Making Progress Toward Healthier Pharma Markets

Pharmaceuticals play a major role in today’s population health era – they can prevent and cure disease, improve or maintain wellness and slow progression of existing conditions. Yet, their promise can also be a curse if high prices limit patient access and bankrupt the healthcare providers and insurers bearing significant financial risk for patient care.

The proactive new leadership at the FDA is promoting competitive markets by combatting the abuse of well-intentioned programs and market share monopolies. Commissioner Scott Gottlieb has ramped up the FDA’s efforts to prevent drug manufacturers from “gaming the system” in a number of ways.

Accelerating generic approvals and creating transparency to stimulate competition

For the first time, the FDA made publicly available a list of off-patent, off-exclusivity branded drugs without generic competition. Using the list, Premier immediately identified a number of critical drugs for patient care and has been working with manufacturers to participate in the FDA’s new expedited review process. Additionally, Congress recently enacted legislation creating an expedited review process for generic drug applications when there are fewer than three manufacturers in the market for a given drug product. We strongly support and helped to champion these efforts, and are hopeful that the FDA will use this new authority to foster competition and curb price spikes and shortages in generic drugs where only a few players dominate.

Reducing duplicate or redundant review processes

We anticipate the FDA will soon release key documents to streamline the Abbreviated New Drug Application process, which will help eliminate unnecessary, duplicative procedures and greatly increase efficiency without compromising standards.

Curbing abuse of Risk Evaluation and Mitigation Strategy (REMS)

Commissioner Gottlieb has strong words for abusers of the REMs program, stating, “some manufacturers are… using the law as a way to delay the ability of generic firms to purchase the doses of a branded drug that they need to run their studies and get to market.” The FDA has been taking important steps to help prevent exploitation of the loophole by releasing draft guidance to stem drug manufacturers’ abuse of REMS.

We also call on Congress to level the playing field for new market entrants that foster competition in order to drive down inflated drug prices.

Policy change is urgently needed to close loopholes and get competitive entrants into the market faster. The Fair Access for Safe and Timely (FAST) Generics Act and the Creating, Restoring Equal Access to Equivalent Samples (CREATES) and Preserve Access to Affordable Generics Act are clear, bipartisan solutions to curb abusive, anticompetitive business practices that are driving up unsustainable spending within healthcare and impede patient access to generic and biosimilar medicines.

We know competition works. Our aggregated group purchasing power alone puts manufacturers through a head-to-head bidding process that brings results. Premier’s drug portfolio prices have held constant at just 4.55 percent per year, well below the inflation rate of 10 percent over the same time period on all drugs with no contractual terms.

While the FDA has made significant progress toward adopting policies that push more competition, there still is a long way to go before these policies have a real, meaningful upstream effect. From reducing and prioritizing backlogged approvals, accelerating entrance of biosimilars into the market and facilitating increased competition around branded drugs, stakeholders from across healthcare, including Premier, are ready and willing to work with the FDA to bring in more manufacturers into the fray and foster healthier markets for pharmaceuticals.

Calling out the abuses is important, but we badly need action by both FDA and Congress.

Michael J. Alkire is chief operating officer of Premier Inc., a healthcare improvement company.

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  1. PBM’s don’t actually buy drugs except for drugs, mostly generics, dispensed by its in-house mail order pharmacy. Instead, they negotiate reimbursement rates on behalf of payers including both insurance companies and self-funded employers. Rebates are paid based on volume in exchange for moving market share which is achieved mainly through favorable formulary placement. The big drug retailers, including Walgreens, CVS and Walmart can buy generics directly from manufacturers whereas the smaller chains and independent drug stores must buy through one of the three big drug wholesalers – Amerisource-Bergen, Cardinal Health and McKesson.

    Most of the rebates paid to PBM’s flow through to their payer clients. As I’ve noted several times in the past, PBM’s have four ways to make money which are (1) administrative fees, (2) rebates from drug manufacturers, (3) the spread between what the PBM pays the pharmacy and the amount it bills the payer / client and (4) profit earned from filling generic prescriptions through its mail order pharmacy. For any given account, the PBM wants to make a targeted amount of money and it doesn’t care which bucket or combination of buckets the profits come from. Some clients want to minimize administrative fees, some want to maximize the rebates that flow back to them. You get the picture.

    The biggest problem with the current system is that patients with high deductible insurance plans are often exposed to paying the full list price for drugs within their deductible. Payers use the rebates passed on to them to lower premiums from what they would have been in the absence of the rebates. The upshot of this model is that the sickest patients wind up subsidizing the healthier patients. If payers passed the rebate on to insured members when they fill their prescriptions, the list price exposure would go away but premiums would be higher for all insured members and there are many more insured members who would be unhappy with higher premiums than sicker members who would benefit from paying the net price after rebates instead of the list price.

