The ‘Blueprint’ to Control Drug Prices: A Quick Guide for Manufacturers

With regulatory measures related to drug prices and rebates supported by both sides of Congress, manufacturers should be prepared for new challenges.

By Dean Erhardt, President and CEO, D2 Consulting

President Trump’s “blueprint” to rein in staggering prescription drug prices offers four broad strategies: increased competition, better negotiation, incentives for lower list prices and lower out-of-pocket costs. The plan also includes immediate actions that will be carried out by the U.S. Department of Health and Human Services (HHS).

These actions include making drug prices and price increases more transparent to consumers; approving a greater number of similar but cheaper biologic products; and giving Medicare Part D plans leverage to negotiate prices with manufacturers, for example, by giving them latitude to remove drugs from their formularies.

moneySome of the blueprint actions can be carried out immediately. Medicare recently published an updated drug pricing dashboard, and the U.S. Food and Drug Administration has published a list of manufacturers that do not share samples of their products with generic drug makers to block them from making cheaper versions. But most of the actions require agencies to issue and finalize regulations and will take longer to implement.

In this increasingly complex environment, pharmaceutical manufacturers are responding to health payer demands for value-based contracting. With potential regulatory changes related to drug prices and rebates supported by both sides of Congress, manufacturers should be prepared to address such changes. 

Tackling High Costs and Other Trends

While many regard these federal actions as a step forward, manufacturers continue to face the high and often hidden costs of commercialization, including compliance with clinical trial requirements, rising FDA fees and approval timeframes, as well as costs tied to achieving market access and reimbursement. Collectively, these factors add to the cost of bringing drugs to market.   

Launching a new therapeutic product is challenging, expensive and leaves no room for error. That’s why it’s important to enlist resources that reflect deep expertise and experience to ensure that a therapies distribution footprint and reimbursement strategy is optimized for commercial success on day one. This requires a customized but comprehensive approach to managing each phase of the distribution and commercialization process.

Furthermore, pharmaceutical manufacturers continue to grapple with the costs of distribution and FDA mandates related to safety, REMS, patient monitoring and physician monitoring, and supply chain. The federal government makes no provision to ease these hidden costs to make drug manufacturing more affordable.

In addition, and interestingly, on May 29, 2018 the Wall Street Journal published an article entitled, “Are Big Clinical Trails Relevant? Researchers Disagree.”  While we will not debate the merits of one pathway vs. another, it’s not debatable that for specialty medications, lowering the cost of getting to market, particularly with smaller, nimble trials that are tailored to a patient’s genetic make-up should A) lower the cost of getting a product to market and B) lower the cost to the healthcare system by enabling lower drug pricing vis a vis lower overall investment cost.

Some key industry trends to keep in mind while analyzing, planning and addressing short- and long-term challenges:

Outcomes-based Contracting

Outcomes-based contracting could lower overall costs in certain disease categories. This approach ties potential rebates and discounts for expensive pharmaceutical products to the outcomes observed in the patients who receive them.

For purchasers, such as insurers and healthcare systems, this approach could improve value. Under such contracts, purchasers often pay more for a drug when it proves to be efficacious — and less when it is not. The fundamental question for value-based contracting must be the potential impact on outcomes. As the industry grapples with the price vs. cost argument we will need to find clarity regarding the fact that better, more efficient outcomes will by default drive down cost. Effectively, an efficient system enabling healthy patients should result in lower overall healthcare costs. Under an outcomes-based contract between a pharmaceutical manufacturer and a payer, reimbursement for a drug is based in part on measurable outcomes of the drug’s use in a patient population.

The value based model is similar to a tiered pricing or rebate structure: Instead of the payer covering all prescriptions at a single price, the initial price remains if a specified percentage of patients achieves a predetermined outcome. When the outcome threshold is not met, the manufacturer refunds some of the original price to the payer. 

Regulation changes in Medicare allow this, but making sense of the data requires expert guidance for both the pharmaceutical company and payer in combination with a system that supports appropriate tracking and measurement requirements.

