays across disease areas and mechanisms of action that they can truly own until assets run their course.
Taking it a step further, the vertical integration that has taken hold in healthcare will likely extend to pharma, i.e., mergers between pharma and payers and/or PBMs. Although this will certainly not be a straightforward path, manufacturers should start considering whether integrating with a payer would offer greater access to the advanced data and analytics capabilities needed to analyze longitudinal patient outcomes; whether integration would facilitate combination pricing and bundling; and how such deals could impact formulary placement.
While there will likely be challenges with compliance - and with the renegotiation of roles across the ecosystem - the reality is that thoughtful attention to the issue of pricing could open pharmaceutical manufacturers to opportunities for meaningful transformation. From increasing the focus on innovation, value-based contracting and scale - to having a longer term vision encompassing direct-to-consumer strategies, integrated services and vertical deals - forward-reaching manufacturers have significant opportunities to parlay pricing reform into competitive advantage.
Author Biography
Peter Gilmore is a Principal in KPMG Strategy with more than 15 years of experience advising senior management teams at leading pharmaceutical, medical device and consumer health companies. Peter supports life sciences clients on both transformation and optimization engagements in Commercial and R&D on issues relating to market access and novel contracting strategies, new product development strategy, launch planning, and commercial model innovation. Peter has also evaluated dozens of licensing and acquisition deals across 30+ disease categories, and has extensive experience designing valuation models and employing decision analysis methodologies in the deal setting.