Drug Pricing, Repricing,

Rebates, and Patient

Access

Jack Hoadley, Ph.D.Health Policy Institute, Georgetown University

Bipartisan Policy Center

April 13, 2016

1

Credits and Notes

Some of my drug policy research has

been done under contract with the Kaiser

Family Foundation

Find links to full reports:

hpi.georgetown.edu/medicarepartd

Thanks to Kaiser Family Foundation and

the Medicare Payment Advisory

Commission for use of their slides2

Outline

Background basics

How are drugs priced?

Who gets what rebate?

How are drugs re-priced over time?

Do payer actions affect patient access

Looking to the future

3

Background

Drug spending trends

Brands, generics, and specialty drugs

Components of the drug supply chain

Flow of dollars for drug purchases

Drug pricing terminology and definitions

4

Drug Spending Growth, 1970s-2024

7%

12%

10%

15%14%

13%

11%

8%

5%

8%

4%

2%

4%

-1%

2%

-1%

2%

11%

10%

4%

5% 5% 5% 6% 6% 6% 6% 6%

19

70

s

19

80

s

19

90

s

20

00

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01

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20

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Prescription (Actual) Prescription (Projected)

Total Health (Actual) Total Health (Projected)

NOTE: Average annual growth rate of prescription drug spending per capita for 1970’s – 1990’s; annual change in actual prescription drug

spending per capita 2000 – 2014 and projected prescription drug spending per capita 2015 – 2024. 2014 to 2015 percent changes are calculated

using 2014 actual and 2015 projected amounts.

SOURCE: Kaiser Family Foundation analysis of National Health Expenditure (NHE) Historical (1960-2014) and Projected (2014-2024) data from

Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group (Accessed on December 7, 2015)

Average annual growth per capita, actual and projected

5

Drug Spending as Share of Health

Retail drug spending = all spending at outlets

that directly serve patients

1965-2015: as low as 6% of health spending versus

12% today

Non-retail drug spending = spending by medical

providers for drugs they provide to patients

Inpatient hospital, outpatient hospital, physicians’

offices, infusion centers

2009-2015: about 4-5% of health spending

Combined retail and non-retail drug spending:

2015: 17% of spending on personal health services6

SOURCE: DHHS/ASPE, Observations on Trends in Prescription Drug Spending March 2016. Based on data from DHHS National Health

Expenditure Accounts and the Altarum Institute.

76%

23%

75%

20%

72%

16%

71%

14%

72%

12%

Brand Versus Generic Drugs, 2010-2014

SOURCE: IMS Institute for Healthcare Informatics, Medicines Use and Spending Shifts: A Review of the Use of Medicines in the U.S. in 2014

Share of Dispensed Prescriptions: Brand DrugsShare of Spending: Brand Drugs

2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

1998 brand share of

prescriptions = 49%

7

Specialty versus Traditional Drugs

No universal definition

Characteristics tend to include:

Expensive (at least $600/month for Part D)

Manufactured in living systems (biologicals)

Difficult to administer; may be injected or infused

Prescribed by specialist physicians

May require complex patient follow-up, monitoring

Used to treat serious conditions for which few or

no alternative therapies available

Administered through specialty pharmacies

Require special handling (temperature control) 8

24%25%

28%30%

33%

Spending on Specialty Drugs, 2010-2014

SOURCE: IMS Institute for Healthcare Informatics, Medicines Use and Spending Shifts: A Review of the Use of Medicines in the U.S. in 2014

2010 2011 2012 2013 2014

As Share of Total Spending

9

Supply Chain for Drug Delivery

Manufacturers

Wholesalers

Retail Pharmacies

Chain

Pharmacies

and Food

Stores with

Pharmacies

Independent

Pharmacies

Mail-Order

Pharmacies

Consumers

Consumers Who Have Some or All Purchases Paid for by a

Third Party (Including health plans and public-sector programs)

