Latest Drugwonks' Blog
The Trump Administration’s triad of HHS Secretary Alex Azar, FDA Commissioner Scott Gottlieb and CMS Administrator Seema Verma represents an exciting policy wonk triple play. All three are idea-driven innovators and nowhere is this more vividly on display than in the American Patients First Blueprint to lower drug prices and reduce out-of-pocket costs.
On May 14th, HHS issued a request for information (RFI) on the administration's blueprint, seeking input from stakeholders on a wide range of policy proposals. Responses are due on or before July 16, 2018. This is not an exercise.
The Blueprint is both a directional document of free-market principles and a high-stakes exam for America’s healthcare leadership. Why an exam? Precisely because in it the Administration asks a series of tough, intriguing, challenging and precise questions on a series of interesting potential pathways for reform. It’s not a final exam – but it certainly is a high stakes one for all involved.
The headline message is that incremental change isn’t enough. Dynamic, discontinuous and disruptive ideas are the order of the day. Attention American healthcare leaders: It’s time to lead, follow or get out of the way. And, as the Beltway adage reminds us, “If you’re not at the table, you’re on the menu.”
As America’s best and brightest cogitate on their RFI responses, here are some things to consider:
Drug Manufacturers: Are you ready to facilitate generic drug development by becoming part of the solution, ceasing the shenanigans that prevent quicker development programs? Straightforwardly, are you ready to come to the table to discuss the real problems with the CREATES Act – and solve them?
Pharmacy Benefit Managers: Are you ready to stop putting profits in front of patients? Will you pass along more of your double-digit discounts to patients in the forms of lower co-pays and co-insurance? Will you stop using restrictive formularies, co-pay accumulators, and prior authorization to pad your own pocket? Are you willing to accept fiduciary responsibility for your actions? If not – better get ready for Uncle Sam to take away your anti-kickback exemption.
Administrator Verma: Are you prepared to grant more states waivers for more aggressive reform pilot programs? How can you insert more market-based forces into Part B while retaining existing price transparency? How can you help to drive more competitive benefit design options both inside and outside of government programs?
Commissioner Gottlieb: FDA’s senior leadership is saying all the right things. Legislation has given the agency broader authority to do more things in new ways. How can you convince, cajole and empower line review staff to get with the program?
Secretary Azar: You’ve accused insurers of “keeping customers in the dark.” How can you use both your authority and bully pulpit to help propel more sunlight (the best disinfectant) into this and other systemic issues that are trying to hide in the shadows of industry lobbyists? How soon can we eradicate the Gag Rule and set pharmacists free to help patients lower their out-of-pocket costs?
Congress: Unfortunately, the less you understand about the healthcare ecosystem, the more simplistic, politically popular sound bite-driven solutions seem like the order of the day. Drug importation, patent expropriation and “single payer” for example, are bad ideas that many in both Houses (and state legislatures) support even though they have been shown, time and again to be not just non-starters but replete with dangerous unintended consequences. Rather than looking for people to blame and punish, how about looking for ways to solve the problem?
And when it comes to the 340B imbroglio, how about a more realistic definition of a "patient?"
Yes, the exam questions are difficult, time is short and the stakes are high. But with sound national leadership, a more open-kimono ecosystem and continued political pressure to develop disruptive solutions that deliver lower costs for patients while enhancing innovation, we can expect more than a passing grade. We can expect real progress.
On May 14th, HHS issued a request for information (RFI) on the administration's blueprint, seeking input from stakeholders on a wide range of policy proposals. Responses are due on or before July 16, 2018. This is not an exercise.
The Blueprint is both a directional document of free-market principles and a high-stakes exam for America’s healthcare leadership. Why an exam? Precisely because in it the Administration asks a series of tough, intriguing, challenging and precise questions on a series of interesting potential pathways for reform. It’s not a final exam – but it certainly is a high stakes one for all involved.
The headline message is that incremental change isn’t enough. Dynamic, discontinuous and disruptive ideas are the order of the day. Attention American healthcare leaders: It’s time to lead, follow or get out of the way. And, as the Beltway adage reminds us, “If you’re not at the table, you’re on the menu.”
As America’s best and brightest cogitate on their RFI responses, here are some things to consider:
Drug Manufacturers: Are you ready to facilitate generic drug development by becoming part of the solution, ceasing the shenanigans that prevent quicker development programs? Straightforwardly, are you ready to come to the table to discuss the real problems with the CREATES Act – and solve them?
Pharmacy Benefit Managers: Are you ready to stop putting profits in front of patients? Will you pass along more of your double-digit discounts to patients in the forms of lower co-pays and co-insurance? Will you stop using restrictive formularies, co-pay accumulators, and prior authorization to pad your own pocket? Are you willing to accept fiduciary responsibility for your actions? If not – better get ready for Uncle Sam to take away your anti-kickback exemption.
Administrator Verma: Are you prepared to grant more states waivers for more aggressive reform pilot programs? How can you insert more market-based forces into Part B while retaining existing price transparency? How can you help to drive more competitive benefit design options both inside and outside of government programs?
Commissioner Gottlieb: FDA’s senior leadership is saying all the right things. Legislation has given the agency broader authority to do more things in new ways. How can you convince, cajole and empower line review staff to get with the program?
Secretary Azar: You’ve accused insurers of “keeping customers in the dark.” How can you use both your authority and bully pulpit to help propel more sunlight (the best disinfectant) into this and other systemic issues that are trying to hide in the shadows of industry lobbyists? How soon can we eradicate the Gag Rule and set pharmacists free to help patients lower their out-of-pocket costs?
Congress: Unfortunately, the less you understand about the healthcare ecosystem, the more simplistic, politically popular sound bite-driven solutions seem like the order of the day. Drug importation, patent expropriation and “single payer” for example, are bad ideas that many in both Houses (and state legislatures) support even though they have been shown, time and again to be not just non-starters but replete with dangerous unintended consequences. Rather than looking for people to blame and punish, how about looking for ways to solve the problem?
And when it comes to the 340B imbroglio, how about a more realistic definition of a "patient?"
Yes, the exam questions are difficult, time is short and the stakes are high. But with sound national leadership, a more open-kimono ecosystem and continued political pressure to develop disruptive solutions that deliver lower costs for patients while enhancing innovation, we can expect more than a passing grade. We can expect real progress.
According to an editorial in the New York Times, “For several years the F.D.A. has been lowering the standards by which it decides whether new medications are safe and useful.” Balderdash.
Is the FDA approving drugs too fast or not fast enough? Are they demanding too much data or not enough? There isn’t any dearth of commentary supporting either proposition. There is, however, no evidence to support the sound bite that the FDA is approving “everything,” or that every product that requests an expedited pathway receives it, or that “all” those that do receive an expedited pathway designation get approved, or that every product that does reach the market via an expedited approval is in some way more dangerous than other medicines. Some particulars:
* An analysis of every product (364) requesting a Breakthrough Therapy designation (from July 2012 – June 2016) shows that CDER granted 133 (37%) of those requests, denied 182 (50%), and the sponsor withdrew their request 49 times (13%) before the agency made a decision. Hardly a regulatory carte blanche.
