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. 

Is There an Escape From the Rebate Trap?

The rebates given to pharmacy benefit managers to secure a drug’s place on the formulary have become a difficult barrier to coverage for new products. The rebate income for these PBMs is sometimes passed on to health plans, insurers, and employer purchasers, but more often it is not.

A big issue is that managed care organizations tend to become addicted to millions of dollars in rebate “income,” and this mindset prevents serious consideration of new medications at competitive costs. 

For biosimilars, Pfizer and Merck have had a difficult time dislodging Janssen, maker of Remicade^®, from its preferred formulary position, despite lower prices based on wholesale acquisition cost (WAC). Janssen has simply matched the net cost (through increasing rebates), while keeping its WAC costs high—tempting plans with ever-increasing rebate revenue. The health plans don’t see the benefit of incurring the administrative costs of moving masses of patients from the preferred product to a new one, or seeing this revenue stream interrupted, without an overall further improvement in net costs.

Managed care plans have long said that discounts of 25% or more will be necessary to release the rebate stranglehold of preferred products. In the case of infliximab, this has not yet occurred, based on recent minor inroads made by Merck’s Renflexis^® biosimilar, despite larger discounts. Until greater competition is available, which drives down the WAC prices (and then average sales prices [ASPs]), barriers to accessing new medications will remain. In fact, when competition does increase, makers of the originator products, like Janssen, can simply ratchet up their rebates to maintain a hold on sales (and a billion-dollar plus profit).

Perhaps the best way around this is to force a change in the marketbasket. This can be accomplished in a couple of ways. The first, by instituting separate tiers for biosimilars and reference agents, takes the biosimilars out of the 1 of 2 preferred drug contracting restrictions, and allows patients to access biosimilars as well as preferred brands.

A second way is to reconsider biologic agents according to indication-based contracts or mechanism-of-action (MOA) based differences. Therefore, the marketbasket is modified to consider anti-TNFs separate from interleukins, allowing preferred agents in each separate category. This would allow, for instance, for more effective psoriasis agents to be well covered, and maintain the preferred position of Humira^® and Enbrel^® for appropriate patients.

A third way is to work out some innovative value-based contract, in which the manufacturer and health plan/insurer reaches an agreement on (usually) the expected outcomes of drug use and additional rebates or performance guarantees if the medication fails to deliver on this performance. The most important consideration in this agreement is the practicality of measuring an outcome of interest or ensuring adherence.

The rebate trap seems to be ensnaring more manufacturers of new biologics and biosimilars. Without greater consideration of the overall good, this trap can cause systematic problems for the pharmaceutical industry and discourage drug innovation and accessibility. 

Controversy Over the Cost to Bring Pharmaceuticals to Market

This is one of the prickliest topics in the health care industry, and it has been as long as I can remember. One of the publications I worked with was called Product Management Today. Long defunct, this periodical followed the pharmaceutical industry quite closely. As a result, we were familiar with Tufts University’s Center for the Study of Drug Development. This was the first organization to publish what was considered credible figures as to what it cost to bring a drug to market.

In the early 1990s, that number was published in the Journal of Medical Economics to be about $231 million. Remember, these were generally small molecules, and the drug industry consisted of dozens of big manufacturers identifying their molecular targets, characterizing them, and cultivating them through the clinical trial process. In 2003, this number was revised upward to somewhere north of $800 million. In 2016, the Tufts team recalculated the numbers, and it found essentially a 10-fold difference (not accounting for the inflationary change in the value of the dollar between 1991 and 2016). They indicated that it costs $2.7 billion to bring a product to the market today, which also considers the cost of failed drug development. In other words, they added the opportunity cost to a pharma company for a drug that was withdrawn or failed clinical trials (any stage). In their 2016 analysis, they took as their drug sample, 106 investigational drugs, 87 being small-molecule compounds and the remaining 19 biologics. I’m guessing that if biologics represented more than 18% of the sample, the total average estimate could have been even greater.

The cost to produce a biosimilar is considerably less. This is partly the result of the lesser clinical trial requirements compared with new chemical entities. Although this figure has not been convincingly calculated, I’ve heard it cited to be anywhere up to $250 million. This seems to be reasonable, based on the development requirements. Unfortunately, several biosimilar manufacturers have to wait to market their agents because of patent litigation, and that in itself represents a cost.

