Magazine Article | September 2, 2014

Market Delivers Low Rx Costs, But The Left Schemes On Price Controls

Source: Life Science Leader

By John McManus, president and founder, The McManus Group

As this column is published, Congress will be returning from a five-week recess … I mean, “district work period” … with only 10 days in September for actual legislating before it calls it quits to campaign for the midterm elections. Republicans stand a better than 50 percent chance of taking the Senate and will certainly maintain control of the House.

The 113th Congress cannot be considered a successful one in terms of advancing healthcare policy. While the committees of jurisdiction achieved a bipartisan breakthrough in developing a consensus on how to replace the dysfunctional Medicare physician payment formula, partisan disagreement on whether and how to finance that change prevented enactment. Moreover, paralysis on tax reform and high U.S. corporate tax rates sparked an incredible M&A run for life sciences companies in pursuit of inversions to lower their tax liability by moving their headquarters offshore.

Meanwhile, the Obama Administration refuses to contemplate ANY legislative changes to the Affordable Care Act (ACA) — repeal of the pernicious medical device tax, delay of the individual mandate that no one felt reasonable, repeal of benefit mandates that compel the cancellation of individual insurance policies — but for its own political convenience blithely halts, defers, or changes implementation of ACA policies that it chooses, despite clear language in the statute.

Congress may address several of these smoldering health policy problems in the lame duck period — after the November elections and before the new Congress is sworn in. But more likely, substantive policy decisions will be addressed next year with a new chairman of the House Ways & Means Committee (likely Budget Chairman and Vice-President nominee Paul Ryan) and possibly a Republican Senate. Democrats will remain influential even if Republicans capture the Senate and newly installed Finance Committee Chairman Ron Wyden (D-OR) will retain substantial input in health policy even if he is relegated to the post of Ranking Member. Democrats will certainly have more than 40 seats, enabling them to block legislation if they stay together.

Ryan and Wyden have collaborated in the past by developing a proposal for moving Medicare to a more marketoriented system known as “premium support,” which would create more competition between private plans and the traditional fee-for-service Medicare program. This possible synergy could occur at a time when Medicare’s private plans are more popular than ever before. The CMS Office of the Actuary’s 2014 Report on National Expenditures noted that more than half of newly eligible Medicare beneficiaries enrolled in these private plans. The Ryan-Wyden plan would apply the competitive reforms to younger beneficiaries who are accustomed to and like private health plans.

A More Active And Intrusive Federal Government
But while there are some rays of sunlight, it isn’t all Yahtzee and mai tais. Senator Wyden envisions a much more active and intrusive federal government with respect to pharmaceutical pricing. In July, his missive with Senator Chuck Grassley (R-IA) to Gilead Sciences demanding a thorough and detailed explanation for its pricing rationale for Sovaldi, its breakthrough cure for Hepatitis C, sent a chill through the drug world. Their eight-page letter demanded documentation for everything from financial analysis for every meeting related to acquisition of Pharmasset (the originating company for the drug), research and development costs of Sovaldi, and market and pricing plans used for launch of Sovaldi domestically and internationally. Wow!

"Let’s hope a new Congress can address the vexing problems afflicting the healthcare system."

One would imagine an intrusive inquiry of this nature would be prompted from exploding Medicare costs and spiraling Part D premium projections. But the Center for Medicare and Medicaid Services trumpeted Part D’s effectiveness in constraining costs in a July 31 press release, crowing that monthly drug premiums would only increase by $1 in 2015. The premiums reflect prescription drug plans’ projections for spending next year, obviously fully accounting for expected utilization of Sovaldi and all other covered drugs.

Perhaps Senator Wyden is responding to a highly orchestrated lobbying campaign by Express Scripts and the insurance industry to demonize pharmaceutical companies that have sought to invest in specialty drugs addressing unmet medical needs. Led by John Rother’s National Coalition on Health Care’s Campaign for Sustainable Rx Pricing, this media-focused activity is long on hyperbole and threats and short on responsible discussions and solutions.

The campaign’s warning of a “tsunami of expensive medicines that could literally bankrupt the healthcare system,” somehow failed to read Express Scripts' own projections for specialty meds to make up between 15 and 20 percent of total pharmacy costs for the future, just as they have for the past 10 years. This is the same Express Scripts that also recently let on to investors that its specialty pharmacy division would be its leading contributor to earnings in the future. Limiting access to history’s most innovative and valuable medical products has never looked so good.

CBO Report Offers Insights On Drug Costs
A newly released report by the Congressional Budget Office (CBO) also counters the alarmists by making clear that drug costs are down substantially because of less brand-name utilization. CBO’s July report “Competition and the Cost of Medicare’s Prescription Drug Program” notes that costs for 2013 were half of the original projections, largely because there has been substantially more generic utilization than initially projected. CBO attributes a combination of greater patent expirations and fewer launches of new drugs. The new Medicare trustees' report even has lowered its drug cost trend for the next 10 years.

Generic utilization in Part D shot up from 67 percent in 2007 to 78 percent in 2010 and has likely climbed higher since. In addition, Part D plans were brutally efficient in forcing generic switches when they were available — increasing the generic fill rate from a marketwide average of 72 percent in 2002 to 90 percent in Part D by 2007 to 2010.

As a result, beneficiary prescription premiums have remained virtually unchanged in the last four years. CMS proudly notes that in plan years 2011 through 2014, premiums have held steady at about $30 to $31 a month even while absorbing the costs of filling in the “donut hole” for beneficiaries with substantial drug costs.

So what is the motivating factor of all this outlandish talk? On the same week that CBO and CMS released data showing success of the Medicare Part D program, the left-leaning Medicare Rights Center issued a report calling for “Better Prices on Prescription Drugs,” which included four proposals:

  1. Impose Medicaid rebates — aka price controls — on Medicare drugs provided to low-income beneficiaries.
  2. Allow Medicare to “negotiate prices” for a new public Part D option.
  3. Increase manufacturer discounts in the “donut hole.”
  4. Establish price controls for Medicare Part B drugs administered in physician offices by using “least costly alternative” reference prices

Oh, one more point the CBO report made about price control regimes like those advocated by the Medicare Right Center: “Firms would respond by curtailing drug innovation.”

Let’s hope a new Congress can address the vexing problems afflicting the healthcare system while allowing programs that are clearly working effectively to continue without ideological intervention that have no empirical basis.