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Does PhRMA Have More to Fear Under Trump Than Clinton?

Does PhRMA Have More To Fear Under Trump Than Clinton?

Former President George W. Bush was famous for measuring every word he said in public for fear of spooking corporations, industries, and the economy as a whole. If the meticulous approach spawned some criticism and fodder for late-night comedians, Donald Trump’s approach appears quite the opposite (save for the late-night show antics). This past week, the President-elect sent the pharmaceutical industry’s stock prices into a nose dive when he stated at a press conference that PhRMA is “getting away with murder.” Seldom have four words ever led to a drop of $25 billion in market value of a major industry.

In this case, PhRMA is the big lobby group of largely brand drug manufacturers that have banded together to fight regulatory and pricing changes that will trim their healthy margins. In general (it can vary from year to year), PhRMA companies seem to average annual margins that can be more than double that of other industries (sometimes banks compete with PhRMA for similar profits).

In defense of free enterprise, businesses should be rewarded for investments and the risks they take. Today, the industry is faced with a number of regulatory and other obstacles, of which two of the primary ones are:

  • The introductory costs of innovator drugs are very high. The Federal Drug Administration (FDA) regulatory approval process for new drug introduction is labyrinthine and time-consuming, even with recent and slated reforms. Drug manufacturers have to recoup investments in development typically in a few short years. Patent protection starts on filing. The long approval time for drugs eats into the exclusivity period (after which generics can be launched by any manufacturer). At the same time, for every drug that makes it through the approval process, multiple drugs have failed. This investment needs to be recouped as well.
  • America shoulders a disproportionate share of the price of innovation in drug spending, not only because it is the largest developed economy but also because single-payer systems in Europe and elsewhere price fix (and ration – more on this later).

None of this changes the fact that margins are an outlier, at least when viewed through a political lense. To compound the issue, PhRMA has partaken in a number of abhorrent practices over the years that have sullied the industry’s reputation significantly.

  • Instead of staying true to its mission of innovation, some brand drug manufacturers poured resources into finding ways to create chemically similar knockoffs that gave them whole new patent periods. Then, they invested millions in marketing to convert Americans to these similar high-cost brand drugs (while no better in efficacy) even though the former drug became a low-cost generic (e.g., the Prilosec and Nexium Purple Pill debate).
  • A good share of innovation has focused on high-cost disease states, biologics, and orphan and ultra-orphan drugs. These clearly help those afflicted, but has led to drugs that cost in the tens or hundreds of thousands of dollars per year. PhRMA did so because they have had better success keeping these drugs on plan formularies (as the only medically necessary treatment) as opposed to new and truly innovative brand drugs for other common disease states.
  • It traditionally fought the introduction of cheap generics at almost every pass.
  • PhRMA has used aggressive marketing tactics (some have been curbed) that were focused squarely at consumers and doctors to push brand medications when long-standing generics are just as effective.

PhRMA has always fought tooth and nail to defeat – or at least sufficiently water down – drug pricing proposals. And they have traditionally had friends in GOP lawmakers. With Donald Trump as president, all that could change as he is not afraid to speak his mind and even put a GOP Congress on notice of his contrary views to traditional Republican positions. Using his bully pulpit, he has already embarrassed House GOP leaders into turning tail in a matter of hours on a bone-headed move when the new Congress convened earlier this month to defang the independent ethics office.

All of this points to a fundamental question: Does PhRMA have more to fear under Donald Trump than they would have under Hillary Clinton? If Hillary Clinton were to have become president, Republican traditional stands on PhRMA might have held. Along with the “getting away with murder” declaration, the soon-to-be-president has been sympathetic (during the campaign and since his election) to the concept of reducing drug costs through negotiations. Specifically, Medicare Part D has been cited.

No one doubts the potential value of drugs in controlling costs in many areas of healthcare. Taken as prescribed, an $8 per month legacy generic drug can do wonders to manage a mild or moderate disease state or condition. At the same time, drug spend has been an ever increasing part of the healthcare pie and growth does not seem to be tapering off. As a nation, we spend 150% more per capita of the average of the Organization for Economic Co-operation and Development (OECD) nations. Drugs are driving these increases. Where PhRMA has failed is in its inability to conclusively document and prove that drugs have or can meaningfully reduce costs in other areas (hospital admissions and other expensive forms of care).

Trump has shown a willingness to look at the following to curb prices.

