Drug Pricing: What is Brewing in Policy Debates?

By Patricia Van Arnum - DCAT Editorial Director

August 1, 2018

The Pharmaceutical Research and Manufacturers of America (PhRMA) has released a new policy position that delinks supply-chain payments as a means to improve patient affordability. The policy is in response to an earlier blueprint issued by the US Department of Health and Human Services to address drug pricing in the US.

Calling it a “bold new policy position,” PhRMA is advocating for reforms that would prevent pharmacy benefit managers and other entities in the supply chain from having their compensation calculated as a percent of the list price of a medicine and instead is advocating for a fee based on the value their services provide. DCAT Value Chain Insights takes an inside look.

Inside the policy

PhRMA highlighted the policy through comments it submitted to the US Department of Health and Human Services (HHS) based on the HHS’ request for information (RFI) to its HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs, which was released earlier this year in May 2018. The Administration’s Drug Pricing Blueprint and RFI include a series of proposals to improve the affordability of drugs and contains proposals relating to rebates, Medicare Part D (the prescription drug benefit under Medicare), pharmaceutical trade, the 340B Drug Pricing Program, value-based contracts, Medicare B (medical insurance), Medicaid, and direct-to-consumer (DTC) advertising.

The key issue that PhRMA highlighted in a policy press statement relates to rebates. “Over time, how we pay for medicines in the United States has evolved into a complex system of list prices and rebates that move through an opaque supply chain,” said PhRMA in a July 16, 2018 statement. “A medicine’s rebate—rather than its actual price—often determines if it is covered or where it sits on a formulary. This creates an unfair system in which patients are often paying higher list prices regardless of the discount their insurer receives. Reforms to prevent PBMs [pharmacy benefit managers] and others in the supply chain from being paid off the list price of a medicine can fix broken incentives and make the system work better for patients,” said PhRMA

PhRMA points out that although discounts and rebates created savings of $150 billion in 2017, “insurers are increasingly asking patients who rely on medicines to pay more out of pocket due to the complex system of list prices, net prices, and rebates,” according to the July 16, 2018 statement. “Furthermore, patients with high-deductible health plans or coinsurance do not realize the benefit of negotiated savings because their out-of-pocket costs are often based on the medicine’s undiscounted list price.” PhRMA said that the industry supports that patients should receive access to negotiated rebates at the pharmacy, rebates should not be allocated solely to premiums, and payers should have tools and information to ensure PBM incentives are well-aligned with plan interests.

"Our industry agrees with the Administration that the status quo is not working in the best interest of patients and our health care system needs to change,” said Stephen J. Ubl, President and Chief Executive Officer of PhRMA, in the July 16, 2018 statement. “Delinking supply-chain payments from the list price will be disruptive and requires our companies and others to adapt, but it is necessary to improve patient affordability. We hope realigning these incentives will result in a greater shift toward value and lower costs for patients.”

Specifically, PhRMA is recommending three main actions: (1) delinking supply-chain payments from the list price of a drug; (2) increasing the position of payers; and (3) ensuring patients benefit from rebates. With regard to delinking supply-chain payments from the list price of a drug, PhRMA says that the current system should shift to one where PBMs and other entities in the supply chain no longer have their fees calculated based on a percent of the list price of a medicine. It also says that payers should have greater visibility into PBM compensation arrangements. It also says that patients should receive the benefits of rebates so that rebates and price concessions that payers receive from biopharmaceutical/pharmaceutical companies should be used to lower the cost-sharing for medicines.

Other proposals by PhRMA

Aside from rebates, PhRMA also responded to the other proposals made in the HHS blueprint relating to drug-pricing issues under Medicare, Medicaid, and specialized government programs as well as on drug-pricing issues being raised in current trade practices, value-based contracts, and direct-to-consumer advertising.  

Medicare Part D. With respect to Medicare Part D, which is the prescription-drug benefit under Medicare, PhRMA acknowledged that changes are needed to improve affordability and predictability in the Medicare Part D program but said that some of the proposals in the RFI would be a “step backward for patients.”

PhRMA said that it supports lowering out-of-pocket costs for seniors by requiring that patients receive a share of negotiated rebates at the pharmacy and establishing an annual maximum out-of-pocket spending limit on medicines. “Research shows these reforms will provide immediate financial relief to patients facing high out-of-pocket costs at the pharmacy,” said PhRMA.