Hospitals, HMOs,

Clinics, Home Health

Care Providers,

Nursing Homes, and

Federal Facilities

Nonretail Providers

Consumers Paying for

Purchases Out of

Pocket

Source: Congressional Budget Office, Prescription Drug Pricing in the Private Sector, 200710

Supply Chain Functions Manufacturers

Develop, produce, and market drugs

Set list prices as a basis for price negotiations

Negotiate rebates and discounts with plans or PBMs

Wholesalers Link manufacturers with outlets that dispense drugs

Help smaller pharmacies negotiate with generic manufacturers

Pharmacies Stock drugs and fill prescriptions on demand

Negotiate discounts with generic drug manufacturers

Pharmacy Benefit Managers (PBMs) Administer drug benefit for health plan or employer

Build pharmacy networks

Negotiate rebates with manufacturers 11

Supply Chain Market Shares

Mail Order

Food Stores

Chain

Pharmacies

Independent

Pharmacies

ClinicsRetail

Pharmacies

Hospitals

Long Term

Care

Other

Source: IMS Institute for Healthcare Informatics, Medicines Use and Spending Shifts: A Review of the Use of

Medicines in the U.S. in 2014

By non-discounted spending, 2014

12

Drug Spending by Payer, 1960-2024

SOURCE: MedPAC analysis of historical and projected data from CMS’s national health expenditure accounts as of July 2015.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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60

19

62

19

64

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66

19

68

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70

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72

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20

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Out of pocket

Private health insurance

Medicare

Medicaid

Other

Start of

Medicare

Part D

Projected

13

Source: Congressional Budget Office, Prescription Drug Pricing in the Private Sector, 2007

Flow of Funds for a Brand Drug

Negotiated Rebate for

Brand-Name Drugs

Preferred

Placement on

Formulary

Copayment

Drugs

Premium

Drug Coverage

Premium

Share of Rebates

from Manufacturer

Managed

Drug

BenefitsPayment

WAC

DrugsDrug

Manufacturer

Pharmacy Benefit

ManagerPharmacy

Health Plan Beneficiary

Wholesaler

Employer

Flow of Funds

Flow of Prescription Drugs

Services

AMP

Drugs

Note: AMP = average manufacturer price; WAC = wholesale acquisition cost

Negotiated

Payment

14

Source: Congressional Budget Office, Prescription Drug Pricing in the Private Sector, 2007

Pricing for a Brand Drug

$80 (Adjusted AMP)

$83 (Average price paid by

independent pharmacies)

Wholesaler

(Retains $3)

Independent Pharmacy

(Retains $5)

Pharmacy Benefit Manager

(Has a net cost of $82)

$88 Payment $6 Rebated from

Manufacturer

$88 (based on 15% discount

off AWP of $101, plus $2 fee)

Drug Manufacturer

(Receives net payment of $74)

$80 Payment $6 Rebate to PBM

15

How Are Drugs Priced?

What is the “price”?

Pricing rationales

Factors influencing pricing

Price variation by payer

16

What is the Price of a Drug?

List prices AWP = average wholesale price, defined as the published list

price that wholesalers post for retailers and other providers

WAC = wholesale acquisition cost, defined as list prices posted by manufacturers

Price measures calculated by the government AMP = average manufacturer price, defined as the average of

prices actually paid by wholesalers and retailers who buy directly from manufacturers

ASP = average sales price, defined as the average price realized by manufacturers for sales to all purchasers net of rebates, discounts, and price concessions

Discounts Retail discounts = discounts available to large-volume retailers

on purchases from wholesalers or manufacturers

Manufacturer rebate = amounts paid by manufacturer to health plan or PBM to create a discount price

17

Rationales for Launch Prices

Lack of transparency

Cost of research & development

Industry estimate: $2.6 billion for an average drug Source: J. DiMasi et al, Innovation in the pharmaceutical industry: New estimates of

R&D costs, Journal of Health Economics May 2016. Tufts Center for the Study of

Drug Development

Savings accrued for the health care system

as a result of taking the new drug

Presence and pricing of competing therapies

Strategic positioning relative to products on

the market or coming soon18

Drug Discovery, Development and Review

SOURCE: Adapted by MedPAC from Pharmaceutical Research and Manufacturers of America.

