PATCHWORK: "Ineffective government programs have failed to lower Brand-name drug prices and patient costs".

PATCHWORK: “Ineffective government programs have failed to lower Brand-name drug prices and patient costs”. November 1, 2023 v.2 Updated By Bruce A. Semingson, Pharmacist Pharmacy Perspectives, LLC Historical Perspective on Brand named drug prices increases During the last three decades or so the federal government has legislated a “patchwork of fixes” in multiple attempts to lower brand-name prescription drug prices. The methods were based on statutorily mandated drug manufacturer product rebates, discounts and penalties in exchange for the placement of their drugs on program formularies (drug lists) available to beneficiaries. During this long time period brand-name drug prices continued to increase, often at rates greater than average inflation rates. Patient out of pocket costs increased and patient medication abandonment increased. In other words, this patchwork strategy has proven to be ineffective. In 1990 and 1992 federal legislation created Medicaid, the Veterans and Department of Defense drug purchase program, and 340B drug discount programs. In 2003 Congress passed the Medicare Prescription Drug Act creating Medicare Part D Prescription Drug Plans and Medicare Advantage (Part C). Brand drug prices increased. (See definitions for brand-name drugs). The federal government passed additional legislation, the Affordable Care Act in 2010 which included provisions to increase manufacture rebates, discounts and penalties in order to adjust unintended market price increases including patient out-of-pocket expenses in Part D. Brand drug prices continued to increase. Concurrently there have been significant changes in the healthcare provider market. The number of independent and small chain pharmacies have decreased and the number of independently owned physicians’ practices declined creating patient access to care issues in many communities. Other health care stakeholders experienced massive growth: prescription benefit management companies (PBMs) grew organically and through mergers; medical insurers vertically integrated with PBMs and a major retail chain pharmacy and drug manufacturers (PhRMA) grew explosively. Brand drug prices continued to increase. 2 During this timeline private sector health insurance companies and PBM’s imitated a long term strategy to consolidate the retail prescription drug market by offering prescription drug management programs to employers, school districts, unions, government employees, and others. The consolidation provided predicable prescription pricing for these payers by leveraging discounts from retail pharmacies. PBMs emerged as key players and soon realized that they had the same market price power over drug prices as the federal government. By managing large groups of employees (thousands to millions of patients) enrolled in prescription plans they were able to leverage retail pharmacies, chains and independents, to accept lower reimbursements for prescription drugs in exchange for access to patients enrolled in the PBM programs. Those providing the deepest price discounts gained access to the largest number of patients in the PBM networks. PBMs and insurers grew in size; through mergers and acquisitions. They utilized their growing market share of prescription volume to negotiate drug rebates contracts with drug manufacturers in exchange for placement on drug formularies. Soon, along with the federal government funded programs like Medicaid and Medicare Part D a handful of PBM-insurers gained control of the majority of the entire USA prescription market. Vertical integration has propelled major insurers, PBMs and a retail pharmacy chains into positions of dominance. Insurer-PBM combinations are United Healthcare Group-OptumRx; Cigna-Express Scripts and Humana. CVS-Aetna includes the CVS retail pharmacy chain and Caremark PBM. Three of these entities, CVS-Aetna, Cigna Express Scripts and United HC-Optum Rx have a current PBM market share of 80%. Eighty out of every 100 prescriptions dispensed are administered by one of these three companies. Most of these entities have also acquired physicians’ practices and clinics. 22 PBMs and Insurers are paid rebates by brand drug manufacturers that range from an estimated 42% to 61% average reduction from the list price (or WAC) according to annual reports from ten pharmaceutical manufacturers reported in Drug Channels Institutes in 2022. Drug Channels also reported the total value of gross to net price reductions for patent protected brand drugs was $204 billion in 2021. Drug Channels coined the term “gross to net bubble” to describe the dollar gap between gross sales (at list prices) and their net prices after rebates and other reductions. 1. List prices or WAC is the price that manufacturers charge wholesalers and pharmacies for their brand drugs. In addition, PBMs and insurers earn markups on brand and generic drugs that are dispensed to enrolled patients. The markup is the difference between the prices charged to clients of the PBM-insurers and the amount paid to pharmacies which is always less. PBMs also charge pharmacies a per prescription fee, called a Pharmacy DIR, for all prescriptions dispensed to Medicare Part D enrollees. The fees were designed to reduce OOP costs to patients and fund performance measurers. They collected more than $11B in 2020. Prescription prices and patient out of pocket costs continued to increase and most performance measures have fallen by the wayside. Pharmacy DIR fees remain in place but in 2024 the fee will be shared with the patient. 