Ed Schoonveld

, I felt that various recent developments were worth noting, considering the impact they could have on the US prescription drug market. They include the drug industry's push to make Inflation Reduction Act (IRA) changes to the “pill penalty” and negotiation eligibility timing for orphan drugs, along with President Trump’s executive order to reinforce transparency rules for prescription drugs. These are detailed further ahead.

The Centers for Medicare & Medicaid (CMS) Services price negotiations under the IRA involve a selection of eligible Rx drugs that have the highest Medicare budget impact. Small molecules become eligible for negotiations nine years after the first launch of the molecule, whereas biologics have a 13-year grace period. The earlier eligibility for small molecules—a four-year difference—is often referred to as the “pill penalty.” Taking four years off the highest revenue-producing years away from drugs that typically also decline much faster in revenue upon patent expiration is heavily impacting the financial viability of small molecule development in comparison with biologics. The drug industry is pushing for an elimination of the pill penalty, making small molecules eligible for negotiation after 13 years as opposed to nine. They also ask to only start the clock for negotiation eligibility for orphan therapies after the drug loses its orphan drug exclusivity status.

Meanwhile, the industry is arguing that CMS should negotiate separately for drug use under a new formulation or indication. Industry association PhRMA argues that CMS’s interpretation of the IRA—which is to set prices for drugs based on their active moiety or active ingredient—is overly broad.

The industry is hoping to include the mentioned changes in the reform package that Congress is currently considering. However, the additional cost of these changes will certainly be weighed against the Trump administration’s ambitious plans to extend the 2017 tax cut, tackle immigration, and provide additional defense spending. It seems as though the Trump administration is unlikely to prioritize CMS price negotiation reform over tax reform objectives, as there is little room to maintain budget neutrality and avoid a need for a 60% majority requirement in Congress.

IRA’s impact on availability of new treatments will likely not be clear for another few years, as the portfolio of negotiated drugs is expanding and the impact on company decision-making regarding R&D will become clearer. The mechanism of IRA drug negotiation selection has already resulted in a deprioritization of small molecule (oral) drugs, along with a delay of launch for smaller patient populations with higher medical unmet need until the uses for larger patient populations are ready for FDA approval and commercialization.

Trump signed an executive order (EO) on Feb. 25 that reinforces healthcare price transparency rules that were first issued in 2019, but that were not prioritized for implementation by President Biden. The new EO makes specific reference to drug pricing: “… fully enforce my Administration’s requirement that would end the opaque nature of drug prices by ensuring health plans publicly post the true prices they pay for prescription drugs.” Furthermore, the EO emphasized: “the old directive also required health plans to post their negotiated rates with providers, as well as their out-of-network payments to providers and the actual prices they or their pharmacy benefit manager pay for prescription drugs.”

The new EO may have some far-reaching implications for the drug industry. Transparency of negotiated drug prices will change the dynamics of negotiations with pharmacy benefit managers and managed care plans. It is my belief that all major drugmakers carefully manage the consistency of rebate terms across their customers, but having all prices across customers publicly displayed can intensify the competitive dynamic and force an even higher level of discipline than currently employed. It does not seem that the EO applies to 340B prices and confidential state Medicaid prices such as under California’s MediCal, which would bring further complications.

The EO offers some great opportunities for the industry to bring transparency to levels of patient copayments in relation to the actual drug cost to health insurance plans. It will offer opportunities to highlight the cases where payers are using patient copayments to generate additional profits.

Ed Schoonveld is a value and access advisor for Schoonveld Advisory and author of The Price of Global Health.

1. Kelly C. IRA Negotiation Changes: Pharma’s Focus Remains On Near-Term Legislative, Regulatory Options. 

https://insights.citeline.com/pink-sheet/market-access/government-payers/medicare/ira-negotiation-changes-pharmas-focus-remains-on-near-term-legislative-regulatory-options-5AJDYB6SWNGVBLOO6KHTLJ3KQA/?utm_source=RSS_feed&utm_medium=twitter&utm_campaign=PinkSheet

Articles

Respective industry and government agendas could significantly reshape the US prescription drug market.

