5 Trends influencing drug pricing
It started the same way many things have in recent memory, with a tweet. On Sept. 21, 2015, about five months into Hillary Clinton’s presidential run, her Twitter account posted "Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on."
The tweet was in reference to an article by The New York Times that detailed the overnight price hike Turing Pharmaceuticals put on Daraprim (pyrimethamine). Under the leadership of then-CEO Martin Shkreli, Turing acquired U.S. marketing rights to the decades-old medicine and jacked up its price from $13.50 per tablet to $750.
Sure, high costs and steep price increases for prescription medications were nothing new. Neither were consumer nor congressional outcries over them. But Clinton’s post shoved those issues back into the public spotlight, and fed the idea that drug pricing could be a main target for healthcare reforms under the next commander in chief.
Recognizing the risks that such reforms would pose to drugmaker revenue, investors quickly sold off millions of shares in pharmaceutical companies. The iShares Nasdaq Biotechnology exchange-traded fund, which shows levels of biotech investments, sunk more than 6% the day of Clinton’s tweet as Biogen Inc., BioMarin Pharmaceutical Inc. and a host of other businesses absorbed hits to their stock values.
In less than 140 characters, the biopharma industry could see just how much was at stake if it left pricing backlash unchecked. Still, the problem persisted.
In response to the pushback, drugmakers have adopted a few key strategies. Some, such as AbbVie Inc., Allergan plc and Novo Nordisk A/S, pledged to keep annual price increases below 10%. Others, including Johnson & Johnson and Eli Lilly & Co., have offered greater transparency about how they price their products. PhRMA has also attempted to shift the blame for high drug costs to healthcare insurers and pharmacy benefit managers (PBMs).
But reactions to those initiatives have been mixed at best, with many viewing them as skin-deep remedies rather than the panacea needed to substantively solve drug pricing. Though a cure-all isn’t on the horizon, five key trends are currently shaping drug pricing decisions:
Rare disease and specialty drug development
High-deductible insurance plans
If there's one thing Democrat and Republican voters can agree on, it's lower-priced medications. A Kaiser Family Foundation poll published last September found 77% of responders said prescription drug costs were unreasonable, up 5% from August 2015. Other research has yielded similar results.
With the backing of their constituents, state and federal legislators have set their sights on drug pricing reform.
In May, for instance, federal lawmakers introduced parallel bills in the House and Senate that would require drug manufacturers, when they enact certain price hikes on medicines that have wholesale acquisition costs of at least $100, to justify the increases to the Department of Health and Human Services. The bills, both dubbed the Fair Accountability and Innovative Research Drug Pricing Act of 2017, are based on legislation of the same name introduced in 2016 by Sens. Tammy Baldwin, D-WI., and John McCain, R-AZ., and Rep. Jan Schakowsky, D-IL.
At the state level, Nevada Gov. Brian Sandoval in June signed a bill similar to the FAIR acts, except it focuses on insulin makers. SB 539 allows the state to levy fines against drug companies and PBMs that fail to supply information about price increases for essential diabetes medications. The month before, Maryland Gov. Larry Hogan let HB 631, a bill aimed at preventing price gouging on generic drugs and increasing pricing transparency, become law.
Capping price increases, or at least shedding some light on the thought process behind them, has been the focal point for much of the legislation cycling through U.S. legislative bodies.
In an outcomes-based pricing deal, the amount of money drugmakers receive for a product depends on patients reaching certain pre-determined outcomes. Eli Lilly, Amgen, Inc., and Express Scripts Holding Co. are just a few examples of healthcare companies that have already entered into such agreements.
Pay-for-performance deals are a relatively new concept, and most are either experimental or in pilot stages. Whether or not pharma sticks with them long-term is uncertain. What is clearer, though, is the need for revamped drug pricing models — ones that are more streamlined and yet flexible, able to more effectively determine the appropriate cost of an orphan drug or more easily adjust to market disrupters like gene therapies.
"Right now, it's kind of a complicated system of list prices and net prices and rebates, and it can lead to a lot of uncertainty and frustration for patients," said Holly Campbell, deputy VP of public affairs at PhRMA. "Our reimbursement system needs to better evolve to recognize and reward value. Not all patients are alike, and they all don't benefit equally from each medicine, and we need to make sure that our payment system for medicines reflects those differences."
Treatments for uncommon conditions frequently make headlines with their sky-high list prices.
Alexion Pharmaceuticals Inc.'s Soliris (eculizumab), for example, was once considered the world's most expensive drug. First approved in 2007, it treats a condition known as paroxysmal nocturnal hemoglobinuria (PNH) that is so rare it literally affects about one in a million people. Looking to compensate for that tiny patient pool, Alexion priced a year's supply of the drug at more than $400,000 in the U.S. and roughly $700,000 in some parts of the globe.