2 3 Hospital system operate out-patient clinics which have access to the 340B drug discount programs which have the lowest net cost for prescription drugs in the USA. See below for additional information. Access to low-cost drugs permit hospital outpatient clinics to maximize their prescription margins because they are reimbursement by PBMs using list prices. As manufacturer rebates and discounts paid to government and private payers increased drug manufacturers increased their prices to compensate. Some drugs were increased by small percentages, others large. Manufacturers utilizing the business strategy of cost shifting in order to meet the demands of the payers: government, PBMs and insurers. As new drugs were innovated, they entered the market at ever increasing prices. In the private sector, the cash, and uninsured marketplace adjusted to pricing pressures too. As PBMs and insurers demanded lower and lower discounts retailers increased cash prices for prescription drugs to offset declines in gross profits. There are hundreds of examples that could be presented to demonstrate three decades of “patchwork” attempts to manage drug prices but none are better than prices for insulin products. In the years prior to government pricing mandates and consolidations of insurers it was standard operating protocol for retail pharmacies to sell insulin products to patients at or near their cost. Competition between retail pharmacies drove the pricing. Retail prices for a 10 ml vial of Humulin, a market dominant insulin, was $20 to $25 in the mid 1980’s. Insulin syringes were priced similarly. As PBM “managed care” programs grew they added insulin as a covered drug to their formularies. Insulin price began to increase at double or triple the rate of inflation. The number of stakeholders increased between the patient and the pharmacy and they demanded a portion of the increasing price for insulin. The physician-patient-pharmacy relationship changed to the physician-PBM -insurer-manufacturer-patient-pharmacy relationship. Insulin prices mushroomed reaching $300-$400 per vial in last year. Newer insulins have higher costs. The Inflation Reduction Act of August 2022, defined later in this document, includes a maximum price of $35 for a month’s supply of some insulin products for patients who are beneficiaries of government funded programs. On March 1,2023 Eli Lilly, one of three worldwide insulin makers, announced the implementation of selected insulins at $35 per month cost for private sector patients. Essentially some insulin prices are returning to the former “low cash price” environment of the 1980’s. PBMs and insurers will not appreciate these changes as they will not be able to collect rebates from these low cost, high demand, insulins. Some significant price reductions have occurred with the beginning of generic drug licensing and manufacturing. In 1984 Congress passed the Hatch-Waxman Act which encouraged the manufacturing of generic drugs by the pharmaceutical industry. As brand drug patents expire, they are recreated by generic manufacturers and sold once approved by the FDA. Competition quickly increased and prices decreased as much as 80-90% from the brand equivalent. Often the cash price for generic drugs is less than the copayment or cost sharing amount charged by Medicare Part D and PBM and insurers. Generic drugs are a text book example of what free enterprise, competition and innovation can achieve. Generic drug prices are not the focus of this document. 4 Drug innovation continues to expand. In recent years the science of human physiology, cellular biology and genetics has expanded exponentially. This new knowledge is the cornerstone for the development of biological pharmaceuticals, also known as Specialty Drugs. Near “miracle” drugs for the treatment of rare and once disabling diseases like diabetes, auto-immune disorders and cancer are now have available. Biopharmaceutical origins can be traced back to recombinant insulin development in the 1980-1990’s. According to Iqvia Institutes “Use of Medicine in the U.S.2022” report, 55% of brand prescription spending in institutional and retail settings is for Specialty medications calculated after manufacturer rebates. Specialty drugs account for a meager 3% of the prescription volume and are four (4) times more costly than traditional medications. Specialty drugs are the new battleground for market share control by PBMs and insurers. 3 In 2021 the private- commercial and government funded prescription drug programs spent $774B for medications calculated at list or wholesale acquisition cost (WAC). The net cost after manufacturer rebates and discounts was $407B according to Iqvia Institute. 3 Five key government programs that administer the procurement and utilization of Brand named prescription drugs. Medicare parts B, C, D, Medicaid. 340B, Veterans Administration, Department of Defense and other federal agencies participate in numerous federal drug purchase programs each of which is operated and administered as separate, disconnected programs. All are beneficiaries of statutorily established drug manufacturer rebates or discounts delivering hundreds of billions of dollars ($B) to federal agencies and Medicare Part D. Medicare Part D, operated through private sector entities, receive drug discounts for patients who are in the “donut hole” phase of the Medicare Part D benefit. Another common component of federal legislation is the inclusion of financial penalties charged to manufacturers whose drug prices increase in percentages greater than the CPI-U index. Penalties contribute billions of dollars annually. Confidentially clauses in the programs are standard which prevent or greatly reduce price scrutiny. Certain federal agencies, 340B and the VA for example, are not permitted to share net pricing data with other agencies. In August, 2022 Congressional legislation added another “patch” to reign in brand drug prices: the Inflation Reduction Act. Following is a review of the current five (5) largest tax payer funded federal prescription drug programs which is essential in order to fully comprehend the 3 decades of patchwork legislation which has fueled drug price increases and patient out of pocket costs and often lined the financial pockets of PBMs-insurers and other middlemen. Coupled with the high concentration of private sector stakeholders our pharmacy industry is in chaos, especially from the perspective of patients. This document will demonstrate that legislators and policy makers either lacked 5 knowledge and an understanding of current drug programs and the marketplace operations or received poor advise or were compromised for personal benefit before making critical decisions that impacted prescription drug pricing for decades. The result: Patchwork fixes failed to benefit patients and taxpayers and to reduce costs. 