Archives For drug pricing

Is it time for a new approach to generic drugs?

Joanna Shepherd —  4 March 2020

We don’t yet know how bad the coronavirus outbreak will be in America.  But we do know that the virus is likely to have a major impact on Americans’ access to medication.  Currently, 80% of the active ingredients found in the drugs Americans take are made in China, and the virus has disrupted China’s ability to manufacture and supply those ingredients.  Generic drugs, which comprise 90% of America’s drugs, are likely to be particularly impacted because most generics are made in India, and Indian drug makers rely heavily on Chinese-made ingredients.  Indeed, on Tuesday, March 3, India decided to restrict exports of 26 drugs and drug ingredients because of reductions in China’s supply.  This disruption to the generic supply chain could mean that millions of Americans will not get the drugs they need to stay alive and healthy.

Coronavirus-related shortages are only the latest in a series of problems recently afflicting the generic drug industry.  In the last few years, there have been many reports of safety issues affecting generic drug quality at both domestic and overseas manufacturing facilities.  Numerous studies have uncovered shady practices and quality defects, including generics contaminated with carcinogens, drugs in which the active ingredients were switched for ineffective or unsafe alternatives, and manufacturing facilities that falsify or destroy documents to conceal their misdeeds.

We’ve also been inundated with stories of generic drug makers hiking prices for their products.  Although, as a whole, generic drugs are much cheaper than innovative brand products, the prices for many generic drugs are on the increase.  For some generics – Martin Shkreli’s Daraprim, heart medication Digoxin, antibiotic Doxycycline, insulin, and many others – prices have increased by several hundred percent. It turns out that many of the price increases are the result of anticompetitive behavior in the generic market. For others, the price increases are due to the increasing difficulty of generic drug makers to earn profits selling low-priced drugs.

Even before the coronavirus outbreak, there were numerous instances of shortages for critical generic drugs.  These shortages often result from drug makers’ lack of incentive to manufacture low-priced drugs that don’t earn much profit. The shortages have been growing in frequency and duration in recent years.  As a result of the shortages, 90 percent of U.S. hospitals report having to find alternative drug therapies, costing patients and hospitals over $400 million last year.  In other unfortunate situations, reasonable alternatives simply are not available and patients suffer.

With generic drug makers’ growing list of problems, many policy makers have called for significant changes to America’s approach to the generic drug industry. Perhaps the FDA needs to increase its inspection of overseas facilities?  Perhaps the FTC and state and federal prosecutors should step up their investigations and enforcement actions against anticompetitive behavior in the industry? Perhaps FDA should do even more to promote generic competition by expediting generic approvals? 

While these actions and other proposals could certainly help, none are aimed at resolving more than one or two of the significant problems vexing the industry. Senator Elizabeth Warren has proposed a more substantial overhaul that would bring the U.S. government into the generic-drug-making business. Under Warren’s plan, the Department of Health and Human Services (HHS) would manufacture or contract for the manufacture of drugs to be sold at lower prices.  Nationalizing the generic drug industry in this way would make the inspection of manufacturing facilities much easier and could ideally eliminate drug shortages.  In January, California’s governor proposed a similar system under which the state would begin manufacturing or contracting to manufacture generic drugs.

However, critics of public manufacturing argue that manufacturing and distribution infrastructure would be extremely costly to set up, with taxpayers footing the bill.  And even after the initial set-up, market dynamics that affect costs, such as increasing raw material costs or supply chain disruptions, would also mean greater costs for taxpayers.  Moreover, by removing the profit incentive created under the Hatch-Waxman Act to develop and manufacture generic drugs, it’s not clear that governments could develop or manufacture a sufficient supply of generics (consider the difference in efficiency between the U.S. Postal Service and either UPS or FedEx).

Another approach might be to treat the generic drug industry as a regulated industry. This model has been applied to utilities in the past when unregulated private ownership of utility infrastructure could not provide sufficient supply to meet consumer need, address market failures, or prevent the abuse of monopoly power.  Similarly, consumers’ need for safe and affordable medicines, market failures inherent throughout the industry, and industry consolidation that could give rise to market power suggest the regulated model might work well for generic drugs.   

Under this approach, Hatch-Waxman incentives could remain in place, granting the first generic drug an exclusivity period during which it could earn significant profits for the generic drug maker.  But when the exclusivity period ends, an agency like HHS would assign manufacturing responsibility for a particular drug to a handful of generic drug makers wishing to market in the U.S.  These companies would be guaranteed a profit based on a set rate of return on the costs of high-quality domestic manufacturing.  In order to maintain their manufacturing rights, facilities would have to meet strict FDA guidelines to ensure high quality drugs. 

Like the Warren and California proposals, this approach would tackle several problems at once.  Prices would be kept under control and facilities would face frequent inspections to ensure quality.  A guaranteed profit would eliminate generic companies’ financial risk, reducing their incentive to use cheap (and often unsafe) drug ingredients or to engage in illegal anticompetitive behavior.  It would also encourage steady production to reduce instances of drug shortages.  Unlike the Warren and California proposals, this approach would build on the existing generic infrastructure so that taxpayers don’t have to foot the bill to set up public manufacturing.  It would also continue to incentivize the development of generic alternatives by maintaining the Hatch-Waxman exclusivity period, and it would motivate the manufacture of generic drugs by companies seeking a reliable rate of return.

Several issues would need to be worked out with a regulated generic industry approach to prevent manipulation of rates of return, regulatory capture, and political appointees without the incentives or knowledge to regulate the drug makers. However, the recurring crises affecting generic drugs indicate the industry is rife with market failures.  Perhaps only a radical new approach will achieve lasting and necessary change.

In China, Health Care, Intellectual Property, International, Patent, Pharmaceuticals, Regulation, Truth on the Market , , , , , , , , ,
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Balancing competition and innovation in the drug industry: An evaluation of current proposals.

