Drug prices have come under attack from consumers and payers, with President Trump now focused on the issue and tasking pharmaceutical companies to respond with better pricing. To date, pharma companies have struggled to address these concerns, but are meeting with little success.
They contend that prices are largely driven by the high cost of bringing a product to market relative to commercialization, including infrastructure and regulatory requirements, as well as the cost of clinical trials.
Cause and Effect
For the most part, it’s simple supply and demand: When there are more entrants in a category, particularly once a therapeutic category has generic entrants, the pricing tends to be pushed down via competitive bidding in the market. As the pricing goes down, manufacturers eventually stop producing a given product because there is no profit left in the product category. If just one or two products remain in the category, the pricing is likely to rebound.
Drug rebates, which have been an essential but opaque aspect of the industry, have come under fire with the Trump administration’s blueprint to lower drug prices, and the industry has continued to push for value-based and fixed-discount pricing to help lower the high cost of drugs in the U.S. Companies dole out billions of dollars in rebates every year, but these savings don’t always translate to discounts that trickle down directly to patients.
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Not surprisingly, Health and Human Services (HHS) Secretary Alex Azar recently announced that the agency is working with Trump to create a comprehensive strategy to address rising drug prices and push proposals laid out in Trump’s 2019 budget proposal even further.
Intensified Attack on Drug Pricing
Earlier this year, the Trump administration called out foreign countries for setting price controls on medication and“freeloading”on American innovation and plans to address high list prices and rising out-of- pocket costs for consumers.
They claim that it’s possible to lower prices without inhibiting research and development. Part of Trump’s plans involve making it easier for pharmaceutical companies to win regulatory approval for their products. The administration will also address the issue of seniors in government programs overpaying for drugs due to lack of negotiating tools, and has rejected the idea of allowing Medicare to directly work with manufacturers on prices.
The administration’s 2019 budget includes moving some costly drugs from Medicare Part B to Medicare Part D, where private insurers who administer plans can negotiate with manufacturers. The administration cites competition as the key to lowering drug prices and wants to simplify the drug launch process for smaller, younger drug companies.
In order to help patients, the Senate approved on July 25 of 2018 the banning of retail pharmacy contract “gag clauses”. These clauses are established by health insurers or pharmacy benefit managers in their contracts which prevents retail pharmacists from telling patients they can pay with cash instead of insurance and save money on prescriptions.
As Secretary Azar states, “Everyone in the system, from drug manufacturers to pharmacy benefit managers and wholesalers, makes their money as a share of list prices, so they have little incentive to force them down.”
Key Questions for Pharmacy’s New “Wholesaler” Model
Can we expect new models for wholesaler pricing to retail pharmacies if the goal is to lower prices?
John Gray, CEO, Healthcare Distribution Alliance (HDA), commented in a letter to HHS on July 16, 2018: “Any compensation systems (for wholesalers) that fluctuate with manufacture pricing are unlikely to be well-aligned with a long-term goal of reducing drug prices.”
This sparks more questions:
- Will the buy-and-sell side at wholesalers disappear for some or all types of products?
- Will retailers pay the new lower list price to wholesalers and will wholesalers earn a fixed fee per unit sold?
- Will they earn some percentage of the new list price with a cap and floor on the fixed fee per unit?
- How will these models compensate the wholesalers for their financial risk of providing same services to pharmacies for a $350 item versus a $3,500 item?
Significantly, what does all of this mean for the profitability of retail phar- macies? Will reimbursement follow some version of the fixed fee path?
At this point, there are more questions than answers.
Biopharma Responds
For the most part, biopharma is on board with HHS plans, and has been seeking to end the current system that uses rebates to buy a place on payers’ formularies, while seeking strategies to curb costs.
Clearly, the old ways may be detrimental to patients. A critical starting point, however, would be to delink supply chain payments from the list price. While this will be disruptive - requiring companies and others to adapt - it is necessary to improve affordability. The realignment of incentives will lead to a greater shift toward value and lower costs for patients.
This would involve figuring out how to assess value from a holistic perspective that looks at value for patients and not simply value through the payer lens. Such a perspective requires transitioning to a value-based pricing model – which would create new challenges for drug companies.
In the meantime, pharmacy benefit managers (PBMs) and payers should consider sharing current rebates with patients. While many plans today would argue that rebates are shared via lower copay amounts, payers must also consider the potential patient out-of-pocket for high cost specialty drugs, which too often patients can’t afford.
A number of industry ideas on lowering drug prices include value/ outcomes-based reimbursement, removing the prohibition in Medicare Part D against drug manufacturers providing financial assistance to beneficiaries and eliminating rebates.
The rationale for this is based upon current market consolidation. Three PBMs control 75% of the market, while three wholesalers handle 90% of the drug volume and a handful of big companies control most of the pharmacies.
Because the list price of a drug must cover the cost and profit margin for everyone in that chain, as well as discounts mandated by government programs, the manufacturer must consider all rebates, fees and discounts when setting a drug price. As much as 50% of a list price could be the PBM rebate if the drug is in a highly competitive therapeutic space.
The key lies in lowering the cost of getting a drug to market while maintaining efficacy and safety standards, extending the timeline for return on investment for life-saving specialty drugs and lowering the cost for all the middlemen by using a fee-for-service structure.
Key Trends
Other key points to consider:
- Discounts - With traditional contracting efforts used by PBMs and payers, the more competitive a product category the more significant the discounts demanded from the manufacturer. While this is not an ideal system, because manufacturers need to price products with the anticipation of providing significant discounts, thereby creating a somewhat false list price, this model can benefit Medicare in the short term.
- Easier, faster drug launches - Launching a new therapeutic product is challenging, expensive and leaves no room for error. Therefore, it’s important to enlist resources that reflect deep expertise and experience to ensure that the therapy distribution footprint and reimbursement strategy are optimized for commercial success. This requires a customized but comprehensive approach to managing each phase of the distribution and commercialization process.
- Outcomes-based contracting - This approach could lower overall costs in certain disease categories by tying potential rebates and discounts for expensive pharmaceutical products to the outcomes observed in the patients who receive them. For pharmaceutical companies developing products with good clinical data, outcomes contracting has the potential to highlight their patient outcomes and drive revenue and share of the market more so than a traditional rebate contract. For purchasers, such as insurers and healthcare systems, this approach could improve value. Under such contracts, purchasers often pay more for a drug when it proves to be efficacious - and less when it is not. The fundamental question for value-based contracting must be the potential impact on outcomes.
Retail pharmacies are at the center of healthcare delivery and that is very likely to continue as more retail pharmacies continue to expand and support more “specialty pharmacy” services. While the industry focuses for the solutions that will lower list prices, keeping pace with trends will better position these hybrid pharmacies to prosper under any new models for healthcare delivery.
Take Action Now
While pressure on the pharmaceutical industry heats up, there will be many possible strategies to adopt. That said, many industry stakeholders believe that Trump has largely been proven correct on most of the economic strategies he has employed. The time is ripe for being proactive in finding a path that can benefit all potential stakeholders, rather than letting other third parties take the helm in a way that negatively impacts potential outcomes.