* In 2013, the first full year of the Breakthrough Designation, the FDA approved 3 new drugs, 14 in 2014, and 9 in 2015. Hardly an onslaught of new medicines.
* Among 22 drugs with 24 indications granted accelerated approval by the FDA in 2009-2013, efficacy was often confirmed in post-approval trials a minimum of 3 years after approval, although confirmatory trials and preapproval trials had similar design elements, including reliance on surrogate measures as outcomes.Unsafe? Not effective? “Dangerous? A new “wild west” FDA? No.
New ways of understanding and interpreting how data evolves over time, upends the traditional frame of regulatory stasis and opens up the opportunity to embrace a more 21st century approach to the regulation of healthcare technologies.
Is the FDA approving drugs too fast or not fast enough? Are they demanding too much data or not enough? There isn’t any dearth of commentary supporting either proposition. There is, however, no evidence to support the sound bite that the FDA is approving “everything,” or that every product that requests an expedited pathway receives it, or that “all” those that do receive an expedited pathway designation get approved, or that every product that does reach the market via an expedited approval is in some way more dangerous than other medicines. Some particulars:
* An analysis of every product (364) requesting a Breakthrough Therapy designation (from July 2012 – June 2016) shows that CDER granted 133 (37%) of those requests, denied 182 (50%), and the sponsor withdrew their request 49 times (13%) before the agency made a decision. Hardly a regulatory carte blanche.
* In 2013, the first full year of the Breakthrough Designation, the FDA approved 3 new drugs, 14 in 2014, and 9 in 2015. Hardly an onslaught of new medicines.
* Among 22 drugs with 24 indications granted accelerated approval by the FDA in 2009-2013, efficacy was often confirmed in post-approval trials a minimum of 3 years after approval, although confirmatory trials and preapproval trials had similar design elements, including reliance on surrogate measures as outcomes.Unsafe? Not effective? “Dangerous? A new “wild west” FDA? No.
New ways of understanding and interpreting how data evolves over time, upends the traditional frame of regulatory stasis and opens up the opportunity to embrace a more 21st century approach to the regulation of healthcare technologies.
Louisiana is leading the nation in smart drug pricing transparency legislation. Last year, as in many other states, the issue was pharmaceutical manufacturer pricing. But many have learned that, by focusing on just one part of the ecosystem, partial transparency results in unhelpful opaqueness.
Bravo to the Bayou State for understanding that real pricing transparency requires real transparency by all concerned. Consider two pieces of legislation that just passed both houses of the Louisiana legislature by unanimous votes:
Senate Bill 283 calls for PBMs to make their rebate data (in aggregate form) available on a public website. Bill 283 requires that pharmacy benefit managers “provide for internet publication of formularies; to provide for transparency reporting; to provide for certain reportable aggregate data; to provide for internet publication of the transparency report; to provide for definitions; to provide for the duties of the commissioner of insurance relative thereto; to provide for confidentiality; and to provide for related matters.”
Translation – show us the money.
The second piece of legislation, Senate Bill 282, requires PBM reporting of “Excess Consumer Cost Burden.” According the bill, this means “an amount charged to an enrollee for a covered prescription drug that is greater than the amount that an enrollee’s health insurance issuer pays, or would pay absent the enrollee cost sharing, after accounting for rebates, or where an enrollee is subject to a paid for as medical care under any hospital or medical service policy or certificate, hospital or medical service plan contract, preferred provider organization, or health insurance organization offered by a health insurance issuer.”
In other words – show us the money – and how it impacts the price patients’ pay at the pharmacy.
As more legislators recognize the value of ecosystem transparency, these two pieces of legislation are likely models of what other states will propose. This is also in keeping with Secretary Azar’s call for PBMs to pass along 30% of their rebates to Medicare and Medicaid patients in the form of lower co-pays, deductibles, and co-insurance. No one understands better than the people of Louisiana that it’s “the price at the pump” that matters most to the average Joe.
To paraphrase the Kingfish, former Louisiana Governor Huey Long, PBMs are going to get real transparency - and they aren't going to like it.
Bravo to the Bayou State for understanding that real pricing transparency requires real transparency by all concerned. Consider two pieces of legislation that just passed both houses of the Louisiana legislature by unanimous votes:
Senate Bill 283 calls for PBMs to make their rebate data (in aggregate form) available on a public website. Bill 283 requires that pharmacy benefit managers “provide for internet publication of formularies; to provide for transparency reporting; to provide for certain reportable aggregate data; to provide for internet publication of the transparency report; to provide for definitions; to provide for the duties of the commissioner of insurance relative thereto; to provide for confidentiality; and to provide for related matters.”
Translation – show us the money.
The second piece of legislation, Senate Bill 282, requires PBM reporting of “Excess Consumer Cost Burden.” According the bill, this means “an amount charged to an enrollee for a covered prescription drug that is greater than the amount that an enrollee’s health insurance issuer pays, or would pay absent the enrollee cost sharing, after accounting for rebates, or where an enrollee is subject to a paid for as medical care under any hospital or medical service policy or certificate, hospital or medical service plan contract, preferred provider organization, or health insurance organization offered by a health insurance issuer.”
In other words – show us the money – and how it impacts the price patients’ pay at the pharmacy.
As more legislators recognize the value of ecosystem transparency, these two pieces of legislation are likely models of what other states will propose. This is also in keeping with Secretary Azar’s call for PBMs to pass along 30% of their rebates to Medicare and Medicaid patients in the form of lower co-pays, deductibles, and co-insurance. No one understands better than the people of Louisiana that it’s “the price at the pump” that matters most to the average Joe.
To paraphrase the Kingfish, former Louisiana Governor Huey Long, PBMs are going to get real transparency - and they aren't going to like it.
In the wake of the President’s speech on drug pricing organizations and individuals funded by the Laura and John Arnold Foundation have been campaigning to establish the Institute for Clinical and Economic Review – another Arnold funded enterprise – as the ultimate and undisputed authority for determining the price and value of new medicines.
An article written by Austin Frakt, a blogger, and director of the Partnered Evidence-Based Policy Resource Center at the V.A. Boston Healthcare System tries to make just that case.
Frakt, the latest expert put on the Arnold foundation payroll wrote that ICER is the light and salvation to the drug pricing issue:
“It is hard to generate enough reliable cost-effectiveness information to give insurers the leverage to say “no” to unreasonably expensive drugs….
The nonprofit and privately financed Institute for Clinical and Economic Review has proposed a way to solve that problem. Largely funded by the Laura and John Arnold Foundation, it is an independent organization that weighs the benefits of medical technologies against their prices.
For each new drug that comes to market, the organization conducts a clinical and economic analysis that’s available to the public. It then suggests to payers and manufacturers a price range that’s aligned with benefits and budgets.
There’s evidence that the exercise is helping insurers cut better deals. For example, Dupixent, the first cure for eczema, was expected to launch last year at a price of $60,000 per year of treatment. At a cost this high, many insurers would have imposed onerous cost-sharing requirements on patients before covering it.
