CALIFORNIA PRICING REGULATIONS DRIVE COSTS HIGHER — John G. Baresky

…California’s Pharmaceutical Pricing Regulations May Drive Up Costs And Influence Other States…

California, Other States Going Grizzly On Pharmaceutical Manufacturers

…According to the U.S. Census Bureau, California is the most populous state; with 39.25 million people its boundaries contain more individuals than the 21 least populous states combined…

On Monday 10/9, California Governor Jerry Brown signed into law legislation requiring pharmaceutical manufacturers to report certain price hikes for prescription medicines. In the United States during 2016, brand pharmaceutical prices rose almost 13 percent on average. Generic pharmaceutical product prices increased by an average of roughly 0.32 percent. Specialty pharmacy pharmaceutical products (injectable therapies, biologicals, etc.) increased by an average of about 8 percent. The rules are being put in place to provide more visibility to drug manufacturer pricing practices.

…The legislation (known as “SB 17”)requires drug companies to provide a 60-day notice if their prices are raised over 16 percent during a two-year period…

Added measures to the legislation include the requirement of health plans and insurers file annual reports outlining how pharmaceutical costs affect healthcare premiums in California.

A Wilderness Of Exhaustive Complexity

  • Brand and generic pricing models are not simple. Starting with the basics, drug makers have to account for R&D, manufacturing and commercial support costs plus competitive measures, marketplace trends and contracting strategies to devise wholesale acquistion cost (WAC) for a product -its published “list price”. Once the pharmaceutical company engages the actual marketplace to sell a product; original WAC pricing is significantly transformed through an array of discounts, rebates, chargebacks and other contract agreement features. WAC is a manufacturer’s list price of a drug when sold to a wholesaler; then typically a 20% mark-up is applied to the manufacturer’s price which results in the average wholesale price known as “AWP”.

…SB 17 focuses on WAC pricing, not AWP pricing…

  • WAC is at the top of the pharmaceutical pricing funnel but once product pricing winds its way down in a particular channel’s contracting process; it is drastically different by the time it is tied directly to provider, payer and / or patient product acquisition costs. Contracting strategies impacting the original AWP are aligned with specific healthcare sectors. These include group purchasing organizations (GPOs), managed care organizations (MCOs), pharmacy benefit managers (PBMs), retail / mail order / compounding / specialty pharmacies, Medicaid, Medicare, 340B, DHA / TRICARE and others. Drug wholesalers and distributors each have their own way of contracting with pharmaceutical manufacturers and then apply different pricing / margin management / incentive formulas to their respective customers. AWP is diced and sliced differently once it travels into various healthcare industry business channels. A single contracting / pricing formula cannot be devised for use within a single or across business channels; each one operates differently to accommodate customers, align with class of trade and be in compliance with regulatory / reimbursement standards.
  • Whether it’s a direct sale from the pharmaceutical manufacturer to the point-of-care provider and / or through the wholesale / distribution supply chain, another series of variables comes into play including: national drug code (NDC) number, active ingredient, original or repackaged product, brand or generic status, formulation, route of administration and package size.
  • Digging down further in the details about package size alone represents its own pricing challenges. Depending on the unit volume of a container, the number of containers sold in one package and / or case, pricing is also differentiated. This can apply to pills, capsules, vials, pre-filled syringes, IV products and other formulations.
  • Procurement practices by purchasing / finance units along the way have an impact on final pricing. Depending upon how much of a particular product is distributed / administered / dispensed, pricing is impacted. Bulk quantities typically have better pricing and buyers may prefer them if their organization goes through a lot of the product or they may use less of the product but still choose to buy the bulk quantities to save money. Depending upon the organization, this can be a good practice (buying drugs at low prices) or a bad practice (outlaying funds and not converting the inventory back into cash fast enough).
  • Buyers also contend with the particular contract arrangement they are purchasing the drugs through as rebates, chargebacks and other incentives come into play. Other considerations include competitive measures between manufacturers, changes in formulary, brand / generic status, clinician preferences and product availability. These factors span all categories of pharmaceutical products and need to be accounted for in purchasing decisions. Based on these variables and AWP, the relevancy of WAC further erodes.

