Drug pricing took center stage in Congress last Tuesday. It’s one of two issues, along with protections for pre-existing conditions, about which there’s bipartisan agreement in Congress that action is needed. It comes at a time when confidence in government (33%) is at an all-time low (Gallup).
LEGISLATIVE ATTENTION
The Senate Finance and the House Oversight Committees heard testimony from patient advocates, think tanks, academics and executives from two drug manufacturers. Members heard about the need for limits on direct-to-consumer drug ads, changes to drug patents and exclusivity periods, the secretive role of pharmacy benefit managers, Medicare’s flawed Part B payments to specialists tied to a percentage of the drug’s price, the need for modernizing the Medicare Part D prescription drug discount program, allowing Medicare to buy drugs directly from manufacturers instead of through private payers and the overall lack of competition among drug companies.
Few new ideas surfaced. Sen. Bill Cassidy (R-LA) suggested a “NetFlix” model whereby government/private insurers pay a flat fee to make specialty drugs available to specific patient groups, like those with Hepatitis C. But as Congressional hearings go these days, partisan bickering was tame. Members in both parties think drug prices are too high. They believe the industry is guilty of price gauging and action is needed.
Friday, the U.S. Department of Health and Human Services announced its intent to suspend rebates negotiated by pharmacy benefits managers with drug companies that are shared with insurers. It’s a continuation of HHS Secretary Alex Azar’s pledge to lower drug prices laid out in his four-part strategy: (American Patients First May 2018):
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Improved competition, including preventing manufacturers from gaming the system (pay to delay et al), making the science for biologics more accessible and others.
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Better negotiation, including strengthening negotiating position in Medicare Parts B and D, integrating drug utilization more directly in value-based purchasing programs and others.
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Incentives for lower list prices including increased accessibility to list prices, evaluating the roles of pharmacy benefits managers and rebate programs, reforms to the 340B drug discount program and others.
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Lowering out-of-pocket costs, including provisions whereby pharmacists are allowed to advise patients about possible ways to lower their out of pocket costs, improvements in information provided to Medicare Part B and Part D enrollees and others.
Augmenting federal efforts, at least half of the state legislatures have introduced or passed laws to limit drug prices, impose new pricing transparency requirements on manufacturers and limit direct to consumer advertising.
The jury’s out on the effectiveness of the measures proposed by Congress, HHS and states but it’s clear drug prices are in the cross hairs of policymakers. In many respects, it’s unwelcome attention for the $477 billion U.S. biopharmaceutical industry.
MARKET ATTENTION
Drug spending is 10% of U.S. health spending: that’s been the case for a decade. But what’s changed is the attention paid to the industry’s business practices and sticker shock for many of its specialty drugs. In response, key stakeholders across the industry have intensified efforts to expose the secretive relationships in the biopharmaceutical industry and lower their own drug costs. Some examples:
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Insurers and employers are promoting outcomes-based contracts for prescription drugs and tightening their formularies so that medication management is more tightly controlled. They’re developing best practices for prescribers and increased patient adherence. Total spending for prescription drugs will likely hover at 10% of total health expenditures for the foreseeable future, but new drugs like the 8 biotherapeutics and novel therapies for rare diseases will carry high price tags.
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Hospitals and medical groups are hiring specialists to zero in on their drug procurement, medication management and patient adherence monitoring activities. Per Huron, savings of 3-5% is possible in a hospital where contracts are appropriately structured and integrated appropriately in care coordination. Going further, 12 health systems have launched CivicaRx, a not for profit generic drug manufacturer, in 2018. They plan to release 14 drugs in 2019 (www.civicarx.org).
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Retail pharmacy chains are integrating primary care, prescribing, over-the-counter alternatives and lifestyle coaching to reduce their drug costs and improve population health for insurers, employers and government programs like managed Medicaid, Medicare Advantage and others. In many cases, they’re implementing strategies to replace prescription drugs with sustainable lifestyle changes.
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Prominent print, broadcast and social media channels are investing in coverage that illuminates how the U.S. drug industry operates and exposes alleged price gauging/misdeeds by manufacturers like Turing, Mylan, Valeant, Purdue and others.
Common to these efforts by policymakers and market stakeholders is a growing chorus in the “blame and shame” game confronting drug manufacturers, distributors and pharmacy benefits managers. Is it fair?