Instead, Dupixent manufacturers Regeneron Pharmaceuticals Inc. and Sanofi sought a value-based price from ICER before setting the list price for the drug. Then, during negotiations with payers, the companies argued that the outside assessment established a fair price that warranted lower cost sharing and fewer barriers for patient access.
A similar story arose with Praluent, for high cholesterol. Regeneron and Sanofi struck a deal with the pharmacy benefits manager Express Scripts to reduce Praluent’s price to one that ICER believed aligned better with benefits. In exchange, patients will get easier access to the drug.”
Frakt ignores how ICER’s suggestions on pricing and limiting access to save money were used to deny and limit access to hepatitis C drugs, recommendations that drove cure rates down from 99 percent to 75 percent in some health plans. It claimed that new medicines for multiple myeloma were not valuable at ANY price. On top of all that, ICER claims that spending more than about $1 billion a year on one drug would threaten the financial stability of a health plan. Which means that even if we had a cure for HCV or Alzheimer’s we would have to limit access once that $1 billion mark was hit.
Frakt is either misleading or uninformed about access to Dupixent. The Dupixent ‘deal’ was made with Express Scripts. The claim that patients have faster access to the drug is bogus: Express Scripts requires Medicare patients to fail first on two other drugs in order to get Dupixent.
“Patient meets both of the following criteria: a. Patient has used at least one medium-, medium-high, high-, and/or super-high-potency prescription topical corticosteroid for at least 28 consecutive days OR patient has atopic dermatitis affecting ONLY the face, eyes/eyelids, skin folds, and/or genitalia and has tried tacrolimus ointment for at least 28 consecutive days AND b. Inadequate efficacy was demonstrated with these previously tried topical prescription therapies, according to the prescribing physician. “
He also claims that ICER research would make more medicines widely available because health plans don’t do any cost-effectiveness analysis of their own to make such patient-focused decisions. Yet as search of Dupixent on Formulary Lookup reveals that only 5 percent of commercial health plans given the drug preferred access. None allow immediate access. Instead, patients have to fail first on 2-3 other drugs. Nearly 70 percent of Medicare Part D PBMs don't even cover the drug.
Frakt also fall flat in describing the health bounty flowing from ICER’s evaluation of new anti-cholesterol medicines called PCSK9s (one called Repatha, made by Amgen and another called Praluent, made by Regeneron) that are much more effective than statins alone in reducing cholesterol levels and the heart disease caused by the condition.
The list price for the drugs was – is - $14000. ICER said it was only worth about $5000 and that to make it available to every patient who could benefit, the price should be $2000.
These recommendations were used by PBMs for force deeper rebates in exchange for excluding competitor drugs from their formulary as well as reduce the PBM and health plan spending on new drugs. In the case of Repatha and Praluent, such practices have cut the market for Repatha and Praluent by two thirds.
As Frakt noted, Express Scripts recently cut a deal with Regeneron to eliminate step therapy and prior authorization for Praluent in exchange for more rebates. ICER produced a new assessment that Express Scripts claimed led to this deal. In fact, ICER essentially restated the findings in its first report: that a small subgroup of patients should get the drug if drug companies cut the price to about $5000.
This value-based pricing process increased rebates and led to a lower net price. But it did NOT result in eliminating cost sharing. Patients – the handful that will get the drug – will still pay $100 a month for the drug. Second, Express Scripts is limiting access to its infusion centers, meaning more profit. Third, as part of the deal, Express Scripts no longer covers Repatha, Amgen’s PCSK9. Patients will have to pay full price or reapply to get Repatha.
The fact is, net prices alone will not guarantee affordable access. PBMs will still use step therapy, prior authorization, and cost sharing to maximize rebates and keep drug costs using ICER prices as a bargaining chip.
The president has made it clear that drug companies will have to find another way to get new and expensive medicines to patients. But those prices must be based, not on the secret and ideologically driven deliberations of a group like ICER or the kind of backroom deals that lead to the Repatha ripoff.
The job of deciding the value of any medicine will have to be democratized. If drug and device companies don’t take the money they now spend on rebates, patient assistance programs, and copay cards and invest in demonstrating the differential value of their products to doctors, health plans and most importantly, patients, groups like ICER will gain more control over access. Which means, contrary to Frakt’s flakking for ICER, most patients will have less access to new medicines and pay more for them.
An article written by Austin Frakt, a blogger, and director of the Partnered Evidence-Based Policy Resource Center at the V.A. Boston Healthcare System tries to make just that case.
Frakt, the latest expert put on the Arnold foundation payroll wrote that ICER is the light and salvation to the drug pricing issue:
“It is hard to generate enough reliable cost-effectiveness information to give insurers the leverage to say “no” to unreasonably expensive drugs….
The nonprofit and privately financed Institute for Clinical and Economic Review has proposed a way to solve that problem. Largely funded by the Laura and John Arnold Foundation, it is an independent organization that weighs the benefits of medical technologies against their prices.
For each new drug that comes to market, the organization conducts a clinical and economic analysis that’s available to the public. It then suggests to payers and manufacturers a price range that’s aligned with benefits and budgets.
There’s evidence that the exercise is helping insurers cut better deals. For example, Dupixent, the first cure for eczema, was expected to launch last year at a price of $60,000 per year of treatment. At a cost this high, many insurers would have imposed onerous cost-sharing requirements on patients before covering it.
Instead, Dupixent manufacturers Regeneron Pharmaceuticals Inc. and Sanofi sought a value-based price from ICER before setting the list price for the drug. Then, during negotiations with payers, the companies argued that the outside assessment established a fair price that warranted lower cost sharing and fewer barriers for patient access.
A similar story arose with Praluent, for high cholesterol. Regeneron and Sanofi struck a deal with the pharmacy benefits manager Express Scripts to reduce Praluent’s price to one that ICER believed aligned better with benefits. In exchange, patients will get easier access to the drug.”
Frakt ignores how ICER’s suggestions on pricing and limiting access to save money were used to deny and limit access to hepatitis C drugs, recommendations that drove cure rates down from 99 percent to 75 percent in some health plans. It claimed that new medicines for multiple myeloma were not valuable at ANY price. On top of all that, ICER claims that spending more than about $1 billion a year on one drug would threaten the financial stability of a health plan. Which means that even if we had a cure for HCV or Alzheimer’s we would have to limit access once that $1 billion mark was hit.
Frakt is either misleading or uninformed about access to Dupixent. The Dupixent ‘deal’ was made with Express Scripts. The claim that patients have faster access to the drug is bogus: Express Scripts requires Medicare patients to fail first on two other drugs in order to get Dupixent.