  • Allow the federal government to negotiate Medicare drug price concessions.
  • Increase transparency related to prices and price increases for drugs. The concept would be to force drugmakers to publicly report any price increase of more than 10 percent and to halt PhRMA from cutting financial deals with generic makers to avoid low-cost drugs coming to market quickly. PhRMA now has begun merging with generic companies as well.
  • Allow drugs to be imported from overseas where they are cheaper. Drug manufacturers have stymied importation with discussion of drug safety concerns. This likely will have a small impact as most of these imports would be generic drugs.

An additional option that also is emerging slowly may be introducing value-based purchasing to drug benefits, where players (doctors, plans, pharmacy benefit managers and drug companies) are paid based on outcomes and quality.

So, could a negotiation scheme really work and save dollars without resorting to explicit or even implicit rationing? The fact is, we do have some programs that force price concessions from drug manufacturers.

  • The federal government has extracted rebates from both brand and generic manufacturers for years in the Medicaid program. Today, these concessions stand at 23% for brands and 13% for generics. In addition, the government is guaranteed the best price against non-federal program deals. Most states now have migrated to a program where bigger state discounts are demanded in addition to the national concessions. Big states and state collaboratives can add meaningfully to the federal discount, increasing the reduction by about double. And many states have now taken over the drug price negotiations of private managed care plans by either carving out the drug benefit from managed care or deeming the spend as part of the rebate program.
  • Deeper discounts from the Medicaid federal rebate occur in other federal programs, including the Federal Supply Schedule (FSS) program, the 340B pricing program, and the Federal Ceiling Price Program (FCP). These programs help support low drug costs in a series of federal health programs (e.g., the VA) as well as private non-profit hospitals, community entities, and community and government programs (e.g., Ryan White AIDS programs and the Federally Qualified Health Centers (FQHCs)).
  • Why would introducing price negotiations into Medicare be so much different? Medicare spends more than $600 billion annually, with drug spend exceeding $100 billion annually for Parts B and D. Today, health plans and Pharmacy Benefit Managers (PBMs) in Medicare Advantage and the Part D program must work independently to extract concessions. The fee-for-service system is a model of inefficiency. Trump has argued that individual health plans or PBMs do not have enough bargaining power.

    While PhRMA and opponents will argue that a Medicare rebate or price negotiation program will mean hurting seniors’ healthcare, it has worked in Medicaid without causing huge rationing concerns. Estimates suggest that average rebates in the Part D program from PhRMA to plans is about 15%. This would mean an opportunity to push the discount to as much as 46%. But back to arguments on innovation and risk: given the health profile of the disabled and aged, Medicare is one of the biggest markets for PhRMA. If discounts were to be extended to this level in Medicare, overall PhRMA margins would drop dramatically (some companies would suffer far worse than others if heavily reliant on senior drug categories). What would all this mean to drug innovation and research investment? And what would the financial impact ultimately be to other players within the industry (PBMs, health plans, pharmacies)?

    Going forward, be on the lookout for changes. Something will happen and, like with healthcare reform overall, we finally welcome a true discussion. Despite the willingness of the GOP Congress to carry PhRMA’s water, Trump likely will embarrass and cajole the GOP into some concessions. Public support is clearly there. He also will continue to turn his ire on individual companies when he feels the business is taking advantage (can you say EpiPen!).

    How far this goes is very dependent on Trump’s and lawmakers’ appetite to venture into the unknown. Any changes on the pricing front would necessarily have to be accompanied by reforms that correct for other barriers PhRMA is facing now.

Marc Ryan

Marc S. Ryan serves as MedHOK’s Chief Strategy and Compliance Officer. During his career, Marc has served a number of health plans in executive-level regulatory, compliance, business development, and operations roles. He has launched and operated plans with Medicare, Medicaid, Commercial and Exchange lines of business. Marc was the Secretary of Policy and Management and State Budget Director of Connecticut, where he oversaw all aspects of state budgeting and management. In this role, Marc created the state’s Medicaid and SCHIP managed care programs and oversaw its state employee and retiree health plans. He also created the state’s long-term care continuum program. Marc was nominated by then HHS Secretary Tommy Thompson to serve on a panel of state program experts to advise CMS on aspects of Medicare Part D implementation. He also was nominated by Florida’s Medicaid Secretary to serve on the state’s Medicaid Reform advisory panel.

Marc graduated cum laude from the Edmund A. Walsh School of Foreign Service at Georgetown University with a Bachelor of Science in Foreign Service. He received a Master of Public Administration, specializing in local government management and managed healthcare, from the University of New Haven. He was inducted into Sigma Beta Delta, a national honor society for business, management, and administration.

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