Today, the results of another study was released, which offers a very different number. Published in JAMA Internal Medicine, authors from Oregon Health and Sciences University and Memorial Sloan Kettering Medical Center found that the cost to produce 10 cancer medications was really $648 million (range, $204 million to $2.602 billion)—add another $110 million or so for opportunity costs. This included 5 drugs that received fast-track approval. Not only did the researchers use US Securities and Exchange filings that cited manufacturer-reported costs, but they limited the analysis to only manufacturers without a previous approved drug on the market. The drugs evaluated included several monoclonal antibodies, so it was reflective of complex molecule development.

I’d like to point out another question that perhaps skews the calculation. Rarely these days does “big pharma” get involved with new drug identification and characterization. True, they are often involved in the expensive clinical trial phase, but do we read in the paper weekly that a drug discovery company has licensed or sold the product to a big pharma entity (or even sold the company itself)? And what is the guarantee that they are not overpaying for the price of the drug or the company?

The upshot of this is that the 10 companies evaluated in the more recent study had cumulative revenues resulting from their new agents of $67 billion from the time of approval (until December 2016 or the time it sold or licensed the product to another company). The range per product was ranged from $204.1 million to $22.3 billion. It sounds overall, that they were good buys for the big pharma companies but not necessarily for the health care system.

In other words, whether it cost $648 million, $800 million, or $2.7 billion, the research and development costs for these new agents are made back in a year or less. It is hard for us to listen seriously to pharma companies who use the cost to develop the agents, or their having to eat the cost of failed agents, as credible justification for the prices being charged.

The Premium Pricing Problem for New Products

It is quite common for pharmaceutical manufacturers’ brand directors to approach new product launches with the mindset that rebates will offset payers’ concerns over premium pricing. This is certainly true for highly utilized products (or brand new drug categories that represent a major advance over the state-of-the-art). And what pharmaceutical executive doesn’t believe his or her product is worthy of premium pricing? Well, if you don’t, you’ll probably be looking for a new career soon.

In discussing specialty products—where all the action seems to be nowadays—premium pricing as little as 10% of the competitors’ wholesale acquisition cost (WAC), may be the real barrier to formulary acceptance, preferred positioning, or both, because the rebate is not important to the plan at launch.

Does that mean if your product is priced at a 10% premium but your company is offering even an extremely generous rebate, payers won’t run to it? Well, that depends.

The rebate is based solely on utilization. At launch and for the first several months, utilization of your product, ABC self-injectable for rheumatoid arthritis, is very limited. Some docs may prescribe it, but payers’ prior authorization programs will often limit or prohibit use of ABC, until the preferred agents are tried first.

For the autoimmune category, Abbvie’s adalimumab (Humira^®) dominates marketshare. The plan’s chief financial officer will have the head of the pharmacy executive who risks losing millions in rebates from Abbvie in favor of ABC, without unquestionable, world-beating superiority to Humira in efficacy and safety (not to mention spread of indications). What is the value of your 40% or even 60% rebate on a product that has very low utilization on day 30? The plan may well argue that the value is less than zero. If utilization is zero, the value of your 60% rebate to the plan is zero, and the loss of established rebates from an existing 1 of 2 contract, for example, could be millions. Also, instead of receiving those rebates, the plan would be paying 10% more for the limited product used.

That seems to be a Catch-22. And it is, based on today’s marketbasket. It may be that the marketbasket needs to be redefined so that a particular indication no longer affects the market leader’s contract. This could also happen with the introduction of a biosimilar that offers competitive pricing to a market leader.  

This illustrates one of the leading reasons why plans considering new products want to see upfront savings—that is, in WAC pricing, before getting involved in the rebating wars. At least, they will know that they’re saving something at the front end of a product launch. Furthermore, if the price is lower from the start, the need for the deep rebate dissipates. 

Risk-Adjustment Payments May Come at the Expense of the GOP

The health care follies continue on Capitol Hill, and the latest irony has little to do with the Uninsurance Guarantee Act (aka the American Health Care Act, TrumpCare, RyanCare). This one has to do with the only successful attempt by the Republican legislators to obstruct the Affordable Care Act (ACA), which may well come back and bite them.

