Prescription drug pricing in the United States—is the pharmaceutical industry facing the perfect storm?

Recent months have seen a flurry of announcements that have potentially profound implications for pharmaceutical pricing in the United States. Several significant acquisitions and joint ventures could transform the pharmaceutical supply chain. New appointments at the helm of two of the three largest pharmacy benefit management companies (PBMs) will give these organisations unprecedented insights into drug manufacturers’ approaches to pricing strategy. The Trump administration plans to introduce new measures to curb drug prices, with particular focus on the “middlemen” in the supply chain. In anticipation of such action, some health insurers have already announced their intention to change the way they handle rebates from pharmaceutical companies.

Amazon—a potential disruptor in the US healthcare and pharmaceutical markets

In June 2017, the media reported that Amazon was actively exploring a move into the pharmacy business in the United States. To date, no initiative in this area has been made public. In January 2018, however, Amazon announced that it was partnering with financial companies Berkshire Hathaway and JPMorgan Chase on ways to address healthcare for their US employees, with the aim of improving employee satisfaction and reducing costs. Details of the new venture are limited, but a press release stated that “the initial focus of the new company will be on technology solutions that will provide US employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.”

According to the Wall Street Journal, the three companies abandoned their original idea to take over the administration of their employees’ health insurance and pharmacy benefits. A document seen by journalists on that newspaper indicated that the initial proposal for the joint venture included plans to establish a healthcare data warehouse and to use digital technology to facilitate data sharing and to work with healthcare systems to provide patient care outside of the hospital setting. Such objectives would certainly play to Amazon’s growing strength in artificial intelligence.

Although the joint venture will initially serve only employees of the three investing partners, Jamie Dimon, Chairman and CEO of JPMorgan Chase has stated that the “goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans.” Some observers have speculated that the joint venture could in time partner with a PBM or move into the generic drug market. What appears more certain is that Amazon, which has built its business by offering customers a combination of convenience and low prices, will be aggressive in seeking to drive down healthcare costs—and prescription drugs are unlikely to be excluded from this process.

Amazon’s new departure has not escaped the notice of the company’s retail competitors. For example, Wal-Mart, the world’s largest retailer and the owner of the fourth-largest pharmacy chain in the United States, has recently expressed interest in acquiring Humana, the fourth-ranked US health insurer. If this acquisition becomes reality, Wal-Mart would not only seek to boost Humana’s share of the US health insurance market, but likely also draw on its own broad experience in negotiating fiercely with suppliers to drive hard bargains with pharmaceutical companies.

Established players pursue vertical integration

Amazon’s move into healthcare will also weigh on the minds of established players in this market. In December 2017, CVS Health announced plans to purchase Aetna, the third-largest health insurer in the United States. In March 2018, Cigna, the fifth-ranked US health insurer, revealed that it intended to acquire Express Scripts, the second-largest PBM. If these acquisitions are approved and take effect, the three largest PBMs—with a combined market share of more than 70%—will all be aligned with leading health insurers. (OptumRx, the third-ranked PBM is already owned by UnitedHealth, the largest health insurer in the United States.) These companies evidently believe that vertical integration will help them to compete more efficiently in an increasingly challenging healthcare environment in the coming years.

Poachers turned gamekeepers?

Two of the big three PBMs have also sought to gain a competitive advantage by appointing new CEOs with top-level experience in the pharmaceutical industry. On 13th March 2018, UnitedHealth announced that Sir Andrew Witty will take over the reins at the company’s Optum subsidiary, which includes the PBM OptumRx. During his time as CEO of GlaxoSmithKline, Witty warned that established pricing models were unsustainable and predicted that “there are tremendous market forces at work in terms of the way the US market is changing.”

Little more than a week later, CVS Health announced that Derica Rice, the former CFO of Eli Lilly, will head up the group’s PBM, CVS Caremark. In a press release on the appointment, CVS highlighted Rice’s expertise in value-based care and developing innovative services.

Given their decades of experience in developing strategies to secure the most advantageous pricing and reimbursement terms for their companies’ drugs in the intensely competitive US market, Witty and Rice will be able to offer their new employers unrivalled insights into how pharmaceutical companies engage with PBMs.

Prospective government initiatives to control pharmaceutical prices

President Donald Trump has been a vocal critic of pharmaceutical prices in the United States. In an interview with Time magazine in early December 2016, he declared: “I’m going to bring down drug prices.” He has also spoken of a need to “create a new bidding procedure for the drug industry because they're getting away with murder.”

In a speech to the Federation of American Hospitals on 5th March 2018, Alex Azar, the Secretary of Health and Human Services, noted that, “in both healthcare services and pharmaceuticals, the huge gaps between the list price and the actual price are notorious. It’s like the gap between the $500 rack rate on the back of the door in your Hampton Inn room and the $100 you actually pay. This thicket of negotiated discounts makes it impossible to recognise and reward value, and too often generates profits for middlemen rather than savings for patients.” By way of a response to this situation, Azar called on doctors, hospitals, drug manufacturers and pharmacies to be more transparent with regard to pricing and outcomes. He added that, “if that doesn’t happen, we have plenty of levers to pull that would help drive this change.”

In a press conference with President Trump on 19th March 2018, Secretary Azar revealed that the administration plans to unveil a “whole slate of other proposals around how we decrease the price of drugs and how we bring discounts that the middlemen right now are getting; how those will go to our patients, to individuals.” Details of these proposals are expected to be announced in the second half of April.

The repeated criticism of middlemen appears to have triggered pre-emptive action from some health insurers. On 13th March 2018, UnitedHealthcare announced that, beginning in 2019, it would pass on the “overwhelming majority” of rebates it receives to beneficiaries enrolled in its fully insured employer health plans. On 28th March 2018, Aetna announced its intention to take similar action next year.

Mark Bertolini, Aetna’s CEO, expressed the hope that his company’s “additional transparency will encourage [drug] companies to rationalise their prices and end the practice of annual double-digit price increases.” This comment exemplifies the current blame game between pharmaceutical companies, health insurers and PBMs with regard to where the responsibility lies for the inexorable rise of prescription drug prices in the United States.

Outlook and implications for the pharmaceutical industry

Scrutiny of pharmaceutical prices in the United States is only likely to intensify in the coming months. The widespread criticism of the cost of prescription drugs has created an environment that is ripe for the cost-cutting mentality that companies such as Amazon and Wal-Mart will surely bring to bear. Vertical integration of health insurers and PBMs will lead to an increasing concentration of power in the hands of a limited number of payers. The insights that former pharmaceutical industry executives can offer in new roles within leading PBMs may require drug manufacturers to rethink some of their strategies. Politicians at both national and state level appear determined to adopt new measures to control the cost of prescription drugs to consumers.

The pharmaceutical industry could choose to fight some of these changes through lobbying and litigation, but such a response would risk misjudging the current mood of politicians and the public in the United States. A wiser response might be to support the calls for greater transparency. Some companies have already taken the initiative to publish details of their average rebate levels and annual price increases in annual transparency reports. The pharmaceutical industry could also use this opportunity to highlight the pressures that some PBMs have exerted on them to raise prices as a way of boosting rebates, as well as the range of additional fees that PBMs charge their customers.

For many years, the pharmaceutical industry has often been represented as the sole culprit for high prescription drug prices in the United States. The time may now be right to openly address the nuances and complexities of US pharmaceutical pricing—and to work with other stakeholders in the healthcare system to develop a more sustainable model.