Making Medicines Affordable A National Imperative (2018) / Chapter Skim
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2 Complexity in Action
2 Complexity in Action
Pages 31-72
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From page 31... ...
As a result, the traditional process where consumers directly search for products has to a considerable degree been replaced by insurance companies that assess benefits and costs of drugs and steer patients' choices using insurance plan design. In contrast, the safety, efficacy, production, and distribution of prescription drugs -- although not their pricing -- are all highly regulated in the United States.
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From page 32... ...
Historically, though, a certain amount of basic research has led to opportunities to develop new medications, at which point the applied research and development efforts commonly shift from the university or research institute setting to corporations, the latter of which bring the skills and resources necessary to develop, produce, and market prescription drugs. Almost all of these corporations operate on a for-profit basis and depend on the free market for the capital that makes them viable as developers and manufacturers of the drugs sought by patients.
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From page 33... ...
Each step of the biopharmaceutical research and development process has a high failure rate even before a drug gets to the point where it is ready for regulatory review. As a result, the returns on investment for successful drug products may appear to be abnormally high, since the average expected return, from the manufacturer's point of view, must also compensate for many failures.
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From page 34... ...
patent law into general alignment with these international standards. In biopharmaceutical products, a single item often involves many patents, ranging from the chemical entity itself to the forms of delivery and sometimes even the packaging.
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From page 35... ...
In recent years, there have been a number of efforts to do so through such steps as making otherwise proprietary clinical data, especially on failed drug candidates, publicly available to all researchers. This report acknowledges that reducing IND failure rate is critical in the drug development process; however, this topic could not be considered in detail amid the competing demands of other topics presented in the study scope.
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From page 36... ...
These data play a major role in ensuring continued drug safety, sometimes revealing adverse effects that occur too rarely to have been detected even in the large phase III trials. Per the Prescription Drug User Fee Act, all these costs are
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From page 37... ...
. It generally takes less time to approve generics because of the data previously generated for the comparable branded drugs and also less time for those products that meet the criteria of the Orphan Drug Act.
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From page 38... ...
Litigation by generic firms against branded manufacturers can help to counteract evergreening, as one analysis found that weaker patents are more likely to draw challenges from generic manufacturers (Hemphill and Sampat, 2012)
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From page 39... ...
Given the uncertainty of litigation and the likelihood that a patent holder will lose its protection on a relatively weak patent, it is often mutually advantageous to the generic firm and the firm owning the patent to enter into a pay-for-delay agreement. Specifically, the firms can settle on a payment to cover the 180-day period that exceeds the amount the generic manufacturer might have earned if it were participating in the market but less than what the firm with the patent would have lost due to generic entry.
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From page 40... ...
, but the Federal Trade Commission (FTC) has expressed concern about "the possibility that procedures intended to ensure the safe distribution of certain prescription drugs may be exploited by brand drug companies to thwart generic competition" (FTC, 2014a, p.
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From page 41... ...
These residual claimants bear the greatest financial risk and in a typical financial market, demand the greatest returns on their investments. Producer Product $X3 Wholesaler Product $X2 Retailer Product $X1 Consumer $X1 > $X > $X 2 3 FIGURE 2-2 A typical market in a free enterprise economy, showing the flow of products and revenues across the participants.
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From page 42... ...
to visit a clinician or undergo a procedure or buy prescription drugs, they become more likely to do those things. Figure 2-3 illustrates how these considerations alter the flow of services.6 Individuals, often through their employer, purchase or are provided with health insurance policies for themselves and their families, usually paying part of the annual premium (see Box 2-1 for a note on the role of employers in the control of drug prices)
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From page 43... ...
First, individuals cannot simply choose to buy medications, but rather require a prescription from a clinician. Without such a prescription, pharmacists are not permitted to dispense prescription drugs.7 7 The same "permission" is required for some types of medical care (most obviously hos pitalization)
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From page 44... ...
