Pharmacist Explaining Prescription to Woman at Register

Drugs costs continue to increase faster than other areas of health. Now, Congress and the Administration are looking for ways to change the system.

Innovation and disruption

The Role of Pharmaceuticals in Health Care’s Value Transformation

  • Jennifer Boese
  • 4/26/2019

Drugs costs are placing strain on everyone in the health care system, creating enough concern that the government, patients, and the market are weighing in. But the cost of pharmaceutical innovation, the complexity of the supply chain, and the global drug market — among other reasons — have presented ongoing barriers to full-scale reform for drug pricing.

These costs continue to increase faster than other areas of health care, putting pressure on government health care spending, employers, payers, and patients’ ability to afford those drugs. If other aspects of health care are moving (voluntarily or not) towards value-based, outcomes-based payment, and evidence-based care delivery, while maintaining access and affordability (and, yes, innovation too), then what is the proper role of pharmaceuticals in that transformation? And what policies or approaches should be considered to reflect that proper role?

Pharmaceutical change is coming

I have referred back to this quote from Health and Human Services (HHS) Secretary Alex Azar frequently because I see it as both a carrot and a stick, and a pivotal statement of where Azar is leading HHS:

“ ...Change represents opportunity, and I exhort all of you to take advantage of the opportunities...because I assure you, in American health care, change is possible, change is necessary, and change is coming.

As the leader of the country’s largest insurer, Azar’s quote describes his commitment to changing the current system by moving forward with four key priorities:

  1. Drug prices
  2. Health care affordability and availability
  3. Shifting Medicare to pay for health and outcomes
  4. Tackling the opioid epidemic
What is fascinating about HHS Secretary Azar’s four priorities is that pharmaceuticals are within all of them; therefore, tackling drug costs concurrently advances all four priorities at the same time.

Not all change will stem from Congress or the Administration, but there has been increasing activity in these branches of government with respect to drug costs. The conundrum is what that change will look like, and whether Congress and the Administration have the willpower to demand meaningful change in the drug space.

HHS proposes international reference pricing

In October 2018, the Administration advanced aggressive changes to lower the costs of drugs under the International Pricing Index (IPI) model.

The current system lets other countries reap the benefits of American pharmaceutical investment and innovation, while the costs fall on American patients and taxpayers. HHS policy brief on IPI

These changes may be proposed to address the reality that pharmaceutical prices are substantially higher in the U.S. market in order to offset lower drug prices in virtually every other country in the world. This purportedly allows drug companies to continue investing in research and development. I am not going to unpack the varied opinions or complexities around this issue, but I will focus on one question being asked by many: Is that fair to the U.S. consumer and the U.S. taxpayer? According to members of the U.S. Senate Finance Committee, who posed this question to seven CEOs of global drug company executives who were brought in to testify earlier this year, the answer is no. And if the IPI model is any indication, the Administration does not find it fair to the U.S. consumer or taxpayer either.

The IPI model would target Medicare Part B drug prices relative to an index of costs for those same drugs in other selected countries. The model would:

  • Establish a target price for these drugs set at 126 percent of the average cost in selected countries
  • Alter how drugs are reimbursed under Part B by replacing the automatic percentage increase providers receive with a flat-fee add-on payment. Doing so decouples any incentive for providers to select and administer more costly drugs.
  • Establish a system of vendors that negotiate with pharmaceutical companies to purchase and then provide those drugs to providers. This eliminates the need for providers to bear the costs of buying and then billing for these drugs.

HHS estimates this would save $17 billion over the next five years. If this is advanced and finalized, the model would be phased in over multiple years.

Regulatory changes impact pharmacy benefit managers and drug rebates

HHS has also offered up multiple other regulatory changes, including changes to pharmacy benefit managers (PBMs) and drug rebates. In a proposed rule released January 2019, HHS eliminates certain Anti-Kickback Statute (AKS) safe harbor exemptions granted to pharmaceutical companies for rebate or discounts given to PBMs. Specifically, the proposed rule would alter the current discount safe harbor (42 CFR 1001.952(h)). It would also exclude price reductions from drug manufacturers to PBMs, Part D, and Medicaid-managed care plans from the safe harbor’s definition of a “discount.” On the flip side, the proposal would create a new safe harbor that allows drug companies to give discounts directly to patients at the pharmacy counter.

Beyond these two reforms, the Trump Administration has released its American Patients First Blueprint on drug pricing reform, and HHS proposed dozens of changes in its 2020 budget request. While neither document has the force of law, they are indications of the direction the Administration wants to go, and various policy options could always be brought into Congressional budget negotiations.

Congress interested in addressing drug costs

No less than eight hearings in Congress have been held on drug costs this year, including hauling in the heads of the drug companies and the major PBMs to testify on Capitol Hill. These hearings have provided the foundation for ongoing discussions over policy proposals.

What does all this mean? First and foremost, it shows just how much the cost of drugs concerns Congress and the Administration. Second, it likely means drug policy proposals are coming and have more potential to become law than in recent years.

In the U.S. Senate, Senators Alexander and Murray, Chair and Ranking Member respectively of the Senate Health, Education and Pensions Committee (HELP), continue to discuss bipartisan policy approaches. In the U.S. House, Speaker Pelosi has reportedly had discussions with the White House about drug policy, and individual House committees, like Energy and Commerce and the Ways and Means Committees, are moving forward with passing drug legislation.