Advantages of J-Codes for Biosimilars

The Centers for Medicare & Medicaid Services (CMS) has begun issuing unique Healthcare Common Procedure Coding System (HCPCS) codes, also known as J-codes, to individual biosimilar products. This change helps to ensure a robust, competitive biosimilar market by increasing the potential for innovation while lowering the risks associated with developing and marketing these complex products.

The coding change may also help reduce concerns about providers who might prescribe biosimilars, which could prompt them to continue prescribing reference drugs instead of biosimilars.

The challenge for the biosimilar products, however, will be adoption. Particularly when innovator products may immediately provide a discount to the market, effectively matching the biosimilar price, thereby maintaining market share, albeit at a lower price. 

A vigorous U.S. marketplace is critical to spur innovation that meets the expectations and needs of American patients, and even more important given the costs savings potential that they represent. In fact, a RAND Corporation study suggests U.S. savings of $54 billion from biosimilars over the next decade, with most savings passed on to patients and taxpayers in the long run.

The new system could also increase awareness and adoption of biosimilars, in general, because more manufacturers would contribute to provider and patient education initiatives to drive long-term uptake and adoption of biosimilar products.

Hopefully, as the market for biosimilar biological products continues to evolve, CMS will continue to reassess its reimbursement policies with an emphasis on supporting patient access while incentivizing biosimilar development, innovation, and value.

A Fee-For-Services Payment Model may Help the System

Fee-for-service is a payment model where services are unbundled and paid for separately. In healthcare, it gives an incentive for entities such as physicians, specialty pharmacies and others to provide appropriate activities. Effectively this model should incentivize an entity to provide the correct services that are needed for appropriate patient care. This is different than many historic models which created an inverse incentive for certain entities by creating a system where the entity only got paid what a drug was dispensed. Clearly this model has the potential to provide an incentive to push more product out the door, when other, alternative care models may be a viable alternative. 

In addition, having reimbursement tied to product sales may incentivize entities to focus on selling more expensive products. That said, the FFS model still has concerns given that payment is dependent on the quantity of care, rather than quality of care. Evidence of the effectiveness of pay-for-performance in improving healthcare quality is mixed, and without conclusive proof that these programs either succeed or fail. As such, these models must be tested to ensure that they are developed and measured in the clinical outcomes attained.  

Position of 1 vs. 2 drugs in Medicare part D Does Little for Negotiation and Lowering Costs

Those in favor of giving the Health and Human Services Secretary the authority to negotiate drug prices on behalf of millions of Medicare beneficiaries believe this would provide the leverage needed to lower drug costs, particularly for high-priced drugs with no competition.

On the other hand, opponents believe that price negotiations would limit the ability of pharmaceutical companies to invest in R&D.

If we use the traditional contracting efforts used by Pharmacy Benefit Manager’s (PBM) and payers as an example, the more competitive a product category the more significant the discounts demanded from the manufacturer.  While this is not an ideal system, as manufacturers need to price products with the anticipation of providing significant discounts, it is a model that can benefit Medicare in the short run. In the long-term, I would challenge the industry to move continually to an outcome-based model whereby incentives are aligned to make patients healthier, not simply play price and discounting shell games.

Average Sales Price (ASP) Mandates and 340B Mean More Reporting Requirements

The CMS has mandated a significant reduction in 340B reimbursement of hospitals from ASP plus six percent to ASP minus 22.5 percent. The payment reduction impacts the roughly 45 percent of all U.S. hospitals that participate in the 340B Drug Pricing Program. One study concluded that 85 percent of 340B hospitals will see overall net payment increases in 2018. Rural hospitals will benefit the most because 80 percent of them are exempt from the 340B cuts yet will receive the increases in non-drug Part B reimbursements.

While the latest proposal from the White House could help make drugs more affordable for patients, others would disrupt coverage and limit patients’ access to innovative treatments. No matter the impact, the industry is in a state of flux. Emerging and established pharmaceutical, biopharmaceutical and medical device manufacturers must stay on top of trends to develop and execute effective initiatives that ensure a successful launch, distribution and reimbursement strategy to survive and thrive in today’s marketplace.

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