While Congress has been grabbing the headlines by holding numerous hearings and introducing various legislative proposals aimed at lowering drug prices, the Trump Administration has introduced some consumer-friendly changes to Medicare that should change the way drugs are priced for seniors and encourage the use of generics and biosimilars.  First, the Centers for Medicare & Medicaid Services (“CMS”) proposes to change how insurance plans and PBMs conduct drug utilization management and structure drug formularies.  Second, the U.S. Department of Health and Human Services (“HHS”) proposes to eliminate the rebates that pharmacy benefit managers (“PBMs”) receive from drug manufacturers and to encourage that any rebates go directly to seniors at the point of sale.

These significant reforms are necessary as the stakes are high.  Since 2006, Medicare Part D spending has more than doubled to roughly $100 billion per year in 2017, and it is expected to climb as a growing and aging population of baby boomers becomes Medicare eligible.  Today, despite making up a modest proportion of Part D prescriptions, brand drugs account for some 84% of total Part D spending.  Generics, meanwhile, which make up most of the Part D prescriptions, account for only 16% of the total spending and saved the Part D program approximately $82 billion in 2017.

Those savings, however, could have been higher.  The formulary construction and contracting practices of both PBMs and Part D plans have cost seniors billions of dollars.  Part D plans have a lot of flexibility to design drug formularies and tier structure.  Historically, generics were placed in lower generic tiers and brands were placed in higher brand tiers.  This meant that seniors’ copays for generics were less than those for branded drugs so their out-of-pocket costs were lower when they purchased generic drugs.  Over time, Part D plans started to place generics in higher brand tiers.  And, in 2016, CMS announced a change to the formulary structure that explicitly allowed Part D plans to create a non-preferred tier, with higher copays, that could include both brands and generics.

The CMS change emboldened Part D plans to place generics and brands in the higher tier.  As a result, seniors have been faced with higher “branded” copays and out-of-pocket costs for generic drugs.  Indeed, recent studies from Avalere estimate that since 2015, seniors have paid nearly $22 billion in additional out-of-pocket costs for their prescription drugs, and seniors are paying approximately $1,000 more in out-of-pocket costs per year than they should be.

The change to formulary structure is costly enough, but matters become worse when PBM and plan incentives are considered.  Because of misaligned incentives that exist in the drug supply chain, PBMs and Part D plans seek out rebates based off escalating list prices of brand drugs.  Instead of offering seniors the best quality medicines at affordable prices, they are incentivized to implement plans designed to steer seniors from lower cost generics to branded drugs by comingling them on the same drug formulary tier.

The Administration’s proposal (1) to reverse CMS’s Part D formulary guidelines that allowed the practice of comingling generics on brand tiers and (2) to require plans to automatically include generic and biosimilar medicines on generic formulary tiers immediately after launch is a great first step in lowering drug prices for seniors.  According to HHS, besides raising seniors’ out-of-pocket costs, in 2017, this practice led to the federal government unnecessarily spending $9 billion on brand-name drugs that have a generic alternative.  HHS claims that if these prescriptions were dispensed as generics, the Medicare program would have saved $3 billion.  Moreover, implementing the current CMS proposal is estimated to save seniors approximately $4 billion in out-of-pocket costs per year.

The Administration’s proposal to eliminate rebates is also critical to lowering the cost of drugs for seniors.  The PBM market is not competitive: it lacks transparency and choice, while conflicts of interest abound.  Perversely, rebates create an incentive for PBMs to actually support higher list prices for brand drugs and sales of brand drugs over lower cost generics, which often result in higher copays for seniors.  It has been estimated that rebates cost seniors up to 30% more for their drugs.  Significantly, rebates have more than doubled in the last five years Indeed, rebates have more than doubled in the last five years and in 2018, pharmaceutical manufacturers paid $166 billion in rebates and price concessions to PBMs, insurers and the supply chain.  The PBMs pocket some of the rebates and pass some of the discounts to the Part D plans.  Seniors, who are purchasing drugs with high copays, though, do not see any significant benefits from the discounts so encouraging that discounts actually be passed on to them at the pharmacy counter is another major step in the right direction.

