Since the threat of drug price reform became a tangible one during the 2016 presidential race, many have wondered the extent to which such changes would tame the pharmaceutical industry’s near discretionary pricing power.
At the time, it seemed like a no-brainer that high drug prices would remain a hot-button issue, even under President-elect Trump and with the GOP holding both houses of Congress. It took another six years, a Democratic majority in Congress and a new president in the oval office to pass such reforms.
But there’s still a chance your reporter sees vindication — that “change in either the price-setting or -increasing arena,” as I put it then — will not be an altogether negative one for pharma marketers. With drug pricing finally the new reality, here are three potential impacts to watch.
1. Getting price right
The newly enacted Inflation Reduction Act of 2022 empowers Medicare to negotiate the prices on a limited set of prescription drugs, as well as to remand drugmakers who don’t follow the rules. But it doesn’t exactly bring the industry’s pricing power to heel. Not yet, anyway.
As two recent analyses show, there’s been an upswing in sticker prices on medicines that made it across the regulatory finish line. The median annual price of 13 novel drugs approved for chronic conditions by the Food and Drug Administration so far this year is $257,000, according to a Reuters study.
That was well above last year’s median annual price, which surged to $180,000 for the 30 drugs first marketed through mid-July 2021, according to a separate study published recently in JAMA. It’s worth noting that nothing in the new law would prevent companies from continuing to freely set prices for new brand-name drugs sold into Medicare.
Initially, the Health and Human Services Secretary will be able to negotiate 10 high-priced Medicare Part D drugs. That give-and-take could lop 25% off the price tags for the 25 drugs the program spends the most on in 2026 and beyond, according to Bank of America.
But the HHS secretary can only price-haggle on drugs that have been on the market for several years without any generic or other competition. With the government’s hands tied on new drugs, will biopharma companies respond by setting launch prices higher?
“It turns up the heat on launch price,” noted pricing guru Jack Mycka, VP in Indegene’s PRMA (pricing, reimbursement, market access) division. “Companies had better be doing their homework and doing what they can to get launch price right…because they’ve got a shorter window to capitalize on the opportunity.”
While seniors won’t see lower prices on the negotiated drugs until they take effect in 2026, a rule in the new law imposes a penalty on manufacturers if a prescription drug’s price is raised above the rate of inflation; that starts later this year. The manufacturer would pay the higher-than-inflation amount back to the government, according to AARP.
With half of prescription drugs taken by Medicare patients seeing price increases higher than inflation in 2020, according to KFF, “This provision could have some bite,” wrote Jon Bigelow, executive director for the Coalition for Healthcare Communications, in an analysis this week.
That only drives further speculation that a rise in biopharma launch prices could be in store. But getting launch price “right” doesn’t automatically mean “higher.” Think optimize, not maximize, Mycka urged.
“Because sometimes the best way to sell a biopharmaceutical product is not to charge the highest price, it’s been easy for people for a long time to kind of say, ‘Ah, well, higher’s always better,’” he added. “I don’t think it is always better. What this says is you’d better sharpen your pencil in a way to understand what it is you’re doing.”
2. “Unique” rebates, extra advertising
Some execs don’t fear the inflationary rule per se. A good deal of “CPI capping” is already going on in the commercial market, whereby a drug’s baseline average manufacturer price (AMP) is compared to the consumer price index (CPI), Eli Lilly CEO David Ricks noted during his firm’s most recent earnings call.
“And with CPI being where it is now, I think these prices in the drug business are not [rising] nearly as fast as the rest of the economy,” he added.
The bigger problem, the CEO said, is the “negotiation piece,” as it will lead to some products having what he called “attenuated lifecycles.”
Since drugmakers often extend their brands’ exclusivity beyond the nine or 13 years afforded for small-molecule and biologic drugs, respectively, their revenue “tail” could be cut short once their drugs are exposed to negotiation, according to a note from SVB Securities.
That will cause headwinds for the industry, especially for small-molecule drugs. “It sends a signal to investors and capital allocators like us that small molecules — particularly in diseases that require step-wise development, like cancer where we start in later stages and work our way to adjuvant, or even in some orphan conditions — really aren’t wanted and are worth a lot less,” Ricks said. “So we’ll focus our resources on other areas of innovation….and so will the rest of the sector.”
Ending development of any drug class would be a worst-case scenario. What’s perhaps more likely, however, is that firms will look to capitalize on their commercial opportunity while they have it.
