Ed Schoonveld

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.

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

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

Articles

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.


Reflections on IRA Drug Pricing Negotiations

The pharmaceutical environment is changing rapidly. The Inflation Reduction Act has introduced US price controls.

 Managed care and pharmacy benefit managers have unprecedented market power, allowing them to restrict patient access for new expensive drugs and extract high rebates for undifferentiated drugs. European payers continue to tighten evidence rules. Placebo-controlled trials and single-arm trials typically don’t cut it anymore. Payers warn that evidence gaps frequently lower price and/or limit patient access. Avoiding commercial failure requires risk benefit assessments with a thorough understanding of pricing and access implications of alternative development strategies.

Large pharmas have portfolio management processes that rely on input from clinical, commercial, and access experts to make trade-offs between clinical program options. Focus is on commercial value. Smaller biotechnology firms deliver a large share of early drug innovation. How prepared are they to optimize drug development decision-making?

Biotechs are very focused on developing scientific solutions for devastating diseases. Having that expertise is an essential ingredient for drug innovation success. However, smaller biotechs tend to have limited or no commercial and access expertise in the leadership team and on the board. This can be highly problematic for two reasons:

Phase III clinical programs form the basis for marketing approval by the FDA in the US and by the EMA in Europe. However, these same trials are also the basis for access and pricing approval by payers worldwide. Payers state that wrong clinical trial design, wrong clinical comparator, inappropriate endpoint, and insufficient length of trial are common grounds for payer rejection, access restrictions, and/or inferior price. Avoiding these traps requires analysis and trade-off decisions for Phase II and Phase III trials. Many biotechs are not thinking about these until it's too late.

Biotech firms are often dependent on partnerships with—or acquisition by—large pharmas to fund Phase III development and commercialization. Negotiations focus on the asset’s commercial potential, which can be hampered by lack of evidence or value. This directly impacts pricing, access, and the ability to present strong differentiating value to prescribers. Lack of focus on these aspects can significantly lower the biotech's equity value.

Biotech organizations need to maintain a low investment burn rate, at least in the earlier stages where clinical failure rates can be high. However, it is extremely unwise to ignore the need for at least high-level commercial and access evaluations to guide development decision-making.

How can biotech companies ensure sufficient attention to access and pricing needs, while limiting investments to the essentials? Here are some general suggestions:

Periodically perform commercial/access assessments for a few clearly defined product profiles with some clinical trial design options for each new drug. Consider a range of upside and downside clinical outcome scenarios.

 Focus on a few countries that can serve as a proxy for global potential and evidence needs. While dependent on the therapy area, the list would include the US, Japan, Germany, and France.

 Consider past health technology assessment decisions in each payer system that seem most relevant as analogues for the situation; evaluate each analogue with respect to the healthcare system.

 Evaluate clinical trial design options based on projected commercial results for each trial design option under a range of outcomes and scenarios.

 Ensure that you can call on deep access expertise to guide and validate the analysis and conclusions.

In earlier phases of drug development, payer research may only be needed in cases where the analysis and the hypothesized commercial results have major uncertainties that significantly impact decision-making. Phase III clinical trial design decisions require a higher level of robustness and validation of the access/pricing assumptions through research.

1. Schoonveld, E. The IRA is Industry’s Wake Up Call. 

https://www.pharmaceuticalcommerce.com/view/the-ira-is-industry-s-wake-up-call

Balancing innovation focus with optimized decision-making.
