White House Issues Report on Policy Options for Drug Pricing and Innovation

By Akia Thorpe -

February 16, 2018

The White House's Council of Economic Advisers has released a report that outlines policy options to address drug pricing while promoting innovation. The report offers proposed changes to Medicare and Medicaid and expansion of the US Food and Drug Administration’s (FDA) expedited review criteria and tools for more efficient reviews.

 “The affordability of healthcare and biopharmaceutical drugs is a top concern for Americans,” said the report, Reforming Biopharmaceutical Pricing at Home and Aboard, which was released in February 2018. “…Federal policies that affect drug pricing should satisfy two goals. First, domestic drug prices paid by Americans should be reduced. Second, the price of better health in the future should also be reduced by spurring medical innovation. This report considers policy options to simultaneously advance these two seemingly conflicting goals,” said the report.

The report further highlights that higher drug prices in the US compared to other countries results in the US paying a higher proportion of global innovation. “Global financial returns from product development drive innovation,” says the report. “But those returns are unfairly low today. This is because most foreign governments, which are the primary buyers in their respective pharmaceutical markets, force drug manufacturers to comply with pricing rules to gain market access. Through this leverage, foreign governments are able to set drug prices below those that prevail in the United States and erode the returns to innovation manufacturers might otherwise see from selling in their markets,” says the report.

The report points out that among members of the Organization for Economic Co-operation and Development (OECD), an intergovernmental economic organization with 35 member countries, mostly high-income economies, the US pays more than 70% of patented biopharmaceutical profits although the US accounts for only 34% of OECD gross domestic product at purchasing power parity. “In short, pharmaceutical innovators—and foreign governments—across the world rely on America’s patients and taxpayers to finance critical research and development,” said the report.

The report outlines policy options to address two primary goals: (1) lower domestic drug pricing and (2) reduce the price of health by raising innovation incentives for products in the future. “The first goal can be addressed by reforms that reduce overpricing by promoting competition and reforming public reimbursement policies,” the report says. “The second goal can be addressed by reforms that cut the cost and raise the rewards to innovation through domestic reforms and limiting underpricing of drugs…”

Medicaid/ Medicare reform

With respect to the goal of reducing drug pricing by reforming public reimbursement policies, the report outlines reforms to drug pricing under Medicaid, Medicare Part B physician administered drugs, and Medicare D outpatient drugs.

For Medicaid, the federal program for low-income people, the report recommends ways to mitigate potentially artificially high prices in the private sector due to the Medicaid Best Price program. Under this program, a drug manufacturer must offer state Medicaid programs the best price given to any other purchaser with a mandatory rebate of 23.1% off the list price. Medicaid programs must, in turn, cover all of the manufacturer's prescription drugs. The report points out that “if a large share of a given drug’s market is enrolled in Medicaid, a pharmaceutical firm has an incentive to inflate prices in the private sector so that it can collect higher post-rebate prices from its large Medicaid customer base…[Furthermore,] lower-income, private patient populations cannot be charged low prices as that jeopardizes the Medicaid price.”

The report says “reforms could help prevent the inflated private sector prices the program induces while at the same time allowing the government to use pricing information from the private sector to determine value.” It also recommends actions by the Center for Medicare and Medicaid Services (CMS), a federal agency, in terms of determining “best prices” and encouraging value-based contracting. “While CMS rules require that best prices be determined on a unit basis, Medicaid statutes do not. CMS could revise rules to specify how manufacturers calculate best prices determined after the sale and the patient’s recovery,” says the report. “This may encourage competition and lower prices. It would also incentivize better adherence regimens and lower the risk to the government that it pays money for something that turns out to be less effective than expected. CMS could also provide more guidance on how value-based contracts and price reporting would affect other price regulations. This would encourage drug purchasers to negotiate, thus increasing competition and lowering prices.”

With respect to Medicare, the report points out that the Medicare Part B program, through which many specialty drugs are reimbursed, drugs administered in physicians’ offices and hospital outpatient departments are reimbursed based on a 6% markup above the average sales price that manufacturers receive net of any price discounts. “As is true in any cost-plus reimbursement environment, this leads to a lack of incentive to control costs and instead an incentive to raise costs,” says the report. “The current policy mutes the incentives for doctors to prescribe cheaper drugs and therefore for manufacturers to engage in price competition.”

The report highlights several options for how Medicare could remove “…incentives for prescribing higher-priced drugs and instead provide an incentive for doctors to prescribe cheaper drugs, putting competitive pressure on manufacturers to reduce their prices.” Options for reform include:  (1) introducing physician reimbursement that is not tied to drug prices; (2) moving Medicare Part B (i.e., medical insurance) drug coverage into Medicare Part D (prescription drug coverage); and (3) changing how pricing data is reported to increase transparency.