US Drug Price Negotiations and Transparency

A bipartisan government funding deal at the end of last year initially included reforms of pharmacy benefit managers (PBMs) that would limit their ability to use rebates as a major profit center. PBM reform was excluded from the final government funding deal, but there continues to be strong support in Congress to address the subject. Focus is now on what the incoming Trump administration will do, and how this may impact the pharmaceutical market in the US.

A handful of PBMs handle patient access to prescription drugs on behalf of health insurance companies, extracting rebates in exchange for a favorable position on the drug formulary. Particularly for drugs that are deemed “interchangeable,” PBMs extract substantial rebate payments without affecting the publicly visible price. Rebates have formed a substantial part of PBMs’ incomes, although some of the rebates are claimed to be passed on to the payers.

In my opinion, there are a few problems with the rebate model:

Formulary choices are based on drug rebate maximization, not patient benefit and clinical goals.

PBMs are potentially skimming profits but add limited value beyond claims handling.

Patients pay copays based on list price rather than net price. In some cases, the copay can be higher than the cost to the PBM.

Many refer to European countries as cheaper options to provide patients access to Rx. These countries fix price through either cost-effectiveness analyses (England, Sweden, etc.) or by scoring the added benefit over a “comparator” drug (France, Germany, etc.).It seems attractive to use European style controls. However, there are some challenges:

Price-controlled countries demand full evidence of long-term outcomes value at time of negotiation, i.e., prior to launch. For true innovations, this is practically impossible without much longer development timelines, which, considering competition and patent lives, is often not feasible.

Smaller countries use their monopsony power to extract steep price concessions. However, given the dominant size of the market, US monopsony behavior would harm early drug development, and venture capital funding for early drug research would be diverted to other more profitable business areas.

Governments do not adequately budget for the impact of aging populations and poor lifestyles on healthcare needs.

The US is burdened with rapidly rising healthcare costs. Drugs have accounted for a constant 12%-13% of healthcare costs since 2000.

The solution is in addressing healthcare effectiveness and efficiency, including the role of drugs.

Payers and PBMs have deflected an increasing share of drug cost to patients through rapidly increasing copays.

 Charging copays makes sense when a patient wants a higher cost option that has no additional benefit, but why charge a substantial percentage of the cost of a drug to a patient, when there is no good alternative?

As artificial intelligence (AI) is emerging, we are better able to direct the most effective care to each patient. Treatment pathways are increasingly used by payers and provider groups to inform treatment decision-making. As we can increasingly power pathways with experience on distinct subpopulations, we can generate cost savings without a negative impact on patient outcomes.

While clinical evidence and AI can inform optimal treatment with existing drugs, no such alternative is available for new drugs. There is limited latitude in performing investigational trials for safety reasons. Showing improvements in long-term outcomes can require many years. European price approval systems require this evidence, thus halting or delaying innovations from reaching patients. When making cost-related reimbursement decisions, we need to make sure to not be rigidly focused on the perfect, practically impossible evidence, but have the medical community make informed judgement calls on expected long-term benefits, in combination with drug company commitments to longer term outcomes trials post launch.

1. The Price of Global Health, 3rd edition, page 38; Ed Schoonveld; Routledge Publishing, ISBN 978-0-367-27940-0

Finding the optimal balance in pharmacy benefit manager reform.


Rebates or Patients?

In exchange for his support of Donald Trump’s candidacy for president, Robert F. Kennedy threw his own name into the mix, and has officially been nominated by the president-elect as the as next Secretary of Health and Human Services. His stated objective is to focus on food safety, referencing the proliferation of processed foods and additives, and tackle the increase in chronic diseases.

However, given RFK’s reputation as a vaccine denier, putting him in this position could scare some. Setting RFK’s candidacy aside, is there a need to develop a better integrated policy that addresses population health issues and disease prevention with a critical look at our food supply and breaking out of food and pharmaceutical silos?