Drug discovery and

preclinical studiesFDA

review

Post-marketing

studies and

surveillance

Fo

od

an

d D

rug A

dm

inis

tration a

ppro

va

l

Basic

researchClinical trials

Phase I Phase II

20 –100 healthy volunteers

100 – 500 volunteers with the condition

1,000 – 5,000 volunteers with the condition

5,000 – 10,000 compounds narrowed

down to ~2501 approved

drug

6 – 7 years3 - 6 years

Phase IV

1.5 years

Inve

stiga

tio

na

l N

ew

Dru

g a

pp

lica

tion su

bm

itte

d

New

Dru

g A

pp

lica

tio

n / B

iolo

gic

s L

icen

se

Ap

plic

ation s

ub

mitte

d

5 compounds

Phase III

19

Price of Oncology Drugs per Life-Year Gained

SOURCE: David Howard, Peter Bach, Ernst Berndt, and Rena Conti, “Pricing in the Market for Anticancer Drugs,” Journal of Economic

Perspectives, vol. 29, no. 1 (Winter 2015): 139-162.

20

Supply-Side Factors Influencing Prices

Increasing complexity of biopharmaceuticals

Emphasis on treatments for small disease

populations (e.g., orphan drugs), often with few

competing therapies

Patents and temporary monopolies granted by

the government

Consolidation within biopharmaceutical industry

Changes in the drug supply chain

21

Demand-Side Factors Influencing Prices

Shift from out-pocket purchases by

consumers to a third-party payment system

Shift from private to public insurance

Consolidation in the insurance industry

Discounts and rebates mandated by law

(Medicaid, VA, DOD, 340B program)

Increased demand as the population ages

22

Who Gets What Rebate?

Factors influencing rebates

Trends over time

Public-sector rebates

23

Factors Influencing Rebates

Proprietary

Ability of a payer to grow market share for the

manufacturer’s drug

Ability of a payer to move market share

Encouraging use of one manufacturer’s drug over

competing therapies

24

Tools Payers Use in Negotiating Rebates

Formulary management tools

Exclusion of competing drugs from the formulary

Preferential tier placement on the formulary, with

lower cost sharing for the consumer

Utilization management tools, such as prior

authorization, for competing drugs

Other factors

Evidence of comparative effectiveness or clinical

preferences

Access to needed drugs for plan members

Marketing considerations

25

11%

15%17%

33%

Estimated Rebate Amounts

* Refers to the top 53 therapeutic classes of drugs, which accounted for 70 percent of Part D spending in 2010

SOURCE: Adapted from Congressional Budget Office, Competition and the Cost of Medicare’s Prescription Drug

Program, July 30, 2014

Share of Total Drug Spend (2010)

Share of Brand Drug Spend (2010)

Share of Brand Drug Spend for

Top Classes* (2010)

Illustrative Rebate for Drug with Competition

26

As Percentage of Drug Costs by Category

8.6% 9.6% 10.4% 11.1% 11.3% 11.5% 11.7%12.9%

14.4%16.6% 16.8% 16.8% 16.8% 16.8% 16.8%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Trends in Medicare Part D Rebates, 2006-20

SOURCE: Medicare Trustees Report, 2015

As Percentage of Total Drug Costs

27

Projected

How Are Drugs Re-Priced?