Joanna Shepherd —  17 May 2019

Last week the Senate Judiciary Committee held a hearing, Intellectual Property and the Price of Prescription Drugs: Balancing Innovation and Competition, that explored whether changes to the pharmaceutical patent process could help lower drug prices.  The committee’s goal was to evaluate various legislative proposals that might facilitate the entry of cheaper generic drugs, while also recognizing that strong patent rights for branded drugs are essential to incentivize drug innovation.  As Committee Chairman Lindsey Graham explained:

One thing you don’t want to do is kill the goose who laid the golden egg, which is pharmaceutical development. But you also don’t want to have a system that extends unnecessarily beyond the ability to get your money back and make a profit, a patent system that drives up costs for the average consumer.

Several proposals that were discussed at the hearing have the potential to encourage competition in the pharmaceutical industry and help rein in drug prices. Below, I discuss these proposals, plus a few additional reforms. I also point out some of the language in the current draft proposals that goes a bit too far and threatens the ability of drug makers to remain innovative.  

1. Prevent brand drug makers from blocking generic companies’ access to drug samples. Some brand drug makers have attempted to delay generic entry by restricting generics’ access to the drug samples necessary to conduct FDA-required bioequivalence studies.  Some brand drug manufacturers have limited the ability of pharmacies or wholesalers to sell samples to generic companies or abused the REMS (Risk Evaluation Mitigation Strategy) program to refuse samples to generics under the auspices of REMS safety requirements.  The Creating and Restoring Equal Access To Equivalent Samples (CREATES) Act of 2019 would allow potential generic competitors to bring an action in federal court for both injunctive relief and damages when brand companies block access to drug samples.  It also gives the FDA discretion to approve alternative REMS safety protocols for generic competitors that have been denied samples under the brand companies’ REMS protocol.  Although the vast majority of brand drug companies do not engage in the delay tactics addressed by CREATES, the Act would prevent the handful that do from thwarting generic competition.  Increased generic competition should, in turn, reduce drug prices.

2. Restrict abuses of FDA Citizen Petitions.  The citizen petition process was created as a way for individuals and community groups to flag legitimate concerns about drugs awaiting FDA approval.  However, critics claim that the process has been misused by some brand drug makers who file petitions about specific generic drugs in the hopes of delaying their approval and market entry.  Although FDA has indicated that citizens petitions rarely delay the approval of generic drugs, there have been a few drug makers, such as Shire ViroPharma, that have clearly abused the process and put unnecessary strain on FDA resources. The Stop The Overuse of Petitions and Get Affordable Medicines to Enter Soon (STOP GAMES) Act is intended to prevent such abuses.  The Act reinforces the FDA and FTC’s ability to crack down on petitions meant to lengthen the approval process of a generic competitor, which should deter abuses of the system that can occasionally delay generic entry.  However, lawmakers should make sure that adopted legislation doesn’t limit the ability of stakeholders (including drug makers that often know more about the safety of drugs than ordinary citizens) to raise serious concerns with the FDA. 

3. Curtail Anticompetitive Pay-for-Delay Settlements.  The Hatch-Waxman Act incentivizes generic companies to challenge brand drug patents by granting the first successful generic challenger a period of marketing exclusivity. Like all litigation, many of these patent challenges result in settlements instead of trials.  The FTC and some courts have concluded that these settlements can be anticompetitive when the brand companies agree to pay the generic challenger in exchange for the generic company agreeing to forestall the launch of their lower-priced drug. Settlements that result in a cash payment are a red flag for anti-competitive behavior, so pay-for-delay settlements have evolved to involve other forms of consideration instead.  As a result, the Preserve Access to Affordable Generics and Biosimilars Act aims to make an exchange of anything of value presumptively anticompetitive if the terms include a delay in research, development, manufacturing, or marketing of a generic drug. Deterring obvious pay-for-delay settlements will prevent delays to generic entry, making cheaper drugs available as quickly as possible to patients. 

However, the Act’s rigid presumption that an exchange of anything of value is presumptively anticompetitive may also prevent legitimate settlements that ultimately benefit consumers.  Brand drug makers should be allowed to compensate generic challengers to eliminate litigation risk and escape litigation expenses, and many settlements result in the generic drug coming to market before the expiration of the brand patent and possibly earlier than if there was prolonged litigation between the generic and brand company.  A rigid presumption of anticompetitive behavior will deter these settlements, thereby increasing expenses for all parties that choose to litigate and possibly dissuading generics from bringing patent challenges in the first place.  Indeed, the U.S. Supreme Court has declined to define these settlements as per se anticompetitive, and the FTC’s most recent agreement involving such settlements exempts several forms of exchanges of value.  Any adopted legislation should follow the FTC’s lead and recognize that some exchanges of value are pro-consumer and pro-competitive.

4. Restore the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers.  I have previously discussed how an unbalanced inter partes review (IPR) process for challenging patents threatens to stifle drug innovation.  Moreover, current law allows generic challengers to file duplicative claims in both federal court and through the IPR process.  And because IPR proceedings do not have a standing requirement, the process has been exploited  by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company by filing an IPR challenge in hopes of crashing the stock and profiting from the bet. The added expense to drug makers of defending both duplicative claims and claims against challengers that are exploiting the system increases litigation costs, which may be passed on to consumers in the form of higher prices. 

The Hatch-Waxman Integrity Act (HWIA) is designed to return the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers. It requires generic challengers to choose between either Hatch-Waxman litigation (which saves considerable costs by allowing generics to rely on the brand company’s safety and efficacy studies for FDA approval) or an IPR proceeding (which is faster and provides certain pro-challenger provisions). The HWIA would also eliminate the ability of hedge funds and similar entities to file IPR claims while shorting the stock.  By reducing duplicative litigation and the exploitation of the IPR process, the HWIA will reduce costs and strengthen innovation incentives for drug makers.  This will ensure that patent owners achieve clarity on the validity of their patents, which will spur new drug innovation and make sure that consumers continue to have access to life-improving drugs.

5. Curb illegal product hopping and patent thickets.  Two drug maker tactics currently garnering a lot of attention are so-called “product hopping” and “patent thickets.”  At its worst, product hopping involves brand drug makers making minor changes to a drug nearing the end of its patent so that they gets a new patent on the slightly-tweaked drug, and then withdrawing the original drug from the market so that patients shift to the newly patented drug and pharmacists can’t substitute a generic version of the original drug.  Similarly, at their worst, patent thickets involve brand drug makers obtaining a web of patents on a single drug to extend the life of their exclusivity and make it too costly for other drug makers to challenge all of the patents associated with a drug.  The proposed Affordable Prescriptions for Patients Act of 2019 is meant to stop these abuses of the patent system, which would facilitate generic entry and help to lower drug prices.