The risk-adjustment payments included in the ACA were based on the assumption that, initially, health plans participating in the exchanges would be exposed financially with a surge of enrollment from Americans with chronic illnesses. Until the individual mandate (and its significant penalties) kicked in, the authors of the ACA understood that the healthy would need encouragement to join an exchange plan and stabilize the market. These payments were supposed to be made to insurers over the first 3 years of implementation of the ACA.

However, the Republican Party, led by Senator Marco Rubio and House Speaker John Boehner, pushed for a measure in the federal budget in 2014 that was largely successful in stunting the individual market that was being cultivated by ObamaCare. This budgetary provision required the risk-corridor payments to not have a negative effect on total spending. In other words, the Centers for Medicare and Medicaid Services (CMS) could not pay out more than it took in. The result: in 2015, CMS released just under 13% of the risk-corridor payments it owed to insurers. This undercut the ability of several health plan cooperatives to survive, as well as played a role in driving up premiums on the exchanges. When the federal government could not make the retroactive and newly owed payments in 2016, even healthy insurers started exiting the market, feeling the effects on their bottom lines. An analysis by Modern Healthcare found, for instance, that Blue Cross Blue Shield of Texas was owed $917 million for losses incurred in 2014 and 2015. Health Republic Insurance of New York, a start-up co-operative that ceased operation in 2015, was owed $463 million. Ten insurers were owed at least $173 million apiece for 2014 and 2015.

In 2017, these insurers want to get paid. In total, they are owed $8.3 billion in risk-corridor payments for the first 2 years of exchange operations. In February, a federal judge ruled that the government owed Moda Health $214 million in risk- corridor payments. That conflicted with the ruling of another judge, who said that CMS never guaranteed these payments. Blues plans from Tennessee, Alabama, Idaho, and North Carolina, have sued, as well as Highmark Inc, and the defunct co-ops Health Republic of Oregon and Land of Lincoln Mutual Health.

The irony, of course, is that it is no longer the Obama Administration that is responsible for this litigation. The Republicans are now in charge, and may have to decide how to settle or pay out these claims. Eight billion dollars is not a huge by federal government standards, but it would be a bitter pill for the GOP to swallow. 

The Value Mirage: Will Allowing Health Insurers to Sell Across State Lines Mean Lower Premiums?

If an annual premium for a silver-level health insurance premium is $3,000 (in 2016) in Minnesota, wouldn’t it be appealing to offer that same plan and coverage to those people paying $5,400 in New York City? This is the concept behind a key component of the Trump Administration’s current replacement (or “fix”) for ObamaCare.

This post will not cite the myriad complex problems associated with this idea. We’ll describe just one—the one that will render the concept almost of no value.

That plan in Minnesota contracts with local providers (physicians and hospitals) for a certain level of payment. Generally, it is what the market will bear in, say, St. Paul, Minnesota versus what the market will bear in White Plains, New York. Historically, health costs and premiums have always been lower in metropolitan Minnesota than in southeastern New York State. Hospitals charge less for hip replacements, doctors are reimbursed less for office visits, and yes, health plans in Minnesota may even be a bit better at leveraging the market, because of their market penetration. If you transport that Minnesota plan to Westchester County, New York, you leave its advantages behind. Gopher Health Plan will have to build a brand new provider network in one of New York’s most expensive counties. Unless it also transports Minnesota providers to New York, it will pay New York prices. It is conceivable that the greater competition for providers may actually push reimbursements up—a new plan entering a market has to entice physicians to sign with their plan (regardless of a narrow or broad network). What does that mean for physicians or hospitals? They are in the driver’s seat, and have a bit more leverage with which to negotiate rates. Remember, that rate negotiation will not start at St. Paul levels. It will begin at New York metro area figures. This could have an inflationary effect.

The basic idea of bringing more competition into high-cost markets is a good one. If 2 or 3 well-run out-of-state insurers were to begin to operate in many such areas, the additional competition should have a beneficial effect on rates. But so would encouraging the birth and growth of organically grown local plans and insurers that were given the financing and resources needed to be successful.

In other words, if you see the shimmering image of a Minnesota health insurer offering great value to New York residents, it is likely a mirage in the hot, dry health reform air. And finally, this mirage evaporates quickly, as Minnesota granted average premium increases of over 50% to exchange plans for 2017, resulting in annual premiums that are closing in on $5,000. 

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.