Lowering drug prices: What’s being done, what’s to come (updated)

When Donald Trump announced his much-anticipated “blueprint” to control prescription drug prices on May 11, he said his administration was “launching the most sweeping action in history to lower the price of prescription drugs for the American people.”

The focus appears to be on four general strategies to bring down prices: increasing competition, giving CMS better negotiating tools, incentivizing drug manufacturers to lower list prices, and helping patients lower their out-of-pocket costs.

Increasing competition among generic drugmakers

A study by Duke University showed that within one year of a generic competitor entering the market, brand-name drugs first experiencing generic competition in 2011-2012 went from having 100 percent market share to 16 percent, on average. The researchers noted, “generic products’ share of total prescriptions in the U.S. increased from 36 percent in 1994 to 84 percent in 2012.”

Despite this, the Food and Drug Administration (FDA) has faced two problems regarding generics. One is a substantial backlog in generic drug approvals. Another is a lack of competition among some generic drugs (or, in some cases, no generic alternative has been produced because it hasn’t been financially viable).

Drugs are issued a 20-year patent soon after discovery, and the time from discovery to market—which includes clinical trials and FDA approval of a New Drug Application—averages about ten years. That means drugmakers have about ten years in which to recoup their investment. After that, generic equivalents are allowed to be sold and distributed, which, depending upon the number of competitors, can dramatically lower drug prices.

Under the Obama administration, the lag time associated with the approval of generic drugs declined from an average of 26 months in 2013 to about 14 months in 2015. The reduced lag time is tied to an increase in generic drug manufacturer user fees: Since the enactment of the Generic Drug User Fee Amendments of 2012, user fees climbed from $121 million in fiscal year 2013 to $373 million in fiscal year 2016. Drugs are getting to market faster, but it’s costing drugmakers more to be in the game.

More recently, under FDA Commissioner Scott Gottlieb, the agency has prioritized review of generic drug applications when there are fewer than three manufacturers of a generic alternative. That’s an important step to encouraging competition and lowering prices because, as one might expect, prices are driven down when more companies are manufacturing the drug.

Giving CMS more power to negotiate prices

Since the presidential campaign trail, Donald Trump has vowed to negotiate Medicare drug prices. But by law, the Centers for Medicare and Medicaid Services (CMS) is prevented from negotiation with drug companies for lower Medicare Part D prices or rebates, and Trump cannot change that by executive order alone.

Yet days after the “blueprint” was announced, Health and Human Services (HHS) Secretary Alex Azar said the current administration doesn’t believe that direct negotiations with manufacturers would lower drug costs. “The only way that direct negotiation saves money is by doing something this administration does not believe in: denying access to certain medicines for all Medicare beneficiaries, or setting prices for drugs by government fiat,” he said.

Instead, Azar announced that he plans to reintroduce a Bush-era competitive bidding program for Part B drugs called the Competitive Acquisition Program. Competitive bidding for generic injectables would have a profound effect on ratcheting prices down. If you doubt this, ask the durable medical equipment folks how much they like competitive bidding.

Azar also expressed President Trump’s interest in moving some Part B drugs to Part D, where Medicare supplemental drug plans can negotiate prices—although he expressed little urgency in when that might happen.

Motivating drug manufacturers to lower list prices

Repeatedly, Trump has threatened to take drug companies for price gouging, but so far his bark has been far worse than his bite. What was announced last week amounted to little more than shaming drug manufacturers into lowering prices.

For example, the FDA posted a list of more than 50 drugs for which generic drugmakers have been unable to obtain samples of certain branded products from the manufacturers. (The samples are needed to support generic drug approval applications; preventing access to them interferes with the approval process.) The FDA referred to this as a “gaming” tactic that leads to “delays in bringing affordable generic alternatives to patients in need.”

And then there was the suggestion that prescription drug prices be included in drug commercials. Fine, we ask, which drug price? Average selling price? Average negotiated price? Average out-of-pocket cost? List price? The reality is, drug pricing is complicated. Most consumers—and even most health care professionals—don’t understand the variations in the prices of drugs.

In fact, the problem lies with the complexity of how drugs are priced and paid for in the U.S., and a lack of transparency throughout the process.

When we pick up our prescription at the pharmacy, most of us pay a copay. The amount we pay has been negotiated in advance by a pharmacy benefit manager, or PBM, which earns rebates on each prescription that’s dispensed. PBMs have a list of all prescription drugs, called a formulary, that they categorize into tiers. Drug plans vary, but typically lower tier drugs are “preferred” and have a lower copay than higher-tier drugs. Drug manufacturers negotiate with PBMs to—you guessed it—be the preferred drug in their category on the formulary.

And what are PBMs and drug companies negotiating over? Rebates.

When President Trump refers to “rigged” pricing, one might presume that this is what he’s talking about. If the rebates that the PBM has negotiated is based on a percentage of list price, then a PBM actually benefits when a manufacturer raises their price.

Regarding PBMs, Secretary Azar noted: “It is easily within our power to forbid remuneration from pharmaceutical companies—to eliminate rebates, align interests, and end the corrupt bargain that keeps driving list prices skyward.” If Azar were to eliminate rebates—if he has the authority to do so—it would be a fundamental shift in how drugs are priced and paid for.

Lowering out-of-pocket costs for consumers

At about the same time the FDA was shaking its finger at the drug companies that weren’t playing well with others, CMS announced its enhanced “drug dashboards” that include year-over-year pricing changes for drugs reimbursed by Medicare Part B and Part D and Medicaid.

“Publishing how much individual drugs cost from one year to the next will provide much-needed clarity and will empower patients and doctors with the information they need,” said CMS Administrator Seema Verma.

Having access to this information may or may not make a difference to consumers, but greater transparency in drug prices—in whatever form it takes—is not a bad thing.

Some strategies outlined in Trump’s blueprint could have an immediate effect on what consumers pay, such as making generic drugs available free of charge to lower-income Medicare patients. Others could make a difference in the long run, such as ramping up demonstration projects for value-based contracting, including indication- and outcomes-based pricing.

Want to lower drug prices? Start a nonprofit drug company

While we wait to see if any of these strategies can truly lower drug prices, an article published recently by The New England Journal of Medicine served as a reminder of an approach that most likely will be effective.

In the article, the authors advocate for the establishment of a nonprofit generic drug manufacturer. In fact, a consortium of hospitals and health plans led by Intermountain Healthcare, in collaboration with philanthropists and the Department of Veterans Affairs, is doing just that with joint effort code-named Project Rx.

Why would having nonprofit status make a difference? The authors of the article argue that such an organization can be mission-driven to produce affordable, essential drugs and ensure a stable supply of products. Since a nonprofit can’t issue equity shares, it could initially be funded by philanthropic contributions. It also could secure contracts with hospitals and health plans for future drug purchases, which would protect the nonprofit manufacturer from being undercut by other generic drugmakers to force it out of the market.

“With its distinctive nonprofit orientation, capital structure, and marketing strategy, such a manufacturer might overcome entry barriers that deter potential for-profit entrants from competing in some generic-drug markets, since it cannot be forced out because of price changes in the market,” the authors wrote.

Now that’s thinking out of the box.

Note: This article first appeared in Our Take, Darwin's weekly strategic brief for health care executives. Sign up here to be on the distribution list.

Update: Regarding Project Rx, Modern Healthcare reported on a new survey from Reaction Data: "80 percent of nearly 750 providers, payers and pharmaceutical companies polled said they are optimistic or cautiously hopeful that the new endeavor will change the status quo, [and] 90 percent of 605 hospitals and clinics surveyed said they would buy drugs from the new entity."