1. Medicare Part D. Medicare Part D is the largest single payer prescription drug program, by dollar volume in the USA and is composed of Prescription Drug Plans and Medicare Advantage with a Drug benefit. According to the Centers for Medicare and Medicaid as of October, 2022 the Medicare Part D program enrolled 50.67 million patients. 4 Medicare Part D provides a comprehensive outpatient drug benefit for older adults and people with long term disabilities. It is administered by private sector sponsors, PBMs and insurers, who bid to provider standard benefits via a CMS annual bidding process. The program is voluntary for Medicare eligible people. Beneficiaries pay a monthly premium which is based on annual income. In 2023 there are four phases to the Medicare Standard Benefit. Phase one is the yearly deductible which is $505 which is paid by patients. Phase two is the initial coverage phase which is the total costs for drugs paid by the plan and patient until the year-to-date total drug costs reaches $4660. Phase three is the coverage gap covering total costs from $4660 to $7400. Phase three provides a 70% price discount for brand drug paid by drug manufacturers. The Plan pays 5% and the patient pays 25%. Patients also pay 25% of the price of generic drugs. Once $7400 in year-to-date drug cost is reached patients move to Phase 4, the catastrophic coverage phase for the rest of the calendar year. The Plan and Medicare pays all drug costs except for a patient payment of 5 percent. All drug costs are defined as the negotiated drug costs between the Plan sponsor and the pharmacy providers. 5 Overall, Medicare Part D is structured so that patients pay approximately 25% of the drug benefit in the form of out-of-pocket costs (OOP) on an annual basis. OOP costs are a total of the premiums, deductibles and drug cost sharing amounts. Some eligible patients receive subsidies that offset their payments. Patient cost sharing amounts are, either a fixed dollar amount (co-payment) or a percentage (co-insurance) of the negotiated cost of the drug. Co-payments are usually for generic drugs or low-cost brands. Co-insurance is used for more expensive brand and specialty or biological drugs. The cost sharing amount is calculated from the drugs cost BEFORE any manufacturer rebates or discounts are paid to the sponsor. Tens of billions of dollars in rebates and discounts are paid by drug manufacturers o Plan sponsors. According to plan sponsors these revenues assist in the funding of the drug 6 benefit, patient premiums, and patient cost sharing. However, the uses and actual expenditures are not disclosed nor transparent. One thing is clear, patient cost sharing for brand prescription drugs continues to increase and a growing number of patients either abandon their drug treatments or never purchase them. Iqvia Institutes calculated that 81 million prescriptions were abandoned at pharmacies in 2021. 3 In 2021 there were approximately 14.3 million patients who qualified as low-income assistance (LIS patients). The Part D program covers the majority cost of the premiums, deductibles and per prescription cost sharing for these patients. Many of these patients are also eligible for state-based Medicaid health services. These patients are known as “Dual Eligible”. 3, 6 2. Medicare Part B Medicare Part B serves Medicare beneficiaries who elect to participate in the program and pay monthly premiums plus 20% co-payment of the cost for covered medications. Medicare also charges an annual deductible. In 2020 approximately 32 million beneficiaries utilized Part B services. Total Part B spend was $40.7 B in 2020 according to MedPAC. 7 Medicare Part B covers approximately 600 brand drugs, mostly infused or injectable drugs administered in physicians’ offices or outpatient hospital centers. Cancer, rheumatoid arthritis, vaccines and macular degeneration are the largest treatment segments of Part B program. Between 2009- and 2020-Part B spending grew 9.2% per year on average. 8 Part B drug ingredient cost is paid to physicians and hospitals based on the Average Sales Price or ASP, plus a small markup. The Average Sales Price (ASP) is defined as the price that manufacturers receive from the sale of a drug net of ANY price discounts including prompt pay. See definitions in Appendix A. Specialty/biological drugs are the fastest growing component of Part B expenditures. They will soon dominate Part B drug use. Eligible hospitals that participate in the 340B drug program, see below, receive substantial discounts for outpatient drugs covered in Part B. 340B net prices are lower than the Part B Average Sales Prices. 8 3. Medicaid and Children’s Health Insurance Program (CHIPS). Medicaid is a joint state and federal government program which provides medical and prescription coverage for approximately 84.37 million (2022) low income and vulnerable populations. The cost to beneficiary’s ranges from zero to $4.00 per prescription in most cases. Gross drug cost estimates for 2020 was $73.4B and a net cost of $39.2B after 7 manufacturer rebates. Brand net cost were less than 50% of the list (WAC) price. 4, 9, 16 In 1990 Congress established the Medicaid Drug Rebate Program (MDRP) to ensure that the Medicaid program pays the lowest drug prices by mandating the payment of drug manufacturer rebates to the federal government for all covered brand and generic outpatient drugs. In return manufacturers are awarded access to Medicaid formularies for all of their drugs. In addition, the MRDP requires manufacturers to provide discounts for brand drugs to the Department of Veterans Affairs, and Medicare Part B. 7, 9 The rebates are shared with the state governments based on federal-state funding ratios. States via group purchasing coalitions also negotiate supplemental rebate contracts (average about 10% of WAC) for their own use. Generic manufacturers also pay rebates as a requirement for participation in each Medicaid program. Medicaid programs pay the “Medicaid Best Price” which is another legislative mandate that requires drug manufacturers to offer state Medicaid programs the best price given to any other purchaser (with a few exceptions) or pay a rebate of 23% of the average manufacturer price (AMP) on most brands and 13% of AMP for generics. Manufacturers are also subject to penalties when their prices increase more than the CPI-U which in recent years generated a significant portion of the rebates. See Appendix A for definitions of Best Price an AMP. 3, 8, 9 There are two types of Medicaid programs: Fee for Service (FFS) operated directly by states or managed Medicaid plans (MCOs) operated through state capitated agreements with private sector companies. Both programs have access the MDRP prices. Over half of the states utilize MCOs. Centene is the largest provider of managed Medicaid prescription plans. In recent years Centene and other PBMs have been required to pay state Medicaid programs for hundreds of millions of dollars in drug overcharges. In 2010 the Accountable Care Act increased the manufacturer rebates amounts and added requirements that manufacturers must participate in the 340B drug discount program and are subject to Medicaid Best Price requirements. 11. 4. 340B Drug Discount Program. Health Resources and Services Administration or HRSA, a division within the Health and Human Services Administration was created in 1992 to give Medicaid like discounts on outpatient drugs for indigent and underserved patients. Currently HRSA administers approximately 1400 Federally Qualify Clinics (aka: grantees), called “Covered Entities”. They also oversee other C.E. including Critical access and Children’s hospitals; Ryan White HIV/AIDS centers; TB clinics; centers for the homeless; Native American tribal clinics; inner city and rural clinics; and others. These clinics operate more than 14,000 deliver sites serving more than 30 million Americans. The clinics either operate their own 8 pharmacies or contract with retail pharmacies to provide formulary-based medications. 10, 13, 15 Hospital systems manage the majority of these clinics through their outpatient departments and offsite clinics. These hospitals are represented (politically and operationally) through consortiums known as Safety Net Hospitals or Critical Access Hospitals and others. Often the covered entity contracted pharmacy providers are reimbursed at market rates because many patients utilizing covered entities have insurance. As a result, they are paid and above market reimbursement because of the below market cost of the 340B drugs. Covered entities often share in these profits. The 1992 legislation mandates that drug manufacturers participating in Medicaid also provide outpatient drugs to covered entities at significantly reduce prices not greater than Medicaid net prices after rebates. The discounted brand drug cost is estimated at up to 50% to WAC or list minus 50%. 12 The Covered Entities purchase their brand drugs at federally mandated deep discounts through a GPO known as Apexus LLC, a subsidiary of Vizient Inc. Vizient negotiates drug purchases for in-patient hospitals. 17 The 340B discount program has expanded exponentially since the passed of the Affordable Care Act in 2010. Now it is ranked as the second largest federal prescription drug program. Purchases of brand drugs in 2021 was $93.6B at WAC or $43.9B after discount; a cost reduction of $49.7B. The Berkley Research Group predicts that the 340B Drug Discount Program will be the largest federal drug purchase program by 2026 exceeding gross purchases through Medicare Part D and Medicaid. See 340B in Definitions in Appendix A. 13,14*15*17 5. Federal Supply Schedule: The Big Four Agencies The federal government and its agencies purchase outpatient pharmaceuticals through other programs, the largest of which is the Federal Supply Schedule or FSS. The FSS negotiates and establishes prices that are available for all direct federal purchases. Agencies provide their own dispensing services. Essentially the FSS is a federal GPO. Four programs dominate and are referred to as the Big Four Agencies. a. The Department of Defense which operates the TRICARE Prime Vendor and TRICARE Retail Pharmacy Network. b. The Veterans Administration Prime Vendor program. c. The Public Health Program which includes the Indian Health Service. d. The Coast Guard. Other direct federal purchases include the Bureau of Prisons, Peace Corps, Immigration and Customs Enforcement, National Aeronautics and Space Administration and the 9 Department of State. Indirect federal purchasing programs, separate from the FSS, are Medicaid, Medicare Part D and the TRICARE retail pharmacy network. Many purchasing conditions apply to FSS purchases including a Federal Ceiling Price which is equal to at least 24 percent OFF the average price that manufacturers charge to non-federal purchasers. The FSS is administered by the Department of Veteran Affairs. Prices are not available to the public. 19 Medicare Drug Price Negotiation Program 6. Medicare Drug Price Negotiation Program. Aka: IRA of August 2022 In August 2022 Congress passed the Inflation Deficit Reduction Act (P.L. 117-169) which requires the Department of HHS (via CMS) to negotiate prices for some top selling brand drugs covered under Medicare for Part D, Part B and for vaccines in Part D and Medicaid/CHIP. The Act established many key provisions including: a. The law sets a “fair price” ceiling at the lower of: 1. A fixed 25 to 60% discount off the pre-rebate non-federal AMP (non-FAMP); or 2. The net price (after rebates) already negotiated by Medicare Part D plan sponsors. For Medicare Part B drugs the lower of ASP price or a percentage of the non-FAMP. The older drugs are subject to the greater discounts. Additional clarification will be needed for the fair price ceiling. Current pricing policies for Part B, Medicaid, 340B and the Federal Supply have “ceilings” and mandated rebates or discounts. b. A rebates penalty against drug manufacturers if their prices are above the CPI-U inflation rate. 2021 is the base for measuring cumulative price changes relative to inflation. d. Manufacturers will be charged additional penalties or an excise tax if they do not negotiate or fail to implement negotiated prices. e. It eliminates the 5% coinsurance for patients in the catastrophic phase of Part D beginning in 2024. f. It caps at $2000 the patient out of pocket (OOP) annual cost. Manufacturers are mandated to provide discounts to beneficiaries who surpass this cap. g. It limits annual increases in Part D premiums to no more than 6% per year for 2024 to 2030. 