Perceptions And Realities Of The Drug Pricing Debate

The issue of drug pricing is neither simple nor straightforward, but here, we will break down the status quo and shed some light on the costs of doing business. We do not argue that pricing concerns are unfounded, but want to bring some transparency to the discussion. While we will not propose a fix, we hope to elucidate there is no panacea to the drug pricing conundrum as it exists given the multitude of complexities, but provide a better understanding of the current state of play.

First, it is important to have an understanding of who the players are and what they do:

  • Manufacturers: pharma and biotech companies who make the drugs
  • Distributors: ship and supply those drugs to…
  • Retailers like pharmacies, hospitals, and doctors offices, where patients physically obtain those drugs
  • Managed care organizations (MCO) provide insurance coverage to the patient for those drugs, and for some payers, the process of deciding which drugs to cover and at what cost is contracted out to Pharmacy Benefit Managers (PBM) rather than being handled by the MCO itself

The core of the drug pricing conversation tends to revolve around how manufacturers increase list prices year over year. Based on historical precedent, there is some expectation for list prices to increase once or twice a year, with an average rate of 5-10% per increase. When viewed in relief of a yearly 2-3% inflation rate, this can quickly look unreasonable. And yet, despite these sometimes double digit price increases, there has actually been a decrease in the estimated net price growth since 2010, according to a 2015 analysis by IMS.

This decrease is due to the multiple points along the chain in which manufacturers must either directly pay or provide a discount to different players. Reasons that contribute to this at times significant delta include:

  • The list price may be an indicator of what companies constitute as “value” for their drug, and by proxy, their shareholders. Payers may have a different view of the value of the same drug.
  • Manufacturers are under increasing pressure to negotiate discounts with commercial insurance to secure a favorable reimbursement environment i.e. preferred formulary tier status, excluded drug lists.
  • These negotiated contracts typically last for a three year period and have a price protection clause for that length of time – so while list price may go up multiple times in that time period, the contracted negotiated rate does not correspondingly change.
  • Some payers simply will not contract with manufacturers for products that have multiple double digit price increases. Many will put utilization management (UM) controls in place to drive usage toward generics or less expensive branded agents instead of the offending products.

There is a wide spectrum of both list price increases and the types of discounts that are given to payers and PBMs, vis-à-vis the negotiated discount, depending on the therapeutic category. While the public may see a list price increase of 5-10%, behind the scenes there may actually be negotiated discounts anywhere from 10-50%. The average discount is about 30%, and can be as low as single digits or as high as 50% in categories like hepatitis C antivirals.

The negotiated discounts are a way for manufacturers to secure optimal formulary placement, which also serves to minimize barriers for both health care providers and patients to obtain the drug. Depending on the drug class, the discounts also:

  • help facilitate the removal of UM controls (called step edits and prior authorization) that can be used to force physicians to prescribe alternative cheaper agents preferred by the plan
  • drive competitive pricing among players (e.g. maximize the discounts among all products)
  • ensure there is no abuse in off-label prescribing

Despite the aforementioned benefits to discounting, some manufacturers continue to pursue significant list price increases even in the face of the apparent risk of sub-optimal, if not total lack of reimbursement, as certain payers simply do not attempt to contract at all. Thus, there will be some segment of payers with which manufacturers can capture their actual list price, which then gives manufacturers more financial leeway to contract with other payers who have placed barriers up for their products. Taking together the two extremes of no contracting and deeply discounted rebates should still average out to some profitability.

On the Medicare side, manufacturer discounts for pharmacy-based agents (e.g. Part D) may need to be more aggressive because of the nature of budget available to cover those agents. In many cases, for a manufacturer to be successful in obtaining formulary coverage for a Medicare Part D plan, a 40-50% discount may be required to achieve a favorable status – whereas the same therapeutic area might only need a 30% discount for commercial plans. For Medicaid, price decreases are mandated by law, but everywhere else, free market forces are very much in effect.

Figure 1: Flow of Pharmaceutical Funds, Products, and Services. Reproduced with permission from doi:10.1001/jama.2017.5607. Copyright © 2017 American Medical Association. All rights reserved.

Payers do note that there is “abuse” in certain therapeutic areas that occurs with price increases over the norms. One trend occurring to address these so called “abuses” in the payer community is to expand their formulary exclusion lists, adding more new, high-cost drugs to those lists. Many times payers are forcing these agents to be excluded because employers are becoming more adamant on cost-efficiencies, as well as reluctance on the part of the plan to reimburse for an agent that is no more efficacious as an older, less expensive branded or even generic agent.