“Patient meets both of the following criteria: a. Patient has used at least one medium-, medium-high, high-, and/or super-high-potency prescription topical corticosteroid for at least 28 consecutive days OR patient has atopic dermatitis affecting ONLY the face, eyes/eyelids, skin folds, and/or genitalia and has tried tacrolimus ointment for at least 28 consecutive days AND b. Inadequate efficacy was demonstrated with these previously tried topical prescription therapies, according to the prescribing physician. “
He also claims that ICER research would make more medicines widely available because health plans don’t do any cost-effectiveness analysis of their own to make such patient-focused decisions. Yet as search of Dupixent on Formulary Lookup reveals that only 5 percent of commercial health plans given the drug preferred access. None allow immediate access. Instead, patients have to fail first on 2-3 other drugs. Nearly 70 percent of Medicare Part D PBMs don't even cover the drug.
Frakt also fall flat in describing the health bounty flowing from ICER’s evaluation of new anti-cholesterol medicines called PCSK9s (one called Repatha, made by Amgen and another called Praluent, made by Regeneron) that are much more effective than statins alone in reducing cholesterol levels and the heart disease caused by the condition.
The list price for the drugs was – is - $14000. ICER said it was only worth about $5000 and that to make it available to every patient who could benefit, the price should be $2000.
These recommendations were used by PBMs for force deeper rebates in exchange for excluding competitor drugs from their formulary as well as reduce the PBM and health plan spending on new drugs. In the case of Repatha and Praluent, such practices have cut the market for Repatha and Praluent by two thirds.
As Frakt noted, Express Scripts recently cut a deal with Regeneron to eliminate step therapy and prior authorization for Praluent in exchange for more rebates. ICER produced a new assessment that Express Scripts claimed led to this deal. In fact, ICER essentially restated the findings in its first report: that a small subgroup of patients should get the drug if drug companies cut the price to about $5000.
This value-based pricing process increased rebates and led to a lower net price. But it did NOT result in eliminating cost sharing. Patients – the handful that will get the drug – will still pay $100 a month for the drug. Second, Express Scripts is limiting access to its infusion centers, meaning more profit. Third, as part of the deal, Express Scripts no longer covers Repatha, Amgen’s PCSK9. Patients will have to pay full price or reapply to get Repatha.
The fact is, net prices alone will not guarantee affordable access. PBMs will still use step therapy, prior authorization, and cost sharing to maximize rebates and keep drug costs using ICER prices as a bargaining chip.
The president has made it clear that drug companies will have to find another way to get new and expensive medicines to patients. But those prices must be based, not on the secret and ideologically driven deliberations of a group like ICER or the kind of backroom deals that lead to the Repatha ripoff.
The job of deciding the value of any medicine will have to be democratized. If drug and device companies don’t take the money they now spend on rebates, patient assistance programs, and copay cards and invest in demonstrating the differential value of their products to doctors, health plans and most importantly, patients, groups like ICER will gain more control over access. Which means, contrary to Frakt’s flakking for ICER, most patients will have less access to new medicines and pay more for them.
Per Paul Krugman's op-ed, Just Saying Yes to Drug Companies -- anyone who was paying attention to President Trump's press conference or has read the White House Blueprint should understand that drug pricing is an ecosystem that includes manufacturers and multiple intermediaries. Games are being played and patients are (generally) the losers.
Why not a single word from Dr. Krugman about the very questionable practices of, for example, Prescription Benefit Managers? PBMs receive large rebates (aka, "kick-backs") and, rather than passing along the savings to patients, they pocket hundreds of millions of dollars. President Trump and HHS Secretary Alex Azar made it very clear they will demand that these rebates be used to "lower the price at the pump" -- lower co-pays for patients when they get their drugs at the pharmacy.
When people say, "My drugs are too expensive," what they mean is "My co-pay" or "My deductible" is too expensive. Shame on Dr. Krugman for perpetuating the myth that drug prices are a one-dimensional issue. And shame on him for ignoring the many solid recommendations made by the President and his healthcare team. As the Yiddish proverb goes, "A half truth is a whole lie." It's the ecosystem, stupid.
Why not a single word from Dr. Krugman about the very questionable practices of, for example, Prescription Benefit Managers? PBMs receive large rebates (aka, "kick-backs") and, rather than passing along the savings to patients, they pocket hundreds of millions of dollars. President Trump and HHS Secretary Alex Azar made it very clear they will demand that these rebates be used to "lower the price at the pump" -- lower co-pays for patients when they get their drugs at the pharmacy.
When people say, "My drugs are too expensive," what they mean is "My co-pay" or "My deductible" is too expensive. Shame on Dr. Krugman for perpetuating the myth that drug prices are a one-dimensional issue. And shame on him for ignoring the many solid recommendations made by the President and his healthcare team. As the Yiddish proverb goes, "A half truth is a whole lie." It's the ecosystem, stupid.
Per the President, “There is a tangled web of special interests keeping the price of drugs artificially high.”
The big take-away from the President’s speech today is that “the price of drugs” is an ecosystem problem that requires an ecosystem solution. To us, this is obvious. To the American people, it is not. (There are no “simple” solutions such as “drugs from Canada.”)
* This truth telling isn’t surprising since POTUS is following the lead of three very sharp policy wonks – Secretary Azar, Commissioner Gottlieb, and Administrator Verma. And they’ve been saying this for years. In fact, Alex talked about it during his confirmation hearing. This speech isn’t at all surprising – if you’ve been listening. Azar, Gottlieb and Verma have been repeating this statement for the past few weeks.
* Per PBMs, the president's budget calls for insurers/PBMs who provide Medicare Part D prescription drug plans to give at least one-third of the rebates and price concessions to beneficiaries at the pharmacy.
* “My drugs are too expensive” generally means, “my co-pay/co-insurance is too high.” The President’s plan will lower the “price at the pump.”
* The big policy implication here is that the ACA promised “insurance for all.” But that rhetoric led people to believe this meant their healthcare would be “free.” Not so. And many of these new plans (especially the Silver ones) were designed along the lines of low premium/high co-pay. This is particularly true for the no/low premium plans. This new thinking begins to get at that problem.
* The next policy conversation will be “Do lower co-pays mean higher premiums?” Watch for the payer pundits to ask this question.
* One man’s rebate is another man’s kickback. Will the federal exemption for rebates be revoked? Big battle here that PBMs cannot afford to lose. Watch how the issue of premium subsidies comes back around.
* The President is voicing free-market solutions. (Azar+Gottlieb+Verma = free market thinking.) See here.
* The large and growing gap between the drugs’ list prices and the actual, secret prices PBMs pay is bad for competition. Markets are less efficient without clear price signals. The proposed HHS rule (for passing along a portion of the rebate) “would improve price transparency which may have a positive effect on market competition and efficiency.”
* Again, per “ecosystem,” do higher list prices equal higher rebates? Well – sometimes. How can this best be addressed? The answer begins with transparency. Transparency can give manufacturers an edge. After all, it’s harder to pocket money (rebates/kickbacks) when it’s sitting on the table where everyone can see it.
* The administration may also considering how it pays for drugs administered in doctor's offices, clinics or hospitals through Medicare's Part B program.
The federal government currently pays providers 6% more than the average price of those medicines. Hence, manufactures have the incentive to raise prices and gives providers the incentive to select more expensive medicines. (This is Seema Verma’s philosophy since her days running the Indiana Health Department.)