FACTS AND PERCEPTIONS
The same day as the hearings last week, the Pharmaceutical Research and Manufacturers Association (PhRMA) ran this online notice in Politico:
“Due to robust market negotiations, retail medicine costs grew just 0.4% in 2017—the slowest rate in 5 years. And a new government study found medicine prices fell 2.8% last year. Unfortunately, it doesn’t feel that way for you. Forty percent of a medicine’s list price is given as a rebate or discount to the government and middlemen, like insurers and pharmacy benefit managers (PBMs). These rebates and discounts exceeded $150 billion, but insurers don’t always share these savings with you. Learn more at LetsTalkAboutCost.org.”
It reflects manufacturers’ awareness that it’s game on. Drug makers do not intend to be victims. They assert they’re misunderstood and unfairly targeted. The facts are these:
Prescription drugs work for most patients most of the time
Prescription drug efficacy is complicated: in pharmacology, it’s the degree to which a specific medication delivers the desired therapeutic benefit. Drug efficacy is calculated in controlled trial settings; drug effectiveness measures the therapy’s outcome after it’s been used by patients—the real-world result. What we know is that efficacy for any class of drugs is rarely 100% and effectiveness is hard to measure. Research has also shown that medication adherence i.e. less than 50% take meds as directed complicating matters. Researchers agree that improvements in cancer mortality, life expectancy and others societal benefits can be attributed to the efficacy and effectiveness of the medications used by 60% of the population. Most drugs work for most patients but not or all.
The prescription drug market is global, large, profitable and growing
The global market for prescription drugs is expected to grow at 6.4% annually increasing from $830 billion revenue in 2018 to $1.204 trillion in 2024. (Evaluate Pharma 2018). The industry was prominently represented at the Davos World Economic Summit last month by its financial performance- $934.8 billion in global worth, with 5.8% forecasted annual growth by 2021. Couple that with 20% routine profit margins makes the sector very attractive to investors. (The Business Research Company)
The U.S. market is important to the industry. It’s big and influential but its growth is slowing
U.S. spending for prescription drugs accounts for 56% of global spending in the sector. It is expected to increase 5.4% annually through 2024 and remain 10% of total U.S. health spending. Payments by government (federal, state and local) will constitute 47% of the total, up from 45% today; and payments from private sources (employers, individuals, private insurers) will decrease from 55% to 53%. (CBO) Even with increased spending forecasted, there’s more to the story as growth through 2022 will be inhibited by several factors:
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Outflows started to slow as a result of expiring patents in 2016-2017, a trend that should continue for the next few years, with 2020 expected to bear most of the brunt.
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Slower than normal new drug growth as compared to the previous 5 years 2013-2017
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Modest growth in branded drug prices of anywhere between 2-5% per year
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Lower than normal sales volumes in both generics and branded medication
Of the 7000 drugs in development worldwide, 4000 are being investigated by U.S. manufacturers and only 12% will get to the first stage of clinical trials (Ardis). Six of the world’s biggest drug manufacturers are U.S. based. It employs 2.4 million (direct and indirect), spent $280 million on lobbying activity, $70 billion on R&D (Berkeley Research, IQVIA) and $6 billion advertising its brands directly to consumers last year. And it is profitable: according to the U.S. Government Accountability Office (GAO), the industry’s profits in the U.S. market have reached 20% in the last decade (Forbes). But notably, much of the industry’s profits are in drug distribution and pharmacy benefits manager—sectors that do not have the capital requirements nor drug discovery risks of manufacturers. So, the U.S. remains the industry’s most important market and will continue to be the epicenter for drug discoveries that benefit the world. But inside the biopharmaceutical industry, tension is building between manufacturers, distributors and PBMs as margins are pressured.