There is significant evidence that many of the ingredients in food products that we find on the shelves in supermarkets are simply unhealthy. Widespread consumption of high-fructose corn syrup has contributed to multiple health consequences, such as insulin resistance, obesity, liver disorders, and diabetes.

 Poor metabolic health has further been linked to diabetes, cancer and Alzheimer’s disease.

 Many other ingredients in our food products have been found to have a negative impact on our health. Propylene glycol, an emulsifier, is widely used in, for example, low-fat salad dressings and the main ingredient in some deodorants. It can cause very severe allergies, which do not clearly show up in allergy skin tests.

 Ironically, most of the dermatological prescription ointments used to treat the resulting eczema also contain propylene glycol. There is a long list of food ingredients that the FDA deems non-toxic, but that are, nevertheless, causing damage. California has started to ban

 a number of ingredients from public school foods and beverages. In my opinion, the FDA seems to act as a follower rather than a leader in this area.

As mentioned, metabolic disease is thought to be a major contributor in cardiovascular disease, cancer, and Alzheimer’s disease. With a third of the US population being obese, and an additional third overweight, the need for good treatments is humanistically and economically crucial. Alzheimer’s disease alone is projected to bankrupt Medicare,

 state Medicaid programs, and individual patients if effective treatments are not found.

The pharmaceutical industry has been able to provide many new treatment options for debilitating diseases. Some anti-cancer drugs have been able to significantly alter the course of the disease. Progress has been made with Alzheimer’s disease drugs as well, but we are still far off from widespread meaningful treatment solutions for these and many other diseases, some of which are believed to be primarily caused by our unhealthy lifestyles and the foods that we consume.

The glucagon-like peptide-1 (GLP-1) agonists semaglutide and high-dose liraglutide are FDA-approved drugs to help the treatment of obesity. Beyond obese patients, these drugs have helped many overweight and individuals reverse the impact of poor nutrition and lifestyle habits, but we need to ask ourselves whether weight losses are sustainable in the long term and whether they further accommodate poor diets.

Provider organizations are increasingly considering the need for social care for patients in addition to their medical treatments, emphasizing relationships between housing, social setting, and therapy outcomes. Social care programs, such as the National Diabetes Prevention Program, assist patients with getting access to food, housing, healthcare, and other social services.

On a government level, we may also need a better integration between all health-related policies, including food (FDA-approved ingredients and related communications), prevention- and treatment-focused medical care, and sports/recreational investments. Individuals have a personal responsibility to make the right choices, but today, choices may simply not be available or insufficiently communicated and incentivized. Is clear labeling enough, or should certain ingredients (such as the aforementioned high-fructose corn syrup) be banned from foods?

The pharmaceutical industry is currently benefiting from the GLP-1 hype and it may save lives of individual patients. However, what will be the longer-term impact on population health? The next generation of obesity drugs may be very safe and effective, but wouldn’t it be better if less than two-thirds of the population need them?

Ed Schoonveld is a value & access advisor for Schoonveld Advisory and author of The Price of Global Health.

1. Samuels B. Trump Says He’ll Let RFK Jr. ‘Go Wild’ on Health and Food in Potential Second Term. 

https://thehill.com/homenews/campaign/4956319-trump-says-hell-let-rfk-jr-go-wild-on-health-and-food-in-potential-second-term/

2. Mai, B.H.; Yan, L.J. The Negative and Detrimental Effects of High Fructose on the Liver, With Special Reference to Metabolic Disorders. 

 https://pubmed.ncbi.nlm.nih.gov/31213868/

Outlive: The Science of Art and Longevity.

https://www.euronews.com/green/2019/01/07/the-truth-behind-propylene-glycol#:~:text=Allergy%20risk%20of%20propylene%20glycol&text=The%20US%20Food%20and%20Drug,reported%20in%20the%20scientific%20literature

5. Wick, J.Y. And the Allergen Winner is: Propylene Glycol! 

https://www.contemporaryclinic.com/view/and-the-allergen-winner-is-propylene-glycol

6. Siegner, C. California Bans More Ingredients. 

https://www.foodbusinessnews.net/articles/26905-california-bans-more-ingredients#:~:text=Beginning%20on%20Jan.,Missouri%2C%20New%20York%20and%20Washington

7. Alzheimer’s Association’s Most Expensive Disease Handout. Alzheimer’s Association

https://act.alz.org/site/DocServer/112114_Most_Expensive_Disease_Handout.pdf?docID=40161

Is the potential of a more formal policy integration for health issues and disease prevention a scary suggestion or a good idea?