It also supports maintaining current formulary protections. PhRMA says the current six protected classes and two-drugs-per-class requirements are core patient protections in Part D and should be maintained. “Insurers currently have ample opportunities under these protections to manage formularies and use prior authorization and step therapy to steer patients to lower cost medicines,” said PhRMA in his comments for the RFI to the HHS blueprint. “Weakening these protections could jeopardize patient care and result in additional paperwork and red tape for physicians due to an increase in appeals requests to access appropriate off-formulary medicines.”

PhRMA also supports continuing current treatment of coverage gap discounts in the calculation of true out-of-pocket (TrOOP) spending under Medicare Part D coverage. “Ignoring coverage gap discounts when calculating TrOOP would exacerbate beneficiary affordability challenges and undermine the Administration’s goal of reducing out-of-pocket costs,” said PhRMA in its comments. “This change would prolong the amount of time patients spend in the coverage gap and increase out-of-pocket spending by hundreds of dollars for some patients.”

PhRMA is also proposing that the US government refrain from moving coverage of medicines from Medicare Part B (medical insurance) to Medicare Part D (prescription-drug benefit), something that was proposed in the HHS blueprint. “Shifting medicines from Part B into Part D would increase costs for most patients,” said PhRMA in its comments. “Also, introducing closed formularies into Part B would limit patient access to medicines where patients typically are not able to switch between therapies.

With respect to Medicare Part D, PhRMA is calling on the US government to avoid the implementation of a competitive acquisition program (CAP). Medicare requires the implementation of CAP for Medicare Part B drugs and biologicals not paid on a cost or prospective payment system basis, according to information from the US Centers for Medicare & Medicaid Services. The CAP is an alternative to the average sales price (buy and bill) methodology for acquiring certain Part B drugs which are administered incident to a physician's services. “We have concerns that a CAP program would restrict patient access, increase patient costs or undermine the market-based Average Sales Price system,” said PhRMA in its comments. “Any CAP program should be voluntary for physicians and should reduce their administrative burden and support quality patient care,” it said.

Trade practices. PhRMA is proposing several actions to secure more even trade practices. “America’s biopharmaceutical sector has witnessed a surge in the number of trading partners that mandate price controls and other harmful trade practices to artificially depress the market value of innovative medicines,” PhRMA said in its comments. “These practices stifle global research and development and the flow of new medicines that lead to greater competition and savings. The result is that Americans are increasingly shouldering the burden of global investment in discovering new medicines.

To address those issues, PhRMA is advocating for strong trade commitments through global, regional and bilateral negotiations, including the ongoing renegotiations of the North American Free Trade Agreement (NAFTA) as well as enforcing existing trade commitments. “The Administration should use all available tools to ensure America’s trading partners live up to their obligations in trade agreements, such as those negotiated with South Korea and Australia,” said PhRMA in its comments.

It is advocating that foreign government pricing and reimbursement policies are transparent, non-discriminatory and appropriately value innovation. “The US government can play a critical role in ensuring transparency and due process of pricing and reimbursement policies as well as in highlighting the global benefits to patients that result from a reduction in trade barriers,” PhRMA said in its comments.

Lastly, PhRMA is calling on the US government to leverage all available trade tools to combat abuse of compulsory licensing. Compulsory licensing is when a government allows someone else to produce a patented product or process without the consent of the patent owner or plans to use the patent-protected invention itself, according to information from the World Trade Organization. It is one of the flexibilities in the field of patent protection included in the WTO’s agreement on intellectual property — the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement. “Where specific and credible threats of compulsory licensing arise, the US government defend American innovators and engage relevant authorities abroad,” said PhRMA in its comments.

Value-based contracts. With respect to value-based contracts, PhRMA said that the biopharmaceutical industry is working with health plans and others to develop new contracting approaches that tie payment more closely to value, pointing to 19 biopharmaceutical companies that publicly announced these arrangements from 2009 to the first quarter of 2018. “These value-based contracts can support lower costs and better outcomes while improving patient affordability and access,” said PhRMA. “Recent data show value-based contracts may have lowered patients’ copays by 28%. It is essential that value-based contracts be based on negotiations between private entities as government price-setting based on centralized determinations of value would harm patient access to medicines,” said PhRMA.

To encourage voluntary value-based contracts, PhRMA outlined several proposals for policy changes. “The Food and Drug Administration recently issued two final guidance documents helping to address one of the key regulatory barriers to value-based contracts, said PhRMA. "We encourage the Administration to continue this momentum and issue an Anti-Kickback Statute safe harbor for value-based arrangements and clarify the rules for the reporting of Medicaid best price.”

