A Blue Print for a House of Cards
In May 2018 the administration published its blue print to make good on a Trump campaign promise to take on escalating prescription drug prices. While there are certainly a number of initiatives worth getting excited about, there are several provisions giving reason for concern. Consulting the blue print and watching the June 12th and 26th hearings covering the issue, makes evident the influence pharmaceutical lobbyists have had in yet another attempt at prescription drug price reform.
Regardless of the administration, it is generally a good idea to exercise a healthy level of skepticism when new pharmaceutical legislation is debated. Pharmaceutical companies are remarkably successful in lobbying for legislation that works in their favor. This is not a right versus left issue. Protectionist and lobbied for drug policy can be found in nearly every transformational piece of healthcare legislation passed under administrations both republican and democrat.
This article will take on a handful of proposals and discuss the related merits and drawbacks. It will also tackle some of the hollow arguments made on both sides of the debate.
NOTE: The precursor article “Know More About Drug Price Reform Than Your Senator” is highly recommended as it covers important concepts related to the measures discussed below.
Price Negotiations
Allowing Medicare to negotiate its own drug prices was one of the more concrete policy proposals made by the president on the campaign trail. With Medicare now accounting for 29 percent of national prescription drug spending, this policy seemed like a match made in heaven for the candidate who ran on a platform of making good deals.[i]
The administration’s blue print appears to pay lip service to the idea without actually addressing the root of the problem. It suggests giving Medicare the ability to negotiate prices paid under Part B while still prohibiting negotiations for Part D drugs. The obvious criticism of this plan being that Part B drugs constitute a much smaller percentage of Medicare drug spending when compared to dollar amounts spent on Part D drugs.
Proponents of the continued prohibition of Medicare Part D drug negotiations focus in on two main arguments. The first argument asserts that the private Part D plan providers are effectively negotiating prices and should be left to do so. The second argument asserts that allowing Medicare to negotiate Part D prices would lead to limited consumer options.
The Private Sector is Handling It — The United States employs a hybrid healthcare system, incorporating characteristics of both the private and public sectors. The hybrid model attempts to balance the desire to foster innovation with the need to provide a safety net for the elderly and less fortunate. It is a valid system, but a system that presents unique regulatory challenges.
Inherent in the fact there is government involvement dictates the inevitable emergence of misaligned incentives between private and public players. Misaligned incentives need to be carefully managed to ensure government systems are not exploited by private organizations. For this reason, government actions that might be viewed as improper in a purely private system may be necessary as it attempts to function like a member of the free market system.
In the prior article the misalignment between Medicare and Part D plan providers during the catastrophic drug coverage period was addressed. Private providers in this situation know their downside risk is mitigated by a government body. Manufactures are also aware of this fact and will use incentive structures to keep prices high in drug categories where the government foots the majority of the bill. These actions have resulted in catastrophic payments continuing to be one of the major drivers of escalating Medicare prescription drug expenditures.
Even if private organizations were incentivized to minimize government expenditures, their ability to negotiate favorable prices pales in comparison to Medicare as an entire body. Medicare represents a large group of retirees with higher health expenditures and more expensive drugs. If it were a private player, Medicare would be enabled to negotiate its prices far more effectively than the smaller Part D plan providers.
This point is clearly not lost on drafters of the blue print. Under Part B the government pays the average of all prices negotiated by private entities. If the government was satisfied with the performance of private entity negotiations it does not appear there would be a strong case for Part B price negotiation either. Thus, it would seem likely that this particular policy measure is motivated more to pay lip service to a campaign trail promise rather than to address underlying drivers of cost.
Consumer Options Would be Limited — Variety and innovation in healthcare are the driving forces behind the hybrid system employed in the United States. Consequently, a popular argument made against nearly every healthcare reform proposal is that tampering with the status quo would reduce consumers’ options for care. Any measure that threatens these core principals is generally met with opposition from both consumers and regulators.
Depending on the reform measure this argument is lobbied against, it has varying levels of merit. When applied to the proposal to allow Medicare to negotiate the prices it pays for Part D drugs, several leaps in logic would need to be made for these claims to be true.
The prevailing train of thought is that if Medicare was allowed to negotiate on behalf of Part D beneficiaries it might pressure prices to a point at which drug manufacturers couldn’t be profitable and thus might stop innovating. Or, worse yet, Medicare might refuse patients access to more expensive lifesaving drugs.