    Foreign governments use price controls and restrictive formularies to lower drug prices. Manufacturers go along with this, at least to a large extent, because the U.S. is a free market that allows them to charge more. With low marginal production costs, there is still a good contribution to profit from the lower selling price overseas. However, these other countries are, in effect, not paying their fair share of R&D costs. So, if the U.S. tried to control prices too, it could have a significant adverse effect on innovation. At the end of the day, the problem boils down to willingness to pay for medical innovation and how that cost should be equitably spread across developed countries.

    • Barry, I appreciate your fine effort here to educate us dummies. But I still am confused. Eg why would the drug manufacturers give the PBM a rebate–your #2 above–when the transaction seems to be that the PBM is trying to lower the prices the plans pay for the drugs? They should be mad at the PBM for doing this, shouldn’t they? …not giving rebates?

      Also, why is the PBM paying the pharmacy? The FT’s article says the pharmacy is paying the PBM.

      Maybe if you could suggest some book or paper on this PBM business we could understand what is going on.

      • Dr. Palmer – Just to be clear, I am not an expert on this subject though I did cover the health insurance companies, drug wholesalers and PBM’s during the last six or seven years of my time in the money management business before I retired at the end of 2011. The foremost expert on the drug distribution business that I’m aware of is Dr. Adam Fein who is the president of Pembroke Consulting and runs a blog called Drug Channels. It’s well worth taking a look at.

        The three largest PBM’s are Express-Scripts, CVS-Caremark and the Optum Health. Express-Scripts will soon be acquired by Cigna assuming the transaction passes FTC scrutiny. Optum is owned by UnitedHealth Group. The three of them combined control about 75%-80% of the PBM market. Tiered formularies can have a dramatic effect in moving patients to urge their doctors to prescribe a drug that falls in a low copay tier assuming it’s clinically effective. My own Part D plan, for example, charges no copay for both Tier 1 and Tier 2 drugs if I order them by mail through Optum Health. Tier 3 drugs have a copayment of $100 or the full cost of the drug if it’s less than $100. Pharmacy retail prices vary a lot for drugs within the same therapeutic class yet cost next to nothing to manufacture. So, drug manufacturers are willing to pay hefty rebates and discounts in exchange for increasing market share through favorable formulary placement.

        Brand name drugs are often not included in the payer’s formulary if generic substitutes are available. That’s one reason why generics now account for roughly 90% of prescriptions written but only about 28% of the dollars spent on drugs. Specialty drugs, defined as costing $600 per month or more, account for 1% of prescriptions but 30%-33% of drug costs and brand name non-specialty drugs are the other 9% of prescriptions and 40% or so of drug costs.

        At the retail pharmacy level, consider a drug like Mylan Pharmaceutical’s Epi-pen. Before the company introduced an authorized generic for $300, the retail price for a two-pack of Epi-pens was a bit over $600. Retail pharmacies acquired the drug from one of the three big wholesalers mentioned in my last post for probably $575-$585. They were paid $600 by the payer or by the patient if the patient has a high deductible plan or no insurance at all. For insured patients that satisfied their deductible or have very comprehensive drug coverage, they pay whatever the copayment is for the tier that the drug falls within on the formulary and the payer pays the balance. Later, assuming volume targets are met for the quarter, half-year, etc. Mylan sends a rebate of probably 50% of the list price in this particular case to the payer, usually one of the PBM’s. The PBM then passes along some, all or occasionally none of the rebate to each client depending on each client’s contract terms. For some drugs that have no effective substitute or competitor, there may be no rebate at all. My understanding is that rebates range from zero to 50% or so and probably average around 30% across the industry.

        The drug manufacturers would love to not have to pay rebates. However, then they would have no way to influence market share. Tiered formularies with significant copayment differentials are an effective way to move patients to choose one drug over another within a therapeutic class. Rebates are the best mechanism to get payers to provide favorable formulary placement. Patients are also likely to ask their doctors to help them minimize copayments by prescribing drugs within a therapeutic class that have a lower copay assuming it’s acceptably effective and the patient can tolerate it. I know it’s convoluted but it’s the system we have and net realized drug price increases were actually quite muted in 2017 as compared to 2016.

      • Just to follow up, the PBM’s have been at this business for a long time. The core of their pitch, especially to self-funded employers but to insurance companies as well, is that there expertise enables them to help the client lower its total drug spend. Prices paid for individual drugs may be higher than average in some cases but it’s the total drug spend that the client is really trying to control. It’s hard to believe that they’ve built the successful businesses they have by screwing their customers. Most of the clients are pretty sophisticated and many hire consultants to help them choose among PBM offerings. In recent years, PBM’s have offered to put some of their fees at risk by offering performance guarantees.