* The administration is considering moving certain Part B coverage (perhaps orals vs. injectables) into the Part D program, where insurers can (in theory) negotiate better prices and requiring manufacturers to provide more accurate sales data to make sure they don't exclude discounts.
* States are the laboratory of invention. Reducing drug costs in Medicaid is also under consideration. The president's budget calls for giving up to five states greater leeway to test drug coverage and payment models in their Medicaid programs. Allowing states to determine which drugs to cover would in theory allow them negotiate bigger discounts directly with manufacturers.
* Exclusionary Contracting. FDA is focusing on reducing prices by increasing competition via generics biosimilars. Gottlieb has teed up tackling the "games" manufacturers play to keep competitors off the market, such as using loopholes to block rivals or paying them to delay bringing their drugs to market and, particularly for biosimilars, exclusionary contracting.
* The President wants to do away with the “gag rule” that prohibits pharmacists (in some states) from telling their customers there are cheaper (generic) alternatives to what they have been prescribed. To-date, this has been a state issue. It is likely to remain so because of interstate commerce regulations.
* Patents should be used to protect innovation, not to delay generics to market. (aka, “shenanigans.”)
* Secretary Azar said that the FDA was going to write new regs that would require drug companies to list the price of their products in their advertising. Not sure where this is going, but it’s worth watching carefully.
* Per other nations’ bullying our drug manufacturers into unrealistically low prices/allowing other countries to freeload off of American innovation,” it’s a fair point that’s going to be difficult to address. But the fact that the President is teeing it up is a big step in the right direction. For more on this point, see this article from the Wall Street Journal.
* What will we read in the New York Times tomorrow? I predict the mainstream media chattering classes will say this is a “victory for Big Pharma.” They will (begrudgingly) admit that direct federal negotiations are a good idea. (It will not mention that this is contrary to the existing Non-Interference Clause that will require legislation to undo). Media and Democrats in Congress will peg the speech as “caving in to Big Pharma.” If I am wrong I will buy you all lunch.
* Addressing the kickback statute and the Non-Interference Clause will require legislation. Will Dems work with the White House?
* Equally important is to not pay much (if any) attention to whatever hyperbole the President uses. Implementation of the above-discussed initiatives will be done by HHS/FDA/CMS.
In the words of the British pundit Ernest Benn, “Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy. “
The good news is that experts are at the wheel.
They’re focusing on free-market solutions.
The ideas require an ecosystem approach.
Nobody said it was going to be easy.
The big take-away from the President’s speech today is that “the price of drugs” is an ecosystem problem that requires an ecosystem solution. To us, this is obvious. To the American people, it is not. (There are no “simple” solutions such as “drugs from Canada.”)
* This truth telling isn’t surprising since POTUS is following the lead of three very sharp policy wonks – Secretary Azar, Commissioner Gottlieb, and Administrator Verma. And they’ve been saying this for years. In fact, Alex talked about it during his confirmation hearing. This speech isn’t at all surprising – if you’ve been listening. Azar, Gottlieb and Verma have been repeating this statement for the past few weeks.
* Per PBMs, the president's budget calls for insurers/PBMs who provide Medicare Part D prescription drug plans to give at least one-third of the rebates and price concessions to beneficiaries at the pharmacy.
* “My drugs are too expensive” generally means, “my co-pay/co-insurance is too high.” The President’s plan will lower the “price at the pump.”
* The big policy implication here is that the ACA promised “insurance for all.” But that rhetoric led people to believe this meant their healthcare would be “free.” Not so. And many of these new plans (especially the Silver ones) were designed along the lines of low premium/high co-pay. This is particularly true for the no/low premium plans. This new thinking begins to get at that problem.
* The next policy conversation will be “Do lower co-pays mean higher premiums?” Watch for the payer pundits to ask this question.
* One man’s rebate is another man’s kickback. Will the federal exemption for rebates be revoked? Big battle here that PBMs cannot afford to lose. Watch how the issue of premium subsidies comes back around.
* The President is voicing free-market solutions. (Azar+Gottlieb+Verma = free market thinking.) See here.
* The large and growing gap between the drugs’ list prices and the actual, secret prices PBMs pay is bad for competition. Markets are less efficient without clear price signals. The proposed HHS rule (for passing along a portion of the rebate) “would improve price transparency which may have a positive effect on market competition and efficiency.”
* Again, per “ecosystem,” do higher list prices equal higher rebates? Well – sometimes. How can this best be addressed? The answer begins with transparency. Transparency can give manufacturers an edge. After all, it’s harder to pocket money (rebates/kickbacks) when it’s sitting on the table where everyone can see it.
* The administration may also considering how it pays for drugs administered in doctor's offices, clinics or hospitals through Medicare's Part B program.
The federal government currently pays providers 6% more than the average price of those medicines. Hence, manufactures have the incentive to raise prices and gives providers the incentive to select more expensive medicines. (This is Seema Verma’s philosophy since her days running the Indiana Health Department.)
* The administration is considering moving certain Part B coverage (perhaps orals vs. injectables) into the Part D program, where insurers can (in theory) negotiate better prices and requiring manufacturers to provide more accurate sales data to make sure they don't exclude discounts.
* States are the laboratory of invention. Reducing drug costs in Medicaid is also under consideration. The president's budget calls for giving up to five states greater leeway to test drug coverage and payment models in their Medicaid programs. Allowing states to determine which drugs to cover would in theory allow them negotiate bigger discounts directly with manufacturers.
* Exclusionary Contracting. FDA is focusing on reducing prices by increasing competition via generics biosimilars. Gottlieb has teed up tackling the "games" manufacturers play to keep competitors off the market, such as using loopholes to block rivals or paying them to delay bringing their drugs to market and, particularly for biosimilars, exclusionary contracting.
* The President wants to do away with the “gag rule” that prohibits pharmacists (in some states) from telling their customers there are cheaper (generic) alternatives to what they have been prescribed. To-date, this has been a state issue. It is likely to remain so because of interstate commerce regulations.
* Patents should be used to protect innovation, not to delay generics to market. (aka, “shenanigans.”)
* Secretary Azar said that the FDA was going to write new regs that would require drug companies to list the price of their products in their advertising. Not sure where this is going, but it’s worth watching carefully.
* Per other nations’ bullying our drug manufacturers into unrealistically low prices/allowing other countries to freeload off of American innovation,” it’s a fair point that’s going to be difficult to address. But the fact that the President is teeing it up is a big step in the right direction. For more on this point, see this article from the Wall Street Journal.
* What will we read in the New York Times tomorrow? I predict the mainstream media chattering classes will say this is a “victory for Big Pharma.” They will (begrudgingly) admit that direct federal negotiations are a good idea. (It will not mention that this is contrary to the existing Non-Interference Clause that will require legislation to undo). Media and Democrats in Congress will peg the speech as “caving in to Big Pharma.” If I am wrong I will buy you all lunch.
* Addressing the kickback statute and the Non-Interference Clause will require legislation. Will Dems work with the White House?