The "manufacturer" in Figure 2-4 includes producers of branded and generic products. PBMs serve as intermediaries between both health insurance plans and retail pharmacies and the manufacturers of prescription drugs.
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From page 45... ...
The other option for such patients is to go directly to a retail pharmacy and offer the copayment specified in the insurance plan. In this latter pathway, the retail pharmacy has previously purchased the drug from a wholesale distributor, and the PBM compensates the retail pharmacy (per the contract between the PBM and the pharmacy)
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From page 46... ...
Rebate Premium Prescription Clinician Patient Health Plan Reimbursement Requests for Direct to Premium Rebate Prescription Consumer Advertising Employer Advertising in Medical Journals, etc. FIGURE 2-5 A broader representation of the current private-sector retail market for prescription drugs.
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From page 47... ...
. In contrast, 57 percent of total Medicare spending on prescription drugs in 2013 was on outpatient prescription drugs covered under Part D (both standalone drug plans and Medicare Advantage drug plans)
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From page 48... ...
Formularies are used to steer patients and prescribing clinicians toward generic substitutes, biosimilars, drugs with similar therapeutic efficacy for the same disease, or other therapeutic options. Formularies contribute to payers' bargaining power by enabling them to restrict the volume of prescriptions in response to higher prices.
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From page 49... ...
But without such formulary controls within pharmacy benefit plans, insurance premiums would rise, potentially also leading to lower enrollment and similar undesired health consequences. The tiered price mechanism can be used by insurers to negotiate better prices for branded drugs (Duggan and Scott Morton, 2010)
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From page 50... ...
drugs in Part D upon its introduction, and concluded that, on net, the extended coverage and strengthened bargaining power of the buyers (collectively, through the insurance plans) caused a reduction in many prescription drug prices (Duggan and Scott-Morton, 2010)
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From page 51... ...
In the world of prescription drug insurance, a commonly used measure of scale would be "covered lives." However, this is a far from perfect measure of drug purchasing scale, because the rate of using prescription drugs varies enormously by age, among other factors. People older than age 65 spend approximately three times the amount per year on prescription drugs as adults younger than age 65, a point not captured by the "covered lives" metric.
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From page 52... ...
These non-retail drugs -- which may well constitute more than half of all prescription drug spending -- come through channels that have relatively weak bargaining power, and generally lie outside the domain of PBMs, entities with the strongest bargaining power currently. Enabling HHS to negotiate drug prices for all Medicare enrollees would increase bargaining power versus drug manufacturers if HHS also had effective formulary control.
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From page 53... ...
Price negotiations in biopharmaceutical markets exhibit a number of factors that differentiate them from other kinds of markets: most notably the price-setting power arising from government-granted exclusivity and the political challenges buyers face in limiting access to prescription drugs, some of which are deemed as "lifesaving." These factors are exacerbated in the United States by the way formularies are designed, the relative fragmentation of private payers, and the diffusion of governmental purchasing power, not least through the legal restriction on CMS negotiating prices. THE "VALUE" OF DRUGS One common proposal to moderate the cost of prescription medicines has been to adopt the so-called "value-based pricing" for drugs, although the meaning of the term "value" varies widely among the participants in the biopharmaceutical sector.
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From page 54... ...
. Value assessments often involve cost-effectiveness analysis, in which the ratio of the added health gains from a medical intervention to the added costs of treatment is calculated, and a pre-established cutoff value is used to determine which interventions are worthy of support (Frakt, 2016; Neumann et al., 2016)
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. Commercial insurers, however, do not face this legal restriction.
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American Society of Clinical Clinical benefit A therapy can be awarded up to 130 points. Clinical benefit (≤80 points)
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From page 57... ...
Stakeholders judge acceptability on the basis of Evidence consistency their overall impression of the listed factors. Affordability European Society for Medical Toxicity The framework assesses the clinical benefit for cancer drugs using a Oncology Magnitude of Clinical Quality of life structured approach to derive a relative ranking of the magnitude of Benefit Scale (ESMO-MCBS)
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From page 58... ...