        That said, Anthem is not satisfied with its relationship with Express-Scripts. It will bring its PBM business in house when its current contract expires in 2020. It sold its small PBM to Express-Scripts in 2009.

  2. PBMs (CVS Heath’s Caremark, Express Scripts, and UnitedHealth’s Optum) are supposed to be oligopsonic purchasers of drugs from manufacturers or wholesalers. That was their reason for being. They are not found in Europe. They aggregate a lot of buyers from plans and go to the manufacturers and say: “We need such and such a drug. We have so many millions of users. What will you sell the drug to us for?” This discount from large purchasing is then supposed to go to the patient through reductions in the premiums she pays for her plan.

    Thus, they are supposed to be paying dough in one direction only: to the drug manufacturers or wholesalers. And they should be receiving dough only from the insurance plans.

    But they are getting dough from the other direction too, from the pharmacies in rebates. Why? They keep an undisclosed amount of this before handing any rebate to the various health plans.

    What service is the PBM delivering to the pharmacy to justify this rebate?

    See 3/29/18 Financial Times by David Crow “….death exposes true cost of US medicines”

    The article also helps explain the fact that insured patients can sometimes be paying more for medicines than people without coverage.

    Our government should at least demand clarity in everything in health care. We can’t fix it if there are so many secrets. This would offer a minimum of help to our struggling sector. Come on, guys!

    • The answer to the question as to why the pharmacy is paying the PBM is staring us right in the face. It is that the PBM is also negotiating with the manufacturer a lower price for the pharmacy and thus enabling it to mark up the price more and make more profit…a service to the pharmacy.

      So we have a flagrant and egregious conflict of interest in the PBM. The PBM is trying to get lower prices of drugs for the patients, but simultaneously trying to allow the pharmacist to mark up his prices more and yield more profit.

      Hence the payment from the pharmacies to the PBM.

      The insurers must negotiate their own prices and the pharmacies theirs. They should not use the same agent, viz. the PBM, to do both. It is ludicrous for the PBM to try to get lower prices for the patient and, at the same time, try to enable the pharmacy to mark up its prices more. The two are mutually excluding.

  3. If competition worked so well, why isn’t it working now? The pharma industry looks like it tries to avoid competition. Maybe some of this will help, but I doubt that the current administration will actually support and carry out new rules and regulations to make things more competitive. Just doesn’t fit with their ethos. I also find it unlikely that a new manufacturer will be able to immediately make generics just as cheaply as the ones doing it for the last 10 years. You do realize that even with expedited approvals, we are probably talking years to bring drugs to market? So that drug I use every day that used to cost $3 a bottle will just stay at $100 until then.

    It should also be noted that essentially all of this is aimed at generic drugs, when on patent drugs account for the large majority of spending.



    Disclaimer- We use Premier. I think they do a great job on prices, but that is when there really are multiple companies making the same drug. I think they are overly optimistic here on the level of cooperation they will get from the government and underestimate the pushback from the private sector.

    • Steve, I’m curious as to what percentage of your hospital system’s cost base is attributed to prescription drugs that are given to inpatients during the course of their treatment. Individual price hikes may be egregious in certain instances but how much difference does it really make at the end of the day in the economics of operating your hospital(s)?

      Many of the outsized price increases that we read about are for drugs with three or fewer competitors and a comparatively small market opportunity which could make it economically unattractive for new competitors to enter the market even under a streamlined FDA drug approval process.

      Interestingly, for 2017, Johnson & Johnson reported that the average list price of its drugs increased by 8.1% but its average net realized price after rebates and discounts actually declined by 4.6%. This must be good news for payers though not for patients with high deductible insurance plans who are exposed to paying the full list price within their deductible. The bottom line is that the overall impact on payers of rising drug list prices appears to be overstated because it doesn’t reflect the mitigating effect of rising rebates and discounts.

      • Barry- Iam off this week and would have to pull out budgets at my office, but I generally think of pharmacy costs as running around 10% of total inpatient costs. That includes the cost of pharmacists and drug machines, so I would have look at our details.


  4. Please tell me how this will be able to mitigate the traditional business model of Big Pharma and its effect on over-all healthcare that is to eventually become EQUITABLY available, ECOLOGICALLY accessible, JUSTLY efficient AND RELIABLY effective for each citizen, community by community. By traditional business model, I mean: 40% of annual cash income is equal to net income (aka profit) plus the expense of business promotion (aka marketing).

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