A look at how legislation—and the wider quest for more transparency on drug costs and reimbursement—may impact manufacturer product launch and pricing strategies in the years ahead.
Jesse Mendelsohn, senior vice president of Model N, recently spoke with Pharmaceutical Executive on the complicated and changing complexion around drug pricing, access, and reimbursement in healthcare—including emerging hurdles biopharma companies are facing to bring new products to the market.
Whether it’s battling long-held reputational perceptions, navigating looming mandates from the Inflation Reduction Act (IRA), or adapting to new and alternative pharmacy payment models, it’s become an increasingly “delicate dance” for manufacturers to price competitively and maintain margins.
The following conversation was edited for length and clarity.
Pharmaceutical Executive: What are your thoughts on the continued pressure in general on industry in the area of drug pricing, particularly amid recent reports of manufacturers hiking US list prices on several hundred brand-name medicines—and the fallout likely from those announcements?
Jesse Mendelsohn: In general, the soundbite of pharma increasing drugs is an easy way to get clicks and views. The truth of, well, pharma has to increase drug prices in order to maintain their margins and still cover the cost of coverage either from private payers, Medicaid, or Medicare, which are increasing every year—that's a much larger, complicated thing.
What I often tell people when I'm asked about this, either formally in my position or by a friend, is by and large, whether or not your drug is covered and covered with a lower copay or without pre-approval is due to the manufacturer paying your PBM (pharmacy benefits manager) for that coverage. That's how it works. And PBMs, year by year, demand higher and higher payment, and government rebates also increase year by year. Therefore, for manufacturers to even maintain the same margins on their drugs, what do they have to do? They need to raise the [list] price. That's just the cycle that we're caught in. In reality, net prices after rebates and after everything else, are flat or going down. But that doesn’t make for sexy news.
PE: Speaking of PBMs and the scrutiny with them, do you see some of these alternative efforts out there, such as Mark Cuban’s Cost Plus Drug Company and CVS’s CostVantage pharmacy reimbursement model, shifting this landscape in pricing transparency—and ultimately more affordable patient access? Can manufacturers and payers operate in these structures effectively?
Mendelsohn: It's interesting. If you look at that CVS announcement, there's an important one sentence in there that says that it's up to employers and employer groups to choose to move to this option. This is not the new way that it’s covering all their prescriptions and their new overall cost model. They're saying this is now an option, just like what Mark Cuban is doing. These are some cool and innovative things. I think there is a place for that, but these models aren’t going to, overnight, unseat the traditional way of [manufacturers issuing] higher rebates, which then get passed on to PBMs, and then to employers’ health plans. That is a very well-ingrained process.
There was an article over the summer that talked about Amgen launching two different prices of its Humira competitor biosimilar. One is a low-priced version with very few rebates and the other a high-priced version with higher rebates. You would think that health plans would be eager to cover the low-priced version to move people off Humira and onto a much lower-priced biosimilar. Amgen went on the record, though, and said, no, plans are choosing the much higher-priced drug because the whole mechanism of getting a rebate and then pocketing some and passing it on to the employer is so ingrained in the current drug system, that it's hard to just break.
That’s the same kind of thing [with these direct-to-consumer approaches]. If it were as simple as manufacturers or payers or pharmacies cutting the prices of their drugs—and sometimes dramatically—and that would solve these problems, that would not be illustrated by plans still choosing the higher-priced version.
PE: But what about just the concept of moving toward simplified drug pricing? Isn’t the overarching goal pricing clarity for consumers/patients?
Mendelsohn: Yes, but the clarity in the way and why something is priced the way it is does not necessarily mean that it’s going to be cheapest for you. Yes, the whole concept of programs such as [CVS Caremark TrueCost] is basically, I am charging you, the patient, my cost—the cost that it took me to acquire that drug either from a manufacturer or from a wholesaler, plus a fee and my margin. That's what the concept is. So that is very visible.
