It is never a good sign when reputational polls show that your industry ranks below lawyers and oil and gas tycoons, but according to the experts at Gallup, that is squarely where the pharmaceutical industry finds itself today1. Gallup’s score for the pharmaceutical industry is net negative 23 points. It’s hard to overlook the irony that biopharmaceutical companies exist to extend and improve lives, but are among the most poorly regarded by American citizens. However, reputation is not the only risk industry faces. The greater peril is near-certain regulatory action on drug pricing coming rapidly into view on the horizon.
Sorting the Signal from the Noise
Campaign trail promises and populism in favor of lower drug prices have spawned a raft of policy proposals from the administration, individual states, and potentially Congress. The decibel level has alarmed biopharma executives, and many are now wondering: Is this a real signal of policy shift, or simply political noise? How does it impact my portfolio and pipeline, and most importantly—what should we do about it?
Not all the proposals will convert into policy, of course. Many ideas will hit the cutting room floor. That means there is an opportunity for industry, advocates, providers, and investors to help shape the debate. Forecasting administration policy is an imprecise science, but below we identify imminent policy shifts and actions the industry should be taking now—beginning with a well-calibrated effort to dispel myths and spell out the facts.
Cost contributors: For years, industry trade groups argued the focus on drug pricing is misplaced in debates about escalating healthcare expenditures. It’s true that, at 18.9%, the spend on pharmaceuticals is significant, according to the Healthcare Cost Institute, which tracks the health spend of Americans in employer-sponsored health plans. However, that amount has remained relatively flat in recent years. Meanwhile, expenditures on health professional services increased significantly, rising to 33.6% of individual healthcare spend. In-patient and out-patient services collectively account for 47.5%.2
Populism driving perception: Last summer, a Kaiser Family Foundation Tracking poll found that 8 in 10 Americans believe drug company profits are a “major reason” people’s healthcare costs were rising.3 Yet, in the same tracking poll this February, most people said it’s easy or very easy to afford prescription drugs.4 On the surface, these contradictory findings suggest people are blaming drug companies for a problem they don’t have, but in truth, some patients genuinely struggle to afford medicines. Others may not understand the factors driving national spending or may be influenced by intense media coverage of price increases.
Healthcare cutting into disposable income: Data indicate that while Americans’ total healthcare spend increased by 4% in 2017, the per capita gross domestic product (GDP) increased just 3%.4 Accelerating healthcare expenditures are likely outpacing salary growth and hitting disposable income harder. Cost-sharing measures being instituted by commercial payers and unexpected hospital bills add to the pain—especially for American seniors who face greater financial exposure to cost sharing and gaps in the donut hole just as they are seeking access to more sophisticated medicines.
What’s on the Table?
Regardless of possible inconsistencies underlying constituent views, policymakers on the right and left find healthcare costs—and drug costs especially—a rallying cry. This has triggered a torrent of proposals, some of them brandished behind closed doors. One idea is to use third-party arbitrators—to set a price if the company and Medicare cannot reach an agreement. A candidate could be The Institute for Clinical and Economic Review.
But ideas like this will sink or sail based on rule-making requirements, feasibility, and the make-up of Congress. Here are five hot proposals and potential implications:
1. Proposal: Drug Importation
Terms: Senator Sanders (I-VT) proposed legislation on importing cheaper medicines from Canada and the President has remarked about importation when campaigning.
Required to become policy: HHS already has the power to import drugs in shortage situations.
Implications: Importation laws are unlikely. They create additional oversight burden on the FDA, and pharmaceuticals would likely minimize additional drug supply to Canada to prevent extra capacity if informal importation was encouraged.
2. Proposal: List prices in direct to consumer (DTC) advertising
Terms: Last fall, CMS proposed including the monthly list price of all medicines paid for Medicare and Medicaid in DTC advertising. The rule would apply to therapies with list prices >$35 per month.
Required to become policy: The policy, if finalized by CMS, is sure to be challenged in the court of law on terms that it is compelled speech, violating the First Amendment.
Implications: Critics argue the list price is misleading, because it does not reflect the actual costs patients pay following discounts and rebates. Regardless, this ship has sailed. Large pharmaceuticals seeking to get ahead of regulation have updated ads and launched websites explaining the average out-of-pocket expense most commercially insured patients pay. Expect to see this trend continue—with some refinement over time to be more consumer-centric.
