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Efforts to address prescription drug pricing have expanded. Rick Kelly reports.
In the first of two articles (based on the white paper, The Pricing Revolution: Pharma is bracing for the future) summarizing the broad range of government efforts to control drug pricing, Rick Kelly focuses on federal government efforts and their potential impact on pharma.
Challenges to drug pricing are now coming from all angles of the federal government. The Centers for Medicare & Medicaid (CMS), the President, and Congress have all proposed significant changes to policies and/or laws that could have revolutionary implications for pharmaceutical manufacturers. This article summarizes all of the federal government actions and proposals and their potential impact on pharma.
CMS has continued to implement and propose Medicare and Medicaid policy changes that can affect prescription drug prices, primarily by increasing payers’ negotiating power.
Implemented policy changes
While the changes to Medicare policies in the last year are not groundbreaking, CMS continues to refine policy to maintain pressure on drug pricing. The most significant change was a large increase in the Part D cost share that manufacturers are responsible for in 2020. On average, the annual increase for a Part D drug is $873, which is due to an increase in the threshold for transition from the donut hole to catastrophic coverage of $1,250, from $5,100 to $6,350.
Recently implemented Medicaid changes also have had minimal effect on drug prices:
Impact on pharma
The increase in a manufacturer’s share of Medicare Part D costs has the net effect of lowering Medicare costs and manufacturer’s revenue, making it a less profitable channel. To optimize brand value, pricing and contracting strategies will need to be evaluated across all channels.
Efforts to minimize spread pricing in Medicaid are designed to ensure that current lower net prices are delivered to patients, which could increase patient demand for lower-priced drugs.
An increased use of uniform PDLs would reduce potential opportunities for pharma to engage and keep/get ideal formulary placement. This is because all management would be handled by one entity (the state) which would increase the state’s bargaining power. Faced with this reality, manufacturers will have to evaluate and potentially change contracting strategies to maintain formulary status.
Proposed policy changes
There are a number of important Medicare proposals for 2021 and 2022 which, if approved and implemented, could affect many manufacturers. The most important proposals would:
The most important of the proposed changes to Medicaid would address rules that have made it difficult for manufacturers to engage in value-based purchasing (VBP) with Medicaid and other payers. The proposals would allow manufacturers to:
Impact on pharma
The proposed Medicare changes are mostly aimed at specialty drugs, so they would affect the increasing number of manufacturers with those drugs in their portfolio. An increase in the use of biosimilars and tiering options would enhance the negotiating powers of Medicare plans resulting in a need for manufacturers to add to rebates or discounts. To manage revenue, manufacturers will need to reevaluate contracting strategies and negotiation objectives. Changes that make VBP agreements with Medicaid plans feasible may be welcomed by a select group of sophisticated manufacturers who have the ability and willingness to implement value-based agreements. However, since these agreements are complicated, involve a different level of risk, and require the infrastructure for successful implementation, the true impact of these changes would vary from company to company depending on their involvement.
In July and September 2020, President Trump issued a series of four executive orders aimed at reducing drug prices. The four executive orders propose the following:
Impact on pharma
While the number of FQHCs is relatively small, this order, if implemented, could open the door for states or the federal government to push for more drugs to be added to the program and made available at FQHCs.
Eliminating rebates as a means of competition within Medicare would make discounts the primary pricing tactic. However, drug companies are not required to convert their rebates to price discounts and will likely only convert a portion. This might cause an increase in drug prices to consumers.
If importation rules were to apply to any drug, regardless of its original source, manufacturers would need to reassess their global pricing strategies to maximize revenue. In spite of those efforts, the importation of lower-priced drugs would result in negative pressure on revenue and profit.
If the use of reference prices from other countries was applied to a broad portfolio of drugs, pharma companies would need to adjust their entire pricing model. One approach could be balancing US and ex-US prices in a way that maximizes profit.
With drug prices a significant concern of the American public, a number of Senators and members of the House have introduced legislation with a wide range of potential effects on drug prices.
Three bills were introduced into Congress in the last year that address the approval of generics or biosimilars.
Two similar federal legislations with comprehensive changes to Medicare, and some to Medicaid, have been introduced in the last year—one in the Senate and one in the House. The Senate bill, titled, “The Prescription Drug Pricing Reduction Act of 2020,” is Republican-sponsored and the House bill, titled, the “Elijah E. Cummings Lower Drug Costs Now Act,” is Democrat-sponsored. Both bills include common measures that would:
In addition to the measures the bills have in common, the Democrat bill would:
In addition to the measures the bills have in common, the Republican bill would:
Impact on pharma
If passed, these pieces of legislation would produce dramatic changes within the drug market. The federal government would have greater leverage to negotiate lower prices (or higher rebates), significantly reducing manufacturers’ revenue.
Taken together, these actions and proposals constitute a pricing revolution that threatens to significantly undermine pharma’s profitability. And these actions don’t even include parallel efforts at the state level. (We will address those in our next article.) Of course, conventional wisdom asserts that every threat is an opportunity. If pharma is going to develop proactive strategies to address these potential challenges – and maximize opportunities within the evolving environment – the time is now.
Bottom line: With the pricing revolution in full force, the moment has come to brace for impact.
Rick Kelly, RPH, MHA, Cyan Health.
Click here for a copy of the white paper, “The Pricing Revolution: Pharma is bracing for the future.”
*Spread pricing is a tactic employed by PBMs whereby they use the higher, pre-discount price as a basis for the cost charged to pharmacies, allowing the PBMs to keep the discounts provided by health plans.