The Trump Drug Pricing Plan: Short Term Reprieve, Long Term Disruption

Last Friday, the U.S. Department of Health & Human Services (HHS) released American Patients First, a report billed as “The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs.” This administration’s blueprint offers a thoughtful diagnosis of U.S. drug pricing along with the unintended consequences and warped incentives of our drug channel system.

The report also proposes a very long list of more than 50 regulatory and legislative fixes. It therefore doesn’t translate to quick action or simple sound bites. Many people are discounting the plan as no big deal and therefore underestimating how radically the system could change.

Below, I review some of its more radical notions—and highlight why the document's ideas pose substantial long-term risks for drug channel companies and their profit models. I also examine proposed changes for modernizing the Medicare Part D program and discuss two popular but ineffective ideas that were omitted from the document. While I don’t cover it in this article, I suspect changes to the Medicare Part B program may arrive soon.

The blueprint avoids facile diagnoses and simplistic solutions. It therefore looked on Friday like a weak political move. However, I expect last Friday’s announcement will mark the start of many coming changes.

Here are my three key observations on the Trump administration’s plans:

1. Despite few short-term actions, drug channel participants still face systemic risks of significant change to their profit models.

Drug channel companies and their investors were relieved that the administration didn’t impose harsh and immediate changes to the system. I think it would be unwise to assume that the danger has passed.

The Trump administration includes three members who have deep knowledge of the pharmaceutical industry: HHS Secretary Alex Azar, FDA Commissioner Scott Gottlieb, and CMS Administrator Seema Verma.

It’s no surprise that Section II of the blueprint (“What’s the Problem?”) contains a sound diagnosis of the warped incentives and inefficiencies within the U.S. drug channel. I recommend that you read this section. It covers such familiar topics as the generic drug plateau, the specialty boom, the increase in cost-shifting to patients, and the gross-to-net bubble.

Section II also lays the intellectual underpinning for the most provocative and futuristic ideas identified in Section V. Some of the items related directly to topics discussed here on Drug Channels include:

• Requiring “fiduciary duty” for pharmacy benefit managers (page 33)
• Revisiting the safe harbor for drug rebates under the Anti-Kickback statute (pages 33 to 34)
• Moving some Medicare Part B drugs to Part D (page 30)
• Reforming the 340B Drug Discount Program (page 35 to 37)
• Preventing manufacturers from using limited distribution models to slow biosimilar development (pages 26 to 27)
• Value-based agreements and indicated-based pricing in Medicare (page 29)
• The impact of rebates and list price inflation on Average Manufacturer Price (AMP) (pages 34 and 35)
• Changing regulations regarding copay discount cards (page 35)

These are framed as “opportunities for public comment,” thereby making them part of the industry conversation. These questions were posed yesterday in a formal Request For Information.

BTW, your friendly neighborhood blogger was especially flattered that the full document contained a chart adapted from a DCI economic report:

[Click to Enlarge]

The report’s endnote 7 also links to our 2017 analysis of the 340B Drug Pricing Program.

2. The blueprint contains valuable ideas for modernizing the Medicare Part D program. Some may be impossible to implement with legislation, so look for regulatory fixes.

There are deep and profound design problems with the structure of the Medicare Part D program. The Centers for Medicare & Medicaid Services (CMS), under both the Obama and Trump administrations, has criticized the warped incentives and unintended consequences now embedded within Medicare Part D’s design. I review the issues in the following Drug Channels articles:

• DIR Fees, Rebates, Pharmacy Economics, and the Future of Medicare Part D

• Will CMS Pop the Gross-to-Net Bubble in Medicare Part D With Point-of-Sale Rebates?

Today’s problem with Part D include: 1) a small percentage of Part D beneficiaries face financially ruinous out-of-pocket costs, 2) Part D plans benefit from high list prices combined with high rebates, 3) the government’s liabilities are growing while plan liabilities decline, and 4) Part D plans can profit by underforecasting Direct and Indirect Remuneration (DIR) amounts.

