Why drug pricing seems so complicated
Drug pricing in the U.S. is in need of a fix. Mired in layers of complexity and controversy, experts insist that pharmaceutical manufacturers can take basic steps to navigate the process more smoothly through improved transparency, better communication about products’ clinical value, and tighter internal organization that focuses on the drug’s full revenue life-cycle.
Why go to the trouble? It is likely that few pharma companies could claim, at least in the eyes of the American public, as a Bayer executive did during a Feb. 22 earnings call, "We have found that our pricing has been relatively stable. We manage it well."
If that is the exception, the rule seems to be that numerous components go into pharma pricing – and it is extremely challenging to manage it well.
"We counsel that many factors should be considered when pricing drugs and biologics, including the clinical value of the drug compared to its competitors, the increased survival and quality of life with the drug, patient affordability, competitors’ prices and the effect of various discount programs," said Lindsay Bealor Greenleaf, director at ADVI. The Washington, D.C.-based firm advises pharma, biotech and digital health companies, as well as provider clients, on reimbursement, market access, commercialization and health care policy issues.
Drug pricing also must involve a close look at rebates and discounts going to middlemen in a complicated supply chain, Greenleaf told BioPharma Dive.
"The rebate system is complex, and employer and government payers often do not benefit from it," she said. "Though rebates may result in lower premiums, patients benefit the least from this process as their prescription drug copays are based off of a list price that has been artificially inflated by [a pharmacy benefit manager] or other stakeholder demands for high rebates."
According to Greenleaf, PBMs are leveraging their ability to exclude drugs from the formulary to demand higher rebates from manufacturers. "We’ve seen CVS flex its muscle by excluding 154 drugs from its 2017 formulary, which is up from 124 exclusions the year before," she added.
"As the threat of exclusion grows, so does the pressure on pharma to provide higher rebates," Greenleaf said. "While this is primarily an issue for the retail setting of care and oral drugs, we see more stability for physician-administered drugs (infused or injected, often biologics) that fall under Medicare Part B due to the market dynamics of Average Sales Price (ASP) and the absence of PBM interference," Greenleaf said.
Marc Samuels, ADVI’s CEO, added that his firm is seeing an uptick in planning and strategy for drug and biologics around value-based contracting with public and private payers. "We have worked with six companies focused on such approaches," he said. "Two in the retail setting focused on showcasing better value by standing behind the effectiveness and patient quality of life of their product versus competitors and four in the physician office setting focused on indication-based pricing and combination pricing strategies for their biologic products."
Along with better communication of the drug’s value, solid pricing also boils down to improved transparency and a more cohesive internal organization, said Nate Taninecz, VP of life sciences at Model N. His firm works with biopharma companies, among others, to maximize revenue life-cycle, handling such matters as government price calculations, and ensuring rebates aren’t being overpaid and contracts are current and include sufficient notice for renegotiations.
Taninecz explained that Model N doesn’t calculate the drug’s initial price, which is based on its clinical value. Instead, he said, his firm’s systems may help determine such issues as the logical sequence for the drug’s global launch given the different pricing rules among countries.
His firm has seen biopharma companies organized into separate units—sales representatives, sales operations team, government pricing teams and more—that don't all have the full knowledge on revenue life cycle that goes beyond initial price. "That opens customers up to higher cost structures, spending more than they need to," he said.
‘Thinking in bits and pieces’
"I think a lot of times companies are thinking in bits and pieces," said Voytech Sudol, director of life sciences product marketing at Model N. He said that some companies ahead of the curve are managing price, adding analytics and tracking patients’ journeys with the assistance of electronic health records and other technologies.
Using integrated tracking systems can show a company if patients are doing better on branded drugs instead of generics, allowing pharma companies to show cost savings for the individual patient and for the healthcare system as a whole, Sudol said. By contrast, the current system focuses on price and generics, but the reality may be different.
Taninecz attributes wide variations in drug pricing to companies’ varying abilities to understand products’ value and how to consider factors such as access, indication, setting and who can be helped by the drug in determining its price. Looking at it from a health economics perspective, a $5,000 drug may keep a person out of a $50,000/year nursing facility. Calculations can’t occur in a vacuum, he said, "and just because you can get a price increase doesn’t mean you should."
He describes the process as "more than getting a bump on your top line," and explains that wholesale acquisition cost (WAC) and list price are just the starting point. Then companies must address complex government pricing rules, a complicated supply chain and make decisions such as whether to send the drug to hospitals or retail pharmacies, as well as whether to tie discounts to performance or to payment terms, such as prompt-pay discounts.
In this multi-layered environment, he said, some discounts apply to brands, some to generics, and some to both. Fee-for-service discounts may comprise 1% to 2% of what’s sold; on the managed care side, with PBMs handling drugs for health plans, there might be an access rebate if the drug is put on a formulary. Then come possible PBM discounts and rebates for group purchasing organizations; and places like the Mayo Clinic might get additional discounts. And so on.
Understanding risk and reward
The stakes are high for pharma manufacturers, and they "have to understand what their risk and reward is with pricing," and follow up with analytics to determine the best ways to move forward, Taninecz said. "In the end, what we’re really trying to do [is improve] communicating and understanding the value of these drugs," he said.
ADVI’s Samuels said his firm’s advice to pharma manufacturers is simple: be prepared and do not take for granted that practice will remain the same, that volume-based discounts won't be challenged and that doctors will continue to treat as voluntary those practice management tools they should have been using for years.
"Our drug and biologic partners would benefit from explicit incorporation of clinical value into pricing, and by being/becoming an active partner in shaping this," Samuels said. "The companies that succeed will be the ones to understand this is coming and are already collecting the relevant data and conducting their trials in a forward-thinking manner."