10 h. It limits cost sharing for covered insulin products to $35 a month per prescription in Part D and for infusion pumps in Part B. i. In 2024 it expands Part D eligibility for low-income subsidy (LIS) beneficiaries’ benefits. j. In 2023 it eliminates cost sharing for adult vaccines in Part D and improves adult vaccine access in Medicaid. k. Vaccines are excluded from maximum price negotiations. l. Price negotiations will begin nine (9) years after a drug patent license date for small molecule drugs and thirteen (13) years for biologic drugs. The new law requires the Secretary of HHS to negotiate Part D and B prices from the 50 most negotiation-eligible drugs with the highest total Part D and Part B spend based on cost. These eligible drugs include brand drugs or Specialty/ biologic drugs and exclude the following: a. Drugs that have a generic equivalent or biosimilar available. Unbranded biologics are excluded. b. Biologics with federal spend of less than $200 million per year. c. Single entity orphan drugs. CMS has announced the following timelines for implementation of changes, subject to change: 2023 a. Manufacturer penalties for drug price increase greater than CPI-U will begin in 2023. b. The Secretary established a list of the most expensive brand drugs in Part D sold between June 1, 2022 and May 31, 2023, and will enter into negotiations with manufacturers to determine a maximum price for ten (10) drugs. c. The list of ten drugs selected for price negotiation released on 9/1/2023: Eliquis, Xarelto, Jardiance, Januvia, Entresto, Farxiga, Imbruvica, NovoLog, Enbrel, and Stelera. d. Implement a maximum cost for covered insulins in Part D at $35 per month per prescription. Infusion pump insulin covered in Part B is included. Deductibles do not apply. e. Eliminate the cost sharing for adult preventive vaccines covered in Part D and implement vaccine coverage in Medicaid. 2024 a. Eliminate the 5% co-insurance drug payment for patients in the catastrophic coverage phase of Part D. b. Expand Part D eligibility for low-income subsidy (LIS) patients. 11 2025 a. Implement a $2000.00 annual cap for Part D patient out of pocket costs. 2026 a. Implement maximum price for 10 Part D drugs selected in 2023. b. Negotiate maximum price for an additional 15 expensive Part D brand drugs for implementation in 2027. 2027 a. Implement maximum prices for the 15 drug prices negotiated in 2026 and implement in 2028. b. Initiate negotiation on an additional group of costly drugs in Part D or B. 2028 a. Negotiate maximum price for 20 additional brand drugs from Part D or B and in 2029. Many components remain to be clarified and established regarding renegotiations; changes to top selling drug lists; discounts from net versus gross drug costs; overall cost sharing between CMS, manufacturers and Part D sponsors; and others. 20, 21 Private or Commercial Prescription Drug Benefits Plans Commercial or private sector drug benefits are not covered in this review although there are many similarities with Medicare Part D program. Our private sector insurance and drug purchase industry also utilizes its market size and leverage to negotiate deep discounts from drug manufacturers. A primary driver of commercial sector drug price negotiation leverage is size. Three insurers owned PBMs (United Healthcare-Optum, Aetna-CVS-Caremark, and CignaExpress Scripts) managed 80% of the US prescription claims including Medicare Part D. 22 Their combined market share grants them the leverage to negotiated deep discounts from drug manufacturers via manufacturer rebates. Other leverage tools include restriction of drugs from formularies; dispensing quantity limits; step therapy policies; prior authorization requirements and others. Unfortunately, most of these price reduction policies do not reduce patient OOP costs at the point of purchase. PBMs maintain that rebates are utilized to offset premiums and patient cost sharing through a tiered pricing system, however factual disclosures are not available. 12 Confusing? Absolutely. Complex? Beyond reason. It’s an inefficient Patchwork Strategy that does not deliver lower brand prescription prices to patients, except those who are eligible for taxpayer subsidized healthcare and prescription benefits (e.g. Medicaid). However, the Patchwork strategy delivers abundant financial rewards to companies in the middle- between manufacturers and patients- including insurers, PBMs, health plans, hospitals, and consultants. Conclusions The US Healthcare system spent $4.1T in 2021. It is the third largest expenditure in our economy. Outpatient prescription drugs accounted for $776B in the same year; 19% of the system spend. However, prescription drugs remain a primary focus of political rhetoric, media attention and consumer anxiety. In a CMS conference call on January 24, 2023 CMS Administrator C. Brooks-LaSure stated that the agency provides health services to over 150 million people. Add the Veterans Administration, the Department of Defense and other federal agencies to this number approximately 50% of our population have federally administered health care. Federal agencies have absolute market leverage for purchasing prescription drugs for the tax payer funded public programs. But our leaders have chosen a pathway to deleverage its purchasing power and buy hundreds of billions of dollars of pharmaceuticals through five separate (soon to become six) programs each of which earn massive discounts or rebates which often fall into the abyss. Our current approach is based on statutory dictates and penalties instead of free market negotiations and strategies. It’s a “Patchwork” of fixes with one common result: brand drug prices continually increase. Imagine negotiating drug purchase prices in a silo for nearly 50 million enrollees in Medicare Part D plans operated by eight (8) separate and distinct plan sponsors. These eight plan sponsors control 89% of all Part D enrollees 23. Other major programs: Medicare Part B’s 32 million patients utilizing 600 high demand and innovative drugs; Medicaid for its 84 plus million patients which is riddled with price ceilings, penalties, rebates, and 50 plus managing entities; the 340B program which enjoys the lowest brand drug costs and little oversight; and the Federal Supply Schedule are all operated as separate entities. It’s a “patchwork”. Add the new Medicare Drug Price negotiation program and the complexity and inefficiency is supercharged. 