To address these issues, the blueprint outlines multiple Part D reforms. Some elements originally appeared in the president’s 2019 budget proposal. They include:

• Requiring Part D plans to apply “a substantial portion of rebates” at the point of sale
• Excluding manufacturer discounts from the calculation of beneficiary out-of-pocket costs
• Establishing an out-of-pocket maximum in the Medicare Part D catastrophic phase
• Permitting faster midyear substitution of generic drugs onto formularies
• Changing Part D plan formulary standards to require a minimum of one drug per category or class, not two
• Eliminating cost sharing on generic drugs for low-income beneficiaries

These are sensible and sober ideas. That’s why, in today’s toxic political environment, I presume it will be impossible to implement any of them with legislation.

3. The blueprint omitted the well-known but wrong fixes of importation and direct negotiations.

H.L. Mencken once said: “There is always a well-known solution to every human problem—neat, plausible, and wrong.”

The canards of “importation” and “direct negotiations” fall squarely into the category of simple solutions that won’t work. The plan wisely avoided these fashionable tactics, so the report was widely dismissed by the president’s political opponents.

The premise of direct negotiations ignores today’s drug spending reality: Utilization—not pricing—is the more significant driver of drug spending.

Consider the double-digit increases in specialty drug spending. Almost two-thirds of specialty drug spending growth can be attributed to the growth in the number of people being treated and the number of prescriptions being dispensed. (See page 8 of Specialty Pharmacy Industry Outlook: What’s Happened & What’s Ahead.) I’ll be writing more about this topic in an upcoming article.)

Can a government program really get tough on utilization? In the February 2017 Drug Channels article Express Scripts Reveals What Really Drives Drug Spending—And Why the Government May Do No Better, I wrote:

“A hot topic is the possibility that Medicare could replace PBMs and begin direct negotiations with manufacturers. But any savings will need to come from much more aggressive restrictions than those used by Part D plans now. Would Medicare be willing to block formulary access to all but one therapy in a class? Overturn the Any Willing Provider rules and mandate the use of limited and exclusive pharmacy networks? Establish highly aggressive prior authorization requirements?”

Importation also makes no logical economic or public safety sense. The theoretical financial benefits are minuscule, so the diversion dangers from this bill would never justify the risk. On Monday, Secretary Azar nicely summarized the problems with importation:

“Many people may be familiar with proposals to give our seniors access to cheaper drugs by importing drugs from other countries, such as Canada. This, too, is a gimmick. It has been assessed multiple times by the Congressional Budget Office, and CBO has said it would have no meaningful effect.

One of the main reasons is that Canada’s drug market is simply too small to bring down prices here. They are a lovely neighbor to the north, but they’re a small one. Canada simply doesn’t have enough drugs to sell them to us for less money, and drug companies won’t sell Canada or Europe more just to have them imported here.

On top of that, the last four FDA commissioners have said there is no effective way to ensure drugs coming from Canada really are coming from Canada, rather than being routed from, say, a counterfeit factory in China. The United States has the safest regulatory system in the world. The last thing we need is open borders for unsafe drugs in search of savings that cannot be safely achieved.”

I wrote a lot about importation myths in the early days of Drug Channels. Click here to read these older articles.

A FINAL THOUGHT

In my presentation at Asembia’s 2018 Specialty Pharmacy Summit, I concluded:

“Politicians, regulators, and the media will scrutinize the specialty channel’s impact on ‘drug prices’ and consumers’ out-of-pocket spending, though the system’s complexity will create deep confusion about appropriate solutions.”

Our complex drug channel system cannot be fixed with simplistic solutions. Even understanding the administration’s proposals requires deep background on the current realities.

I’m not naïve enough to believe that the administration’s blueprint will radically alter anything tomorrow. I am hopeful, however, that we can at least begin to fix the true issues underlying our complicated industry.