Implementing both of the Administration’s proposals is vital to the current and long-term success of the Medicare Part D program as they will have the effect of lowering Part D prices to seniors and the federal government.  They will also increase utilization of less expensive generics and biosimilars.  Medicare has been largely successful at moderating cost growth where there is generic competition, so regulations that make generics and biosimilars more accessible is critical to ensuring that patients have access to the therapies they need at lower out-of-pocket costs.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Generic Prices are Down, But Is that a Good Thing?

The short term effects appear good for the consumer, but the longer term effects could result in higher prices and drug shortages.  Today, 90% of U.S. prescriptions are for generic drugs not branded drugs, but in 2017, generics made up only 13% of all prescription spending.  Over the past several years, branded drug prices have been going up while generic drug prices have been going down.  Prices are so low that some generics are deciding to exit, stop producing and marketing certain drugs that are no longer profitable. If they exit, where will consumers get basic antibiotics and drugs that are no longer sold by the branded firms?

Powerful Buying Groups Are Squeezing the Generic Industry

Buyer muscle has become more visible in the generic pharmaceutical industry in the past five years as three buying groups control 90% of all generic prescription drug purchases.  From an antitrust perspective, there is usually nothing wrong when buying groups squeeze suppliers for lower prices. Indeed, hard bargaining by profit-minded buying groups can help drive down prices for consumers. But, under the antitrust laws, if dominant buying groups use their clout to distort the market and push prices to a level where the generic drug manufacturers can no longer profitably produce certain drugs, are forced to exit the market, or reduce output significantly, the antitrust authorities could take action to protect consumers.

Today, three buying groups include the top three wholesalers, top three pharmacy benefit managers (“PBMs”), 3 of 5 top insurers and the top five pharmacies.  ClarusOne Sourcing Services include McKesson, CVS Caremark, and Walmart. Walgreens Boots Alliance Development includes Walgreens, Express Scripts, ABC, and Cigna.  Red Oak Sourcing includes CVS, United, Aetna, Optum, and Cardinal.

Buying groups are typically used to help small businesses gain some bargaining leverage, but, that is not what is going on with these three buying groups. Here, the buying groups are populated with some of the most powerful firms in the United States.  Each on its own certainly has enough buying power to push prices down.  Combined, they may have too much buying power.  If prices are pushed down too low, generics may be forced to stop producing certain drugs and launching other drugs that are critical to patients and consumers.

Pricing Pressure Leads to Tough Choices for Generics

Because the generic drug industry is under pressure, firms are making tough choices.  The costs of doing business are high as getting a generic drug to market is difficult and complex. Development, FDA compliance and litigation costs keep going up while prices have been going down.  Generic drug manufacturers are rationalizing their portfolios because certain low margin drugs are not worth making any more.  While the number of ANDAs have increased, generic pharmaceutical firms are deciding not to launch new drugs because they cannot obtain a fair return on investment.  Generic firms are discontinuing drugs, closing down facilities, and reducing their work forces because profitability is going down. Inevitably, this will result in shortages of certain drugs that are important for consumers meaning that not only may prices go up in the long term but certain drugs may no longer be available.

Antitrust Enforcement May Be Necessary

The goal of the antitrust laws is to protect consumers.  The antitrust agencies need to take notice of how buying groups may be exercising monopsony power in the purchase of prescription drugs. There is certainly a tension as the goal is lower prices for consumers.  But, when there is evidence of exits and a reduction in output, the agencies may want to explore whether the generic industry is healthy.  Investigations into buying power is likely warranted.  Without any action, the situation will become worse and consumers will either lose access to critically important prescription drugs or face higher prices as choices will become more limited.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com