Are we on the cusp of a new drug pricing paradigm?
By Dr. Robert Popovian, Erin Delaney, and Dr. Michael Mandel
We may be on the verge of a titanic shift in how drug prices are set. It’s been led by a dramatic decline in insulin prices, but it’s spreading to other brand drugs as well. This new paradigm is the unintended but welcome result of legislative, regulatory, and market pressures exerted on the biopharmaceutical industry.
The big change: the three major insulin manufacturers decided to sell their medicines at a set low out-of-pocket price for all patients. The previous list prices offered for insulin were bloated by all manners of rebates, discounts, and fees necessary for the byzantine rebate contracting model promoted by the pharmacy benefit managers (PBM) and state Medicaid programs. The new list prices are stripped of all the extraneous baggage and now closely reflect the actual net payments received by manufacturers. In other words, with a straightforward move, pharmaceutical companies Lilly, Sanofi, and Novo Nordisk cut out the middlemen, the PBMs, and others who benefit handsomely by keeping some or all of the rebates, discounts, and fees provided by those companies.
But that’s not all: another brand manufacturer has started selling its brand-name diabetes medicine directly to patients at a significant discount through an innovative retail pharmacy outfit. The reduced price is 50% of the drug’s average retail price. This move helps patients saddled with substantial deductibles and co-insurance since those out-of-pocket costs are calculated based on the inflated retail prices when they utilize their insurance benefit — not the significantly lower prices negotiated by the PBMs that never reach the pocketbook of patients who are consuming those medicines. Furthermore, patients can continue to benefit from patient assistance programs offered by biopharmaceutical manufacturers.
For many years, we have called for such a revolution in pharma pricing as policy experts and economists. Why did we observe these drastic moves only now and not several years ago? The opportunity to simplify the current biopharmaceutical pricing, which inflates retail prices due to the misaligned incentives in the rebate contracting model, has been apparent for years.
Unfortunately, until recently, the motivation within the biopharmaceutical industry to rethink the pricing model has been non-existent. Instead, the industry has focused on preserving the model while advocating for the passage of the concessions they provide to intermediaries directly to the patients. Why haven’t companies drastically cut prices and removed the rebate and fee from brand product prices? Especially products that have been on the market for several years and are in therapeutic classes with multiple competitors, which favors the rebating model and its misaligned incentives.
We believe the un-intended elixir exerted from the legislative and regulatory changes has created a new business and regulatory environment, increasing the manufacturer’s appetite to re-evaluate their pricing principles. Primarily four seminal activities may be shaping the biopharmaceutical industry’s thought process.
One, the scrutiny of manufacturer prices, specifically insulin prices, has been building up for several years. For example, some states have introduced legislation specifically to address insulin prices. The impetus is obvious for such legislative action; there were too many patient stories of insulin rationing because of high out-of-pocket costs — rationing that would necessarily lead to patients getting sicker and even dying. Patients who are forgoing their lifesaving therapies in other disease areas can exert similar pressure through policymakers.
Second, the Federal Trade Commission (FTC) investigating the business practices of PBMs, including formulary construction and new research examining consequences of inappropriate formulary exclusions, have prompted renewed calls for evaluating the original intent of formularies. Due to misaligned incentives in rebate contracting, PBMs at times prefer providing coverage for medicines with higher prices and more significant rebates and fees since they keep part or all of it as compensation. The FTC’s activity has potentially created an environment where biopharmaceutical companies no longer fear retaliatory action from PBMs regarding formulary positioning if they reduce prices or introduce new products at significantly lower prices.
Third, the congressional action of the Inflation Reduction Act (IRA) passage enforcing potential price setting by the federal government may have persuaded the industry to rethink its pricing strategy. For years, executives in the biopharmaceutical industry have steadfastly protected the PBM business model. However, with the passage of IRA, where government price setting is now a reality, the voices within pharma companies clamoring for “business as usual” may have been replaced by those asking who benefits from the current pricing model? When over 50% of brand name medicine revenue goes to someone else as profit (primarily the PBMs) other than the innovator company, there is a problem. The IRA may have inadvertently forced the companies to act. The reduction of the prices may force the Center for Medicare and Medicaid Services (CMS) to reevaluate which medicines are forced into the price-setting scheme. Hence, the companies may be better off cutting prices and getting public accolades rather than facing the possibility of bureaucrats setting prices for them.
Finally, ending the regulation capping Medicaid rebates at 100% of the Average Manufacturer Price (AMP) may prompt biopharmaceutical companies to take further action to reduce prices. Companies with biopharmaceuticals with high list prices and significant rebates (e.g., older brand medicines) may have to pay Medicaid to cover those drugs. Let that sink in; companies will have to pay Medicaid instead of getting paid by Medicaid for having their medicine on the list of covered medications. The only remedy for such companies is to lower their prices drastically to avoid negative pricing consequences.
Clearly, direct and indirect action by policymakers and additional political pressure is making the biopharmaceutical industry rethink its pricing strategy. While the industry gets 50% of the value of brand name medicine sold in the U.S., they get 100% of the political blowback from policymakers for their pricing strategies. The primary losers of the price cutting and new pricing will be PBMs and parties who benefit handsomely from high list prices, providing the highest rebate revenue. At the same time, the genuine payers in the marketplace — the patients — may finally have found a path to the savings they have been asking for.
Dr. Robert Popovian is the founder of the strategic consulting firm Conquest Advisors and serves as Senior Healthy Policy Fellow at the Progressive Policy Institute; Erin Delaney is the Director of Health Care Policy at the Progressive Policy Institute; Dr. Michael Mandel is Vice President and Chief Economist at the Progressive Policy Institute.