However, the Act goes too far by also capturing many legitimate activities in its definitions. For example, the bill defines as anticompetitive product-hopping the selling of any improved version of a drug during a window which extends to a year after the launch of the first generic competitor.  Presently, to acquire a patent and FDA approval, the improved version of the drug must be different and innovative enough from the original drug, yet the Act would prevent the drug maker from selling such a product without satisfying a demanding three-pronged test before the FTC or a district court.  Similarly, the Act defines as anticompetitive patent thickets any new patents filed on a drug in the same general family as the original patent, and this presumption can only be rebutted by providing extensive evidence and satisfying demanding standards to the FTC or a district court.  As a result, the Act deters innovation activity that is at all related to an initial patent and, in doing so, ignores the fact that most important drug innovation is incremental innovation based on previous inventions.  Thus, the proposal should be redrafted to capture truly anticompetitive product hopping and patent thicket activity, while exempting behavior this is critical for drug innovation. 

Reforms that close loopholes in the current patent process should facilitate competition in the pharmaceutical industry and help to lower drug prices.  However, lawmakers need to be sure that they don’t restrict patent rights to the extent that they deter innovation because a significant body of research predicts that patients’ health outcomes will suffer as a result.

In Antitrust & Competition, Federal Trade Commission, Financial Regulation, Health Care, Intellectual Property, Patent, Pharmaceuticals, Truth on the Market , , , , , , , , , , , , , , ,
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Drug Prices and Distortions in the Pharmaceutical Market

Joanna Shepherd —  11 January 2019

Drug makers recently announced their 2019 price increases on over 250 prescription drugs. As examples, AbbVie Inc. increased the price of the world’s top-selling drug Humira by 6.2 percent, and Hikma Pharmaceuticals increased the price of blood-pressure medication Enalaprilat by more than 30 percent. Allergan reported an average increase across its portfolio of drugs of 3.5 percent; although the drug maker is keeping most of its prices the same, it raised the prices on 27 drugs by 9.5 percent and on another 24 drugs by 4.9 percent. Other large drug makers, such as Novartis and Pfizer, will announce increases later this month.

So far, the number of price increases is significantly lower than last year when drug makers increased prices on more than 400 drugs.  Moreover, on the drugs for which prices did increase, the average price increase of 6.3 percent is only about half of the average increase for drugs in 2018. Nevertheless, some commentators have expressed indignation and President Trump this week summoned advisors to the White House to discuss the increases.  However, commentators and the administration should keep in mind what the price increases actually mean and the numerous players that are responsible for increasing drug prices. 

First, it is critical to emphasize the difference between drug list prices and net prices.  The drug makers recently announced increases in the list, or “sticker” prices, for many drugs.  However, the list price is usually very different from the net price that most consumers and/or their health plans actually pay, which depends on negotiated discounts and rebates.  For example, whereas drug list prices increased by an average of 6.9 percent in 2017, net drug prices after discounts and rebates increased by only 1.9 percent. The differential between the growth in list prices and net prices has persisted for years.  In 2016 list prices increased by 9 percent but net prices increased by 3.2 percent; in 2015 list prices increased by 11.9 percent but net prices increased by 2.4 percent, and in 2014 list price increases peaked at 13.5 percent but net prices increased by only 4.3 percent.

For 2019, the list price increases for many drugs will actually translate into very small increases in the net prices that consumers actually pay.  In fact, drug maker Allergan has indicated that, despite its increase in list prices, the net prices that patients actually pay will remain about the same as last year.

One might wonder why drug makers would bother to increase list prices if there’s little to no change in net prices.  First, at least 40 percent of the American prescription drug market is subject to some form of federal price control.  As I’ve previously explained, because these federal price controls generally require percentage rebates off of average drug prices, drug makers have the incentive to set list prices higher in order to offset the mandated discounts that determine what patients pay.

Further, as I discuss in a recent Article, the rebate arrangements between drug makers and pharmacy benefit managers (PBMs) under many commercial health plans create strong incentives for drug makers to increase list prices. PBMs negotiate rebates from drug manufacturers in exchange for giving the manufacturers’ drugs preferred status on a health plan’s formulary.  However, because the rebates paid to PBMs are typically a percentage of a drug’s list price, drug makers are compelled to increase list prices in order to satisfy PBMs’ demands for higher rebates. Drug makers assert that they are pressured to increase drug list prices out of fear that, if they do not, PBMs will retaliate by dropping their drugs from the formularies. The value of rebates paid to PBMs has doubled since 2012, with drug makers now paying $150 billion annually.  These rebates have grown so large that, today, the drug makers that actually invest in drug innovation and bear the risk of drug failures receive only 39 percent of the total spending on drugs, while 42 percent of the spending goes to these pharmaceutical middlemen.

Although a portion of the increasing rebate dollars may eventually find its way to patients in the form of lower co-pays, many patients still suffer from the list prices increases.  The 29 million Americans without drug plan coverage pay more for their medications when list prices increase. Even patients with insurance typically have cost-sharing obligations that require them to pay 30 to 40 percent of list prices.  Moreover, insured patients within the deductible phase of their drug plan pay the entire higher list price until they meet their deductible.  Higher list prices jeopardize patients’ health as well as their finances; as out-of-pocket costs for drugs increase, patients are less likely to adhere to their medication routine and more likely to abandon their drug regimen altogether.

Policymakers must realize that the current system of government price controls and distortive rebates creates perverse incentives for drug makers to continue increasing drug list prices. Pointing the finger at drug companies alone for increasing prices does not represent the problem at hand.