Prescription drug manufacturers
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From page 59... ...
. Drug manufacturers have the ability to use a portion of their sales revenue to stimulate demand by creating incentives for various participants in the biopharmaceutical supply chain and beyond.
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From page 60... ...
argue that revealing their transactions would actually increase the drug prices paid by patients. Arguments for and Against Transparency The biopharmaceutical sector is rife with divergent, strongly held views regarding the concept of transparency.11 As noted earlier, various participants in the prescription drugs pricing debate offer divergent statements about who is responsible for high and steadily rising drug prices, but with little to no relevant data to support their claims.
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From page 61... ...
These data may provide clarity about the interactions -- specifically the flow of funds and products -- among the intermediaries of the biopharmaceutical supply chain, or they may point toward necessary regulation for additional data gathering from each participant in the biopharmaceutical supply chain. This proposed approach would involve a sequential process of first gathering information at the two ends of the supply chain -- manufacturers at one end and consumer payments at the other -- with the
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From page 62... ...
understanding that more refined data may be needed later to completely understand how the biopharmaceutical supply chain operates. Experience from other sectors would suggest that transparency on supply chain costs tends to reduce these intermediary costs (see Box 2-3)
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From page 63... ...
While some of these companies in the biopharmaceutical sector did not have bond ratings (some companies do not issue corporate bonds) , of those with a rating provided by Morningstar, which accounted for 86 percent of the market capitalization considered, the bond ratings were all A– or higher, with one AAA rating (Johnson & Johnson)
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However, a concern about the future profitability of biopharmaceutical companies emerges from a recent analysis from Deloitte LLP (2016) , which reported a steadily declining return on investment (ROI)
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From page 65... ...
With these considerations in mind -- and emphasizing that the committee does not view these data as conclusive -- the analysis does shed light on the profitability of various elements of the biopharmaceutical supply chain. The key result is presented in Figure 2-7, which shows that $41 out of every $100 spent on prescription drugs is retained in the supply chain, including wholesalers, retailers, PBMs, and insurance companies (Sood et al., 2017)
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From page 66... ...
. The Sood analysis also estimated gross and net margins for each sector, segmented by branded drug, generic drug, and the total market, and found the following: net margins resulted: 28.1 percent for branded drug manufacturers, 18.2 percent for generic manufacturers, and 26.3 percent overall.
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From page 67... ...
Second, its analysis began with total sales at gross list prices, whereas Sood and colleagues assessed the flow of funds only through retail sales involving commercial insurance plans. Sood and colleagues estimated that the manufacturer retained 58 percent of sales dollars, using as a base the actual amounts spent by consumers on retail sales (e.g., in pharmacies and other retail distribution outlets)
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From page 68... ...
* 469.0 100 FIGURE 2-9 Share of 2015 net drug expenditures realized by manufacturers and intermediaries in the biopharmaceutical supply chain.
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From page 69... ...
The study's description of the countries chosen for the analysis stated: Brazil: Upper-middle income country with large retail out-of-pocket market and a major market in the region. India: Lower-middle income country with a large out-of-pocket market but undergoing change and implementing mechanisms to control the build-up of drug prices.
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From page 70... ...
Thus, public programs such as Medicaid, veterans' benefits, TRICARE, and the 340B program, among others, are excluded, along with sales to clinicians who purchase and then directly administer prescription drugs.15 FINDINGS Based on the material presented in this chapter, the following findings are offered: 15 This same omission accounts for the difference between estimates that prescription drugs account for 10 percent of U.S. health care costs versus other estimates of 16 percent.
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From page 71... ...
would allow a fuller understanding of how participants in the biopharmaceutical supply chain operate and how they influence final prescription drug prices to the consumer. This would improve market performance and provide the basis for future policy changes as needed.
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From page 72... ...
Finding 2-14: Although the available data are not fully comparable, they indicate that intermediaries in the U.S. biopharmaceutical supply chain extract a higher fraction of total prescription drug spending than do the entities performing similar functions in other countries.
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