The report highlights how those policy choices would contribute to lower pricing. “By moving Part B coverage into Part D, the 71% of Medicare beneficiaries who participate in Part D would receive prescriptions that they would fill and their physicians would administer, thereby removing any economic incentive from prescribing decisions,” said the report.

With respect to Medicare outpatient drugs, the report points to several issues that it says artificially raise prices. “The Social Security Act requires Medicare Part D plan formularies to include drugs within each category and class of covered drugs. CMS has previously interpreted the Social Security Act’s requirement to include drugs within each therapeutic category and class to mean the inclusion of at least two non-therapeutically equivalent drugs. This requirement eliminates the ability of Part D sponsors to negotiate for lower prices when there are only two drugs on the market since drug manufacturers know that CMS must cover both. The two-drug requirement leads to more spending.”

The report also describes policy options to address measures in Medicare Part D that it says provide incentives to use “high-value drugs” and that favor high-priced, high-rebate drugs. These options in the report include the following: (1) requiring plans to share drug manufacturers' discounts with patients; (2) allowing plans to manage formularies to negotiate better prices for patients; (3) lowering co-pays for generic drugs for patients; and (4) discouraging plan formulary design that speeds patients to the catastrophic coverage phase of benefit, where Medicare covers 80% of costs, and, thereby, increases overall spending.

In reference to the report’s proposed reforms designed to increase price transparency and reduce incentives for more spending, the report offers two suggestions. “First, require better and more accurate sales data from drugs that are older than six months since launch,” the report says. “This is important because drug makers have an incentive to exclude discount prices from the sales price they report since the higher the average sales price, the more they are paid. Second, for new drugs that do not have much sales data, cut the doctor’s payment. This removes the incentive of prescribing a high-priced drug when physicians write prescriptions and elevates clinical competition as a decision-making factor.”

FDA reforms: expedited review and tools for more efficient reviews

In terms of reforms by the FDA to address drug pricing while promoting innovation, the report offers two suggestions:  expanding expedited review criteria and reducing drug-development costs and time through new tools that allow sponsors to demonstrate safety and efficacy more efficiently and earlier in the process.

The report offers a policy option to expand the criteria for expedited review to include new molecular entities that are second or third in a class, or second or third for a given indication for which there are no generics. “This would serve as a new pro-competition pathway that would enhance therapeutic price competition by providing expedited entry into monopoly markets,” the report says. “To avoid imposing policies retroactively on the industry, this policy change could be phased in slowly so that current drug manufacturers of single-source drugs would retain the value of their efforts to be the first in a given therapeutic space.” The report continued to clarify the reasoning behind the proposed change by explaining several review limitations for new molecular entities. “The Breakthrough Therapy designation may no longer be available for new but similar drugs because they cannot demonstrate significant clinical improvement over the initial Breakthrough Therapy drug,” the report says. “Moreover, Accelerated Approval and Fast Track are only available to fill ‘an unmet medical need,’ which has already been met by the initial drug.”

The report also notes drug-development and FDA review costs as an issue. “Because clinical trials and FDA review are the most time- and resource-intensive steps, reforms that significantly reduce the fixed costs of entry could address these areas,” the report says. “The fixed costs of developing and bringing a drug to market are typically large compared to the small marginal costs of producing additional pills or doses. Thus, the incentive to innovate is driven by whether expected profits exceed these fixed R&D costs, and government policies have a major influence on the size of these fixed costs.”

Regarding time costs, the report calls for more progress to create a faster system other than through the FDA’s expedited review platforms, including breakthrough therapy designation, priority review, accelerated approval, and fast track designation. “While these programs have been put in place to speed up the entry for therapeutic drugs, there is still room for improvement — an average time of development and entry of new drugs of more than a decade is too long. The FDA could continue to facilitate the validation and qualification of new drug development tools that allow sponsors to demonstrate safety and efficacy more efficiently and earlier.”

In addition, the report notes that The FDA Reauthorization Act of 2017 (FDARA) is addressing generic competition matters through a certain provision. The FDARA authorizes the FDA to designate a drug as a “competitive generic therapy” upon request by an applicant when there is “inadequate generic competition” i.e., when there is no more than one approved abbreviated new drug application (ANDA) for the patented reference product (not including discontinued products). This designation allows for a 180-day exclusivity period with no additional ANDA approvals available for other applicants.

Source: Council of Economic Advisors