In Antitrust & Competition, Health Care, Pharmaceuticals , , , , ,
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The DOJ’s Approval of the CVS/Aetna Merger and Vertical Innovation by Incumbents

Geoffrey Manne —  19 October 2018

Last week, the DOJ cleared the merger of CVS Health and Aetna (conditional on Aetna’s divesting its Medicare Part D business), a merger that, as I previously noted at a House Judiciary hearing, “presents a creative effort by two of the most well-informed and successful industry participants to try something new to reform a troubled system.” (My full testimony is available here).

Of course it’s always possible that the experiment will fail — that the merger won’t “revolutioniz[e] the consumer health care experience” in the way that CVS and Aetna are hoping. But it’s a low (antitrust) risk effort to address some of the challenges confronting the healthcare industry — and apparently the DOJ agrees.

I discuss the weakness of the antitrust arguments against the merger at length in my testimony. What I particularly want to draw attention to here is how this merger — like many vertical mergers — represents business model innovation by incumbents.

The CVS/Aetna merger is just one part of a growing private-sector movement in the healthcare industry to adopt new (mostly) vertical arrangements that seek to move beyond some of the structural inefficiencies that have plagued healthcare in the United States since World War II. Indeed, ambitious and interesting as it is, the merger arises amidst a veritable wave of innovative, vertical healthcare mergers and other efforts to integrate the healthcare services supply chain in novel ways.

These sorts of efforts (and the current DOJ’s apparent support for them) should be applauded and encouraged. I need not rehash the economic literature on vertical restraints here (see, e.g., Lafontaine & Slade, etc.). But especially where government interventions have already impaired the efficient workings of a market (as they surely have, in spades, in healthcare), it is important not to compound the error by trying to micromanage private efforts to restructure around those constraints.   

Current trends in private-sector-driven healthcare reform

In the past, the most significant healthcare industry mergers have largely been horizontal (i.e., between two insurance providers, or two hospitals) or “traditional” business model mergers for the industry (i.e., vertical mergers aimed at building out managed care organizations). This pattern suggests a sort of fealty to the status quo, with insurers interested primarily in expanding their insurance business or providers interested in expanding their capacity to provide medical services.

Today’s health industry mergers and ventures seem more frequently to be different in character, and they portend an industry-wide experiment in the provision of vertically integrated healthcare that we should enthusiastically welcome.

Drug pricing and distribution innovations

To begin with, the CVS/Aetna deal, along with the also recently approved Cigna-Express Scripts deal, solidifies the vertical integration of pharmacy benefit managers (PBMs) with insurers.

But a number of other recent arrangements and business models center around relationships among drug manufacturers, pharmacies, and PBMs, and these tend to minimize the role of insurers. While not a “vertical” arrangement, per se, Walmart’s generic drug program, for example, offers $4 prescriptions to customers regardless of insurance (the typical generic drug copay for patients covered by employer-provided health insurance is $11), and Walmart does not seek or receive reimbursement from health plans for these drugs. It’s been offering this program since 2006, but in 2016 it entered into a joint buying arrangement with McKesson, a pharmaceutical wholesaler (itself vertically integrated with Rexall pharmacies), to negotiate lower prices. The idea, presumably, is that Walmart will entice consumers to its stores with the lure of low-priced generic prescriptions in the hope that they will buy other items while they’re there. That prospect presumably makes it worthwhile to route around insurers and PBMs, and their reimbursements.

Meanwhile, both Express Scripts and CVS Health (two of the country’s largest PBMs) have made moves toward direct-to-consumer sales themselves, establishing pricing for a small number of drugs independently of health plans and often in partnership with drug makers directly.   

Also apparently focused on disrupting traditional drug distribution arrangements, Amazon has recently purchased online pharmacy PillPack (out from under Walmart, as it happens), and with it received pharmacy licenses in 49 states. The move introduces a significant new integrated distributor/retailer, and puts competitive pressure on other retailers and distributors and potentially insurers and PBMs, as well.

Whatever its role in driving the CVS/Aetna merger (and I believe it is smaller than many reports like to suggest), Amazon’s moves in this area demonstrate the fluid nature of the market, and the opportunities for a wide range of firms to create efficiencies in the market and to lower prices.

At the same time, the differences between Amazon and CVS/Aetna highlight the scope of product and service differentiation that should contribute to the ongoing competitiveness of these markets following mergers like this one.

While Amazon inarguably excels at logistics and the routinizing of “back office” functions, it seems unlikely for the foreseeable future to be able to offer (or to be interested in offering) a patient interface that can rival the service offerings of a brick-and-mortar CVS pharmacy combined with an outpatient clinic and its staff and bolstered by the capabilities of an insurer like Aetna. To be sure, online sales and fulfillment may put price pressure on important, largely mechanical functions, but, like much technology, it is first and foremost a complement to services offered by humans, rather than a substitute. (In this regard it is worth noting that McKesson has long been offering Amazon-like logistics support for both online and brick-and-mortar pharmacies. “‘To some extent, we were Amazon before it was cool to be Amazon,’ McKesson CEO John Hammergren said” on a recent earnings call).

Treatment innovations

Other efforts focus on integrating insurance and treatment functions or on bringing together other, disparate pieces of the healthcare industry in interesting ways — all seemingly aimed at finding innovative, private solutions to solve some of the costly complexities that plague the healthcare market.

Walmart, for example, announced a deal with Quest Diagnostics last year to experiment with offering diagnostic testing services and potentially other basic healthcare services inside of some Walmart stores. While such an arrangement may simply be a means of making doctor-prescribed diagnostic tests more convenient, it may also suggest an effort to expand the availability of direct-to-consumer (patient-initiated) testing (currently offered by Quest in Missouri and Colorado) in states that allow it. A partnership with Walmart to market and oversee such services has the potential to dramatically expand their use.

Capping off (for now) a buying frenzy in recent years that included the purchase of PBM, CatamaranRx, UnitedHealth is seeking approval from the FTC for the proposed merger of its Optum unit with the DaVita Medical Group — a move that would significantly expand UnitedHealth’s ability to offer medical services (including urgent care, outpatient surgeries, and health clinic services), give it a significant group of doctors’ clinics throughout the U.S., and turn UnitedHealth into the largest employer of doctors in the country. But of course this isn’t a traditional managed care merger — it represents a significant bet on the decentralized, ambulatory care model that has been slowly replacing significant parts of the traditional, hospital-centric care model for some time now.