As we witness more specialty products come to market, which tend to be accompanied by high price tags, high deductible plans continue to increase premiums, and employers are indicating that they cannot sustain those increases. In turn, more cost must be borne by the patient. This “financial toxicity” to patients can result, for example, in poor prescription drug compliance and intentional skipping of doses, or waiting between refills to help manage their own out of pocket costs.

While the increasing use of discounts for payers does allow the plan to offer lower prescription costs for clients and plan members compared to list price, patients still bear the brunt of co-pays associated with the list price rather than discounted price. Patients who have commercial insurance will have out of pocket costs, which can range from $25 – $100 per prescription, depending on the type of branded product. To offset the higher co-pay, manufacturers can offer coupons to patients that, depending on the size and scope of the program, can quickly and substantially add up for the manufacturer. There are certain camps within the sector that promote the idea that co-pay card program costs require the manufacturer to increase price to recoup these extra costs. But for the most part, the impact on gross to net of these programs is in reality quite small and not the sole reason a manufacturer increases the price of an agent. Yet, there are some manufacturers that take a greater hit on co-pay program costs due to greater demand. Also of note, these co-pay cards only work for commercial plans, and not Medicare or Medicaid plans.

There are still several other dynamics at play that drive price increases, with distributors and PBMs also culprits to the pricing conundrum. When a drug company distributes their agents they use wholesalers that are paid based on a percentage of the list price, and depending on the agreement with the manufacturer, often also some percentage of sales or volume. Paradoxically, manufacturers are forced to drive higher prices on their agents because lower prices are penalized as many wholesalers will not stock or distribute a drug that does not yield a sufficiently healthy ROI. Manufacturers are somewhat stuck to price on the higher side simply to appease the wholesalers.

PBMs also are part of the problem when it comes to higher list prices. PBMs make money through various administrative fees and rebates, where the bigger the negotiated rebate, the bigger the benefit to their bottom line. Lower price products simply have less room for the negotiation of deep discounts, but a deep discount on a big ticket specialty drug is a nice win that PBMs can bring to their clients and employers. It is also advantageous for manufacturers to entertain these deep discounts with PBMs as it can secure optimal placement on formulary exclusion lists and keep out competitors in their therapeutic category. Again, in what feels like a pay to play scenario, manufacturers are forced to drive up list prices to both give themselves negotiating power but also to appease another stakeholder.

We started this article by noting this system is neither simple nor straightforward, and should rightfully sound complicated after all that we have laid out. Figure 1 depicts the various players and the relationships between them.

With all of that being said, some manufacturers are starting to take more proactive steps to neutralize the pricing conversation, rather than get stuck putting out fires in the press as has happened of late. Allergan’s CEO has committed to limiting price increases to single-digit percentage increases. Novo Nordisk has said it will not raise drug prices by more than 10% in a year, and Eli Lilly has made a similar pledge. Other large players like Novartis and Amgen have started publicly engaging in value-based pricing arrangements, where they will be responsible for costs when patients do not respond as anticipated to drug. Recently Optum, the health services business of UnitedHealth Group, and Merck announced they will collaborate on outcomes-based arrangements for Merck drugs. Current pay-for-performance deals in specialty categories exist in MS, PCSK9s, oncology, diabetes, and anticoagulants. Pay-for-performance systems assess the quality and efficiency of a drug by looking at surrogate markers like blood pressure or cholesterol. These actions and others are scratching the surface at creating a more transparent pricing environment, along with finding new ways to build, demonstrate, and monetize drug value.

The key questions we are pondering and trying to solve for related to the US reimbursement and pricing are:

  • Have we reached a tipping point whereby we will see a ground swell around price re-calibration and new mechanisms to deal with this issue?
  • How will the influx of novel mechanisms in a myriad of therapeutic areas impact drug pricing overall?
  • With the advent of biosimilars and more generics, will this help with budget management overall by freeing up dollars for other novel therapies?
  • With manufacturers still needing to grow revenue with existing product portfolios, what will be the new norm by way of accepted price increases and how will other US stakeholders take part in this new modality?

As discussed in a previous issue of this newsletter, gene therapy products will also likely force more creative pricing and reimbursement strategies given anticipated high costs with unprecedented value from a single dose. There are many different levers that can be pulled that can and do affect cost – in the next article, we will explore some legislative options that have and continue to be explored to reign in drug pricing.