Prescription Drug Pricing: “The Times They Are A Changin”
“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”
Bob Dylan, recorded his iconic “The Times They Are a-Changin'” in 1963, released on the 1964 album by the same name.
One of Dylan’s favorite tracks and the saying that it has coined, could not ring more true with respect to a core healthcare policy debate on the cost of (bio)pharmaceuticals. Not a day goes by without the words “drug pricing” in the headlines of a major international newspaper. In the 2020 campaign for the U.S. White House, the pharmaceutical industry has become the prime target of bipartisan outrage.
Surely no senator or member of congress ‘blocks the hall or dares to stall’. The healthcare debate’s focus on drug costs and pricing processes is not new - it has been a matter of public debate for over thirty years. Unprecedented are both the recent inflation of regulatory rulemaking and level of vitriol in Washington to vindicate various proposals.
The new tune in DC
Following President Trump’s infamous dictum to prevent (bio)pharmaceutical companies from “getting away with murder,” a Republican Administration released the most aggressive drug policy ideas ever put forth in a nation attracting massive investment in (bio)pharmaceutical research and development every year. Merely 100 days after releasing the ‘America Patients First Blueprint’ in 2018, the US Department of Health and Human Services re-iterated the paradigm change: “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.” In what has followed in terms of legislative activity ever since, the country is witnessing unforeseen speed towards combining volume control with regulations to limit branded drug spending.
While the Centers for Medicare and Medicaid Services (CMS) have proposed regulatory rules, withdrawn some, and passed others, a bi-partisan reform bill in the US Senate’s Financing Committee proposed by Senators Grassley (R) and Wyden (D) aims to constrain perceived “excess spending”. Drawing on inflation caps and benefit re-designs, the act aims to reduce government spending on drugs by $100 billion across Medicare and Medicaid programs over the next decade. “The time to act on prescription drug prices is now”, both Senators proclaimed, leading to endorsement by 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 before joining the administration in July 2017.
Under Democratic leadership, the US House of Representative has just passed the “Lower Drug Costs Now Act”, known by policy-wonks as H.R. 3 and 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. The bill is estimated to reduce net revenues of drug developers by up to $1 trillion or roughly 58% of companies’ earnings before interest and taxes (EBIT). Thus, the non-partisan Congressional Budget Office has predicted a recession in overall pharmaceutical development so that 8-15 fewer innovative drugs will come to market over the next decade. Some health economic studies indicate that the impact on small and emerging biotech would be more dramatic than on larger pharma. Their models predict that had one of the key measures, the ‘international reference pricing,’ been applied over the past decade, the consequential decrease in investor funding would have resulted in small biotech in states like California developing 88% fewer drugs.
Joe Kennedy, a former chief economist for the U.S. Department of Commerce, and Senior Fellow at the Information Technology and Innovation Foundation has presented an excellent literature review of academic studies on the robust relationship between expected profitability of pharmaceutical products and R&D innovation. Given the media thunder, you could be forgiven to believe that it's a only a biased 'industry talking point' that a reduction in current drug revenues will lead to a shortfall in future research. But that verdict is simply the consensus of a body of positive economic research. Most noted economists who have spent some time professionally studying the issues agree that some impact on innovation financing of the various current policy measures would be unavoidable. But they also admit that it is impossible to accurately model which products would be squeezed, and importantly, what public health consequences it would ultimately entail, both in the US and abroad.
Recent FDA commissioner Scott Gottlieb made no bones about the view that such regulations merely hurt the development of the most transformative and life-saving innovations:
"The price-control approach would increase uncertainty and reduce returns from biotech investment, raising the cost of capital for these invaluable endeavors. It would alter incentives and shift money from the most speculative but highest-value science, including regenerative medicine and gene editing. Money would flow instead to known disease areas and well-characterized targets, using proven approaches such as pill-form drugs." Scott Gottlieb
The latest series of proposals from Democratic presidential hopefuls relies on an even more blunt application of direct price controls, namely the forced withdrawal of the patent protections that incentivize biopharmaceutical innovation. For instance, Senators Bernie Sanders (VT), Cory Booker (NJ), and Kamala Harris (CA) recently proposed to establish a federal agency to decide on 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 patent exclusivity period from the developer. This would allow generic manufacturers to jump in and provide the product at a cheaply discounted launch price. Many lawmakers have dispensed with advocacy for the once sacrosanct belief that the innovation engine can only be sustained through the rigorous defense of patent law and patent lives. Those that purposefully protect pharma’s market monopolies as part of a societal contract which also sees generics enter the market at a fraction of the cost once brand exclusivity periods end. To the economists, the trade-off between current welfare sacrifice and future innovation is, in fact, intentional.
At the same time that federal proposals are outbidding one another, a more silent but equally pervasive escalation is occurring 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 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)
Access to Biosimilars
Government Drug Price Negotiation
Medicare Part D Caps
Medicare Part D Re-design
Pass-Through of Rebates (POS)
While the enormity of sticker price hikes of certain therapies has led to reporting on skyrocketing drug prices, industry experts point to two important data points routinely lost among the noise in the debate:
Drug costs represent less than a fifth of healthcare spending, and
Drug price increases have been 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 focuses on transaction prices for retail drugs which reflect any negotiated price discounts and incorporate generic savings. Data from IQVIA also support that the narrative of soaring drug prices is incorrect: When avoiding the use of list prices which misrepresent actual gross-to-net concessions that were made in the transaction chain – such as rebates to insurers and other discounts – drugs showed 1.5% net price growth in 2018 (vs. 5.7% gross).
Whether due to the political climate or growing negotiation status of insurers, the days of simply determining the market demand as a function of price and choosing the revenue or profit optimizing point are gone. In the new environment, the idea of an explicit rationale, also known as the “value-based price”, has become a pre-requisite for enabling conversation with payers, while policy-makers seem poised to limit the pricing corridors with increased government intervention.
Interestingly, the B-side of Dylan’s 1965 single release features the song “Honey, Just Allow Me One More Chance”. It seems that pharma is out of luck for anyone in DC to be willing to hear that tune when it comes to the drug pricing question.
Versions of this article have been re-published on eyeforpharma.com, pharmaboardroom.com and certara.com with my permission.