In words of Gordon Gekko from the 1987 movie “Wall Street:” “Greed is good.” While that might be true if you’re on Wall Street, it is clearly not good if you are a drug manufacturer.
That statement may be somewhat an exaggeration, but in the pharmaceutical industry, it’s clear that there are examples of companies that went too far with their pricing strategies. Over the past few years, we have seen multiple news articles outlining the pricing practices of certain companies that have instituted dramatic price hikes, notably Touring Pharmaceuticals (Daraprim) and Mylan (EpiPen).
Many of these practices bring us to where we are today, with an administration and an FDA that is planning to increase competition to drive down drug pricing. Every day, we read more information outlining the various potential strategies being considered to get drug pricing under control. Upon reviewing the various alternatives currently being raised, one wonders if those professing these ideas have truly evaluated drug pricing trends?
A recent article published in Forbes by Wayne Winegarden (senior fellow in business and economics at the Pacific Research Institute and the Principal of Capital Economic Advisors) demonstrated some interesting trends in drug pricing. According to the Winegarden’s article, over a 12-month period ending October 2018, overall consumer prices grew 2.5 percent. The growth in medical costs over the past 12 months was slightly slower: medical costs grew 1.7 percent, and the growth in prescription drugs was even slower than that at 0.8 percent..
Further, according to the pricing data for medicines collected by IQVIA, the list prices for brand medicines increased 6.9 percent in 2017. Net prices, or the actual transaction prices of the medicines, increased only 1.9 percent. Inflation in 2017 was 2.1 percent. Therefore, the growth in the actual transaction prices for medicines was less than the growth in overall consumer prices — what the CPI data also showed for 2018.
Based upon this information, the question arises: Does the pharma industry have a pricing issue, or a public relations issue?
There are multiple ideas being discussed, so let’s consider a few:
- Potential drugs to be imported from other countries including Canada.
- Adopt foreign market price controls for Medicare Part B drugs
- Price transparency
Reimportation
It seems like the discussion regarding reimportation has been ongoing since Aspirin first came to the market. As an FYI, Bayer was selling Aspirin worldwide by 1899. This practice has long been considered unviable due to inherent challenges stemming from the simple lack of controls via a secured distribution channel, (i.e., track and trace). In today’s environment, a system lacking in the necessary product/inventory controls cannot be confidentially trusted to ensure FDA approved, unadulterated products via a secured, trackable, distribution channel.
Foreign Market Style Price Controls
This again is not a new idea, but one for which no one has provided a viable, acceptable, workable model. Further, one of the true characteristics of the U.S. pharmaceutical market is innovation in and around new product development. Assuming it takes significantly more time for a company to develop a viable ROI, and conversely a much longer time for investors to see a return, will there be a movement of monies currently invested in pharmaceutical product innovation to other markets? And, if there is less innovation, leading to less competition, could this actually lead to more expensive medications?
Price Transparency
Price transparency bills require drug manufacturers, health insurers, and PBMs to provide price transparency and increased access to more generic drugs. Certainly, increased access to generic drugs is positive and has historically proven to be a cost-effective way to lower overall drug cost. Therefore, the Administration and FDA’s stated goal of creating a timelier generic drug review, thereby reducing the number of cycles of review that generic applications typically undergo, should yield a positive return.
The challenge is that currently approximately 86 percent of the prescriptions filled in the U.S. are generic, representing 24 percent of the dollars. Therefore, while there is certainly room for generics to make up even more of the pie related to the number of prescriptions, it is less likely that generics will make up much more of the dollars. In fact, it is more likely that the discrepancy will continue to grow — in that the fill rate for generics will remain very high while the dollar sales represented by generics will decrease. This will be driven by the fact that as more specialty drugs hit the market, the disparity between low-cost generics vs. the higher-cost specialty medications will be more dramatic. This means that branded pharmaceuticals will represent a growing component of the total drug spend.
Another ongoing discussion point regarding price transparency is related to the relationship between a pharmacy benefit manager (PBM) and an individual health plan. Potential price transparency considerations requiring PBM’s to disclose pricing they receive and to disclose the amount of rebate dollars that flow down to the individual payer can be captured in a word: problematic.
This is problematic for a few reasons: First, the amount of rebates provided to an individual plan is a confidential matter between the PBM and the plan, and is highly negotiated in a way that is supposed to align incentives so that both parties win. This therefore maintains an acceptable level of projected impact on cost (i.e., acceptable increase, flat or decrease).
Further, having sudden open transparency may jeopardize the current PBM-payer rebate model — a dramatic shift for which the industry is ill prepared. And while we can all argue why that might be of interest, the elimination of rebates must be balanced with an alternative methodology that enables continued value to be provided to payers and patients, and cannot simply be stripped from the current market, given the current market alignment of rebates between the PBM and the payer.
Other Factors
One issue driving increased cost in pharmaceuticals is, as previously noted, the continued FDA approval of high-cost products. This is not a bad thing, per se. Certainly, these products bring tremendous value to patients and an outright cure for certain diseases such as hepatitis C, which was historically unheard of.
That said, it is no secret that specialtyclasses such as autoimmune,oncology,andnewbrandHIV antivirals, are driving spending growth in the specialty segment. In addition, there are new approvals in the area of gene replacement therapy (GRT) that will even more dramatically impact the cost differential between generics, traditional branded pharmaceuticals and specialty medications. While these types of products represent cosmic changes to patients, they will most certainly come at a high price.
The final element is, of course, the aging population. As the population continues to age, the demand for pharmaceuticals will continue to grow. From the group that once bragged, “40 is the new 30,” there will be a growing demand for products that enable a longer and more active lifestyle.
Regardless of individual perspective, the attention to drug pricing from both the Administration and the FDA will be intense, and there are no ready-made answers. In a more classic marketing sense, there has long been the premise that buyers look for three things: quality, service and price. Sellers try to convince the buyer that two of the three elements can be provided without too much impact on the third.
Contrast this model to the pharmaceutical marketplace. There are similarities in what the various stakeholders will demand: a) quality via a safe and secure drug supply; b) service with continued innovation for new technologies; c) a price that both reflects relative affordability at the plan level, and strikes a balance between the questions of: ”Can I make this product available?” and “Can I afford the co-pay/co-insurance associated with this product?”
The question will be if these three can stand together or if the industry is forced to pick between just two.