1. First, it is more than a little precarious to say that increased price competition might cut into drug manufacturers’ profitability to such an extent that R&D expenditures would lessen. One must consider the industry’s above average profit margins, significant stock buy backs, record setting executive salaries, anti-kickback and off label use settlements, and the hundreds of millions of dollars spent on lobbying and campaign contributions. In 2018 to date, profit as a percentage of total revenue has clocked in at 19.5% for the US Pharmaceutical industry.[ii]
This is not in any way to say that the government should get into the price setting business or that it should try to control corporate profits. Rather it is to say that Medicare should be allowed, like all other free market participants, to use its buying power to force companies to compete on price and outcomes. Unlike socialized healthcare systems where a government sets the prices to be paid for prescription drugs, the United States is not a single payer system. There is a fundamental difference between price negotiation and price setting.
2. Second, we must note that Medicare is enabled to negotiate prices on most other goods and services it covers. In the face of this reality, the fears expressed don’t appear to have materialized in a significant way. As in Part D, private players are allowed to offer plans under Parts A, B, and C. These private players are incentivized to attract consumers and thus offer different covered goods and services. There is nothing inherent in the proposal to allow Medicare to negotiate prices that has to limit what private Part D plan providers can choose to cover in an effort to attract customers. The proposal would simply need to stipulate that, for those drugs, providers would need to bare the risk of poor price negotiations.
3. Third, if this was a real threat then wouldn’t it also hold true that Medicare should not allow price negotiations for drugs covered under Part B?
4. Fourth, within this argument there lies fundamental issue with how the words “options” and “access” are defined. With some exceptions, it is true that the United States is home to a considerable amount of medical innovation, and it does benefit from early access to new and ground-breaking treatments. However, these benefits are only of value to a portion of the prescription holders in the United States. There is zero value for the reported 24% of cancer patients that didn’t fill prescriptions due to cost. It is of little value for the additional 39% of cancer patients that only partially filled their prescriptions or took less than the recommended dose to manage costs.[iii] The innovative treatment options for these individuals look very similar to the average American’s choice of private jet manufacturers.
Coverage Shifting
As a stand alone policy allowing Part B rather than Part D price negotiations is already a relatively ineffectual proposal. However, there is a second measure being a proposed that would not only render the Part B negotiation proposal even more ineffectual, but would also serve to raise government and consumer costs beyond their current levels.
Within the blue print there is a proposal to shift a significant number of drugs currently covered under Part B to Part D. Beyond the inherent contradiction to the first proposal, there are several other consequences that must be taken into consideration.
1. Increased Catastrophic Coverage Payments: Part B drugs tend to be bigger ticket items that, when moved into Part D, will likely take their place on the list of prescriptions that move patients into the catastrophic coverage phase. As was discussed, it is in this phase that Part D plan providers have the least incentive to negotiate fair prices. With catastrophic payments under Part D being the leading culprit of increased Medicare drug spending, it is likely this proposal will increase government expenditures.
2. Increased Out of Pocket Expenses: Coinsurance amounts for Part D beneficiaries are clearly higher up to the catastrophic benchmark. For drugs that either do not meet or do not significantly exceed that benchmark, consumers will likely pay more in out of pocket costs. This is of course dependent on the drug price negotiated by the provider selected and any supplemental insurance the consumer may have.
For drugs that significantly exceed the catastrophic benchmark consumers may end up paying less. However, as was discussed above, that is highly dependent on the price reaction as the drug is shifted from Part B to Part D. In studying the potential impacts of this policy shift, Avalere found that in 2016 the average out of pocket expense for patients receiving new cancer therapies increased when coverage was shifted. Out of pocket expenses for these cancer drugs were 33% higher when covered under Part D rather than Part B. The study of course notes that based on the caveats mentioned earlier, there will be disparate impacts to individual consumers.[iv]
3. Increased Monthly Premiums: Moving expensive drugs out of Part B into Part D may also serve to put an upward pressure on Part D monthly premiums. This will impact consumer expenses as well as the subsidized premiums paid out by Medicare.
Switching Rebate Systems for Fixed Cost Negotiations
As was discussed in the prior article, rebate systems can have serious consequences in how they incentivize PBMs to push for higher list prices. A proposal in the blue print suggests doing away with the rebate system and instead implementing a fixed cost negotiation structure. In a fixed cost negotiation there wouldn’t be an inflated list price. The PBM would simply go to the drug manufacturer, negotiate the price it is willing to pay, then the drug would be sold at the defined price. In this model, negotiated savings are passed directly on to the consumer.
This new system would certainly disrupt the current compensation models in place. Compensation would likely take the form of a fixed fee for the volume of services the PBM provided to a client.
Drug Importation
Allowing consumers and drug wholesalers to import drugs from abroad was another proposal made by the President while on the campaign trail. The purpose of the proposal is to spur price competition and put an end to a policy that allows drug manufacturers to set a US price that is substantially higher than the prices the manufacturer charges abroad. This proposal did not make it into the blue print, but it was a fairly significant topic of debate during the June hearings.
