The political mood in the US on drug pricing at a national and state level is putting the pressure on pharma to demonstrate value
“Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled”
One of Bob Dylan’s favorite tracks and the saying that it has coined, could not ring more true when it comes to the healthcare policy debate of the moment: the cost of pharmaceuticals. Not a day goes by without the words “drug pricing” printed in big letters on the front page of a major national newspaper.
In the 2020 campaign for the White House, the pharmaceutical industry has taken over from America’s gun lobby as the prime target of bi-partisan outrage. Surely no senator and no congressman (or woman) ‘blocks the hall or dares to stall’.
While debate about drug costs and pricing processes is no new phenomenon in Washington, what is unprecedented is the level of vitriol used to vindicate various proposals.
The new tune in DC
Following President Trump’s infamous dictum to prevent pharmaceutical companies from “getting away with murder”, his administration released what has arguably become the most aggressive collection of official drug policy ideas ever put forth.
Only 100 days after releasing the ‘American Patients First Blueprint’ in 2018, the US Department of Health and Human Services re-iterated the new approach in no uncertain terms: “For years, American patients have suffered under a drug-pricing system that provides generous incentives for innovation, while too often failing to deliver important medications at an affordable cost”.
The resulting legislative program is moving at unprecedented speed, combining volume control with regulations to limit branded drug spending.
The Centers for Medicare and Medicaid Services (CMS) followed suit with a flurry of regulatory rules (some withdrawn, others passed) while a bi-partisan reform bill in the US Senate’s Financing Committee proposed by Senators Grassley (R) and Wyden (D) is designed to reign in perceived “excess spending”.
Drawing on inflation caps and benefit re-designs, the bill aims to reduce government spending on drugs by $100 billion across Medicare and Medicaid programs over the next ten years. “The time to act on prescription drug prices is now,” both Senators proclaimed in a joint statement of rare bipartisan unity, leading to supportive endorsement of the White House.
“This is a once-in-a-generation opportunity to confront these issues in a non-ideological fashion,” said the president’s senior adviser Joe Grogan about the bill this week. Like HHS Secretary Alex Azar, a former Lilly executive, Grogan has seen the view from the other side, having served as head of Government Affairs at Gilead Sciences just before entering the administration in July 2017.
Under Democratic leadership, the US House of Representatives is set to soon pass the “Lower Drug Costs Now Act”, known by policy-wonks as H.R. 3 and to most of the public as (Speaker) ‘Pelosi’s Drug Bill’. It combines various measures in three main categories: direct drug price negotiations, inflation-based rebates and caps on patient out-of-pocket spending.
Impacts on pharma
The effect of the bill is estimated to reduce drug developers’ net revenues by up to $1 trillion or roughly 58% of companies’ EBIT. The result, according to the non-partisan Congressional Budget Office, will be a reduction in overall pharmaceutical development amounting to 8-15 fewer drugs coming to market over the next decade.
Some health economic studies indicate that the impact on small and emerging biotech will be a lot more dramatic than on larger pharma, an effect brought about by ‘international reference pricing’, one of the bill’s key measures. As an indicator of its likely impact one study suggests that had it been applied over the past decade, it would have resulted in 88% fewer drugs developed by small biotech in states like California.
The latest in a series of proposals from Democratic presidential hopefuls relies on an even more blunt application of direct price controls, namely the forced withdrawal of the very patent protections that incentivize biopharmaceutical innovation in the first place.
Many lawmakers have dispensed with the once sacrosanct belief that the innovation engine can only be sustained through rigorous defense of patent law that purposefully protects pharma’s market monopolies for a period of exclusivity.
Senators Bernie Sanders (VT), Cory Booker (NJ), and Kamala Harris (CA) are proposing to establish a federal agency to decide on the appropriate level of a product’s launch price. If a private company which is requested to submit R&D expenses were not to comply with the Bureau’s determinations of fair price, the bill would authorize the government to simply strip the developer from the patent guaranteeing an exclusivity period, allowing generic manufacturers to provide the product at a cheaply discounted launch price.
While this federal bidding war rages, a more silent but equally pervasive escalation is underway in various state legislatures to regulate drug pricing, force price transparency, limit co-pay assistance, allow importation, rate setting, prevent price gouging, set spending targets, drive group purchasing and enable biosimilar substitution.
Separating Signal and noise
Most drug pricing reform proposals discussed above combine various core policies, which include:
• Importation of Products (e.g. from Canada)
• International Reference Pricing (e.g. the IPI Model for Part B)
• Inflation Cap
• Access to Biosimilars
• Government Drug Price Negotiation
• Medicare Part D Caps
• Medicare Part D Re-design
• Pass Through of Rebates (POS)
• PBM Reform
• Pricing Commissions
Pharma needs to be prepared to mitigate the business impacts of these proposals says Elizabeth Kinter, Head of US Market Access Strategy and Operations at Biogen. “Most manufacturers, if not all, are modeling these as they're pretty extreme in some cases, such as the IPI and the inflation cap which are really the most destructive to the industry.”
Kinter also points to safety and also wider ripple effects if drug importation is allowed from Canada or other markets. “One of the issues with parallel trade that we see is the stock outs, in markets that sell their supply to other countries,” she says.
Beyond the headlines about skyrocketing drug prices, industry experts point out that an important fact often gets lost among the noise in the debate: Actual drug costs represent less than a fifth of healthcare spending, and prices have only increased in the lower single digit percentages over the last decade.
For the past two years, prices have even fallen by some measures, to less than 2% when adjusted for inflation, according to the Council of Economic Advisers (CEA). The CEA methodology focusses on transaction prices for retail drugs which reflect any negotiated price discounts and incorporate generic savings.
Statistics from data and analytics company IQVIA also challenge the narrative of soaring drug prices. When avoiding the use of list prices, which misrepresent actual gross-to-net concessions made in the transaction chain such as rebates to insurers and other discounts, its figures suggest there has been a roughly 1.5% net price growth of drugs in 2018 (vs. 5.7% gross).
A recent eyeforpharma survey showed that 57% of 180 manufacturers support a government policy to eliminate the opaque system of rebates between pharma and payers. The savings could be passed on to patients and, not surprisingly, only 13% of industry respondents oppose the idea.
The problem of the gross to net issue goes even beyond rebates, says Robert Popovian, Vice President, US Government Relations at Pfizer. “The overall concessions that we as manufacturers are giving back sums up to close to $160 billion dollars, which is 30%-40% of what we spend on drugs on both retail and non-retail, a significant amount that gets lost in the supply chain.”
Removing the incentive to support this market situation that former FDA commissioner Scott Gottlieb once called a “Kabuki theater” where prices constantly rise until “the sick end up paying for the healthy” is one of the few reform areas industry leaders could align on. Despite this, the CMS reform proposal, the “removal of safe harbor exemption for rebates” in Medicare Part D and Medicaid-managed markets, was withdrawn in the spring.
Whether due to the frosty political climate or the growing negotiating power of insurers, the days of simply determining price based on revenue or profit optimizing seem long gone.
In the new environment the “value-based price” has become a pre-requisite for enabling conversations with payers, while policy-makers seem poised to limit the pricing corridors with increased government intervention. In short, pharma's power to set prices is more limited than ever and the imperative o demonstrate value will only grow.
Dylan devotees may know the B-side to Dylan’s 1965 single release: “Honey, Just Allow Me One More Chance”. No one in DC seems today willing to listen to that flipside when it comes to the question of drug pricing.