shutterstock_295193543_cropped-763324-editedHoward Deutsch co-authored this blog post with Pratap Khedkar.

President Donald Trump and HHS Secretary Alex Azar addressed the nation from the White House Rose Garden last week, introducing American Patients First, a drug pricing plan that Pres. Trump described as the “most sweeping action in history to lower the price of prescription drugs.” Let’s take a closer look, shall we?

The blueprint characterizes the problem well, and is surprisingly quite pharma-friendly. In outlining four ways that the drug pricing system needs to be realigned, the plan points to a few drivers that have contributed to today’s issues: the rise of the middlemen such as PBMs and their incentives to want higher list prices, the expansion of government funding and mandatory rebates, the growth of expensive specialty drugs even as small molecule pills became generic and got a 90% price cut, and the high and growing R&D costs of pharma innovation. We shouldn’t lose sight of the fact that 89% of all pills are generic, and high prices largely are a problem among the remaining 11%, aside from the occasional Daraprim-style price gouging.

The immediate actions proposed in the plan, including improving reporting, giving Medicare Part D plan negotiators better tools and eliminating pharmacy gag clauses, are all good steps, but their impact will likely be modest. Part D already extracts higher rebates than commercial payers, partly because Part D has one tool that commercial payers don’t: a ban on patient co-pay assistance. This sounds like patients need to be helped less in order to help payers more.

The most creative short-term proposal, and one of the few mentioned directly by Azar in the speech, is requiring TV drug advertisements to mention drug prices. It’s unclear whether the proposed tactic will survive a court challenge, but if it does, the patient’s out-of-pocket expense likely will be the focus, which won’t have the desired effect since a drug’s cost varies by patient (“from $20 and up”). In other words, a drug’s cost to any given patient can’t be easily communicated via a TV ad. And if the idea is to declare the drug’s list price, is there an assumption here that the list price is hard for consumers to find? In reality, one simple Google search is all that’s needed.

The long-term actions, described as “further opportunities” in the plan, are more interesting. Some may require legislation, but it’s unlikely that today’s environment on Capitol Hill will be conducive to substantive changes. However, the following three proposed actions are significant, and provide an opportunity for pharma organizations to plan accordingly:

1. Eliminate the use of rebates as a safe harbor. This proposed change to the rebate structure has the potential to be the most disruptive. One potential outcome is that drug prices will reset much closer to the average net price, but not necessarily below it. Or, as we’ve seen in the airline industry, transparency could lead to a price war. Or greater price transparency could strip large payers of their negotiating leverage and keep the high price structure intact. Thinking about that airline industry example, if the primary driver is finding the lowest price, travelers’ flying experience could suffer, but they won’t care as long as the ultimate outcome (getting from A to B) remains intact. Can the same hold true in pharma? Business class seems to be a more apt analogy for healthcare. The price sensitivity is lower because the consumer isn’t really paying, so customer service and experience become key drivers in the purchase decision. Technically, the drug price transparency issues persist despite the CMS being privy to the lowest net prices all along because manufacturers report to Medicaid’s best price program quarterly. Of course, this strategy will eliminate half of the PBM business model, which may be the Trump plan’s main consequence.

2. Apply Medicare Part D negotiation models to Part B drugs. Using the competitive acquisition program (CAP) to negotiate the price of Part B drugs and providing that avenue to small physician practices could have a major impact. An extension of this idea could be to use the average sales price (ASP) from the CAP as a reference number for payment as opposed to the complex ASP calculation process that’s currently in place. Even if the CAP isn’t used, moving a drug from Part B to Part D would emulate a strategy that many commercial payers are already applying.

3. Establish true value-based pricing around the patient condition. This strategy is most aligned with linking price to valuable innovation—and value is certainly linked to indication. The move from volume to value had slowed down under the previous HHS secretary’s jurisdiction, but there seems to be a renewed focus on outcomes, which is a welcome change. However, current regulations are serving as barriers to certain forms of value-based pricing. By carefully removing Medicaid pricing and other barriers, we could open up more avenues of price negotiation between pharma and payers.

What’s notably absent in the document is the central government’s role in negotiating drug prices through Medicare Part D. The argument here has been that Canada and European countries have been successful because having scale helps get to a lower price, but this is a false argument. Just look at UnitedHealth Group, which is four times bigger than any pharma company and has more buying power than Canada. And as the largest Part D payer, UnitedHealth has plenty of scale all by itself. Yes, the government is bigger, but the Medicare Part D business is so consolidated that nearly all of it comes from entities with plenty of scale and power already.

Taken outside of the political context, the blueprint does a nice job of laying out the issues and providing a wide spectrum of possible solutions, including some pretty disruptive ones. The hope is that this initiative will lead to better communication among healthcare stakeholders, and not just more rhetoric in a year in which HHS likely will make more progress than Congress. Overall, the steps outlined in the blueprint are positive for pharma companies, particularly when we consider Pres. Trump’s earlier stance on drug pricing and what he has communicated across various channels prior to his appearance in the Rose Garden.

But the seemingly soft sentence for pharma shouldn’t be an excuse to sit back and see what comes of the president’s proposal. Instead, the question now is how pharma companies can leverage some of these ideas to formulate a proactive plan that continues to put American patients first.


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Topics: Medicare, Pratap Khedkar, Drug pricing, Howard Deutsch, value-based pricing, price transparency, pharma companies, rebates