…According to the LA Daily News, more than 1 in 3 Californians, or 13.5 million people, are covered by Medicaid — more than the entire population of Pennsylvania. About 80 percent of those in California’s program are enrolled in a managed-care plan, in which insurers receive a fixed rate per person to handle their medical care…

A Gold Rush Of Controversy

There is well found criticism of the legislation as it looks and sounds good to the media and consumers (i.e. voters) but falls short of accounting for the true complexities involved. While it puts a spotlight on pharmaceutical company pricing, it fails to address the pricing practices of wholesalers, distributors, health systems, pharmacies, PBMs and other stakeholders through which pharmaceutical products change hands. Another consideration is the premiums health insurers and MCOs levy on their memberships in relation to medical loss ratios (MLRs) and other risk management variables. To what extent are premium and copay increases attributed to rising drug costs versus the profits of health insurers and managed care organizations?

…In the case of the California legislation, the requirement for health insurers and MCOs to file annual reports regarding the impact of drug costs adds to their operating costs. They will need to setup and manage ongoing streams of pricing data and other information to be compiled, analyzed and submitted to the state. Likewise, pharmaceutical manufacturers will need to account for these reporting requirements by developing tracking, analysis and compliance measures which will require data, staff and financial resources…

For state government, they will need to develop their own management processes requiring staff, IT and budget resources to manage the reports being submitted by dozens of pharmaceutical manufacturers, health insurers and MCOs. It is widely recognized administrative costs play a tremendous role in the spiraling expenses of healthcare; the requirements of SB 17 significantly contribute to the administrative burden for government, health insurers, managed care organizations and pharmaceutical manufacturers.

Pharmaceutical Manufacturers Stake Their Claim

The pharmaceutical industry delivers enormous value in minimizing the impact of acute and chronic health issues which can include the avoidance of costly medical procedures and constant professional care. While its profits are scrutinized, it is equally important to recognize the high cost of doing business in the healthcare product manufacturing sector. Complex research and development initiatives have staggering costs. Manufacturing, quality control, commercialization, legal fees and other factors all contribute to pricing considerations.

…It is also important to note pharmaceutical pricing and contracting practices are not essentially in the pure interest of profit. They are also in place so manufacturers can assertively compete against each other which helps to lower prices…

Pharmaceutical manufacturers have numerous options to choose from to minimize scrutiny of pricing practices beyond disclosing WAC. Pricing and margin advantages can be shrouded in contractual arrangements between GPOs, PBMs, MCOs and other business partners which are well within compliance and legal requirements. Other states have deployed or are in various stages of passing legislation similar to California’s so some drug manufacturers have already voluntarily committed to specific price increase limits on an annual basis.

Price increases at the maximum level below the reporting requirements implemented across a series of calendar intervals are fair and reasonable options drug companies will consider regarding California and those states with similar requirements. Pharmaceutical companies still have the option to raise prices at their own discretion above the 16 percent over a two-year period threshold, routinely report it and be in compliance with the California laws. It may also encourage them to spike prices in a single year and revert to considerably smaller price increases in subsequent years.

…Looking ahead, pharmaceutical companies may also choose to launch products with significantly higher WAC prices in the future. This will give them more room to maneuver with customers through various contracting arrangements...

If the goal is to eventually limit pharmaceutical price increases through government price controls, WAC at launch will be a paramount starting point for pharmaceutical manufactures to introduce a new product. It may potentially trigger a trend in higher than normal drug prices for new and conceivably better pharmaceutical products moving forward as drug makers strategize they need to make more money out of the gate versus increasing profit gradually over the lifespan of a product. Pharmaceutical manufacturers may also be encouraged to acquire others to widen pipelines and portfolios of established products to make up for the loss of per product margin.

Will More Regulation Provide A Positive Payout?

Lawmakers, industry stakeholders, clinicians and patients / consumers are seeking a middle ground. Ultimately, it is higher care at lower cost. It is clear the State of California government and dozens of other state governing bodies want to do more to reign in healthcare costs. Political leaders want to be recognized and re-elected. Merely by introducing such legislation, politicians can claim they are taking action on behalf of their constituents. If states enact measures that are not well-conceived and administered, they generate bureaucratic waste, cultivate complexity and drive up costs for multiple stakeholders including government, health insurers, MCOs, pharmaceutical manufacturers, providers and ultimately patients / consumers / voters.

Thank you for reading this article; check out these other stories about healthcare benefits, pharmacy benefits and contracting ; connect with me further through reading my other Medium articles or through my social media links:

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John G. Baresky — Brand Marketing, Product Management, Digital Marketing, Marketing Leadership, Product Launches, Marketing Strategy, Digital Strategy, Social Media, Market Access, Market Research, Marketing And Sales Collaboration