The first FDA guidance, Drug and Device Manufacturer Communications with Payors, Formulary Committees, and Similar Entities—Questions and Answers, answers common questions about companies’ communications to payors, including insurance companies, formulary committees and similar entities. The guidance includes recommendations that are designed to enable truthful, non-misleading and appropriate company communications with insurers across a product’s lifecycle to facilitate the development of value-based contracts.

The second FDA guidance, Medical Product Communications That Are Consistent With the FDA-Required Labeling, provides the FDA’s views on manufacturers’ communication of information that is not contained in the FDA-required labeling for their products, but that is consistent with that labeling. FDA-labeling is subject to content requirements and limitations to help ensure that it effectively communicates information but it does not exhaustively address all that’s known about a product for its approved or cleared uses. Consequently, there are types of information that are not in the labeling, but that are consistent with the labeling, which medical product companies also may want to share. This information, such as data from post-market studies and surveillance of a product’s approved uses, or additional information from the pre-market studies that were used to support approval of the product, may help inform decision-making regarding patient care. Sometimes payors also want this information to inform purchase decisions, or to serve as the basis for value-based contracts where reimbursement may hinge on measures of benefit that aren’t expressly described in the drug’s label.

340B Drug Pricing Program. PhRMA also outlined its proposal to reform the 340B Drug Discount Program, a US federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible healthcare organizations and covered entities at reduced prices. 340B refers to a section of the Public Health Service Act, which specifies which covered entities are eligible to participate in the 340B Drug Program.

”PhRMA supports the goals of the 340B program, but increasing evidence from the Government Accountability Office (GAO) and the HHS Office of Inspector General (OIG) and recent journal articles is proving many hospitals are taking advantage of the program,” PhRMA said in its comments. “Even as independent watchdogs have raised concerns about patients not benefiting from the program, 340B has continued to grow exponentially, and economists have raised concerns that the program’s growth is likely increasing overall spending on medicines. We urge the Administration to revisit current 340B policies and make changes to strengthen the program,” PhRMA said.

It is calling on the US government to put forth a clearer patient definition for patients qualifying under the 340B program. It says that the GAO and the OIG have both raised concerns that the current guidance on which patients qualify for 340B discounts is “overly vague and is not interpreted consistently. HHS should develop clearer standards for who is a 340B patient and ensure the definition is aligned with the statute,” said PhRMA.

PhRMA is also calling for an update of eligibility standards for hospitals’ outpatient sites. “Current eligibility rules increase incentives for provider consolidation, driving up costs for consumers,” said PhRMA. It is also calling for a review of contract pharmacy guidance. It cites a recent GAO report that it says found that “hospitals often do not pass along 340B discounts and large pharmacy chains are profiting off the program.”

Direct-to-consumer (DTC) advertising. In other comments addressing the HHS blueprint, PhRMA does not support the disclosure of drug prices in direct-to-consumer (DTC) advertising. “The disclosure of list prices in DTC ads would not benefit patients and could be confusing given the significant negotiations occurring in the marketplace,” said PhRMA in its comments. “List prices are often not the prices insurers pay and are generally not a good indicator of what patients will pay at the pharmacy counter since their insurer may charge a flat copayment or patients may have reached their out-of-pocket maximums. In addition, price comparison websites already exist to help consumers compare prices charged for medicines at different pharmacies. Moreover, any such requirement would raise significant legal issues, including First Amendment concerns,” said PhRMA.

Medicaid. PhRMA also outlined its concerns with several issues relating to Medicaid, the US government healthcare program for low-income people. “Spending on medicines represents a small share (7 percent on average) of total state Medicaid budgets. At the same time, biopharmaceutical companies’ Medicaid rebate liability and tax obligations have increased dramatically with the implementation of the Affordable Care Act. The expansion of Medicaid rebates, along with the pharma tax, may have placed pressure on list prices, forcing companies to raise prices overall in the market,” said PhRMA in its comments. To avoid what it calls “further market distortions,” PhRMA is urging the Administration to maintain the cap on Medicaid rebates. “This cap is a common-sense policy that prevents further cost shifting while still ensuring Medicaid can obtain many medicines for free after rebates are received. Removing this cap could backfire on the Administration’s goal and contribute to higher launch prices."