Policy and Population Health

We all had some time to reflect on the published price reductions for the 10 drugs under the Inflation Reduction Act of 2022 (IRA). The Biden administration and the Harris election campaign claim victory, and the drug industry is relieved that the impact has been limited. On the surface, this seems like an unusual win-win. However, experience in other countries shows that once introduced, price controls become a convenient tool to address government budget overruns.

The Democratic party is celebrating its “victory over the powerful drug industry” with the institution of price controls on prescription drugs, lowering Medicare patient cost of insulin to $35 and capping total patient out-of-pocket costs to $2,000 annually. The first price reductions range from 38% to 79% discount off list price for the initial 10 drugs that are part of the initial round; these reductions go into effect in 2026.

Pharma stays muted as it realizes that the actual impact is limited in the following ways:

The negotiated discounts off list price are not much higher than the rebates companies already pay. Since the rebates are confidential, it is hard to calculate actual savings, but 

estimates it at an actual 22% discount over current net prices for the Medicare portion of sales.

 The Centers for Medicare & Medicaid Services (CMS) has exercised some restraint in its pricing demands—even though drug companies have no “negotiation” leverage—and face steep penalties for not accepting the dictated outcome.

Many of the drugs are close to patent expiration, at which time a much higher level of net price reductions automatically occurs with generic competition. 

 also argues that it hurts the generics savings that would otherwise be delivered later.

 This is consistent with experience in Europe, where generic markets have been less attractive in countries with early price controls such as France, Italy, and Spain.

With everybody seemingly happy, the IRA implementation is deemed successful.

As mentioned, the actual drug cost savings starting in 2026 will be very limited. The annual expansion of the list of price-controlled drugs will increase the impact of the program, but it will take several years before this materializes. A new administration may be very tempted to further accelerate the addition of new drugs and expansion to the private market, as already propagated by Sen. Bernie Sanders et al.

Price control laws have been introduced in virtually every high-income country. They seem to always raise the governmental appetite for deeper controls:

Formulated savings goals are hardly ever met, thus feeding appetite for more action.

It is politically much easier to tighten and expand existing controls than it is to first introduce them.

Both Democrats and Republicans have expensive new spending programs for causes that are higher on the sympathy list than pharma.

The negative impact on industry investment and availability of new treatments in the future is less concrete in people’s minds.

Predicting the future in politics is a dangerous endeavor. The attitude toward drug price controls may only be slightly different between Democratic and Republican administrations. Whether a Trump or Harris administration, it will have to deal with the impact of expiration of the 2017 Trump tax cuts at the end of 2025. Trump has also claimed to cut social security taxes, and both parties have committed to eliminating taxes on tips. Both parties also seem committed to sustaining or elevating defense spending and to protect social security, which is facing insolvency.

As a result, the pharma industry seems to be at high risk of more price control measures. Factors driving that risk include: (1) CMS has all the power to insist on deeper price cuts in the next round of negotiations; (2) a future Harris administration may expand CMS negotiations to more drugs faster and to extend it to the private market; and (3) a future Trump administration may try to repeal elements of the IRA but is not very motivated to touch the drug pricing part of it.

https://www.wsj.com/opinion/biden-drug-prices-inflation-reduction-act-pharma-cms-generics-6be3a99a

2. Schoonveld, E. In Search of the ‘Bad Guy’. 

https://www.pharmaceuticalcommerce.com/view/in-search-of-the-bad-guy-

As the dust settles on the first round of Medicare negotiations, not everything is what it seems.
