The White House on Drug Pricing: “There’s a press event Friday, give me every idea you’ve got”

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Richard Evans / Scott Hinds

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May 15, 2018

The White House on Drug Pricing: “There’s a press event Friday, give me every idea you’ve got”

  • The White House’s launch of its drug pricing initiative lacks form and momentum, but it may be a mistake to conclude that the effort lacks substance or commitment
  • The “American Patients First” blueprint document is a disorganized and poorly edited scattershot of some 50 pricing policy ideas ranging from impactful (restrict use of rebates) to Quixotic (get other nations to pay higher prices). Of these 50, we find 22 that are both feasible, and relevant to brand prices. Of these, we see six as having major potential impacts (co-pay cards for HHS beneficiaries, restrictions on rebates, shifting of Part B drugs into Part D plans, indication-based pricing, removal of the 100% limit on Medicaid rebates; and, development of fiduciary standards for intermediaries such as PBMs)
  • Our impression of the principals behind the administration’s ideas on drug pricing, specifically HHS Secretary Azar and FDA Commissioner Gottlieb, is entirely separate from our impression of Friday’s press event and the blueprint document. Both understand drug pricing well, and we believe that both genuinely intend to take constructive action on drug pricing – it’s just not at all clear from Friday’s event, or the blueprint document, where the priorities lie


The Trump administration on Friday announced a broad set of policy initiatives targeting prescription drug affordability. The administration released the “American Patients First” blueprint document, available here. Secretary Azar’s comments to reporters in the White House press briefing room are useful for clarification and emphasis, and can be viewed here

The WH blueprint contains some 50 actions. The proposal of 50 largely disparate policy options for drug pricing reflects the complexity of the problem, but also betrays that the administration’s efforts with respect to drug pricing are still at an early stage. And, the document reads like a mash-up of policy memos written by multiple authors to meet a press event deadline, rather than a tight set of arguments and proposals reflecting a well-organized policy initiative – locating each policy proposal is like an Easter egg hunt in tall grass. Despite this, we believe that the principals behind many of the ideas, specifically HHS Secretary Azar and FDA Commissioner Gottlieb, are very much in earnest – and that it would be a mistake to ignore the administration’s drug pricing efforts entirely

That makes our immediate goal the identification of those policy ideas that are both feasible, and relevant to brand pricing. The first set of policy ideas to get caught in this filter deal with international pricing; we see the political importance of acknowledging US v. OECD drug price disparities, but do not see the proposed policy actions as realistic, and so ignore them here

On net, we identified 22 feasible and brand-pricing relevant policies mentioned in the document (Exhibit 1). The document also makes at least six causal assertions linking certain market factors with higher drug costs, and while the document may lack direct ties between these assertions and specific policy proposals, it seems reasonable to infer that policy initiatives targeting these causal assertions are an eventual possibility (Exhibit 2). Among the many questions proposed for public comment, the blueprint asks three questions which also point to presumptive causal links, and/or would otherwise seem to foreshadow potential policy initiatives (Exhibit 2, again)

Exhibit 1 categorizes policy initiatives using the blueprint’s four broad strategic categories of ‘Improve Competition’, ‘Better Negotiation’, ‘Incentivize Lower Prices’, and ‘Lower Out-of-Pocket Costs’; designates whether each initiative can be passed under existing executive / regulatory rule-making authority or requires new legislation; and further designates timing (using the blueprint’s language) as ‘Immediate Action’ or ‘Further Opportunity’. Where the blueprint is silent on authority and timing, we use our best judgement. Page references for each policy initiative are provided, and refer to page numbers in the blueprint document

Our best estimation is that only 5 of the 22 viable, brand-relevant provisions fall into the category of ‘Immediate Action’, all of which can be effected with existing executive / regulatory authority. The remaining 17 initiatives fall into the ‘Further Opportunity’ timing category; of these 17 we estimate that only 5 can be effected without legislation. Of the 22 provisions, we view six (shaded in Exhibit 1) as having potentially major impacts. The following paragraphs discuss each of these provisions in turn

Co-pay cards for Medicaid / Medicare

HHS does not allow Medicaid and Medicare beneficiaries to use manufacturer-sponsored co-pay cards; one of the questions posed in the blueprint is the effect allowing these beneficiaries to use co-pay cards might have on drug prices. Our view is that the availability of co-pay cards in the short-term limits patients’ out-of-pocket costs and so improves consumption, but in the long-term enables formulary managers to raise patients’ out-of-pocket exposures, thus shifting costs to manufacturers[1]. The only potential benefit to manufacturers is that the existence of co-pay cards gives them an alternative to paying the rebates required to get products onto preferred formulary tiers. We also note that the emergence of co-pay card accumulators threatens the relevance of co-pay cards[2], and that the impact of accumulators would have to be restricted if co-pay cards were to have any utility for HHS sponsored beneficiaries. Of the six pricing proposals that we categorize as having a potentially major impact, this is the only one we believe can be effected without new legislation

