The time has come to be proactive in finding a path that can benefit all potential stakeholders, rather than letting other third parties define the system in a way that negatively affects potential outcomes.
In its push to end a system that relies upon rebates to buy a place on payer formularies, the Department of Health and Human Services (HHS) is striving to make changes that will benefit patients. Although this is commendable, delinking supply chain payments from the list price will likely be disruptive, requiring pharmacy manufacturers to adapt and make greater strides toward value-based models.
A key challenge for drug company executives is knowing how to determine value from both the patient and payer perspectives while making the transition to a value-based pricing model. The switch could take up to a decade—5 years to determine what the new model should look like and another 5 to implement. In the short term, pharmacy benefit managers (PBMs) and payers should consider sharing current rebates with patients.
Implementing New Ideas
Other ideas for 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. These ideas stem from current market consolidation. Three PBMs control 75% of the market, 3 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 the chain, as well as discounts mandated by government programs, the manufacturer must consider all rebates, fees, and discounts when setting a drug price. In some cases, 50% or more of a list price could be included in 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 middlemen by using a fee-for-service structure. One potential option in aligning this type of structure may be in extending the patents for certain drugs for which the manufacturer must also agree to a set pricing formula for both launch prices and future price increases. Such an extension would allow sponsors to recoup their research and development costs over a longer period while lowering the list price for a new product entrant.
Keep in mind that the Trump administration contends that it’s pos- sible to lower prices without inhibiting research and development. Part of their plans involve making it easier for pharmaceutical companies to win regulatory approval for their products. The administration will also address the issue of senior citizens in government programs overpaying for drugs because of a lack of negotiating tools and has rejected the idea of allowing Medicare to work directly with manufacturers on drug pricing.
The administration’s 2019 budget includes moving some costly drugs from Medicare Part B to Medicare Part D, which will allow private insurers who administer plans to negotiate with manufacturers. There is certainly an argument that this strategy has merit. The administration also cites competition as the key to lowering drug prices and is seeking to simplify the drug launch process for smaller, younger drug companies, thereby bringing more competition to the market.
Key Points to Consider
With traditional contracting efforts used by PBMs and payers, the more competitive a product category, the more significant the discounts demanded from manufacturers. Although this is not an ideal system, because the prices manufacturers set for products include projections for providing significant discounts—subsequently creating a somewhat false list price—this model can benefit Medicare in the short term.
What’s more, easier and faster drug launches would be more than welcome. Launching a new therapeutic product is challenging and 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 could also lower overall costs in certain disease categories. This approach ties potential rebates and discounts for expensive pharmaceutical products to the outcomes observed in the patients who receive them. For purchasers, such as insurers and health care 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 issues for value-based contracting are (a) the ability to define and track the appropriate information and (b) the potential impact this structure has on outcomes.
Pharma Companies Should Be Proactive
Ultimately, prices are largely driven by the cost of bringing a product to market relative to commercialization, including infrastructure and regulatory requirements, as well as the cost of clinical trials.
John Gray, CEO, Healthcare Distribution Alliance, commented in a letter to HHS on July 16, 2018: “Any compensation systems, for wholesalers, that fluctuate with manufacturer 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 wholesalers for their financial risk of providing the same services to pharmacies for a $350 item versus a $3500 item?
What does all of this mean for the profitability of pharmacies? Will reimbursement follow some version of the fixed fee path? Clearly, there are more questions than answers at this point.
For the most part, it’s about 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 a few products remain in the category, the pricing is likely to rebound.
While pressure on the pharmaceutical industry heats up, there will be many possible strategies to adopt. Many pharma stakeholders believe that the Trump administration has largely been proven correct on many of the economic strategies it has employed. The time has come to be proactive in finding a path that can benefit all potential stakeholders, rather than letting other third parties define the system in a way that negatively affects potential outcomes.