Interaction of price and utilization

Price trends over time

Factors driving price changes for generics

Impact of generic substitution

Factors driving price changes for brand

drugs, including specialty drugs

28

Growth in Drug Prices and Utilization

SOURCE: Kaiser Family Foundation analysis of Bureau of Economic Analysis data

Annual percent change in price and quantity indexes of pharmaceutical

and other medical products, index numbers 2009=100

0%

2%

4%

6%

8%

10%

12%

14%

Price Index Quantity Index

29

2.0% 1.9%

6.8%3.2%

-2.1%

11.0%

5.2%

-0.1%

17.7%

All Drugs Traditional Drugs Specialty Drugs

Unit Cost

Utilization

SOURCE: Express Scripts 2015 Drug Trend Report

Components of Drug Spending Trend, All Payers,

2015 versus 2014

30

Peterson-Kaiser Health System Tracker

Source: IMS Institute for Healthcare Informatics. Medicines Use and Spending Shifts: A Review of the Use of Medicines in the U.S. in 2014.

Components of Drug Spending Growth, 2010-2014

Contribution to growth in drug spending, by spending growth drivers, in billions, 2010 -2014

$10.4 $7.2 $8.5 $5.7 $9.5

$4.6 $6.4 $5.7 $6.5

$20.2$16.6 $17.9 $15.6 $20.3

$26.3

-$1.4 -$4.2 -$2.9 -$2.1 -$0.7-$14.7 -$14.3

-$29.3-$19.6

-$11.9

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

$70

2010 2011 2012 2013 2014

Generics New Brands Protected Brands Price

Protected Brands Volume Patent Expirations

31

Medicare Part D Drug Price Trends, by

Brand-Generic-Biological Status, 2006-2013

15%

32

2.29

2.14

0.30

1.47

0.0

0.5

1.0

1.5

2.0

Generic drugs

All Part D covered drugs

Single source

brand name

Biologics*

Dru

g p

ric

e in

de

x e

qu

alto

1.0

at

the s

tart

of

the P

art

D p

rog

ram

NOTE: Chain-weighted Fisher price indexes.

* The shift in biologics price index in October 2012 is due in part to a change in how prescription quantifies were reported for Avonex.

SOURCE: Adapted from MedPAC, Report to the Congress: Medicare Payment Policy, March 2016, Figure 13-8 (Acumen LLC analysis for MedPAC)

Part D Drug Price Trends, with Effects of

Generic Substitution, 2006-2013

15%

33NOTE: Chain-weighted Fisher price indexes.

SOURCE: Adapted from MedPAC, Report to the Congress: Medicare Payment Policy, March 2016, Figure 13-7 (Acumen LLC analysis for MedPAC)

1.47

1.02

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

All drugs and biologics

All drugs and biologics accounting

for generic substitution

Dru

g p

ric

e in

de

x e

qu

al to

1.0

at

the s

tart

of

the P

art

D p

rog

ram

Factor Driving Generic Price Changes

Number of generic manufacturers in market

Timing of generic approvals

Special circumstances

Markets with limited entry of generics

Mergers and acquisitions, resulting in market

concentration

Shortages resulting from permanent or temporary

market exit

Special cases of new patents or market exclusivity

(e.g., asthma drugs)

34

94%

52%

44%39%

33%26% 23%

6%

1 2 3 4 5 6 7 . 19

Number of generic manufacturers

Prices Relative to Number of Generic Entries

SOURCE: MedPAC, based on FDA analysis of retail sales data from IMS Health, IMS National Sales Perspective, 1999-2004, extracted

February 2005

Average relative price per dose

35

Brand Share After Patent Expiration

SOURCE: IMS Health, National Prescription Audit, February 2011, used from “The Use of

Medicines in the United States: Review of 2010,” IMS Institute for Healthcare Informatics.36

Factors Driving Generic Substitution

Traditional Drugs

Automatic substitution by pharmacists with patient

consent, based on state laws

Biosimilars

Estimates of lower prices: 20% to 40% (CBO,

European experience)

FDA policies on interchangeability

State laws on substitution of biosimilars

Consumer and prescriber acceptance

Public and private insurance rules

37

Factors Driving Brand Price Changes

Introduction of competing therapies

Other changes in competitive environment

Negotiations with PBMs on behalf of plans

and employers

Stage in patent protection cycle

38

Source: Alliance of Community Health Plans, from Medi-Span® Price Rx®.