13 Now imagine a SINGLE federal drug purchase program where all of the drugs for all federal-state programs negotiated with the manufacturing industry. Using the business fundamentals of negotiation strategies that maximize the market power of the buyer (our government) could save billions of dollars; reduce the size of its agencies saving additional billions.; and achieve the original objectives of tax payer funded prescription benefits: lowering the overall brand drug costs and reducing patient out of pocket costs. Implementation of a single drug procurement program will face much opposition especially from private and government stakeholders including: ? Drug manufacturers, ? Medical Insurance companies and PBMs, ? Federal and state government elected Representatives, ? policy makers, ? and bureaucrats. The loss of billions of dollars in rebates and penalties will outrage the stakeholders who utilize them for the benefit of their entities as they will lose the power to manipulate the market. When European nations, the UK, Japan and others created their health care programs they chose to maximize their purchasing power by utilizing a single source negotiation process’ for pharmaceuticals. They select drugs based on treatment outcomes and costvalue ratios. While they have their own economic challenges including limited access to some drugs and delays in treatments it behooves our leaders to explore their procurement strategies. Recently two worldwide pharmaceutical manufacturing companies have announced that they are considering exiting two European purchasing programs. The primary reason is the apparent absence of financial benefit from the sale of their products to the UK and Germany. Is this the new trend in opposition to a business environment that is no longer supportive of rewarding development and innovation? Earlier in this document I reviewed the circumstances that contributed to the pricing escalation of insulin prices which serve as the premier example for the evolution of high drug prices in the USA. Currently our dynamic marketplace is demonstrating push-back regarding excessive rebates, discounts and price inflation. In the 2021 and 2022 annual company reports of Sanofi pharmaceutical, the manufacturer of the highest volume insulin product in the world-Lantus, described the results of years of increasing rebates and list prices. Remember list prices are the purchase prices that manufacturers assign to their drugs and are often referenced as the price of brand drugs in media publications and political mantra. Since 2012 the average out of pocket costs for patients taking Lantus (insulin glargine injection) purchased through commercial and Medicare Part D prescription plans increased approximately 60%. During this same period Sanofi received 62% less income for the same insulin due to increases in rebates paid to government and 14 commercial sector payors. The 62% is a discount from the Lantus list price, also known as the net price earned by the manufacturer. The net price of Lantus has fallen for seven (7) consecutive years. In 2022 the average net price of Lantus paid to Sanofi was lower than in 2004. In 2021, 49% of Sanofi’s gross sales, at list price, were given back to payor as rebates composed of: $5.8B in mandatory rebates to government payers (USA) and, $8.3B in discretionary rebates to PBMs, insurers, and others. According to their annual reports Eli Lilly and Novo Nordisk experience similar pricing scenarios. In March 2023 Sanofi, Eli Lilly and Novo Nordisk, the worlds makers of insulin products announced drastic decreases in list price of their insulins: ? Eli Lilly-list less 70% for most insulins and at maximum of $35/month for insulins on its “Insulin Value Program”. ? Sanofi-list less 78% for Lantus and 60-70% on other insulins ? Novo-Nordisk-list less 75% for Novolog, 65% less for Novolin and Levemir. The three manufacturers’ prices reductions will be implemented between April 2023 and January 2024. The maximum patient OOP cost will be $35 per month for some insulins corresponding to the recent decreases in Medicare Part D. 24, 24, 26 These decreases were in response to political pressure influencing the market through the Inflation Reduction Act of 2022 for Medicare patients; the need to lower patient OOP costs for commercial and cash paying patients taking insulin. It may be a “shot across the bow” to change the rebate/discount game that does not directly benefit patients. . The availability of $35 insulin and new lower costs for other newer insulins expands patient choices for supply. They can use their insurance benefit or simply pay cash whichever is less. A common purchase tactic utilized by millions of Americans when their insured prescription cost sharing payments (co-payments and co-insurance) are greater than cash prices available in the market. The eventual loss of rebates on these insulin products will negatively impact government, PBM and insurers payors. Other brand drug products may follow this new “rebate less” pricing strategy. Some branded drugs are vulnerable to this new pricing strategy due to ever increasing deductibles and cost sharing amounts. Perhaps our energy should be applied to discovering new methods for the payment of certain high-cost pharmaceuticals. A new program with an objective to support affordable access for patients. We should end anti-competitive conditions such as 15 statutory mandated discounts, rebates and penalties that do little more than promote gamesmanship and concentrate economic power. Appendix A Definitions. 