3. Proposal: International price index (IPI)
Terms: The policy pits drug prices paid for under Medicare Part B to a basket of drug prices in 16 OECD countries. Additionally, physicians would receive a smaller percentage payment to administer Part B drugs.
Required to become policy: CMS is setting this up as a pilot to roll out by 2024, but the final pilot language is still pending, following a public comment period. Don’t be fooled by the term “pilot.” If it proceeds, it will impact half the nation.
Implications: Specialty medicines administered or monitored in-office would feel the pain of this pilot. But, the law of unintended consequences is likely to prevail here. If we adapt the IPI, odds are that manufacturers may change strategies to avoid revenue loss, such as increasing drug prices in the comparator countries or halting manufacturing in the EU all together.
4. Proposal: Change Safe Harbor protections to pharmacy benefit manager (PBM) rebates
Terms: Health Secretary Alex Azar proposed a rule that Medicare and Managed Medicaid should no longer enable rebating for drug formularies unless the rebate is directly passed to consumers at the point of sale. A second rule would require PBMs to take a flat fee reimbursement from manufacturers instead of the prior model which used a percentage of the drug’s list price.
Required to become policy: CMS has the authority for this rule-making. To address the concerns of payers and PBMs, CMS Administrator Seema Verma has told PBMs to plan as if rebates will be in place for 2020, and if the rule goes into effect that year, the government will absorb 95% of the risk for participating PBMs.
Implications: Pharma has long fought rebates, which perversely incentivize manufacturer list price increases to maintain formulary status. With new rebate policy on the horizon, all eyes will be on the industry to not raise list prices. And, while this change applies to Medicare and Managed Medicaid, the question is whether the same reforms will take root in commercial plans.
5. Proposal: Transitioning drugs from Medicare Part B to Part D
Terms: Drugs administered by physicians in the outpatient setting historically didn’t undergo price negotiation as is conducted in Part D. The administration proposes changing this to force more free-market competition for these specialty medicines, with the goal of reducing prices.
Required to become policy: The administration has enabled plans participating in Medicare Advantage to transition Part B drugs to the Part D benefit, but HHS requires that a majority of savings be passed to plan members. HHS may also allow Medicare Advantage to apply step edits for these drugs.
Implications: Many specialty medicines, including oncologics, may see increased price pressure. Some studies indicate that certain Medicare patients may pay less in drug out-of-pocket costs, but more in cost-sharing. Drug makers, provider, and many patient groups are opposed to the move.
What Should the Industry Do?
Finding consensus across the entirety of the biopharma industry can be a challenge, but one that must be addressed. In the lead-up to yet another polarizing election cycle, companies should put energy behind ideas that address patient subsets and disease states experiencing the greatest affordability challenges. Sample ideas include:
- Partner with CMS for Patient-Centric Reimbursement Design. Unlike the FDA, which has embraced patient-centric drug development, the culture of CMS remains relatively opaque to patient advocates. Industry, along with advocacy groups, should partner with CMS to create co-informed reimbursement programs for the emerging medicines that drive professional services and drug costs. This is especially critical when new treatments like gene therapies and CAR-Ts upend traditional payment models.
- Transparent price justification. The era of taking “silent” price increases is over, especially when the increment exceeds the consumer price index and is not supported by new data. Manufacturers should commit to avoiding hikes outside these parameters, while articulating the rationale behind pricing of existing and new medicines. Some companies are dabbling with public-facing reports already, but few have found an effective way to communicate such information in patient-centric terms.
- Partner with insurers. Too often developers see payers as the obstacle. Yet, recent moves by insulin makers and Cigna and Express Scripts are a positive example for potential collaboration. Those companies put a ceiling on the price of insulin, with the aim of passing rebate savings directly to plan members. As insurance design evolves, manufacturers will need to partner with insurers and advocates to educate Americans on right-sized plans for their healthcare needs.
- Support generic innovation. The industry should embrace incentives for generic innovation such as extending the length of non-compete protections in categories of high need and cost burden.
There is no silver bullet to addressing drug pricing, but clearly, we need pragmatic, middle ground reforms that address the subsets of patients who are most exposed. Healthcare drives nearly 20% of the nation’s gross domestic product and underpins many retirement fund portfolios. Decapitating an industry that accelerates our nation’s economic and innovative edge is unwise and could create a host of new, unintended consequences that have different, but equally painful, consequences to American citizens.