Note: Figures reflect wholesale acquisition cost. Price modifications will alter the values reflected above.

Price Increases, Diabetes Drugs, 2010-2015

39

Components of Diabetes Spending Growth,

2013-2014

In billions of dollars

40

Changes in MS Drug Spending, 2010-2014

In billions of dollars

41

MS Drug Prices from FDA Approval Date

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Betaseron Avonex Copaxone

Rebif Tysabri Extavia

Gilenya Aubagio Tecfidera

42

SOURCE: D Hartung et al., The cost of multiple sclerosis drugs in the US and the pharmaceutical industry, Neurology 84, May 26, 2015, 2185-2192.

Do Payer Actions Affect Patient Access?

Utilization management

Decisions by payers to raise or lower access

barriers (e.g., PA criteria) in concordance with

price negotiations (e.g., new hepatitis C drugs)

Impact of price changes on the cost to

consumers

Varying use of coinsurance versus copay

Impact of closed and open formularies on

consumers

Effectiveness of appeals and exceptions43

12.9%

5.6%

3.3%

Express Scripts Plan Management Strategies

SOURCE: Express Scripts 2015 Drug Trend Report.

Unmanaged Plans Managed Plans Tightly Managed Plans

44

Average annual increase in per-member per-year spending, 2014-2015,

compared to overall U.S. trend of 5.2%

20

20

2

16

8

6

20

12

7

20

20

20

18

4

12

14

8

13

Harvoni

Sovaldi

Viekira Pak

Copaxone

Tecfidera

Avonex

Humira

Enbrel

Orencia

Gleevec

Revlimid

Zytiga

Plans listing drug on formulary in 2016 Plans not listing drug on formulary in 2016

NOTE: Analysis includes 20 national and near-national stand-alone prescription drug plans in Baltimore, MD (zip code 21201).SOURCE: Georgetown/Kaiser Family Foundation analysis of 2016 Medicare Plan Finder data.

Formulary Coverage of Specialty Drugs Varies

Across Medicare Part D Plans, 2016

He

pat

itis

CM

ult

iple

Sc

lero

sis

Rh

eu

mat

oid

A

rth

riti

sC

ance

r

45

$1,271

$392

$430

$382

$472

$173

$172

$154

$86

$56

$181

$142

$60

$47

$47

$47

$33

$40

$29

$31

$29

$29

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400

Spiriva (COPD/emphysema)

Namenda (Alzheimer's disease)

Lantus Solostar (diabetes)

Advair Diskus (asthma)

Januvia (diabetes)

Crestor (high cholesterol)

Lowest cost when onformulary

Median cost when onformulary

Highest cost when onformulary

Highest cost when noton formulary

NOTE: Analysis includes 20 national and near-national stand-alone prescription drug plans in Baltimore, MD (zip code 21201) and reflects pricing at a Rite Aid pharmacy in this zip code. SOURCE: Georgetown/Kaiser Family Foundation analysis of 2016 Medicare Plan Finder data.

Difference Between the Lowest and Highest Out-of-Pocket

Monthly Cost, Brand Drugs, Medicare Part D, 2016

Part D enrollees’ out-of-pocket costs in 2016:

46

0.4%

17.4%

0.7%

16.8%

1.3%

17.2%

SOURCE: Express Scripts 2015 Drug Trend Report

Future Projected Trend, All Payers, 2016-2018

Trend Forecast: Specialty DrugsTrend Forecast: Traditional Drugs

2016 2017 2018 2016 2017 2018

47

What Does the Future Hold?

Factors to watch that will influence trends

Approvals of new drugs (brands, generics,

biologics, biosimilars)

Trends in drug benefit management by public

and private payers

Price sensitivity by consumers and prescribers

Price transparency

Evidence on comparative effectiveness

Innovations in value-based purchasing

48