Restrictions on rebates

The principals behind the administration’s stance on drug pricing recognize that relying on a rebate-based approach to drug pricing causes at least 3 potential downsides: 1) patients’ out-of-pocket costs, when based on list rather than net price, become disconnected from actual drug costs; 2) because intermediaries such as PBMs may capture a share of rebates, maximizing rebates competes with lowering net prices as a driver of formulary decisions; and 3) in order to ensure their products are as attractive as possible to intermediaries, manufacturers may be incentivized to raise list prices in an effort to maximize rebates’ dollar values. Eliminating rebates in Medicaid and/or Medicare would limit the first two costs for patients in these programs; however, unless rebates also were eliminated in the commercial setting (which does not appear to be in the scope of the proposal), manufacturer incentives to raise list prices would continue

Shift of drugs from Part B to Part D

Drugs administered to Medicare beneficiaries by caregivers in an institutional or clinical setting tend to fall under Medicare Part B, rather than Part D (prescription drug coverage). Part D drugs are subject to mandatory discounting, and their use can be limited by formulary design. Part B drugs are not subject to mandatory discounts but are subject to formulary restrictions on an institution by institution basis. Shifting coverage of certain drugs from Part B to Part D would at a minimum subject these drugs to the mandatory discounts that apply to Part D. Whether Part D plans could extract additional concessions by subjecting these drugs to Part D formularies is an open question. As a practical matter, institutional (especially hospital) pharmacists control the drugs used in their institutions – with an iron hand. And, at least in our experience the incentives applied to these pharmacists tend to reflect a more ideal clinical / economic balance than those applied to Part D formularies. Hospital formularies tend to reflect rigorous clinical selection, and discounts received by hospitals are paid through the chargeback system, rather than via rebates – which removes the distorting effects of rebates mentioned above. Giving product selection control over to Part D removes the hospital pharmacist from the decision – for no apparent reason; and, unless rebates are eliminated from Part D, introduces their distorting effects into Part B. Our sense here is that the proposal to shift Part B drugs into Part D may do nothing more than subject Part B drugs to mandatory discounts, at the cost of disintermediating hospital pharmacists, and at the further cost of complicating Part B with rebates. It would be much cleaner to simply subject Part B drugs to mandatory discounts

Indication-based pricing

Indication-based pricing would allow HHS to pay different amounts for the same drug when used in different indications. This first requires establishing a means by which the indication-specific values of drugs are found, which implies creating something along the lines of the UK’s National Institutes for Clinical Excellence (NICE). Ignoring the question of whether this is good policy, as a practical matter the politics of determining drug price by indication are a briar patch – so while we see this as a proposal with transformative implications, we believe the odds of it happening are remote. In fact, including indication-specific pricing in a broader drug pricing initiative might reasonably be expected to compromise the entire agenda

Elimination of the 100% limit on Medicaid rebates

Brands pay at least two rebates on sales to Medicaid beneficiaries: either a 23.1% rebate, or a rebate sufficient to give Medicaid the best available net price; and, any additional rebate required to remove the effect of real list price inflation from Medicaid’s net price. The combined value of these rebates currently is limited to 100% of the brand’s list price; the blueprint proposes removing this limit. The effect would be to limit list price inflation on products that have commercial discounts well above the 23.1% base Medicaid rebate, and/or that have increased list price substantially faster than inflation. We suspect the impact would be significant, but would fall on a relatively narrow subset of brands – mainly those that are sufficiently old: 1) to be in categories with multiple entrants and thus high average commercial rebate percentages; and 2) to have accumulated real pricing gains over multiple years

Require fiduciary standards / behaviors for PBMs

As we noted under ‘Restrictions on rebates’, we believe the principals behind the administration’s views on drug pricing see rebates as distorting, in part because the share of rebates captured by intermediaries such as PBMs may cause them to pursue larger rebates at the expense of net pricing and/or clinical considerations. One way to limit the effect of rebates is to eliminate them from Medicaid and Medicare, which is one of the policy options proposed in the blueprint. An alternative path would be to subject intermediaries such as PBMs to the same types of fiduciary standards imposed on other intermediaries, such as asset managers. Removing the safe harbor for rebates in anti-kickback legislation is a much easier legislative lift than passing de novo, clean-sheet legislation subjecting PBMs to fiduciary standards – so for practical reasons we see this policy proposal as a fall back that is only worth the effort if a more realistic effort to eliminate rebates from Medicaid and Medicare fails to align incentives. Importantly, eliminating rebates from Medicaid and Medicare would leave rebates as a viable mechanism for commercially-insured populations, where de novo legislation to require PBMs to follow fiduciary standards arguably would affect all PBM beneficiaries

  1. See “Co-pay cards: A bottle for the drug-pricing genie?”, SSR Health LLC, August 7, 2012
  2. See “Co-Pay accumulators: Who’s most at risk; Manufacturers’ options for limiting their effect”, SSR Health LLC, April 17, 2018

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