Opponents of drug importation went two directions when expressing distain for such a proposal. First, opponents tried to refocus the conversation on how the rest of the world freeloads off the higher prices paid by US consumers. Second, they raised fears that allowing importation might in fact raise prices for US consumers.
Freeloading — In today’s world of protectionist trade policy, it is unsurprising that an argument has been made surrounding other countries taking advantage of the higher prices paid for prescription drugs in the United States. The logic goes that because other countries have single payer systems where the government negotiates a lower price, drug companies must compensate for the lower margins they earn abroad by charging US consumers more. To evaluate this argument we must first look at the cost-benefit structure of socialized healthcare, then we must take a look at how US policy actually enables this very concern.
First, as many senators have argued, there are very real consequences to adopting a socialized healthcare system. In socialized healthcare systems, lower prices have in many cases lead to a lower supply of specialists, health services, and treatment alternatives. Lower prices in foreign countries have often meant that drug companies are incentivized to file with the FDA to receive authorization to sell in the United States first, and file with other foreign regulatory bodies second.
In reality, any model of healthcare is going to have costs and benefits. The ideal model employed by a given country will reflect the preferences of its citizens. In the United States our value set favors innovation and novelty, while in Europe the value set favors affordability and access. Thus, we see differentials in the drugs available and the prices charged across the two healthcare models.
Second, current policy enacted in the United States is in fact reinforcing the very issue being defined. The willingness of the United States to block its consumers from purchasing drugs abroad means that the manufacturers can lower prices around the globe with no concern as to how it will impact its profitability in the United States.
Higher Prices — As an extrapolation of the second point above, opponents then argue if importation is allowed, drug manufacturers may stop selling in foreign markets all together. They claim drug manufacturers would find it more profitable to stop selling in foreign markets altogether than to lose out on the higher prices they are able to charge US consumers in the absence of importation. In this scenario there would no longer be a competing price point abroad, and manufacturers would then be able to raise prices in the United States beyond where they are today. Opponents then pile on with the possibility of foreign governments reacting to drug manufacturers pulling out of all international markets, by employing compulsory licensing practices (discussed below). While terrifying in concept, the arguments are demonstrably crazy.
The United States does disproportionately account for roughly 37% of pharmaceutical sales. However, that means 63% of sales come from countries outside of the United States.[i] To make the above fear profitable, it would have to be true that the drug companies could raise US prices so high they could compensate for losing 63% of sales and the resulting margin. It would also have to be true that it would even be feasible for the US market to stomach exorbitantly higher prices. There is ultimately an ability to pay threshold, and the United States is already at or very near that level. Furthermore, this scenario would leave the entire world as an unmet market which competitors would in no doubt step in to address.
To address the second point of the argument, even if it was somehow logical to discontinue all foreign sales, the possibility of compulsory licensing being a wide spread threat is pretty farfetched. Compulsory licensing is a provision under the World Trade Organization TRIPS agreement. Under the agreement a country can allow someone other than the patent owner to produce a good for national use without the patent owner’s consent. To do so the country would have to (1) prove they exhausted all attempts to negotiate with the patent owner, (2) go through a notification process, and (3) fairly compensate the patent owner in some manner before forcibly seizing the patent.
Could this happen in a dooms day situation where drug manufacturers try the above strategy? Sure, for some lifesaving drugs. Could each country ramp up the production capabilities to make that possible for a large breadth of drugs? And would all drug manufacturers refuse all negotiations made by countries prior to their patents being seized? Objectively the answers to these questions are a resounding no.
A far more likely response to the decision to allow drug importation is that manufacturers would be more prudent in lowering prices abroad in exchange for gaining access to new markets.
Drug Alternative Transparency Measures
Removing the Gag Clause — One proposal in the blue print includes removing the gag clause on pharmacies dispensing prescriptions to Medicare beneficiaries. This will allow pharmacists to alert patients if the drug they have been prescribed would be cheaper paid in cash rather than through the insurance provider. The current proposal only applies to Medicare, but it is certainly a measure that should be rolled out to all patients in the private market.
Allowing Physician Consultations — Another proposal includes arming Medicare beneficiaries with the right to know their expected out of pocket cost across all available drug alternatives when speaking with their doctor. This is a fantastic measure with an obvious roll out problem that must be addressed if this proposal is to be executed upon.
Doctors often do not have the technology infrastructure to account for all the variables that determine what the patient ultimately pays at the pharmacy. As has been discussed, out of pocket costs are dependent on the provider, the plan, how much the patient has paid out of pocket to date, and at which pharmacy the patient fills the prescription. In today’s world of technology these variables should not be difficult to account for. However, from personal experience I can attest that sometimes a PBM’s own customer assistance line can’t account for these variables and is unable quote the correct out of pocket costs.