Consumers trust their drugs but distrust manufacturers
Three in five Americans take prescription drugs. American spend $800 per person per year for prescription drugs. They believe the drugs they take are safe and effective. They trust pharmacists as much as their physicians (Gallup) but blame drug manufacturers for price gauging. (Kaiser Family Foundation, Deloitte). Ironically, manufacturers bear the brunt of the public’s contempt when distributors and pharmacy benefits managers, whose operating margins are higher, share responsibility. Media coverage of alleged price gauging by Turing, Mylan, Valeant and others contributes to the public’s growing contempt for drug manufacturers. Disdain for distributors and PBMs is a non-issue since most consumers do not understand their role or the economics of their businesses. Distribution is a highly consolidated sector: the 3 major distributors control 71% of the domestic market. PBMs are being absorbed by insurers and retail giants: recent deals including UnitedHealth Group and OptumRx; CVS-Aetna and Caremark, Cigna and Express Scripts, Anthem and IngenioRx and others reflect growing recognition of the financial attractiveness embedded in the drug industry’s “middlemen.” And each of these sectors flies below the radar to consumers.
Drug prices have increased faster than other health costs, but prices are misleading
In the United States, drug prices overall are forecasted to increase at roughly the same rate as overall healthcare spending. However, the price you’re charged at the pharmacy will only tell you so much: of $100 in gross spending for prescription drugs, manufacturers keep $63. Rebates and discounts reduce actual prices by up to 30%. And the profitability of each drug varies widely depending on the size of its market, its contractual relationships with distributors, pharmacy benefits managers and insurers, retailers and others. It goes without saying that drug pricing is far more complicated than it appears.
MY TAKE
For drug manufacturers, this is not a new fight. They’re a convenient target for public frustration about healthcare affordability, especially among those with high deductible insurance plans and those with rare conditions. Their co-conspirators—pharmacy benefits managers, distributors and retailers—draw substantially less public scrutiny but are gaining the attention of policymakers and key stakeholders across the industry.
In my judgement, current policies and market forces will likely contain prescription drug prices for 90% of the population’s needs. Policies like importation or price controls are unlikely given widespread voter concern about government overreach. But for 10% of the population who need specialty drugs, the story is different. Their therapies represent 50% of U.S. spending on drugs and 70% of its R&D investment. There’s no easy solution. If the industry’s much maligned Tufts’ estimate that these drugs require an investment of $2.6 billion to move from bench to bedside is anywhere near accurate, it’s unlikely their prices will decrease.
So, big questions will be on the table for the U.S. drug industry:
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How should the industry educate policymakers, voters and industry stakeholders about how it operates? Should the industry be more proactive in its transparency efforts?
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How might federal policies reward R&D and risk taking by manufacturers recognize the value of their innovations for a growing global market? Should access to U.S. therapeutic innovations be integrated in to federal trade policies more directly?
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Should manufacturers, distributors and the rest of the pharma supply chain police itself more aggressively to police the misdeeds of its outliers?
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Should the industry’s boards of directors take more accountability for price hikes that appear egregious? Should bonus plans for pharma company execs that incentivize unreasonable price hikes be transparent to the public? Can its contractual “deals” between producers, distributors, prescribers and others be more transparent?
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How should manufacturers, distributors and others in the biopharmaceutical supply chain establish credibly the value of their innovations? What’s the best methodology for measuring and pricing drugs? And should the costs associated with R&D failures, or the value of the taxpayer-funded basic research be factored into pricing by private companies?
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How should Congress encourage innovation and risk taking by companies and keep prices low? Should state policies that regulate drug prices take precedent over federal policy?
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How should the industry respond to the public’s demand for price transparency and lower drug prices? How should it behave?
Big questions! So, the Congressional hearings will likely result in few new solutions, the administration will continue to exert pressure on the industry, states will legislate solutions and industry stakeholders will double down on their drug price transparency and cost containment initiatives. That’s for sure.
Drug prices are the bull’s eye in healthcare today. Other sectors will likely follow. The biopharmaceutical industry can ill-afford to see itself as a victim nor take the public’s growing disaffection lightly.
Paul
FACT FILE
Drug Spending: In 2017, per capita prescription drug spending decreased 0.3% for the first time since 2012. In 2015, pharmaceutical spending increased 8.1% on a per capita basis and in 2014 these costs increased 11.5% as new specialty drugs came to market. Looking ahead, CMS projections suggests growth in per capita drug spending will be moderate through 2026 bringing total spending to 10.6% of total US health spending.