Orphan drug developers have long been able to rely on the very nature of their products — the small populations they target, the expensive clinical investigations needed to test them, the inherent lack of competition they face once on the market — as a basis to set prices high. And many times, the healthcare system tolerated it, if for no other reason than the treatments didn't weigh too heavily on costs because they applied to so few patients.
Rare disease drug development has ramped up over the last decade, though. Today, orphan medicines account for a sizeable chunk of overall drug spend.
Healthcare information and services provider QuintilesIMS Holdings Inc. has predicted that specialty medications, which often include orphan drugs, will constitute 35% of drug spend by 2021.
"If you’re in the kitchen and one of these new specialty drugs rolls under the refrigerator, you’ll throw out your fridge, because the pill costs more," Mike Thompson, CEO of the National Alliance of Healthcare Purchaser Coalitions, said in a June report from PwC.
But that bigger role in total spending has put a spotlight on orphan drugs. As a result, drugmakers may need to make more cautious pricing decisions moving forward. Some payers have even started cracking down on high-priced orphan meds, opting only to cover the treatments only for certain patients.
Newly minted head of the Food and Drug Administration Scott Gottlieb is working to eliminate the agency's backlog of orphan drug designation requests, as well as ease the approval pathway for low-cost generics. Both measures could increase competition in the orphan and specialty drug spaces, prompting companies to shave down list prices so that rivals don't steal market share.
If the FDA's new tone wasn't enough incentive to lower drug prices, a similar one from Congress may be. Sens. Tom Cotton, R-AK., Chuck Grassley, R-IA, and Orrin Hatch, R-UT, sent a letter to the U.S. Government Accountability Office in March requesting it investigate whether drug manufacturers were taking advantage of the Orphan Drug Act.
Pharmaceutical companies, regardless of what they manufacture, almost always negotiate over the price of their products with insurers and PBMs. Yet in recent years, the two latter industries have strengthened their hands, putting more downward pricing pressure on pharma.
The trend is mostly driven by increased competition. As therapeutic areas become more crowded, insurers and PBMs can be pickier about what products they do and don't cover. Inclusion on formularies or insurance plans gives a drug a much better chance of being prescribed and ultimately turning a profit, meaning drugmakers are keen on offering big discounts and rebates as a way of making sure their medicines make the cut.
Oncology, immunology and diabetes are a few therapeutic areas hit particularly hard by shifting negotiating dynamics. Eli Lilly, which has a large diabetes portfolio, explained in March that while average list prices for its U.S. portfolio climbed 14% in 2016, average net prices — which factor in discounts and rebates — rose a much more modest 2.4%.
On a larger scale, QuintilesIMS recently lowered its U.S. drug spending growth projections for the next five years, citing payer negotiating power as a key source for the decline.
If companies resist coming to the table, payers and PBMs have shown a willingness to limit or flat out reject coverage for medications they deem too expensive, even when no other FDA-approved treatments exist.
While drugmakers lament that the money saved through rebates and discounts isn't passed on to patients, they're aren't likely to sit out of the pricing game. Exclusion can lead to weakened revenues in the long-term or dampened investor optimism in the short-term.
The Centers for Disease Control and Prevention estimates that, in 2016, nearly 40% of privately insured working-age adults were enrolled in a high-deductible health plan — up from 26% in 2011
Such plans require patients to pay larger sums out of pocket before insurance kicks in. Employers looking to curb their own healthcare expenses have found the plans attractive. Workers, especially the ones on expensive medications or with chronic conditions, have been less enthused.
"The challenge is the discounts that PBMs negotiate and pass on to plans are used to reduce premiums and other costs once you get into the insurance benefit," Mark Merritt, CEO of the Pharmaceutical Care Management Association, the largest PBM trade group in the U.S., said in an interview.
"But if it's a high-deductible plan, people are getting exposed to the full price of the drug, which they have no idea how expensive a lot of these products were. They're used to a $25 co-pay thinking that was kind of close to the cost of the drug, not realizing it was a $25 co-pay for a $700 drug."
High-deductible insurance plans gained traction with employers as healthcare costs, including drug prices, ballooned. That popularity is beginning to subside, however, as workers rally against the plans and companies acknowledge their pratfalls.
While drug prices have clearly affected insurance coverage, industry analysts note the dynamic is a two-way street.
"The current slowdown in the shift to high-deductible plans will ease some of the downward pressure on utilization and, therefore, nudge medical cost trend up in 2018," PwC said in its latest "Medical Cost Trend: Behind the numbers" report. "Without the lever of high deductibles to reduce costs, employers may consider supply-side management strategies — such as narrower provider networks and centers of excellence — that focus on bringing price, rather than utilization, down."
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