That entails deploying more high-pressure tactics to secure payer coverage. For one, drugmakers often use large rebates to get a pharmacy benefit manager (PBM) to make its product a preferred one on the payer’s formulary.
Pharma has demonstrated “a very aggressive rebate appetite,” said Philip Vecchiolli, SVP/GM of pharmacy benefit administration services for the startup PBM Capital Rx.
If anything, he sees that hunger intensifying in light of the new health law: “Some would say that this is like, ‘Get what you can get now until they really clamp down.’”
Drugmakers have maintained a love/hate relationship with PBMs, healthcare’s middlemen who wrangle with them over rebates and other fees on behalf of insurance plans. As the new law spurs drugmakers to adopt a more “unique” rebating strategy — very high rebates here, lower ones there — Vecchiolli predicted that circumstances will bring the two stakeholders “either reluctantly or willingly together.”
As Reuters noted in its pricing analysis, some drugmakers are disclosing less information on the prices of their new medicines. That lack of transparency gives them a measure of political cover to build in the higher rebates.
“On new launches, because there’s still lack of clarity, you’re going to see unique rebate strategies that will just get padded onto the price,” Vecchiolli said.
The desire to get-while-the-gettin’s-good could lead to more assertiveness on the advertising front – especially in pricey therapeutic categories like immunology, as a means to capture consumer sentiment, he noted. Then again, for other products, particularly older in-line ones that have several competitors, pharma may need to watch its ad budget, take a more price-disclosure-oriented communications tone (versus emotion-driven) and rethink its overall rebate infrastructure in order to exist in a lower pricing construct.
Rebates “won’t be the simple, add-on, ‘rack-and-stack’” anymore, said Vecchiolli. As pricing transparency increases with drugmakers setting the trajectory of a launch, “It’s going to come down to, ‘Are you competitive or not?’ And if you’re not, and you’re not being chosen for coverage…that’s going to force pharma to look at all of their processes to see where they can cut costs.”
3. Symbolic starting point
The negotiations, along with Medicare’s new inflationary rule, could potentially be even more impactful. Industry sources said the changes represent a symbolic starting point — a breaching of the gates, if you will — that could have broader consequences.
“The larger question is whether a precedent has now been set that will lead to Medicare negotiation on a broader range of prescription drugs or extend the negotiated prices to the much larger commercial insurance market,” Bigelow wrote.
Negotiations on prices or on price hikes wouldn’t be a new phenomenon in the private market. In fact, they have been going on for years between drugmakers and payers.
Commercial payers that manage Part D plans, for instance, may tell a pharma company that has a very large Part D presence, “‘Look, for these Part D drugs, I can’t support your price increases,’” Mycka explained. “‘So when you write a contract with me, you’re either going to give me price protection or we’re not going to have a contract.’”
As things currently stand, the drug pricing reforms included in the legislation are limited to Medicare and exclude the millions of people on private insurance. Some foresee this leading to a two-tier pricing system for certain drugs, in which employers and enrollees in commercial plans pay significantly higher rates than the government.
But that bifurcation could ease somewhat. “Over time, you’re going to see price parity,” Vecchiolli predicted. “This is just the beginning.”
Mycka echoed that sentiment. “Looking back, what we generally see in how the U.S. market evolves is that when CMS [the Centers for Medicare and Medicaid Services] sets a standard, it fairly quickly becomes the standard for commercial,” he explained.
Mycka cited the example of Medicare Part D introducing co-insurance for drugs whose cost exceeded a certain threshold. It wasn’t long before commercial payers started imposing co-insurance on patients, too, he recalled.
“The seal has been broken,” said Mycka. “So unless somebody’s going to figure out how they put the genie back in the bottle, it’s going to proceed from here. And it’s not going to offer a whole lot of new opportunity for different ways to play price on the upside.”
That said, with Republicans forecast to retake control of the House after the midterms, Bigelow noted that “it seems unlikely that the scope of drug price negotiations will be widened in the near future.”
In the meantime, the number of drugs on the potential price-control list is cumulative, ramping up from 10 in 2026 to 60 by 2029. In 2026 and 2027, Medicare will only negotiate prices for drugs in Part D. Starting in 2028, it also impacts those in Part B, which are physician-administered.
And don’t expect Democrats’ grand effort to bring prices of a drug in line with its value to society.
“I don’t think there’s a whole lot of thought that’s gone into it in those terms. There’s just been thought as far as, ‘How do we bring price down?’” Mycka said.