Is It That Trump Fails Again to Understand the Problem?

The new budget proposal by the Trump White House attempts to attack the problem of high drug costs, but the battle tactics do not appear to be a winning strategy.

President Trump promised in several rallying speeches as well as in the State of the Union address to lower drug prices for people across the country. However, what is the benefit of lowering drug prices if the costs paid by Americans will balloon elsewhere?

In the White House budget framework sent to Congress earlier this week, the Trump Administration sought to pass through to Medicare recipients the large rebates given to pharmacy benefit managers (PBMs) and Medicare Advantage plans. The rebates, often 15% or more of the price of the drug, are given by manufacturers in exchange for coverage by the Medicare Advantage or Part D plan. There is an unmet need in this country for greater pharmaceutical cost transparency. Today, health plans, insurers, and PBMs depend on millions of dollars in rebates as a distinct revenue stream. Getting those rebate savings into the hands of the consumer is important. Yet, the reaction by payers will be as dependable as medical costs going up—they will make up for the rebate revenue shortfall by raising Medicare premiums. In other words, the balloon squeezed on one side will pop out at the other side. And the Medicare beneficiary will have to pay somehow for the revenue shortfall.

Health plans say that the rebate revenues help fund other services and medical needs, and may actually help put a lid on premium increases. That would be very difficult to prove or disprove. The inference is that the money is used for some purpose, and should it go away, funds would have to be sought elsewhere—most likely not the federal government. There is only one place to turn—the beneficiaries.

Yes, drug prices are very high, but controlling them will require a lot more than managing rebates. Better price transparency is needed throughout the system, including how the manufacturers of innovative pharmaceuticals decide on starting wholesale price at launch and interim price increases. That can only be achieved in two ways: (1) with strict regulations, such as used in other advanced countries, or (2) by exerting more control over demand, which could have damaging effects on drug industry innovation.

Medicaid plans commonly used closed formularies, which although they accept steep rebates from the pharmaceutical industry, they generally are the beneficiary of steep drug price discounts as well. Many expensive drugs are simply not covered, and the result can be frustration from patients; sometimes, they cannot receive the medication prescribed by their doctor. Remember though, patients in Medicaid have very limited (if any) cost sharing.

It seems that there is little in-depth understanding behind such an initiative by the White House, and one has to assume that it is merely done to satisfy the populist promise to lower drug costs. It is a superficial idea that does not address any unintended consequences.

If the President is serious about utilizing these tactics, he won't win this battle much less the war. Perhaps, that is precisely the intention--a show for his base. 

The Pitfalls of Pinning Savings on Biosimilars

By Stanton R. Mehr

With the recent capitulation by the Centers for Medicare and Medicaid (CMS) that its part B pilot on value-based purchasing was not going to be implemented, another organization has proposed 2 other avenues to value-based purchasing, which it thinks will encourage biosimilar use and save the part B program billions.

The Pew Charitable Trusts acknowledge the core problem, that payment of average sales price (ASP) plus 4.3% encourages use of the higher priced drug. To address this, Pew offers a consolidated rate plan or a least costly alternative (LCA) plan. They demonstrated the savings that could accrue with either by utilizing an economic model based on the introduction of 5 major biosimilars (1 already approved [infliximab], 3 filed for approval [bevacizumab, pegfilgrastim, and trastuzumab], and 1 not yet under review [rituximab]). Under the model’s assumptions (a few of which are questionable), either approach would cut costs dramatically with just these 5 biosimilars.

Under a consolidated payment rate, CMS reimbursements would be based on a volume-weighted ASP of all reference and biosimilar prescribing, similar to what is used in the conventional brand–generic arena. Pew suggests that “Part B drug spending could be reduced if providers responded by increasing their use of biosimilars over reference biologics (or increasing the use of the reference product if it were available at lower cost… A consolidated payment approach, which would effectively decrease Medicare payment for higher-cost reference biologics and increase payment for lower-cost biosimilars, would create a financial incentive for providers to switch to the latter.”

The second approach is the least-costly alternative, where the payment rate for a higher-cost therapy is set at the payment of a lower-cost, therapeutically comparable alternative—a form of maximum allowable cost (MAC) used in the generic marketplace.

Either approach would depend on the substitutability of a biosimilar for a biologic, as well as an acknowledgement that if the part B payment is lower than the providers’ purchase cost, they will avoid treating part B patients who need these agents and send them to potentially more expensive treatment settings.

Based on these two alternative payment policies, the Pew Charitable Trusts believes that the part B program can save, based on 2014 Medicare expenditures for the 5 reference products, $4.32 billion (or a 21% savings) with the consolidated payment approach and $3.56 billion (or a 35% savings) with the LCA.

These savings figures are unlikely, however, because the devil is in the details, once again. A few key assumptions are important to note:

These 5 biologics are assumed to have lost exclusivity and patent protection, and to have begun facing competition from biosimilars. The time horizon may be problematic here, as clearing the patent litigation is taking far longer than expected, meaning that launches are experiencing unanticipated delays, unless the manufacturer decides to launch “at risk.”

The price of each reference biologic remains constant at the average of its 2014 payment rate. Reference biologic and biosimilar ASPs do not change during the year. Unfortunately, we know this is not the case, as several biologics facing the possibility of biosimilar competition have been subject to alarming price increases, often twice a year, which affect the ASPs.

Biosimilar prices are 35% lower than those of reference biologics. The authors of the analysis based their assumption on pricing differentials found in Europe. So far, the pricing differential of 15% for the 2 launched biosimilars would result in minimal savings, according to the Pew Charitable Trusts’ sensitivity analysis. A 35% decrease may not be evident until competition intensifies, with more than 1 biosimilar available for the reference product.

Under the current payment policy, use of biosimilars is 50% of the total biologic utilization. This assumption is also based on the uptake in Europe, and will not likely be seen in the US without steep price discounts.

Biosimilar prices and uptake are not affected by the number of biosimilars available. The launch of multiple biosimilars for the same reference biologic does not create any additional effect on prices or utilization. This would seem to violate a basic precept of competition in this area, but it could mean that model savings are understated. We’ll have to wait and see how far prices are driven down by additional competition.

The concept of a value-based payment model, which would help encourage use of the lower priced, effective product, is laudable, but savings calculated based on economic modeling (here and for other estimates of biosimilar adoption) have been overly optimistic. Perhaps the numbers pan out over the long term, but today, they may not present a strong enough case to influence CMS or legislative action. 

SM Health Communications provides writing, consulting, and market research services for the payer, pharmaceutical, and health care markets. For information on its payer access consulting services and its proprietary P&T Insight™,  please visit www.smhealthcom.com or contact Stanton R. Mehr, President, at stan.mehr@smhealthcom.com.