And, perhaps most interestingly, some recent moves are bringing together drug manufacturers and diagnostic and care providers in innovative ways. Swiss pharmaceutical company, Roche, announced recently that “it would buy the rest of U.S. cancer data company Flatiron Health for $1.9 billion to speed development of cancer medicines and support its efforts to price them based on how well they work.” Not only is the deal intended to improve Roche’s drug development process by integrating patient data, it is also aimed at accommodating efforts to shift the pricing of drugs, like the pricing of medical services generally, toward an outcome-based model.

Similarly interesting, and in a related vein, early this year a group of hospital systems including Intermountain Health, Ascension, and Trinity Health announced plans to begin manufacturing generic prescription drugs. This development further reflects the perceived benefits of vertical integration in healthcare markets, and the move toward creative solutions to the unique complexity of coordinating the many interrelated layers of healthcare provision. In this case,

[t]he nascent venture proposes a private solution to ensure contestability in the generic drug market and consequently overcome the failures of contracting [in the supply and distribution of generics]…. The nascent venture, however it solves these challenges and resolves other choices, will have important implications for the prices and availability of generic drugs in the US.

More enforcement decisions like CVS/Aetna and Bayer/Monsanto; fewer like AT&T/Time Warner

In the face of all this disruption, it’s difficult to credit anticompetitive fears like those expressed by the AMA in opposing the CVS-Aetna merger and a recent CEA report on pharmaceutical pricing, both of which are premised on the assumption that drug distribution is unavoidably dominated by a few PBMs in a well-defined, highly concentrated market. Creative arrangements like the CVS-Aetna merger and the initiatives described above (among a host of others) indicate an ease of entry, the fluidity of traditional markets, and a degree of business model innovation that suggest a great deal more competitiveness than static PBM market numbers would suggest.

This kind of incumbent innovation through vertical restructuring is an increasingly important theme in antitrust, and efforts to tar such transactions with purported evidence of static market dominance is simply misguided.

While the current DOJ’s misguided (and, remarkably, continuing) attempt to stop the AT&T/Time Warner merger is an aberrant step in the wrong direction, the leadership at the Antitrust Division generally seems to get it. Indeed, in spite of strident calls for stepped-up enforcement in the always-controversial ag-biotech industry, the DOJ recently approved three vertical ag-biotech mergers in fairly rapid succession.

As I noted in a discussion of those ag-biotech mergers, but equally applicable here, regulatory humility should continue to carry the day when it comes to structural innovation by incumbent firms:

But it is also important to remember that innovation comes from within incumbent firms, as well, and, often, that the overall level of innovation in an industry may be increased by the presence of large firms with economies of scope and scale.

In sum, and to paraphrase Olympia Dukakis’ character in Moonstruck: “what [we] don’t know about [the relationship between innovation and market structure] is a lot.”

What we do know, however, is that superficial, concentration-based approaches to antitrust analysis will likely overweight presumed foreclosure effects and underweight innovation effects.

We shouldn’t fetishize entry, or access, or head-to-head competition over innovation, especially where consumer welfare may be significantly improved by a reduction in the former in order to get more of the latter.

In Amazon, Antitrust & Competition, Antitrust Division, Health Care, Health Insurance, Justice Department, Mergers & Acquisitions, Monopolization, Pharmaceuticals, Platforms, Vertical Restraints , , , , , , , , ,
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A Windfall for Insurers in the Medicare Part D Coverage Gap

Joanna Shepherd —  13 February 2018

The two-year budget plan passed last week makes important changes to payment obligations in the Medicare Part D coverage gap, also known as the donut hole.  While the new plan produces a one-year benefit for seniors by reducing what they pay a year earlier than was already mandated, it permanently shifts much of the drug costs insurance companies were paying to drug makers.  It’s far from clear whether this windfall for insurers will result in lower drug costs for Medicare beneficiaries.

Medicare Part D is voluntary prescription drug insurance for seniors and the permanently disabled provided by private insurance plans that are approved by the Medicare program.  Last year, more than 42 million people enrolled in Medicare Part D plans. Payment for prescription drugs under Medicare Part D depends on how much enrollees spend on drugs.  In 2018, after hitting a deductible that varies by plan, enrollees pay 25% of their drug costs while the Part D plans pay 75%.  However, once the individual and the plan have spent a total of $3,750, enrollees hit the coverage gap that lasts until $8,418 has been spent.  In the coverage gap, enrollees pay 35% of brand drug costs, the Part D plans pay 15%, and drug makers are required to offer 50% discounts on brand drugs to cover the rest.  Once total spending reaches $8,418, enrollees enter catastrophic coverage in which they pay only 5% of drug costs, the Part D plans pay 15%, and the Medicare program pays the other 80%.

The Affordable Care Act (ACA) included provisions to phase out the coverage gap by 2020, so that enrollees will pay only 25% of drug costs from the time they meet the deductible until they hit the catastrophic coverage level.  The budget plan passed last week speeds up this phase out by one year, so enrollees will start paying only 25% in 2019 instead of 2020.  The ACA anticipated that with enrollees paying 25% of drug costs and drug maker discounts of 50%, the Part D plans would pay the other 25%.  However, last week’s budget plan drastically redistributed the payment responsibilities from the Part D insurance plans to drug makers. Under the new plan drug makers are required to offer 70% discounts so that the plans only have to pay 5% of the total drug costs.  That is, the new plan shifts 20% of total drug costs in the coverage gap from insurers to drug makers.

Although the drug spending in each individual’s coverage gap is less than $5,000, with over 42 million people covered, the total spending, and the 20% of spending shifted from insurers to drug makers, is significant.  CMS has estimated that when drug makers’ discounts were only covering 50% of drug spending in the gap, the annual total discounts amounted to over $5.6 billion.  Requiring drug makers to cover another 20% of drug spending will add several billion dollars more to this total.