* Equally important is to not pay much (if any) attention to whatever hyperbole the President uses. Implementation of the above-discussed initiatives will be done by HHS/FDA/CMS.
In the words of the British pundit Ernest Benn, “Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy. “
The good news is that experts are at the wheel.
They’re focusing on free-market solutions.
The ideas require an ecosystem approach.
Nobody said it was going to be easy.
Previews of President Trump’s speech on drug pricing made it quite clear that he wants to eliminate the bribes and barriers that are pushing drug prices higher and make access to the medicines that work best for each individual affordable. At the heart of this effort is to change or eliminate the role PBMs play in perpetuating such scams. If there was a slogan that captured the tenor of Trump’s address it is: Replace PBMs with affordable access to important medicines.
Currently, about 30-40 percent of the price of a drug goes to PBMs, insurance companies, state Medicaid programs and Medicare in the form of rebates, not lower prices. Drug companies have an incentive to launch or raise prices as high as possible, so they can give PBMs the biggest rebates possible. PBMs and insurers then steer you to medicines that can make them the most money. Often people seeking a drug that is more effective must fail to get better or wind up getting sicker using the rebate rich drugs instead of the medicine that works best. Moreover, while PBMs and insurers pocket the rebates, the sickest patients who need the newest medicines are paying a part or all of, the retail price of a drug.
Indeed, the gaming of the system is cruel and discriminatory.
In fact, individuals with Medicare and employer-sponsored plans with people with cancer, HIV, hepatitis C, autoimmune conditions, multiple sclerosis and rare diseases are also much more likely to have to pay up to 40 percent of the retail price of a medicine. They comprise about 2 percent all insured consumers – 4.4 million people -- and less than 3 percent of all prescriptions.
Though specialty drugs are only 1.9% of all prescriptions dispensed each, they and the patients that depend on them generate nearly 30 percent of all rebates.
PBMs and health plans could use rebates to reduce cost sharing. Instead, they systematically maximize their use for the sickest patients. They do it because they can and because by doing it, they rake in tens of billions of dollars in a predictable manner.
In addition, the 2 percent paid PBMs and insurers approximately $12 billion in cost sharing based on a percentage of the full price of the medicine, not the rebated price.
Put another way, each of the 4.4 million patients in the 2 percent provides PBMs and health plans close to $11000 in rebate and coinsurance revenue. Discrimination makes net price profitable under these circumstances.
The combination of withholding rebates and retail priced based cost sharing – in addition to other ways PBMs (on behalf of insurers) use to reduce access –discourages a large percent of people from simply not picking up prescriptions or refilling them. And when they don’t pick up or refill their prescriptions, people get sicker. Or they die.
Incredibly, there are groups that want to go after the list price of drugs and not address the assault on human health that fills the pockets of the PBMs. The fact is, cutting the launch price of expensive drugs for small populations (price controls in effect) will have no effect on PBM discrimination.
Indeed, those groups and politicians who want to chop launch prices want to give PBMs more control over access such drugs to achieve that goal. They want PBMs to force patients to get sicker on cheaper drugs. They want them to continue to exclude such drugs when they can. Which means they are willing to let them pocket rebates and force patients to pay a share of the retail price that is unaffordable.
PBMs are systematically exploiting the vulnerability of the sickest 2 percent of Americans to maximize profit. They can profit from the suffering because they can design prescription drug benefits to impose a special burden on people with pre-existing conditions. Giving PBMs more power to cut launch prices and keep the spread between list and net prices would only deepen the discrimination the President has pledged to eliminate.
My fellow Americans, medical innovation is the beating heart of health care. Absent new drugs and vaccines for a wide range of illnesses, including HIV, heart disease, cancer and hepatitis C, we would spend more on health care and insurance premiums and get less for it. Our lives would be shorter and less productive.
For most Americans, access to new medicines is not a problem. Generic versions of off-patent medicines comprise 90 percent of all prescriptions written. Over the past few years, the average out of pocket costs for drugs has declined. So too have the net price of medicines. In fact, while there more new medicines for unmet needs than ever, prescription drugs as a percentage of health care spending has remained stable at 10 percent.
At the same time millions of Americans, those with the rarest conditions and fewest options have had to pay more, much more for their medicines than they can or should. That’s because pharmacy benefit management companies — the middlemen that handle drug coverage for almost every American control what medicines you can get and how much you have to pay.
Instead of maximizing health, prescription drug benefits are designed to maximize revenue. Indeed, these Americans are caught up in an extortion scheme in which drug companies, pharmacy benefit managers, insurance companies and even the government participate.
And the goal of this extortion is to extract as much cash from drug companies in the form of rebates paid in exchange for a pharmacy benefit manager and health plan covering a medicine. Rebates and discounts pocketed by PBMs, health plans and hospitals are 40 percent of the retail price of drugs. In fact, rebates that are generated when you fill a prescription total $130 billion a year. Nearly a third of that money from less than the 3 percent of Americans with cancer, HIV, autoimmune disorders and rare diseases. Yet, these are the same people who pay a share of the retail price of a drug, something that can cost thousands of dollars a year.
That’s what happened to Kristin Agar, who was diagnosed with Lupus but can’t afford the drug that could keep her health. Insurance pays 80 percent of the retail price of $2500 a dose and she has to pay 20 percent of that, about $1000 a month, on top of insurance premiums and other medical expenditures. As she told the Washington Post, although she works hard and makes decent money, “I make too much money to qualify for assistance, but I don’t make enough to pay the bills,”
That money goes to PBMs, insurance companies, state Medicaid programs and Medicare, not to you to lower prices. Drug companies have an incentive to launch or raise prices as high as possible, so they can give PBMs the biggest rebates possible. PBMs and insurers then steer you to medicines that can make them the most money. Often people seeking a drug that is more effective must fail to get better or wind up getting sicker using the rebate rich drugs instead of the medicine that works best. Moreover, while PBMs and insurers pocket the rebates, you are paying a part or all of, the retail price of a drug.
Too often PBM profits come at the expense of not only of someone’s well-being but their lives. Cancer doctor and CEO of New York Cancer Specialists, Jeff Vacirca tells of a young husband with advanced melanoma and tumors attached to his brain being treated in his practice who had a potentially life-prolonging drug waiting for him at the pharmacy. But, as he wrote, “his Pharmacy Benefit Manager pumped the brakes, instead requiring that he and his wife order the medication from the mail-order pharmacy owned by that PBM — and submit a $1,000 co-pay.
By the time his wife was able to procure co-pay assistance, the young man could no longer swallow pills and passed away in the ICU. Medication that was critical to treating his cancer remained just on the other side of the clinic’s pharmacy counter, with access denied by the couple’s PBM."
As FDA Commissioner Scott Gottlieb said recently, “Patients shouldn’t face exorbitant out-of-pocket costs, and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries. Sick people aren’t supposed to be subsidizing the healthy.” Nor are they supposed to subsidize those hospitals, insurance companies and PBMs that make money under. Obamacare, Medicaid or Medicare.