1. GROSS and NET Brand drug prices. Drug manufacturers set a list or wholesaler acquisition price (WAC) on all proprietary/brand drugs covered under a patent. In order to offer their medications, usually through formularies or list of drugs, to patients they most often pay rebates or discounts to market payers including insurers, pharmacy benefit managers (PBMs), state and federal governments and agencies. Separate distribution fees are paid to distributors and wholesalers Industry rebate and discounts have been increasing and currently average 30% or more of the list (WAC) price with the majority in the form of rebates and discounts paid to insurers, PBMs and government entities. For many years Drug Channel Institute has analyzed and reported brand drug manufacturer rebates and discount reductions. In 2021 they reported that reductions to list prices exceed 50% from the entire industry and exceed $200B. Drug Channels Institute, May 10, 2022. Gross-to-Net Bubble Update: 2021 Pricing Realities at 10 Top Drugmakers. https://www.drugchannels.net/2022/05/gross-to-net-bubble-update-pricing.html . 2. Brand-name drugs. Brand-name drugs are patent protected pharmaceuticals commonly known as single-source drugs. Once a patient expires equivalent copies of these drugs may be manufactured according to FDA regulations. Once available the drug is defined as a multi-source drug or generic. Brand-name drugs are referred to in this document as brand drugs. Most manufacturer rebates are paid on brand-name drugs. However, some providers, Medicaid for example, collect rebates on multi-source brand drugs when the actual brand product is dispensed in place of less costly generics. 3. Wholesaler Acquisitions Price (WAC) or List Price. The WAC, also known as the manufacturer list price, direct price, wholesaler invoice price or gross price is the primary industry price of a brand drug. The WAC does not include discounts, rebates, prompt pay allowances or other reductions in price which may be a component of pricing transactions. Retail pharmacies, mail order pharmacies and other outpatient drug providers purchase pharmaceuticals at WAC plus or minus a discount. Large volume purchasers earn a discount from WAC based on volumes, product mix, payment terms, and other criteria. Discounts vary from1% to 6% or more. WACs may also be utilized to define the retail or reimbursement price paid to pharmacies and other medical providers for brand drugs. WAC prices are published by brand manufacturers for industry use. 4. AVERAGE SALES PRICE (ASP) Recognizing flaws in the Average Wholesale Price benchmark, the Medicare Prescription Drug Improvement Act of 2003 changed the basis for Medicare Part B drug reimbursements from AWP to ASP. 16 The ASP is the price that manufacturers receive from the sale of a drug net of ANY price rebates, discounts, and prompt pay discounts. CMS manages AND compiles this data and offers it to authorized Part B providers. Part B providers are reimbursed at ASP times 106%. Best Price requirements also apply. For comprehensive details on ASP go to. https://www.ecfr.gov/current/title-42/chapter-IV/subchapterB/part-414/subpart-K/section-414.904 5. Average Manufacturer Price (AMP). The AMP is, for a covered outpatient drugs, the average price paid to the manufacturer for the drug in the United States by wholesalers for drugs distributed to retail community pharmacies and pharmacies that purchase drugs directly from the manufacturer. The AMP is less all adjustments such as rebates, and discounts, including cash discounts except prompt pay; to charitable organizations, insurers, PBMs, federal agencies, VA, HIS, TRICARE, HMOs, mail order pharmacies, LTC. pharmacies, and 340B. For more details on AMP go to: https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-C/part447/subpart-I/section-447.504 6. Nonfederal Average Manufacturer Price (non-FAMP). The non-FAMP is the average price paid to manufacturers by wholesalers for drugs distributed to nonfederal purchasers, less discounts but excluding any prices paid by VA. The non-federal AMP excludes rebates paid by manufacturer to third party payers such as insurance companies and PBMs. The Big Four, see definitions, are entitled to a brand manufacturer discount of at least 24% OFF the price that manufacturers charge to non-federal purchasers. This price is referred to as the “Federal Ceiling Price”. It is reported to the VA and not publicly available. https://www.cbo.gov/publications 57007, February 2021. 7. Big Four He Big Four are the following federal departments or agencies: Department of Defense (DOD), Veterans Administration (VA), Public Health Services which includes the Indian Health Service, and the Coast Guard. https://www.cbo.gov/publications 57007, February 2021. 8. Best Price The Medicaid Drug Rebate program (1990 plus revisions) established a Best Price requirement defined , for a single source drug or innovator multiple source drug (aka: Brands) of a manufacturer (including an authorized generic drug), as the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity in the United States in any pricing structure (including capitated payments), in the same quarter for which the AMP is computed. Prices excluded from Best Price include: Federal Supply Schedule, Medicare Part D, TRICARE, state supplemental rebates, manufacturer coupons and charity donations, and others. Brand manufacturers are also required to pay rebates calculated from AMP. The current rebates are 23.1% of AMP for most drugs and 17.1% of certain brands such as blood clotting factors. Penalties tied to price increases above CPI-U inflation also apply to brands and generics. Generic drugs do not have a Best Price requirement, but manufacturers are required to pay a 13% of AMP rebate to the Medicaid program. Best price applies to all Medicaid and Part B outpatient programs. BP is confidential. 17 https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-C/part-447/subpart-I/section-447.505 9. 340B Ceiling Price. 