A government intervention that forces suppliers to cover 70% of the spending in a market is a surprising move for Republicans—supposed advocates of free markets.  Moreover, although reducing prescription drug costs has become a national priority, it’s unclear whether shifting costs from insurers to drug makers will benefit individuals at all.  Theoretically, as the individual Part D plans pay less of their enrollees’ drug costs, they should pass on the savings to enrollees in the form of lower premiums.  However, several studies suggest that enrollees may not experience a net decrease in drug spending.  The Centers for Medicare and Medicaid Services (CMS) has determined that under Medicare Part D, drug makers increase list prices to offset other concessions and to more quickly move enrollees out of the coverage gap where drug makers are required to offer price discounts.  Higher list prices mean that enrollees’ total out-of-pocket drug spending increases; even a 5% cost-sharing obligation in the catastrophic coverage for a high-priced drug can be a significant expense. Higher list prices that push enrollees out of the coverage gap also shift more costs onto the Medicare program that pays 80% of drug costs in the catastrophic coverage phase.

A better, more direct way to reduce Medicare Part D enrollees’ out-of-pocket drug spending is to require point-of-sale rebates.  Currently, drug makers offer rebates to Part D plans in order to improve their access to the millions of individuals covered by the plans.  However, the rebates, which total over $16 billion annually, are paid after the point-of-sale, and evidence shows that only a portion of these rebates get passed through to beneficiaries in the form of reduced insurance premiums.  Moreover, a reduction in premiums does little to benefit those enrolled individuals who have the highest aggregate out-of-pocket spending on drugs. (As an aside, in contrast to the typical insurance subsidization of high-cost enrollees by low-cost enrollees, high-spending enrollees under Medicare Part D generate greater rebates for their plans, but then the rebates are spread across all enrollees in the form of lower premiums).

Drug maker rebates will more directly benefit Medicare Part D enrollees if rebates are passed through at the point-of-sale to reduce drug copays.  Point-of-sale rebates would ensure that enrollees see immediate savings as they meet their cost-sharing obligations.  Moreover, the enrollees with the highest aggregate out-of-pocket spending would be the ones to realize the greatest savings.  CMS has recently solicited comments on a plan to require some portion of drug makers’ rebates to be applied at the point of sale, and the President’s budget plan released yesterday proposes point-of-sale rebates to lower Medicare Part D enrollees’ out-of-pocket spending.  Ultimately, targeting rebates to consumers at the point-of-sale will more effectively lower drug spending than reducing insurance plans’ payment obligations in hopes that they pass on the savings to enrollees.

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The year ahead in drug pricing.

Joanna Shepherd —  10 January 2018

Last week, several major drug makers marked the new year by announcing annual increases on list prices.  In addition to drug maker Allergan—which pledged last year to confine price increases below 10 percent and, true to its word, reported 2018 price increases of 9.5 percent—several other companies also stuck to single-digit increases.   Although list or “sticker” prices generally increased by around 9 percent for most drugs, after discounts negotiated with various health plans, the net prices that consumers and insurers actually pay will see much lower increases. For example, Allergan expects that payors will only see net price increases of 2 to 3 percent in 2018.

However, price increases won’t generate the same returns for brand drug companies that they once did.  As insurers and pharmacy benefit managers consolidate and increase their market share, they have been able to capture an increasing share of the money spent on drugs for themselves. Indeed, a 2017 report found that, of the money spent on prescription drugs by patients and health plans at the point of sale, brand drug makers only realized 39 percent.  Meanwhile, supply-chain participants, such as pharmacy benefit managers, realized 42 percent of these expenditures.  What’s more, year-after-year, brand drug makers have seen their share of these point-of-sale expenditures decrease while supply-chain entities have kept a growing share of expenditures for themselves.

Brand drug makers have also experienced a dramatic decline in the return on their R&D investment.  A recent Deloitte study reports that, for the large drug makers they’ve followed since 2010, R&D returns have dropped from over 10 percent to under 4 percent for the last two years.  The ability of supply-chain entities to capture an increasing share of drug expenditures is responsible for at least part of drug makers’ decreasing R&D returns; the study reports that average peak sales for drugs have slowly dropped over time, mirroring drug maker’s decreasing share of expenditures.  In addition, the decline in R&D returns can be traced to the increasing cost of bringing drugs to market; for the companies Deloitte studied, the cost to bring a drug to market has increased from just over $1.1 billion in 2010 to almost $2 billion in 2017.

Brand drug makers’ decreasing share of drug expenditures and declining R&D returns reduce incentives to innovate.  As the payoff from innovation declines, fewer companies will devote the substantial resources necessary to develop innovative new drugs.  In addition, innovation is threatened as brand companies increasingly face uncertainty about the patent rights of the drugs they do bring to market.  As I’ve discussed in a previous post,  the unbalanced inter partes review (IPR) process created under the Leahy-Smith America Invents Act in 2012 has led to significantly higher patent invalidation rates.  Compared to traditional district-court litigation, several pro-challenger provisions under IPR—including a lower standard of proof, a broader claim construction standard, and the ability of patent challengers to force patent owners into duplicative litigation—have resulted in twice as many patents deemed invalid in IPR proceedings.  Moreover, the lack of a standing requirement in IPR proceedings has given rise to “reverse patent trolling,” in which entities that are not litigation targets, or even participants in the same industry, threaten to file an IPR petition challenging the validity of a patent unless the patent holder agrees to specific settlement demands.  Even supporters of IPR proceedings recognize the flaws with the system; as Senator Orrin Hatch stated in a 2017 speech: “Such manipulation is contrary to the intent of IPR and the very purpose of intellectual property law. . . I think Congress needs to take a look at it.” Although the constitutionality of the IPR process is currently under review by the U.S. Supreme Court, if the unbalanced process remains unchanged, the significant uncertainty it creates for drug makers’ patent rights will lead to less innovation in the pharmaceutical industry.  Drug makers will have little incentive to spend billions of dollars to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them.

We are likely to see a renewed push for drug pricing reforms in 2018 as access to affordable drugs remains a top policy priority.  Although Congress has yet to come together in support of any specific proposal, several states are experimenting with reforms that aim to lower drug prices by requiring more pricing transparency and notice of price increases.  As lawmakers consider these and other reforms, they should consider the current challenges that drug makers already face as their share of drug expenditures and R&D returns decline and patent rights remain uncertain.  Reforms that further threaten drug makers’ financial incentives to innovate could reduce our access to life-saving and life-improving new drugs.