My administration has already taken steps to make more medicines more affordable. The FDA has cleared the backlog of generic drug applications and is working hard to bring more affordable versions of biotech drugs – called biosimilars – to the market.
Unfortunately, our success in breaking lower priced medicines to market has not always led to lower out of pocket costs for consumers. FDA approved two cheaper versions of a brand biologic drug for arthritis last year. Rather than letting products compete on price, PBMs used the competition to extract even bigger rebates from the brand drug in exchange for excluding the less expensive versions from coverage. The brand drug’s list price and sales actually increased with nearly 90 percent of the price hike going into the pockets of the PBMs.
Starting today, my administration will eliminate the bribes and barriers that are pushing drug prices higher and make access to the medicines that work best for each individual affordable.
First, we are going to let people know when they are being taken advantage of. Starting next month, Medicare and Medicaid will require the disclosure of the actual net price of every drug they pay as well as the retail price for every medicine.
Second, we are going to pay for the net price of drugs, nothing more. To that end, we have stopped letting hospitals that serve the poor to get discounts on drugs and then sell them to you at the retail price.
We will expand this policy to every drug benefit program the government pays for.
Third, I have instructed Secretary of Health and Human Services, Alex Azar, to use the buying power of the federal government to get a better deal for consumers. We will, starting next year, require pharmaceutical companies, health plans and insurance companies participating in a federally subsidized health plan to reduce out of pocket drug costs of those who pay most for new medicines. We will also encourage the development and use of outcomes-based health coverage where companies provide money back guarantees to the government and consumers if their products don’t work.
HHS has already established such agreements for the use of gene therapy for cancer. But we can do more. And as part of that effort, we will allow drug companies to directly reduce net prices of medicines and out of pocket costs of Medicare and Medicaid patients. That means using charities to pay part of a higher retail drug price will be phased out in a way that does not disrupt patient access.
Fourth, we will begin to actively investigate and prosecute health plans, PBMs and drug companies that steer patients to certain medicines that generate higher rebates or impose barriers to access that are designed to achieve the same goal. Our administration is already going after a group of generic drug companies for conspiring to increase prices by over 1000 percent. Free markets benefit the consumer and spur innovation. Cartel like behavior in the pharmaceutical supply chain will be targeted and eliminated. You can count on it
Fifth, we will regard drug benefit designs that have a pattern of forcing the sickest to pay the most or to require people in need of medicines take other drugs just because they are cheaper to the plan as both discriminatory and in potential violation of anti-kickback and racketeering laws.
Finally, will eliminate the use of gimmicks and legal maneuvers to limit generic drug approvals. The FDA will waive requirements that generic and brand companies have to agree on steps to handle the distribution and testing of new medicines in favor of a more streamlined policy that will protect the public health while freeing innovators to partner with generic manufacturers in ways that benefit both.
We have seen how medical innovation has reduced the burden of major diseases in our lifetime. It is now time to ensure that those innovations today and, in the future, do not impose yet another burden by virtue of their cost.
In the United States, the manufacturers of branded medications (on-patent, innovative drugs) represent 39% of gross net drug expenditures while the morass of non-manufacturer middleman -- Prescription Benefit Managers (PBMs), brokers, agents and assorted wholesalers and intermediaries -- are responsible for 42% of gross expenditures. What’s going on?
Perhaps a better question is what’s not going on. Topping that list is a lack of transparency in the cost supply chain, leading to cloudy conflicts of interest. If sunshine is the best disinfectant, perhaps enlightened self-interest is the best medicine.
Consider Caterpillar. Like many large corporations they were suffering under the burden of runaway healthcare expenses –especially for prescription medicines. Between 1996 and 2004, this iconic American company saw its drug spend rise by an average of 14% annually.
And then something happened. The company realized that the mechanisms it had put in place to manage cost (the traditional PBM model) wasn’t getting the job done and that a major part of the problem was systemic conflict of interest
According to Todd Bisping, Caterpillar’s Global Benefits Manager, “Our initial analysis estimated that there was 10% to 25% waste in the system, some of which we believed was driven by conflicts of interest in the system. For example, some of the same consulting firms that plan sponsors pay to help them choose their pharmacy benefit manager (PBM) often receive “broker fees” from the selected PBM. As we evaluated the supply chain, we knew eliminating conflicts of interest would be an area of focus.”
Deciding to reassert control of their own destiny, Caterpillar decided to forge a new path. After thoroughly investigating their relationship with their PBM, Restat (now a part of the UnitedHealth Group), the company decided, per Bisping, to “disintermediate the PBM from certain functions” that generated profits for them – but not for Caterpillar or its employees.
“One thing is certain, says Bisping, “the current market dynamic is creating a bloated supply chain and, ultimately, exposing plan sponsors to additional costs.”
Caterpillar’s first steps was to identify the complex ecosystem of the prescription drug supply chain, applying the same principles to their pharmaceutical costs as they do to other expenditures at Caterpillar. The result? According to Bisping? “We eliminated waste in the prescription drug supply chain. That, in turn, promoted the sustainability of our healthcare benefits.”
Caterpillar developed a unique and potent pathway to success.
First, they identifed at least one major pharmacy that would be willing to partner in a direct contracting relationship (bypassing the normal PBM pricing process) via non-exclusive relationships.
In the current system, pharmacies do not have an effective way to increase their market share outside of building additional stores. By negotiating directly with pharmacies, Caterpillar enabled them to find another way to increase their market share -- by exchanging volume for margin. A win–win for both companies. Per Bisping, “Although this model also would work in an exclusive arrangement, we believe in healthy competition. So a key deliverable was to ensure that neither party would be locked into an exclusive arrangement. It also allows for continued competition as this methodology takes hold in the industry.”
Next, Caterpillar developed a new pricing methodology to eliminate the use of average wholesale price (AWP) methodology. Bisping believes (as do many health policy experts) that the AWP methodology is flawed and only produces more waste. Caterpillar worked with its pharmacy partners to develop a “cost-plus” methodology. The Caterpillar plan includes a “real” invoice price, which represents the actual net cost to purchase the drug by the pharmacy -- not a transfer price. It also includes all net items/revenue streams that are generated now or in the future by the purchase of such drugs.
For Caterpillar’s model to be sustainable, pharmacies need to realize a profit. Therefore, the final cost is real invoice price + overhead + margin for each drug. It allows pharmacies to optimize/compete on three fronts in addition to customer service—buying, efficiency, and margin—to make them a more attractive partner to payers and win more of their business.
Perhaps most revolutionary is Caterpillar’s recognition that the fatal flaw of the established PBM is a lack of fiduciary responsibility to its clients. Therefore, their new strategy establishes audit rights.
Obviously, the net price any company pays its supplier often is a confidential matter. However, to ensure that this new methodology doesn’t design in the historic opportunity for corruption, validation is necessary. Caterpillar’s arrangement gives them the right to engage a third-party auditor to ensure that their pricing methodology is properly applied. The audit keeps critical pharmacy information confidential while allowing the company to validate that they are paying the price agreed to in the contract. In other words, trust – but verify.