This impediment raises an important point. For many of the truly transformational reforms to take place, they will have to be accompanied by technology mandates. Many players in the US healthcare market have not had to face the level of competition that would force them to get lean in order to survive.
The book “Reverse Innovation in Healthcare” details how healthcare players in India are already running leaner and more efficiently as they leverage technology. This innovation has come out of necessity. If these organizations are not lean and efficient they would not be able to compete in a country where poverty levels do not allow for the price tags set in the United States. Unless other measures are put in place to spur the type of competition experienced abroad, technology mandates will be required. These mandates would be similar to the Electronic Health Records initiative put in place under the American Recovery and Reinvestment Act.
Generic Drug Competition
There is also a proposal being debated that would restructure how generic drugs are allowed to come to market. Right now there is a 180 day exclusivity window granted to the first generic company that files an application with FDA. Once granted, the 180 day window does not begin until the company begins selling to consumers. During this time no other generics can come to market to compete with it. This is meant to incentivize new generic companies to invest in the R&D funds to bring lower priced alternatives to market as soon as drug patents expire.
The problem with this provision is how it has been improperly leveraged by brand name drug manufacturers. In some instances, generic drug companies have colluded with brand name manufacturers to not send their generic to market. If the generic company does not begin selling to consumers, the 180 day window never starts. This collusion is often referred to as “pay for delay.” It can take many forms but usually involves some sort of payment made by the brand name manufacturer to the generic company in exchange for the generic company not going to market.
The ultimate result of this behavior is an environment in which manufacturers can function without low price generic competition. With no generics available, US consumers are stuck buying the higher priced brand name drug. To combat this issue a proposal is being made to start the 180 day clock when the second generic company is ready to go to market. This should increase generic competition and lower prices for consumers.
Direct to Consumer Advertising
The blue print also seeks to address the issue of direct to consumer pharmaceutical advertising. It recommends requiring pharmaceutical companies to publish the prices of drugs directly in their advertisements. The goal of this effort is to increase price transparency and help consumers consider the price tag before going to a doctor to inquire if the new drug is right for them.
This move for additional transparency does raise a number of effectiveness and implementation questions. In the current environment where list prices far exceed what an insured consumer will ever pay, requiring a drug manufacturer to list its price may ultimately have the same effect as requiring all side effects be listed in direct to consumer advertisements. In the same way consumers no longer react to death as a potential side effect, they may not react to a Humira list price of $16,600 in month one and $60,900 over months two through twelve. The insured individual knows his or her provider is going to negotiate the price and will ultimately foot a considerable portion of the bill. This goes back to the issue of price insensitivity when consumers are not the ultimate purchasers.
A second question worth asking regards the price that will be quoted in advertisements. If the fixed price negotiation initiative is put in place, will the price in the advertisement be the average negotiated price? Furthermore, with consumer out of pocket expenses varying dramatically across plans and providers will drug companies be allowed to include caveats such as “the cost to you could be as low as $0 depending on your insurance provider”? Such a caveat might have the exact opposite effect from what is intended.
These questions are certainly not a reason to abandon the initiative. It is an experiment worth running. However, there is one additional question that seriously deserves consideration as we evaluate potential policy. Why do we even allow direct to consumer advertising? Most countries have determined the negative consequences to be so significant that this type of advertising has been banned.
Closing Statement
Drug price reform must stop resembling a hostage negotiation. Your senator’s reelection campaign funding may be dependent on PhRMA’s money, but we the people are not captives of the pharmaceutical industry. By allowing protectionist policies to be negotiated and put into law we are ensuring our own captivity to a system that is fundamentally broken.
If effective drug price reform is to ever be a reality it must be done incrementally. As tempting as sweeping reform is, it is too frequently the catalyst for bills that are written to pass the senate rather than institute change. These pieces of legislation create behemoths that give little room for trial and error as new legislation is proposed.
Continuing to draft and propose reform initiatives as we have in the past ensures that any blue print put forward will only build upon the existing house of cards.
[i] https://torreya.com/publications/torreya_global_pharma_industry_study_october2017.pdf
[i] https://www.kff.org/medicare/issue-brief/the-facts-on-medicare-spending-and-financing/
[ii] https://clients1-ibisworld-com.ezproxy.lib.utah.edu/reports/us/industry/currentperformance.aspx?entid=487
[iii] https://www.ncbi.nlm.nih.gov/pubmed/23442307
[iv] http://avalere.com/expertise/life-sciences/insights/avalere-analysis-highlights-complexities-of-transitioning-medicare-part-b-d