In Health Care, Intellectual Property, Patent, Pharmaceuticals, Supreme Court, Truth on the Market , , , ,
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Voluntary pricing restraints in the drug industry

Joanna Shepherd —  13 June 2017

Today, the Senate Committee on Health, Education, Labor, and Pensions (HELP) enters the drug pricing debate with a hearing on “The Cost of Prescription Drugs: How the Drug Delivery System Affects What Patients Pay.”  By questioning the role of the drug delivery system in pricing, the hearing goes beyond the more narrow focus of recent hearings that have explored how drug companies set prices.  Instead, today’s hearing will explore how pharmacy benefit managers, insurers, providers, and others influence the amounts that patients pay.

In 2016, net U.S. drug spending increased by 4.8% to $323 billion (after adjusting for rebates and off-invoice discounts).  This rate of growth slowed to less than half the rates of 2014 and 2015, when net drug spending grew at rates of 10% and 8.9% respectively.  Yet despite the slowing in drug spending, the public outcry over the cost of prescription drugs continues.

In today’s hearing, there will be testimony both on the various causes of drug spending increases and on various proposals that could reduce the cost of drugs.  Several of the proposals will focus on ways to increase competition in the pharmaceutical industry, and in turn, reduce drug prices.  I have previously explained several ways that the government could reduce prices through enhanced competition, including reducing the backlog of generic drugs awaiting FDA approval and expediting the approval and acceptance of biosimilars.  Other proposals today will likely call for regulatory reforms to enable innovative contractual arrangements that allow for outcome- or indication-based pricing and other novel reimbursement designs.

However, some proposals will undoubtedly return to the familiar call for more government negotiation of drug prices, especially drugs covered under Medicare Part D.  As I’ve discussed in a previous post, in order for government negotiation to significantly lower drug prices, the government must be able to put pressure on drug makers to secure price concessions. This could be achieved if the government could set prices administratively, penalize manufacturers that don’t offer price reductions, or establish a formulary.  Setting prices or penalizing drug makers that don’t reduce prices would produce the same disastrous effects as price controls: drug shortages in certain markets, increased prices for non-Medicare patients, and reduced incentives for innovation. A government formulary for Medicare Part D coverage would provide leverage to obtain discounts from manufacturers, but it would mean that many patients could no longer access some of their optimal drugs.

As lawmakers seriously consider changes that would produce these negative consequences, industry would do well to voluntarily constrain prices.  Indeed, in the last year, many drug makers have pledged to limit price increases to keep drug spending under control.  Allergan was first, with its “social contract” introduced last September that promised to keep price increases below 10 percent. Since then, Novo Nordisk, AbbVie, and Takeda, have also voluntarily committed to single-digit price increases.

So far, the evidence shows the drug makers are sticking to their promises. Allergan has raised the price of U.S. branded products by an average of 6.7% in 2017, and no drug’s list price has increased by more than single digits.  In contrast, Pfizer, who has made no pricing commitment, has raised the price of many of its drugs by 20%.

If more drug makers brought about meaningful change by committing to voluntary pricing restraints, the industry could prevent the market-distorting consequences of government intervention while helping patients afford the drugs they need.   Moreover, avoiding intrusive government mandates and price controls would preserve drug innovation that has brought life-saving and life-enhancing drugs to millions of Americans.

 

 

 

In Antitrust & Competition, Health Care, Pharmaceuticals, Regulation, Regulatory Reform, Truth on the Market , , , ,
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Understanding government negotiation of Medicare drug prices

Joanna Shepherd —  16 January 2017

In a weekend interview with the Washington Post, Donald Trump vowed to force drug companies to negotiate directly with the government on prices in Medicare and Medicaid.  It’s unclear what, if anything, Trump intends for Medicaid; drug makers are already required to sell drugs to Medicaid at the lowest price they negotiate with any other buyer.  For Medicare, Trump didn’t offer any more details about the intended negotiations, but he’s referring to his campaign proposals to allow the Department of Health and Human Services (HHS) to negotiate directly with manufacturers the prices of drugs covered under Medicare Part D.

Such proposals have been around for quite a while.  As soon as the Medicare Modernization Act (MMA) of 2003 was enacted, creating the Medicare Part D prescription drug benefit, many lawmakers began advocating for government negotiation of drug prices. Both Hillary Clinton and Bernie Sanders favored this approach during their campaigns, and the Obama Administration’s proposed budget for fiscal years 2016 and 2017 included a provision that would have allowed the HHS to negotiate prices for a subset of drugs: biologics and certain high-cost prescription drugs.

However, federal law would have to change if there is to be any government negotiation of drug prices under Medicare Part D. Congress explicitly included a “noninterference” clause in the MMA that stipulates that HHS “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”

Most people don’t understand what it means for the government to “negotiate” drug prices and the implications of the various options.  Some proposals would simply eliminate the MMA’s noninterference clause and allow HHS to negotiate prices for a broad set of drugs on behalf of Medicare beneficiaries.  However, the Congressional Budget Office has already concluded that such a plan would have “a negligible effect on federal spending” because it is unlikely that HHS could achieve deeper discounts than the current private Part D plans (there are 746 such plans in 2017).  The private plans are currently able to negotiate significant discounts from drug manufacturers by offering preferred formulary status for their drugs and channeling enrollees to the formulary drugs with lower cost-sharing incentives. In most drug classes, manufacturers compete intensely for formulary status and offer considerable discounts to be included.

The private Part D plans are required to provide only two drugs in each of several drug classes, giving the plans significant bargaining power over manufacturers by threatening to exclude their drugs.  However, in six protected classes (immunosuppressant, anti-cancer, anti-retroviral, antidepressant, antipsychotic and anticonvulsant drugs), private Part D plans must include “all or substantially all” drugs, thereby eliminating their bargaining power and ability to achieve significant discounts.  Although the purpose of the limitation is to prevent plans from cherry-picking customers by denying coverage of certain high cost drugs, giving the private Part D plans more ability to exclude drugs in the protected classes should increase competition among manufacturers for formulary status and, in turn, lower prices.  And it’s important to note that these price reductions would not involve any government negotiation or intervention in Medicare Part D.  However, as discussed below, excluding more drugs in the protected classes would reduce the value of the Part D plans to many patients by limiting access to preferred drugs.

