Magazine Article | May 22, 2017

Drug Costs Moderating, But Growing Copays Fuel Ire

Source: Life Science Leader

By John McManus, president and founder, The McManus Group

An irony in the simmering drug pricing debate in Washington is that net drug cost growth has moderated substantially, and of all the places to shoot, the industry still finds itself in the crosshairs of Democrats and Republicans alike.

At a Stanford University conference last week, Office of Management and Budget (OMB) Director Mick Mulvaney said President Trump keeps asking him what he is doing to address the high cost of pharmaceuticals. He then embraced a solution that had been pushed exclusively by Democrats: Medicaid-like rebates (aka price controls) in Medicare.

Mulvaney declared, “When Medicare Part D was put in, there was a tremendous giveaway to the pharmaceutical companies in terms of the fact that they no longer had to rebate like they did in Medicaid. So, we’ve actually floated that idea with the president to try and be a little heavier-handed on the rebates they have to pay to drive those prices down.”

The Trump administration hasn’t followed up on the remark, and considering Mulvaney (who, had he been a member in 2003, likely would have opposed MMA [Medicare Prescription Drug, Improvement and Modernization Act] as being an expansion to an entitlement) later strongly opposed price controls in Medicare, we must assume this is not a fully flushedout policy priority. Yet it sent already-nervous pharmaceutical executives to DEFCON 2. The industry has been hearing that the administration is developing a list of policy options to address pharmaceutical pricing but never dreamed former Chairman Henry Waxman’s (D-CA) preferred solution would be seriously contemplated by a top Republican cabinet appointee.

Moreover, the industry has become increasingly frustrated by the growing power of pharmaceutical benefit managers (PBMs) that demand and receive substantial rebates that cut into the margins of the pharma companies but do not seem to benefit patients. Indeed, privately negotiated rebates between brand manufacturers and PBMs have dwarfed sales growth:

  • Credit Suisse analysis showed that gross sales had increased 90 percent from 2007 to 2015, but rebates had ballooned 262 percent in that period.
  • QuintilesIMS Institute found that invoice prices had risen by double digits from 2012 to 2015 (topping out at 14.3 percent in 2014), but net price growth slowed to 2.8 percent in 2015.
  • List prices increased 9.2 percent in 2016 yet net prices grew just 3.5 percent.

As a result, patients are paying artificially inflated prices at the pharmacy counter, which has fueled political resentment and demand for relief. Where is the spread going? Quintiles estimates that 28 percent of the total $450 billion pharmaceutical spend in 2016 goes to middlemen, often paid in retrospective rebates months after the patient receives and pays for a prescription at the pharmacy counter.

PBMs argue that retrospective rebates from pharmaceutical companies and fees collected from pharmacies are passed on to insurers, employers, and Medicare in lower premiums. This is the PBM’s “trust us” argument that should fall flat with patients experiencing egregious out-of-pocket costs. This argument was substantially undermined last month when Express Scripts stock plummeted by 13 percent in a single day on news that its biggest customer, Anthem, announced it was unlikely to renew its contract. Anthem had sued Express Scripts for allegedly overcharging for prescription drugs to the tune of $15 billion. Anthem evidently is done “trusting.”

Anthem’s actions amplify what many policymakers are asking: Where are all these resources going? Rep. Doug Collins (R-GA), who has sponsored a bill requiring greater transparency of PBMs said, “What PBMs are experiencing right now is that both Wall Street and Washington are calling their bluff.”

Pharmacies have ratcheted up their lobbying campaigns, rallying behind Collins’ legislation and Rep. Morgan Griffith’s (R-VA) bill to prohibit PBM’s retroactive direct and indirect remuneration (DIR) fees. Although pharmacies lack the deep pockets of Big Pharma and the PBM industry, they have an incredible grassroots capability and enormous credibility of having the patient’s best interests at heart with lawmakers.

They appear to be gaining traction with their arguments that DIR fees charged by PBMs are threatening their ability to provide high-touch services that improve patient adherence to their complex specialty medications.


Patients are hit with a double whammy: copays on inflated prices of expensive drugs and increasing cost-shifting from health plans. A PwC study found that the percentage of plans requiring a deductible for pharmaceuticals had more than doubled between 2012 and 2016 — rising from 23 to 49 percent.

Likewise, cost-sharing has increased in Part D. According to an Avalere analysis, the average percentage of covered drugs facing coinsurance has increased over the past three years from 35 percent in 2014 to 58 percent in 2016. The percent of beneficiaries enrolled in Part D plans with more than one tier requiring coinsurance has skyrocketed to 96 percent in 2016 from 39 percent in 2014. Coinsurance on expensive specialty drugs is much more onerous for patients than flat copays.

Manufacturer copay assistance programs can help defray costs for patients in commercial plans, but the anti-kickback law prohibits the use of such programs for Medicare patients. Medicare patients must rely on charitable foundations. However, many foundations are under increasing scrutiny from the Office of Inspector General (OIG) and have caused some manufacturers to pull back critical support.

Yet while patient cost-sharing of expensive specialty medicines can be substantial, an often unnoticed truth is that the vast majority of prescriptions is for generic drugs. And those drugs have very modest or even no cost-sharing at all. Quintiles reports that 89.5 percent of prescriptions are for generics and 29 percent are dispensed with no copay at all.

Therein lies the genius of the American system. Under the Hatch-Waxman system Congress negotiated with the industry, brand-name companies can derive substantial returns on breakthrough products, but only for a limited time. Then generics can take over IP of the innovator product, enter the market, and drive prices down to the cost of production. The generic market is much more vibrant in the United States than Europe, and generics command a much bigger role in the U.S. According to the 2015 IMS Report, Europe’s generic utilization hovers around only 56 percent.


If Congress is unhappy with the returns generated by this system, then it should be addressed directly — monkeying in other areas without focusing on this fundamental deal isn’t helpful.

One such persistent idea is importing drugs into the U.S. that are priced and initially sold in other countries. This past week a group of bipartisan senators led by Sen. McCain, Sen. Klobuchar, and Sen. Grassley urged the administration to use executive authority to lower prescription drug costs by certifying the importation of prescription drugs from Canada.

But as long as foreign price-controlled regimes artificially set drug prices abroad, there cannot be “free trade” with the U.S. Trump et al. are unhappy that other nations are not paying their “fair share” in terms of global costs of biomedical innovation. But allowing middlemen to leverage differential pricing systems is not the way to ”get even.” Oh, and we rather like our FDA-enforced gold standard drug distribution network. Four former FDA commissioners — Democrat and Republican alike — agreed in a letter to Congress that importing drugs from other countries is not the right approach. The commissioners warned of serious risks to consumers and patients because these drugs can be counterfeit, substandard, and unsafe. Nonetheless, legislation to reauthorize the Prescription Drug User Fee Act, now moving through congressional committees, will become a target for such populist hyperbole.

Congress’ time would be better spent developing a Medicare Part D modernization package or working with the administration to address growing operational problems that Congress did not foresee when the benefit was first enacted in 2003.  overcharging for prescription drugs to the tune of $15 billion. Anthem evidently is done “trusting.”