But if you have insurance coverage, especially for branded pharmaceutical products—not generics, which are commodities in some ways—that visibility might not impact you. Because at the end of the day, you want to pay your $25 copay, not the TrueCost dollar amount. That means you're going to take whatever version your insurance covers, and behind the scenes your insurance might be choosing the most expensive version because they have a very high rebate involved in that.
I agree absolutely about visibility. That's very important; it definitely has given people an easier way of seeing how much a certain type of drug is actually costing the pharmacy. But whether that results into more plans choosing that drug because of that cost, it largely remains to be seen.
PE: Shifting to the potential impact of the US Inflation Reduction Act (IRA) on drug pricing and access—what dynamics do you see developing there? Particularly on the manufacturing end and the greater risk in the years ahead on getting drug launches right.
Mendelsohn: Largely due to the IRA, the first thing manufacturers will need to take into account when launching a product is the price negotiation. Manufacturers might think, I’ll have exclusivity [from mandated price negotiations under the IRA] for a certain number of years, so there’s not a threat of having my drug on one of these negotiation lists. (Editor’s note: Medicare price negotiations between HHS and manufacturers on certain brand-name drugs will take effect in 2026).
But the problem is, if the manufacturers are launching a product into even the same therapeutic class as a drug that is on one of those lists, then they're going to have cost pressures on their product as well. So, for example, let's say there's a drug on the list that treats diabetes, or high blood pressure, or certain types of cancer, you might have immunity from being on list for a decade or so, but you could be sure that you're competing against a drug where Medicare is price negotiating control. You're going to have limited access to the Medicare market or you're going to get pricing pressure on that drug to be able to compete with the competitor drug that is on that list. That's one key area of importance for manufacturers when launching—to recognize that these negotiation lists could have impact on them even if their product is not on them.
The other thing are the inflation penalties [imposed by the IRA]. The concept of having to pay a rebate, which can increase price faster than the rate of inflation, is not new to other government programs. It already has existed in Medicaid and the VA for a long time. But it's now being applied to Medicare for the first time. If you increase your drug price above the [negotiated price], you now, for every unit dispensed to Medicare, need to pay back a rebate.
What that's going to do is encourage manufacturers to launch at a higher price. You could see how those two things conflict with each other. If a manufacturer wants to compete with a drug on the negotiation list, they're going to have to launch at a lower price to get traction in the Medicare market. But if they want to be able to increase that drug price or maintain good margins without triggering inflation penalties, they would want to launch at a higher price.
Depending on the type of drug and the therapeutic class manufacturers are launching into, there are certainly a few wrinkles or asterisks to consider because of the IRA.
PE: Having to undergo these more careful calculations and checks and balances for product launch, what might be some potential ramifications on company R&D and innovation strategies? In a recent Model N survey, you found that almost 30% of pharma executives cited regulatory changes as having the largest impact on plans for innovation.
Mendelsohn: That's a big deal. It’s not a lack of talent they’re citing, or inflation, or the cost of raw materials—not even competition. It’s regulation that is limiting innovation.
I’ll give an example. The traditional way that drug prices decrease is the company that innovates the product gets to benefit from that innovation for X number of years; then it goes generic or biosimilar, and then those launch and there's competition and the price comes down for everybody. But if you think about this kind of new way of doing things where you're going have these expensive drugs now—prior to generic or biosimilar competition—have their prices basically tapped due to Medicare price negotiation, it's going to limit the manufacturers of biosimilars and generics to want to launch products in competition with those branded products.
It's going to limit innovation in generics and biosimilars, but it’s also going to limit innovation in general with new branded products. The motivation for manufacturers to create new products in therapeutic classes that have, basically, Medicare price caps is going to be minimal. There might become certain disease categories where research and the money spigot is turned down because, with the IRA, there isn't as much margin there. At the same time, there might be more focus on areas where there's fewer Medicare patients. So, by making things cheaper for Medicare patients, you might have a long-term effect of limiting options for Medicare patients as well.
I can confirm that there are manufacturers that are changing which drugs they are choosing to focus on from a research perspective. There's also manufacturers, based on these factors, choosing when exactly to launch and at what price to launch.