For government negotiation to make any real difference on Medicare drug prices, HHS must have the ability to not only negotiate prices, but also to put some pressure on drug makers to secure price concessions.  This could be achieved by allowing HHS to also establish a formulary, set prices administratively, or take other regulatory actions against manufacturers that don’t offer price reductions.  Setting prices administratively or penalizing manufacturers that don’t offer satisfactory reductions would be tantamount to a price control.  I’ve previously explained that price controls—whether direct or indirect—are a bad idea for prescription drugs for several reasons. Evidence shows that price controls lead to higher initial launch prices for drugs, increased drug prices for consumers with private insurance coverage,  drug shortages in certain markets, and reduced incentives for innovation.

Giving HHS the authority to establish a formulary for Medicare Part D coverage would provide leverage to obtain discounts from manufacturers, but it would produce other negative consequences.  Currently, private Medicare Part D plans cover an average of 85% of the 200 most popular drugs, with some plans covering as much as 93%.  In contrast, the drug benefit offered by the Department of Veterans Affairs (VA), one government program that is able to set its own formulary to achieve leverage over drug companies, covers only 59% of the 200 most popular drugs.  The VA’s ability to exclude drugs from the formulary has generated significant price reductions. Indeed, estimates suggest that if the Medicare Part D formulary was restricted to the VA offerings and obtained similar price reductions, it would save Medicare Part D $510 per beneficiary.  However, the loss of access to so many popular drugs would reduce the value of the Part D plans by $405 per enrollee, greatly narrowing the net gains.

History has shown that consumers don’t like their access to drugs reduced.  In 2014, Medicare proposed to take antidepressants, antipsychotic and immunosuppressant drugs off the protected list, thereby allowing the private Part D plans to reduce offerings of these drugs on the formulary and, in turn, reduce prices.  However, patients and their advocates were outraged at the possibility of losing access to their preferred drugs, and the proposal was quickly withdrawn.

Thus, allowing the government to negotiate prices under Medicare Part D could carry important negative consequences.  Policy-makers must fully understand what it means for government to negotiate directly with drug makers, and what the potential consequences are for price reductions, access to popular drugs, drug innovation, and drug prices for other consumers.

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What’s next for the pharmaceutical industry?

Joanna Shepherd —  5 December 2016

On November 9, pharmaceutical stocks soared as Donald Trump’s election victory eased concerns about government intervention in drug pricing. Shares of Pfizer rose 8.5%, Allergan PLC was up 8%, and biotech Celgene jumped 10.4%. Drug distributors also gained, with McKesson up 6.4% and Express Scripts climbing 3.4%. Throughout the campaign, Clinton had vowed to take on the pharmaceutical industry and proposed various reforms to reign in drug prices, from levying fines on drug companies that imposed unjustified price increases to capping patients’ annual expenditures on drugs. Pharmaceutical stocks had generally underperformed this year as the market, like much of America, awaited a Clinton victory.

In contrast, Trump generally had less to say on the subject of drug pricing, hence the market’s favorable response to his unexpected victory. Yet, as the end of the first post-election month draws near, we are still uncertain whether Trump is friend or foe to the pharmaceutical industry. Trump’s only proposal that directly impacts the industry would allow the government to negotiate the prices of Medicare Part D drugs with drug makers. Although this proposal would likely have little impact on prices because existing Part D plans already negotiate prices with drug makers, there is a risk that this “negotiation” could ultimately lead to price controls imposed on the industry. And as I have previously discussed, price controls—whether direct or indirect—are a bad idea for prescription drugs: they lead to higher initial launch prices for drugs, increased drug prices for consumers with private insurance coverage, drug shortages in certain markets, and reduced incentives for innovation.

Several of Trump’s other health proposals have mixed implications for the industry. For example, a repeal or overhaul of the Affordable Care Act could eliminate the current tax on drug makers and loosen requirements for Medicaid drug rebates and Medicare part D discounts. On the other hand, if repealing the ACA reduces the number of people insured, spending on pharmaceuticals would fall. Similarly, if Trump renegotiates international trade deals, pharmaceutical firms could benefit from stronger markets or longer patent exclusivity rights, or they could suffer if foreign countries abandon trade agreements altogether or retaliate with disadvantageous terms.

Yet, with drug spending up 8.5 percent last year and recent pricing scandals launched by 500+ percentage increases in individual drugs (i.e., Martin Shkreli, Valeant Pharmaceuticals, Mylan), the current debate over drug pricing is unlikely to fade. Even a Republican-led Congress and White House is likely to heed the public outcry and do something about drug prices.

Drug makers would be wise to stave off any government-imposed price restrictions by voluntarily limiting price increases on important drugs. Major pharmaceutical company Allergan has recently done just this by issuing a “social contract with patients” that made several drug pricing commitments to its customers. Among other assurances, Allergan has promised to limit price increases to single-digit percentage increases and no longer engage in the common industry tactic of dramatically increasing prices for branded drugs nearing patent expiry. Last year throughout the pharmaceutical industry, the prices of the most commonly-used brand drugs increased by over 16 percent and, in the last two years before patent expiry, drug makers increased the list prices of drugs by an average of 35 percent. Thus, Allergan’s commitment will produce significant savings over the life of a product, creating hundreds of millions of dollars in savings to health plans, patients, and the health care system.

If Allergan can make this commitment for its entire drug inventory—over 80+ drugs—why haven’t other companies done the same? Similar commitments by other drug makers might be enough to prevent lawmakers from turning to market-distorting reforms, such as price controls, that could end up doing more harm than good for consumers, the pharmaceutical industry, and long-term innovation.

In Antitrust & Competition, Health Care, Intellectual Property, International, International Trade, Patent, Pharmaceuticals, Truth on the Market , , , , , , , , ,
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