Idealism Vs. Reality: Potential Issues Impacting President's Plan To Lower Drug Prices

By Dean Erhardt

In looking at the President’s plan for lowering drug prices, especially as they impact many health plans — particularly those in their infancy — a significant chasm exists between idealism and reality. While it will be important to take all factors into consideration, some key potential issues merit close attention.

Are The President’s Recommendations Realistic?

Let’s start with those that might be considered the “easy” items. As outlined in the report, Trump promised to end the system's "double dealing” that allows middlemen such as pharmacy benefit managers (PBM) to pocket rebates and discounts.

It should be evident that there are many “pricing games” that are played in the pharmaceutical industry, including discounts provided to PBMs. That said, much of the discounts (i.e., rebates) provided to the PBMs are in fact “shared” with the PBM’s customers. In fact, it could be argued that, because some portion of the rebate is passed on to the PBM’s customers (e.g., payers, employer groups, etc.), the rebate holds down overall drug costs and enables patients to access products at a better cost (i.e., lower copay) than what might happen if no rebates were provided.

How Much Of The Rebates Are Shared?

If the rebate is kept by the PBM and not shared with the payer, it could be argued that a conflict of interest occurs that may in fact drive up market prices. On the other hand, if the PBM is sharing the discounts with the plan and thereby enabling lower overall costs, one could argue that there is an alignment of incentives. The conflict is tied to the rebates driving the profits of the PBM vs. the drug discount enjoyed by the payer. This would force the manufacturer to provide a high list price with a potential deep rebate to the PBM, rather than a lower list price that might be directly provided to the payer.

Is Price Transparency A Way For Pharma To Take Control From Third Parties?

Arguable price transparency that provides to the market information related to how manufacturers price to the PBM, may inure to the benefit of both the payer and the manufacturer. For the payer, they can see exactly the discount provided to the PBM, and therefore determine how they might best participate in that discount. For the manufacturer, their relationship, or perceived value from the payer, may be enhanced if the payer understands the relative discount of the manufacturer.

Will Payers Push Hard On Pharma To Make Lower Prices Happen?

Certainly, this is an interesting question, but it’s one that has potentially different answers.

Biologic Medications — Prices are largely driven by several issues:

• The cost of bringing a product to market relative to commercialization including infrastructure and regulatory requirements.
• Clinical trials, even small ones, are costly and take a long time to complete.
• In some cases, this is made more difficult with rare/orphan diseases whereby finding patients with orphan diseases can be extremely difficult.

Interestingly enough, on May 29, 2018, the Wall Street Journal published “Are Big Clinical Trials Relevant? Researchers Disagree.” While we will not debate the merits of one pathway vs. another, it is not debatable that smaller, nimble trials that are tailored to a patient’s genetic make-up should:

• lower the cost of getting a product to market
• lower the cost to the healthcare system by enabling lower cost vis-à-vis lower overall investment cost.

The next driver is similar to the first in that it reflects the combination of:

• small number of potential patients
• significant investment relative to research and trials
• limited window for attaining a ROI and limited patent period contribute to the need for a significant drug cost
• This does not consider the additional, significant costs of commercialization and patient-support programs that are all incurred by the manufacturer.

Current Products On The Market

For traditional, existing pharmaceutical products, like products in many industry categories, pricing within the pharmaceutical industry can be driven by 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 will eventually stop producing a given product because there is no profit left in the product category. If just one or two products remain in the category, the pricing is likely to rebound back up — simple supply and demand.

Another circumstance occurs where opportunists take advantage of small-market products that have little historic value. In this case, investors might look at a small-volume product where there is only one therapeutic option. An investor might buy a product relatively inexpensively, and then significantly increase the cost of the product.

Some organizations, such as CVS Health, have taken significant steps to address this issue. In 2017, they started a process to identify “hyper-inflationary” drugs off the formulary from entities they identified as pricing offenders, including products from Canadian drugmakers Valeant Pharmaceuticals and Concordia Healthcare, both of which had come under significant fire for huge price hikes.

In theory, payers may push back significantly on the hyperinflationary products, much like the response from CVS Health. It is easy to see where patients and governmental agencies will both support this effort. Biologic products, on the other hand, create a different set of concerns involving regulatory issues around drug approval and patent timelines that might be necessary to significantly impact the pricing curve.

What’s Ahead?

While the pressure on the pharmaceutical industry heats up, there will be many ideas and options to consider. That said, many industry stakeholders believe that President Trump has largely been proven correct on most of the economic strategies he has employed. The leadership adage credited to General Patton — “Lead, follow, or get out of the way” — offers some guidance to the pharmaceutical industry. Now is the time to move forward aggressively to find a path that can benefit all potential stakeholders, rather than let other third parties dictate potential outcomes.

BIO: Dean Erhardt is president and CEO of D2 Consulting