Pharmaceutical Finance on the Brink of Epochal Change

by John J. Otrompke, JD

                With pharmaceutical companies entering a bidding process for inclusion onto the formularies of PBMs over the next few months, the drug industry may be entering a historically chaotic time, according to speakers on a May 14 panel at New York BIO, “The Impact of Pricing and Policy on the Next Decade of Therapeutic Intervention.”

That may be especially true if CMS finalizes its proposed rule, “Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees,” which came out in January.

Discussants speculated that the change might come January 1 of 2020.

“Nobody’s quite sure how the rule will shake out, so there’s a dual-bidding process going on for Medicare D contracts, with a deadline in June, with one bid under the old rule, and another bid if the proposed rule passes,” said Jeff Berkowitz, JD, CEO of Real Endpoints.

Inflationary Forces

                Some on the panel opined that the rebate system, in which drug manufacturers compete for PBM formulary access by offering larger rebates, means that competition raises prices, not lowers them.

“The details of the PBM contracts are proprietary, unless there is a lawsuit, like when there were dueling lawsuits in 2017 between Express Scripts and Kaleo, which makes narcan pens,” explained Madelaine Feldman, MD, a rheumatologist and clinical assistant professor of medicine at Tulane University Medical School in New Orleans.

“When attorneys can go in and look at the contract, they found that the PBM was passing back only 7% of the rebate to the plan in the private market, and only 20% to Medicare. The rebate was only 7% of the price concession, 93% of which was held onto by the middleman,” she added.

The proposed regulation would take away the safe harbor under the Anti-Kickback Statute for PBM rebates, and create a safe harbor for a flat, market rate administrative fee. It would also create a safe harbor for patients, noted Feldman, who pointed out that some of her rheumatology patients who take very expensive drugs for incurable diseases rely on rebates for their drugs.

“It would certainly be a change to PBM’s cost structure,” said Berkowitz. “All the PBMs say they could live in a world without rebates, but that they do valuable administrative work, and they would charge an administrative fee for it.”

(Another proposed rule from CMS, “Modernizing Part D and Medicare Advantage To Lower Drug Prices and Reduce Out-of-Pocket Expenses,” was published last November and is still pending. That rule proposes a great many changes, including a new definition of “negotiated price,” but would also allow payors and PBMs to use step therapy for prior authorization for six heretofore protected classes of drugs).

                                Will PBMs Have a Role in Innovation Decisions?

That said, PBMs, too, are an evolving industry. Five large insurers own or intend to own PBMs, such as CIGNA, which recently purchased ExpressScripts, and the Humana-Walmart merger. Last summer, Amazon bought Pillpack, which has pharmacy licenses in 49 states.

In addition to regulatory proposals, other market solutions proliferate.

“In addition to re-aligning financial incentives among supply chain intermediaries so that they do not encourage higher prices, I favor value-based pricing, particularly for treatments that have no branded or unbranded competitors,” said Anna Kaltenboeck, senior health economist at Memorial Sloan Kettering Cancer Center in New York, who also spoke on the panel.

“Value-based reimbursement is one way to get to the answer,” said Berkowitz. “Although it has taken on a negative connotation, it is a term of art in the industry. Now it’s time for pharma to put it on the line. If you don’t get to your outcome, that’s going to have repercussions,” he said.

“In Louisiana, where we have a large prison population, and so a very large hepatitis C problem, the Netflix model was proposed. The state would contract for an unlimited supply of the hepatitis C drug, and the contract also assures the manufacturer of a minimal amount of money,” said Feldman.

 “Policy needs to have an effect on solving Alzheimer’s. There’s no capital going into this, and we’re all aging,” he gave as an example.

“In disease areas like COPD, cardiovascular disease and diabetes, there’s not a tremendous amount of continued innovation going on right now,” agreed Berkowitz. “But you’re seeing therapies like CAR-Ts in the pipeline, where you get a one-shot deal. People take it once and get cured. The industry would develop a treatment for a rare disease, and treat seven people for a million dollars each.

“So people in the audience should travel to Louisville, Kentucky, or Minnesota, and sit down with the PBMs, and ask them, ‘What kind of innovation do you want to fund?” he suggested.

© 2019 John Otrompke