By John McManus, The McManus Group
“There is no terror in the bang, only in the anticipation of it.” – Alfred Hitchcock
As the midterm elections approach, with the trajectory pointing toward increasing likelihood of the Democrats taking control of the House of Representatives and with each Trump tweet on drug pricing, a feeling of foreboding has settled over the pharmaceutical industry.
House Democrats have chosen drug pricing as one of the few substantive issues to campaign on, believing that their energized but fractured based needs little other motivation to recapture a key branch of government. In the August recess packet Democrat Leader Nancy Pelosi (D-CA) sent home with her members, point one said: “Our closing argument: For the People” is lowering your health costs and prescription drug prices.
The packet includes a sample Op-ed, stating: “At the core of our proposal is holding Big Pharmaceutical companies accountable — ensuring they cannot excessively raise prices on American customers without justification.” It goes on to call for Medicare negotiation of drug prices, the establishment of a new enforcement agency to investigate price increases, and a new requirement for companies to submit justification of any price increase 30 days before it takes effect.
Democrats need to win 23 seats to take control, and 56 Democrat challengers outraised Republican incumbents last quarter (compared to just three Republican challengers outraising Democrat incumbents), a bad harbinger for Republicans. Sensing the coming storm, 26 Republicans have announced retirements compared to just eight Democrats. Open seats are always easier to win than unseating a known incumbent.
Since the end of the Civil War, the president’s party has lost House seats in 92 percent of midterm elections. When presidential approval ratings sink below 50 percent, his party has lost two dozen or more seats in the House. President Trump’s approval ratings have averaged 40 percent, though they dipped to a worst-yet 34 percent approval and 61 percent disapproval last week.
IS PHARMA FACING A PERFECT STORM IN 2019?
Combine the rising “blue wave” — the Democrat fixation on pharmaceutical pricing — with President Trump’s populist focus on getting credit for cutting patients’ drug costs, and the industry could be confronting a perfect storm in 2019.
President Trump was reportedly irate when pharmaceutical stocks rose on the announcement of the administration’s drug-pricing blueprint. Since then, he has tweeted angry reactions to announced price increases.
On July 9, he tweeted “Pfizer and others should be ashamed they have raised drug prices for no reason. They are merely taking advantage of the poor and others unable to defend themselves, while at the same time giving bargain prices to other countries in Europe and elsewhere. We will respond.”
But the tweet that sent chills down pharmaceutical executives’ spines came from Health and Human Services Secretary Alex Azar, underscoring Trump’s tweet was not merely a bid to blow off steam and distract from some other crisis. Azar tweeted: “Those who increased prices will be remembered for creating a tipping point in U.S. drug policy. The President’s noticed, I’ve noticed, but more importantly the American people noticed. Change is coming to drug pricing, painful or not for pharmaceutical companies.”
The next day, Trump tweeted, “Just talked to Pfizer CEO and Secretary Azar on our drug-pricing blueprint. Pfizer is rolling back prices so Americans don’t pay more. We applaud Pfizer for the decision and hope other companies do the same.” Turns out Pfizer merely delayed price increases until the blueprint goes into effect or the end of the year, but the action showed that Trump could flex his muscles and obtain results from an industry thrown back on its heels.
Several other companies followed with pricing pledges of their own, some more symbolic than others (like Merck’s announcement to substantially cut the price of a product that had no sales).
The actions prompted Finance Committee Ranking Member Ron Wyden (D-OR) to inquire in a letter to Secretary Azar whether the President and Secretary had violated the “noninterference” clause in the statute, which prohibits secretarial interference with negotiations between Part D plan sponsors and pharmaceutical manufacturers. Wyden has been a proponent of repealing that controversial provision.
Pharmaceutical companies anxiously pondered whether having tasted their blood, Trump found the negotiations and taste of their flesh enjoyable. Would he be back for more if prodded on by a new Democrat majority? As the business community has witnessed in regard to trade policy, Trump has shown himself to be unmoored by traditional Republican, market-oriented approaches to policy.
Causing further angst is the pending retirement at the end of the year of Finance Chairman Orrin Hatch (R-UT), a powerful ally of the industry, thereby removing a key backstop in the Senate to troublesome policy coming from the House. If Republicans hold the Senate (which seems likely), the Finance Committee will be helmed by either Senator Charles Grassley (R-IA), a populist, or Senator Mike Crapo (R-ID), who has not shown much interest in health issues.
For the remainder of the year, the administration will be rolling out detailed proposals emanating from their drug-pricing blueprint. Most notable was the announcement by the Office of Inspector General (OIG) that it has sent its proposal to repeal and replace the current safe harbor from the antikickback statute, which permits manufacturers to provide rebates to pharmacy benefit managers negotiating for Part D plans. The OIG has historically operated independently of the political leadership in the agency.
A detailed proposal should be forthcoming in a matter of weeks, and both the PBM and pharmaceutical industries are preparing to adapt to changes to an industry negotiating structure that has become ingrained.
Secretary Azar and many health economists believe the current system rewards high list prices and results in patients paying exorbitant out-of-pocket costs that do not reflect the price concessions provided by manufacturers through retrospective rebates. Underscoring that point is data showing that expenditures for high-cost enrollees — those who reach the catastrophic coverage phase of their Part D plans — rose at an annual rate of 10.4 percent between 2010 and 2015, while the average expenditures of the remainder of enrollees declined by an average of 2.1 percent each year during that period.
PBMs and health plans have warned that converting rebates into front-end discounts could raise premiums. But CMS’ recent announcement that Part D premiums will actually decline by $1 a month next year may provide them some room to make adjustments and assist those with higher costs.
Since the initial pricing brouhaha on July 9, Secretary Azar issued a flurry of nearly a dozen tweets about drug pricing and various actions the administration was taking to make headway on the issue. The industry now awaits administration action-pending blueprint items including narrowing Part D formularies, reforming payments for physician-administered drugs in Part B, and the recommendations from a newly created task force assigned to develop a reimportation proposal for generic drugs that lack competition and have seen big price increases.
They hope that tortured anticipation of what may come is worse than the impact of the actual policy.
John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his master of public policy from Duke University and bachelor of arts from Washington and Lee University.