While there is certainly interest in taking action, there are significant policy and political divisions on what to do. Filtering through all of this activity and developing a set of policies that Congress can agree on is where the bulk of work will take place. Here are a few areas which have been cited as key problems, and where lawmakers could come to an agreement:

  • Address the role of rebates and PBMs so savings are passed on to consumers. In addition to HHS, Congress appears particularly focused on reform here.
  • Address sole source drugs or drugs with limited competition. Since there are no market pressures to drive down prices, this may be desirable. Potential policies could look like the bipartisan Short on Competition Act, introduced by Senators Klobuchar and Grassley.
  • Address specialty drugs. The proportion of specialty drugs compared to all other drugs is rapidly increasing. Because these drugs (think immunotherapy and orphan, rare disease drugs) address limited patient populations, they are also extremely expensive. Potential ideas could include developing new payment models around certain high-cost drugs, like the recently approved CAR-T cell therapies.
  • Change Part B add-on reimbursements. This would move the current reimbursement for Part B drugs from the Average Sales Price + 6 percent to some type of flat fee add-on payment.
  • Address Part D catastrophic phase and cap out-of-pocket costs for beneficiaries. This is a strong bipartisan concern because this leaves Medicare beneficiaries on the hook for high co-pays when their drugs costs reach the catastrophic phase.
  • Provide more transparency and sunshine laws. A ban on “gag clauses” at the pharmacy counter has already been passed by Congress and signed into law by the president. This makes it so pharmacists can advise patients on lower-cost versions of their prescription regardless of any contracts they have with PBMs. The Administration also continues to pursue regulations requiring drug companies to include drugs costs in any television ads.

    Congress has expressed interest in transparency as well, including the House Ways and Means Committee passing the Prescription Drug STAR Act (HR 2113), which would require an explanation for any spikes in prices. Future proposals could require pharmaceutical company gifts (e.g., meals, speaking fees) to be disclosed, or the costs of research and development to be far more delineated (to remove marketing, administrative, and related costs). Some states are moving forward independently on various transparency laws.
  • Address gaming of exclusivity periods, patent laws, and bringing generics/biosimilar to market quicker. Various proposals have been offered, including the CREATES Act, to prohibit limiting generics’ ability to get brand samples and other perceived or real manipulations of the Risk and Evaluation Mitigation (REMS) requirements. Another bill would ban brand drugs from paying generic companies to not come to market.
  • Move forward with value-based models. Examples could include Senator Cassidy’s Patient Affordability Value and Efficiency (PAVE) Act. This legislation would remove legislative and regulatory barriers, such as the Medicaid best price, Stark, and Anti-Kickback laws to allow for outcomes-based, value-based arrangements. In general, the perspective is that value-based arrangements would create incentives to develop drugs that are aligned to population needs. The Centers for Medicare and Medicaid Services (CMS) is also looking in this direction and will allow Medicare Advantage plans to test in a Part D Value-Based Insurance Design demonstration to allow for varying approaches in the catastrophic phase of drug coverage.

Value-based approaches: states test Netflix and market-based models

There has already been movement towards value-based models in the commercial market as well as state governments.

Louisiana was the first state to move forward with what has been dubbed the “Netflix” model for purchasing drugs. Under the Louisiana model, a drug company would provide an unlimited supply of the hepatitis C drug to the state’s Medicaid and prison populations for a set amount of money over a five-year period. Essentially, the state would receive access to unlimited drugs (a “subscription”) for a set payment amount pushed out over a long time period. This alternative financing approach helps patients receive the drug immediately, the state can apportion costs over a longer time period, and the pharmaceutical company has a guaranteed, built-in revenue stream.

Multiple drug companies bid on this opportunity, and the state recently selected a Gilead subsidiary for the contract. Washington State followed suit with its own Netflix subscription-type approach, also for hepatitis C, which will cover Medicaid, prisoners, and state employees. These approaches will be watched and replicated if successful. They also demonstrate a willingness by pharmaceutical companies to engage in innovative contracts.

Oklahoma received approval by CMS to implement a rebate approach for drugs in its Medicaid program, and other states are using novel approaches. Utah will pay public employees to travel to Mexico to fill a prescription for any of 13 drugs that are identical to ones in the U.S — an interesting concept, but not new to health care. For example, many companies apply this approach to high cost medical procedures, like Walmart’s use of Centers of Excellence to pay for the costs of patients to travel to high value providers, like Mayo Clinic, to receive care. Reference-based pricing (RBP) is also changing the way patients pay for medical services. This has been recently implemented in the state of Montana and proposed in North Carolina. While medical services may be a first step, it isn’t that difficult to think about employing more RBP approaches down-the-line in the drug space, as HHS has shown with its IPI proposal.

Independent of the regulatory or legislative activity or government contracts, drug makers and insurers have moved into value-based contracts for certain pharmaceuticals on their own. Several years ago, Cigna entered into a pay-for-performance contract with Novartis for the heart drug Entresto. Cigna developed its own outcomes metrics, a key one being the rate of hospitalizations based on heart failure. Overall, Novartis, creator of the break-through cancer drug Kymriah, a CAR-T cell drug immunotherapy, has expressed its support for value-based contracts and has been working with payers on agreements. With Kymriah, they developed outcomes-based contracts that would not charge participating treatment centers for the drug costs when the patient does not achieve a result within one month following infusion.

How we can help

It may be messy to shift towards value, but other parts of the health care ecosystem are further along this same trajectory towards quality and outcomes delivery at better prices. It should not be a surprise that these same goals and expectations have begun percolating into the pharmaceutical space as the industry joins the entire health care system while it groans through a fundamental re-alignment.

The ultimate goal is putting pharmaceutical and health care costs onto a more sustainable future path. Wherever you are on your journey, CLA can help you strategically understand and plan for your future. We are here to know you and help you.

Read about more health care disruptors on CLA’s Health Care Innovation and Insight blog, HI2.