340B ceiling prices are, in my opinion, the lowest brand drug costs in the USA. Administered by the Health Resources Services Administration. Statutes requires drug manufacturers to sell outpatient drugs at a discount to “Covered Entities” as a requirement for participation in Medicaid and Big Four contracting. The Berkeley Research Group predicts that the “340B program will be the largest federal drug program, eclipsing gross drug sales of both the Medicare and Medicaid drug programs.” (HRSA calculates a 340B Ceiling Price (C.P.) by utilizing Average Manufacturer Prices (AMPs) and Best Prices. The C.P. is the maximum price a manufacturer can charge a C.E. The statute defines the 340B C.P. as the AMP less the established Medicaid basic rebate of 23.1% for branded drugs, 17.1 % for pediatric and blood clotting factor medications, and 13.0 % for multi-source generics. Most Covered Entities pay even lower prices by participating in the Prime Vender Program, currently administered by Apexus who negotiate prices below ceiling price for many, not all, of the drugs under contract. The estimated average savings are, at least, an additional 10% below C.P. (6). Ceiling Prices are proprietary and are not disclosed. Industry and government analysts utilize various methodologies to predict 340B prices. a.340B Vendor Program. https://www 340B pvp.com . b. IQVIA Institute.org . “340B program continues to grow while contract pharmacy restrictions take effect, April 5, 2022”. https://www.iqvia.com/insights/t340B . c. Smith, William, Archambault, Josh. “340B Drug Discounts: An Increasingly Dysfunctional Federal Program”, March 22, 2022. https://pioneerinstitute.org/pioneer-research/340b-drug-discounts-anincreasingly-dysfunctional-program . d. Berkley Research Group. 340B Program Outlook. https://www.thinkblogbrg/ ___________________________________________________________________ . Citations and References 1. Fein, A. “Gross to Net Bubble Update: 2021 Pricing Reality at Ten Top Drug Makers.”. Drug Channel Institute. May, 10, 2022. https://www.drugchannels.net/2022/05/gross-to-net-bubble-update-pricing.html . 2. Fein, A. Pharmacy DIR Fees in Medicare Part D, 2013 to 2020. https://www.drugchannels.net/2021/11/ 3. IQVIA Institute.org . “The Use of Medicines in U.S. 2022”. https://www.iqvia.com/insights/the-iqviainstitute/reports/the-use-of-medicines-in-the-us 4. CMS.gov . “CMS Daily Digest Bulletin, January 31, 2023. 5. Kff.org . “Medicare Fact Sheet Part D drug Benefit. https://www.kff.org/medicare/fact/sheet/anoverview-of-the-medicare-part-d-prescription-drug-benefit . October 19, 2022. 6. 2022 Annual Report of The Boards of Trustees of Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds available at https://www.cms.gov/OACT/TR . 7. Medpac, “Health Care Spending and the Medicare Program”. https://www.medpac.gov/document/july2022-data-book-health-care-spending-and-the-medicare-program/ . Chart 1-10, pages 133-135,145,155. 8. CMS.gov . Medicare Part B. https://www.cms.gov/medicare/medicare-fee-for-service-part-bdrugs/mcrpartbdrugavgsalesprice and 340B. https://www.hrsa.gov/opa/educational-resources . 18 9. Kaiser Family Foundation. “Understanding the Medicaid Prescription Drug Rebate Program, December 19, 2019. https://kff.org/medicaid/issue-brief-/medicaid-outpatient-prescription-drug-trends-during-rthecovid-19-pandemic-appendix/ . 10. Centers for Medicare and Medicaid Services, 2022 Medicare Advantage and Part D rate announcement fact sheet, January 2022. https://www.cms.gov/newsroom/fact-sheets/2022-medicare-advantage-and-partd-rate-announcement-fact-sheet . 11. Affordable Care Act of 2010. P.L.111-148. https://www.govinfo.gov/content/pkg/PLAW111publ148/pdf/PLAW/ 12. Medicaid and CHIP enrollment data. https://www.medicaid.gov/home/medicaid/ program/information/Medicaid and CHIP enrollment data. And prescription drug/state prescription drug resources/ 13. HRSA.gov . https://www,hrsa.gov/home/ and https://hrsa.gov/opa/implementationcontract 14. Amgen 2022 Biosimilar Trends Report., Figure 41. https://www.amgenbiosimilars.com/commitment/2022-Biosimilar-Trends-Report . 15. Fein, A. “Exclusive: Five Pharmacy Chains and PBMs Dominate 2022’s Still-Booming 340B Contract Pharmacy Market”. https://www.drugchannels.net/2022/07/12/ 16. Medicaid Drug Rebates. https://www.medicaid.gov/medicaid/prescription-drugs/medicaid-drugrebate-program/index.html 17. Apexus. https://www.apexus.com/340b-prime-vendor-program 18. Fein, A. “The 340B Program Climbed to $44 Billion in 2021—With Hospitals Grabbing Most of the Money”. https://www.drugchannels.net , August 15, 2022. 19. Mulcahy, Andrew. Health Affairs, https://www.healthaffairs.org . “Medicare Drug Price Negotiation: Key Decisions to Reach A “Fair Price”. November 7.2022. DOI:10.1377. 20. KFF.org . https://www/kff/org/medicare/issues-brief/explaining-the-prescription-drug-provisions-inthe-inflation-reduction-act . 21. Inflation Reduction Act of 2022. https://www.congress.gov>plaw>PLAWS>117-169 . 22. Fein, A. “The Top Pharmacy Benefit Managers of 2021.” https://www.drugchannels.net/2022/04/05 . 23. KFF.org . “Key Facts About Medicare Part D Enrollment and Costs 2022.” August 17, 2022 https://www.kff.org/medicare/issue-brief/key-facts-about-medicare-part-d-enrollment-and-costs-in-2022/ 24. Loftus, Peter, Wall Street Journal, “Novo Nordisk to Slash Insulin Prices by Up to 75%.” https://www.wsj.com .. 25. Sanofi. https://www/sanofi.com/investors/annual reports/2021, and 2022. 26. Eli Lilly. https://esg.lilly.com/social . Data and Sources There is no shortage of data and analysis about the prescription drug industry. In fact, there is a shortage of unbiased, accurate and reliable data/information. It is standard procedure that final, scrutinized data regarding government prescription programs to take 2 to 4 years after the close of fiscal years. Early data elements are estimates. Ambiguates and inaccuracies abound. In this White Paper the author utilizes the most recent creditable sources from the industry and government as stated in the citations. The year in which the data was released is also stated and often lags two or more years after the close of the reporting period analyzed Even our own Department of Health and Human Services and other government agencies do not have consistent data. One reason is that key definitions have multiple interpretations. Examples: Best Price, Ceiling Price, AMPs, gross and net pricing data. The intent to demonstrate program enrollments, costs, trends, and perspective can be fluid when data varies.

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