In case you’re wondering, it’s not just me who had that reaction, and it’s not just those who oppose the current administration. The stock market also found nothing to be concerned about on behalf of the drug manufacturers. As noted by Bob Herman in Axios: Pharma stocks boom after Trump's drug speech. This headline from EndPoints News sums up the general reaction to the speech: Trump’s ‘sweeping action’ to lower drug prices mocked by analysts as relieved investors trigger rally in Big Pharma stocks.
I spend a lot of time (my wife would say too much) thinking about drug prices. I write a weekly newsletter for ICER on the drug industry and recently, I had the opportunity to speak to Maine Senator Angus King about high drug prices. To understand what was and wasn’t addressed by the President’s speech, we need to start by understanding the problem; during my conversation with the Senator, I discussed how the drug pricing issue is really several different problems. Let’s look at those issues and how the President did and did not address them.
One way to categorize the problems is by looking at two dichotomies (generic vs. brand and price vs. cost) and the resulting four areas of concern (understanding there are overlaps and interaction between the categories):
- Generic drugs (availability and lack of competition)
- Brand name drug (including unique issues for specialty and orphan drugs)
- Cost to the system
- Price individuals pay (out-of-pocket cost)
Let’s start with this one – The President argues that other countries "extort unreasonably low prices". The problem with that characterization is that it’s just not true. Other countries negotiate drug prices (remember, he said he wanted Medicare to negotiate while campaigning). Additionally, no one thinks the prices other countries pay for drugs impacts what we pay – do you think if a firm was getting more in England that would make them charge you less? And finally, even if it was true that foreign prices were the fundamental issue, how does he think he is going to influence what other countries pay for drugs
However, as I mentioned above, there were some positives in the speech. Many of the positives were the steps outlined to address the issues around generic drugs – perhaps the area that is “simplest” to fix. Before we proceed, for reference note that while fixing the problems around generics is important, brand-name drugs account for 73 percent of retail drug spending, despite comprising only 11 percent of prescriptions (http://www.gphaonline.org/media/generic-drug-savings-2016/index.html).
Among the generic issues that need to be addressed are:
- Biosimilar obstacles - Five of the top 10 selling drugs have biosimilars approved, but most are not on the market due to litigation (biosimilars are generic versions of biologics)
- Generic introduction obstacles – Generic manufacturers can’t get samples from brand manufacturers, patent lawsuits slow the generic development process, and pay not to play contracts exist
- Generics with only single source yield higher prices
Sadly, while there are some concrete steps in the administration’s plan, overall the document is a laundry list of proposals with no timeline for implementation. The document also has many places where it discusses seeking input on addressing identified issues (although the plan itself discusses no method for providing input). Seeking input is good, but clearly, this plan is not “the most sweeping action in history to lower the price of prescription drugs for the American people” as the President claimed during his speech.
Next, let’s talk about brand name drugs; among the factors leading to high costs are:
- Lack of competition during the patent exclusivity period
- Extension of patent exclusivity period by slight changes to a formulation that may not provide clinical benefits
- Cost-plus reimbursement for physician-administered drugs in Medicare means providers are incented to use higher-priced medications
There are other more fundamental ways to change the way drugs are developed not touched on by the administration’s plan. Ideas such as “prizes not patents” that would offer a set dollar amount as a prize for a new drug that treats a specific condition and Building a NASA for Prescription Drugs would be game-changing: I’d love to see these ideas getting more attention and discussion.
Cost to the system - one proposal receiving attention is requiring manufacturers to include the list price of the drug in their advertising. I have my doubts about this – both with the legality of the measure and with the impact it would have – but it certainly sounds good, doesn’t it?
Out-of-pocket costs - the plan does focus on i current system of rebates used by manufacturers and pharmacy benefit managers (PBMs) on behalf of the drug purchasers. The President singled out PBMs as being a problem, and there is no doubt they have garnered their share of profits. Certain actions such as working to provide more transparency to the rebates and eliminate gag clauses (that prevent pharmacists from talking about less expensive options) are positives that will reduce what an individual (if they are insured) pays at the drugstore.
However, it’s worth noting that while some of the rebate money goes to the PBMs, much of it goes to the payers where it is used to reduce premiums (the medical loss ratio rules in the ACA see to that). So ultimately, the system won’t save any money, and many individuals won’t save much since they will face higher premiums in exchange for the lower copay or coinsurance amount.
Also, worth noting is that the environment is not static. The PBM landscape was already in a state of upheaval as the CVS-Aetna and Cigna-Express Scripts deals move forward. It is unclear what these new relationships will mean for how PBMs conduct their business.
Another way the administration’s plan tries to address costs is the proposal to allow Part D formularies (formularies are a list of drugs covered by the plan) to have one drug per class instead of two – the theory being this will allow for “tougher negotiations.” Like with so much in health care, the implementation of this idea will determine its impact on patients. Restricted formularies can be an appropriate cost-saving strategy, but they must have adequate exception procedures. While many will be able to use the drug in the formulary, there will always be some who need one of the alternatives. Moving from two drugs per class to one will increase the number who will need to go outside the formulary increasing the importance of an appropriate exception process.
Above, I’ve done my best to approach the Administration’s plan with an open mind. There are some parts of the plan that will help although there is not as much substance as we had hoped. The President did not include two of his major campaign promises – Medicare directly negotiating prices and the importation of drugs from other countries. (Personally, I was not disappointed at the omission of the importation idea – I don’t think it would work as discussed in Appendix 1 below.)
After so much build-up, the reality is that the plan is just smoke and mirrors with a dash of policy thrown in.
Appendix 1 - Drug Importation
This idea, while not included in the administration’s plan is popular. Several states (Vermont being the farthest along) are looking to do this on their own. However, I remain skeptical and believe that at best this might be a transitional solution. Before I get to the reasons I don’t think this strategy will work, let me comment on the safety argument against importation. I consider this a scare tactic and not a reason to oppose importation – I’m sure all else being equal it would be possible to ensure the safety of Canadian drugs being imported into the US.
However, all else is not equal, and there are fundamental reasons why the strategy won’t work long term. Importing drugs from other countries is essentially outsourcing out drug pricing problem. There are difficult discussions to be had and decisions to be made regarding drug pricing; it won’t work if we try to point to Canada and say I’ll have what they’re having…
Other countries have lower prices than us for a reason. They obtain them by negotiating the countries single price for a drug. The key to a successful negotiation is the ability to say no – that above a certain price the purchase won’t be made – in the US we don’t negotiate a single price for everyone. And while some benefit plans do say no to certain drugs, most government plans (like Medicare and Medicaid but not the VA) essentially are not allowed to say no.
Why would a manufacturer agree to supply enough drugs at the Canadian price to export to the US when they are currently earning a higher price in the US? It would be a simple matter for them to restrict the Canadian purchasers from reselling the drugs, or to restrict the supply so that there was no product available for export. Again, while importation sounds like a good idea, if tried at any scale I don’t believe it would work.
Appendix 2 - Additional Resources
- Kaiser Health Tracking Poll – March 2018: Views on Prescription Drug Pricing
- Prescription Drug Spending in the US Health Care System (American Academy of Actuaries)
- Policy Strategies For Aligning Price And Value For Brand-Name Pharmaceuticals (Steven Pearson, Len Nichols, Amitabh Chandra)
- What are the recent and forecasted trends in prescription drug spending? (Peterson/Kaiser Charts)