FDA approvals: In FY 2018, which ended September 30, the FDA approved a record 971 generic drugs—a 94% increase over 2014. But the number of surveillance inspections done globally by the FDA—meant to ensure existing drug-making plants meet U.S. standards—dropped 11%, to 1,471, in FY2018 vs. FY2017 and falling 13% FY2017 vs. FY2016 (PricewaterhouseCoopers).
Generics: 90% of the medications Americans take are generics. (PhRMA)
Medication adherence: “Taking medications is a routine for most Americans; nearly three of five American adults take at least one daily medication, and, from 2000 to 2012, the proportion of people taking five or more prescription medications doubled. But for many Americans, taking their medications according to their health care provider’s instructions is a challenge. About half of patients with chronic diseases don’t take their medication as prescribed. Medication non-adherence has important health consequences, ranging from decreased quality of life and poorly managed symptoms to death. But the implications of medication non-adherence extend beyond the individual; non-adherence is also associated with significant societal costs. Upwards of $300 billion of avoidable health care costs have been attributed to medication non-adherence annually in the U.S., comprising up to 10% of total health care costs.”
Leah L. Zullig, PhD, MPH & Hayden Bosworth, PhD “Engaging Patients to Optimize Medication Adherence” New England Journal of Medicine Catalyst May 14, 2017 https://catalyst.nejm.org/optimize-patients-medication-adherence/
Online risks: Online pharmacy startup Valisure reported that 10% of the drugs it tested didn’t have the proper amount of the active ingredient or didn’t dissolve as they should. (www.valisure.com)
Supply Chain: Per the FDA, 80% of active ingredients used to make U.S.-consumed drugs are produced outside of the country. India companies accounted for 38% of approvals in 2018, up from 33% in 2015; Chinese accounted for 8% through October 30, up from 1% (Moody’s)
Global Market Trends: (www.IQVIA.com) “2018 and Beyond: Outlook and Turning Points)”
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US drug spending was $466.6 billion in 2017 (five-year CAGR for 2013-2017 was 7.3%). Forecast: 4-7% CAGR through 2022, reaching $585-615 billion. Net per capita spending on medicines will decline in 2019 and remain relatively flat at roughly $800 per person through 2022.
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EU spending was $154.4 billion in 2017; (CAGR through 2022 is 1-4%) reaching $170-200 billion.
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Emerging markets (22 developing countries) is estimated at $269.6 billion in 2017 (CAGR of 6-9% through 2022) to $345-375 billion.
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China will slow to a 5-8% CAGR from historic double-digit growth.
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Life expectancy trends 1950 to 2018: 71.1 to 81.2 for women; 65.6 to 76.3 men (CDC)
“Strengthening Biopharmaceutical Innovation: the Growing Role of Corporate Venture Capital” October 2018 http://phrma-docs.phrma.org/files/dmfile/PhRMA-CVC-Report.pdf
Efficacy and effectiveness: 90% of drugs work in 30-50% of the people (GlaxoSmithKline Worldwide Vice President of Genetics Allen Roses). 950 meds match for 67 conditions i.e. dementia, smoking cessation, weight loss (www.ParallelProfile.com)
Adverse drug events: 350 Americans die and more than 7,400 are hospitalized due to an unexpected adverse drug reaction every day (ADR).
Notable PBM strategic alliances: UnitedHealth Group and OptumRx; CVS-Aetna and Caremark, Cigna and Express Scripts, Anthem and IngenioRx
Access to New Medications: 90% of newly launched medicines from 2011 to 2017 were available in the United States, compared to just two-thirds in the UK, half in Canada and France, and one-third in Australia. IQVIA
ADDITIONAL RESOURCES:
“Strengthening Biopharmaceutical Innovation: the Growing Role of Corporate Venture Capital” October 2018 http://phrma-docs.phrma.org/files/dmfile/PhRMA-CVC-Report.pdf
“2018 and Beyond: Outlook and Turning Points)” (www.IQVIA.com)
Research! America. U.S. Investments in Medical and Health Research and Development, 2013-2016. Arlington, VA. Fall 2017
U.S. Government Accountability Office November 17, 2017https://www.gao.gov/products/GAO-18-40
“The Growing Pharmaceuticals Market: Expert Forecasts and Analysis” The Business Research Company May 2018 https://blog.marketresearch.com/the-growing-pharmaceuticals-market-expert-forecasts-and-analysis