Rather than relying on their PBM for a one-size fits all provider network, Caterpillar developed their own. In locations where participants didn’t have reasonable access, Caterpillar added local, independent pharmacies to the preferred network. According to Bisping, “With a preferred network in place, we chose to incentivize our plan participants to purchase their prescriptions at a preferred network pharmacy by maintaining current prescription copayments at those pharmacies. Plan participants continue to have the option of using a pharmacy in our broader PBM network; however, they now will have higher copayments (or coinsurance) at those pharmacies.”
Smart choice pays dividends. Says Bisping, “Our model is based on a simple premise: find a way to manage pharmaceutical costs so we continue to provide a sustainable, valuable prescription benefit to our healthcare participants.”
The Caterpillar model increases their ROI by decreasing COI (conflicts of interest). The company’s benefits design allows pharmacies to take control by setting their own prices and exchanging better pricing for volume, thereby eliminating the squeeze from PBMs who are forcing prescription volume to mail order (largely owned by PBMs) to lower their costs.
A key problem to address is an institutional one: too much benefit outsouring by too many companies (both large and small) – with too little strategic thinking. Perhaps this is a timely opportunity for a new wave of benefits consultants who, as their primary objective, is to help companies reduce costs and enhance patient outcomes – rather than the profits of PBMs.
It’s not an easy process. According to Bisping, “It’s been difficult to initiate and implement this process. Developing the solution has required a significant investment of time from Team Caterpillar and our consultants and vendors, but we think this model is an improvement over the way most payers purchase prescription drugs today, and other payers could easily adopt it.”
But, as Admiral Rickover so famously reminds us, “The devil is in the details – but so is salvation.”
Perhaps a better question is what’s not going on. Topping that list is a lack of transparency in the cost supply chain, leading to cloudy conflicts of interest. If sunshine is the best disinfectant, perhaps enlightened self-interest is the best medicine.
Consider Caterpillar. Like many large corporations they were suffering under the burden of runaway healthcare expenses –especially for prescription medicines. Between 1996 and 2004, this iconic American company saw its drug spend rise by an average of 14% annually.
And then something happened. The company realized that the mechanisms it had put in place to manage cost (the traditional PBM model) wasn’t getting the job done and that a major part of the problem was systemic conflict of interest
According to Todd Bisping, Caterpillar’s Global Benefits Manager, “Our initial analysis estimated that there was 10% to 25% waste in the system, some of which we believed was driven by conflicts of interest in the system. For example, some of the same consulting firms that plan sponsors pay to help them choose their pharmacy benefit manager (PBM) often receive “broker fees” from the selected PBM. As we evaluated the supply chain, we knew eliminating conflicts of interest would be an area of focus.”
Deciding to reassert control of their own destiny, Caterpillar decided to forge a new path. After thoroughly investigating their relationship with their PBM, Restat (now a part of the UnitedHealth Group), the company decided, per Bisping, to “disintermediate the PBM from certain functions” that generated profits for them – but not for Caterpillar or its employees.
“One thing is certain, says Bisping, “the current market dynamic is creating a bloated supply chain and, ultimately, exposing plan sponsors to additional costs.”
Caterpillar’s first steps was to identify the complex ecosystem of the prescription drug supply chain, applying the same principles to their pharmaceutical costs as they do to other expenditures at Caterpillar. The result? According to Bisping? “We eliminated waste in the prescription drug supply chain. That, in turn, promoted the sustainability of our healthcare benefits.”
Caterpillar developed a unique and potent pathway to success.
First, they identifed at least one major pharmacy that would be willing to partner in a direct contracting relationship (bypassing the normal PBM pricing process) via non-exclusive relationships.
In the current system, pharmacies do not have an effective way to increase their market share outside of building additional stores. By negotiating directly with pharmacies, Caterpillar enabled them to find another way to increase their market share -- by exchanging volume for margin. A win–win for both companies. Per Bisping, “Although this model also would work in an exclusive arrangement, we believe in healthy competition. So a key deliverable was to ensure that neither party would be locked into an exclusive arrangement. It also allows for continued competition as this methodology takes hold in the industry.”
Next, Caterpillar developed a new pricing methodology to eliminate the use of average wholesale price (AWP) methodology. Bisping believes (as do many health policy experts) that the AWP methodology is flawed and only produces more waste. Caterpillar worked with its pharmacy partners to develop a “cost-plus” methodology. The Caterpillar plan includes a “real” invoice price, which represents the actual net cost to purchase the drug by the pharmacy -- not a transfer price. It also includes all net items/revenue streams that are generated now or in the future by the purchase of such drugs.
For Caterpillar’s model to be sustainable, pharmacies need to realize a profit. Therefore, the final cost is real invoice price + overhead + margin for each drug. It allows pharmacies to optimize/compete on three fronts in addition to customer service—buying, efficiency, and margin—to make them a more attractive partner to payers and win more of their business.
Perhaps most revolutionary is Caterpillar’s recognition that the fatal flaw of the established PBM is a lack of fiduciary responsibility to its clients. Therefore, their new strategy establishes audit rights.
Obviously, the net price any company pays its supplier often is a confidential matter. However, to ensure that this new methodology doesn’t design in the historic opportunity for corruption, validation is necessary. Caterpillar’s arrangement gives them the right to engage a third-party auditor to ensure that their pricing methodology is properly applied. The audit keeps critical pharmacy information confidential while allowing the company to validate that they are paying the price agreed to in the contract. In other words, trust – but verify.
Rather than relying on their PBM for a one-size fits all provider network, Caterpillar developed their own. In locations where participants didn’t have reasonable access, Caterpillar added local, independent pharmacies to the preferred network. According to Bisping, “With a preferred network in place, we chose to incentivize our plan participants to purchase their prescriptions at a preferred network pharmacy by maintaining current prescription copayments at those pharmacies. Plan participants continue to have the option of using a pharmacy in our broader PBM network; however, they now will have higher copayments (or coinsurance) at those pharmacies.”
Smart choice pays dividends. Says Bisping, “Our model is based on a simple premise: find a way to manage pharmaceutical costs so we continue to provide a sustainable, valuable prescription benefit to our healthcare participants.”
The Caterpillar model increases their ROI by decreasing COI (conflicts of interest). The company’s benefits design allows pharmacies to take control by setting their own prices and exchanging better pricing for volume, thereby eliminating the squeeze from PBMs who are forcing prescription volume to mail order (largely owned by PBMs) to lower their costs.
A key problem to address is an institutional one: too much benefit outsouring by too many companies (both large and small) – with too little strategic thinking. Perhaps this is a timely opportunity for a new wave of benefits consultants who, as their primary objective, is to help companies reduce costs and enhance patient outcomes – rather than the profits of PBMs.
It’s not an easy process. According to Bisping, “It’s been difficult to initiate and implement this process. Developing the solution has required a significant investment of time from Team Caterpillar and our consultants and vendors, but we think this model is an improvement over the way most payers purchase prescription drugs today, and other payers could easily adopt it.”
But, as Admiral Rickover so famously reminds us, “The devil is in the details – but so is salvation.”
Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.
