President Donald Trump has made no secret his disapproval of unreasonable price increases implemented by pharma companies. The feud between pharma and the White House gained more attention recently when Trump called Pfizer CEO Ian Read and questioned the company’s decision to increase prices on 40 drugs. After a reportedly long discussion, Pfizer agreed to delay its price hikes. This move nonetheless has perturbed the pharma industry and could have significant repercussions throughout the healthcare sector.
Pharma: In the absence of national laws or regulations around drug pricing pharma companies are free to set their list prices at any level; they also often implement price increases at the beginning of the year and mid-year. It is outside the scope of the Food and Drug Administration’s responsibilities to take drug prices or affordability into account when deciding whether to approve a therapy; safety and efficacy are the primary elements under the agency’s purview. Lax regulations coupled with increased pressure to meet financial targets have prompted drug manufacturers to implement steep price hikes over the past few years. Pharma justifies these price increases for branded drugs by saying that it is the only way to recover research and development costs. It is noteworthy that the average return on R&D in 2017 was close to 3 percent, a huge plunge from around a 10 percent rate of return a decade ago. With leading pharma companies like Pfizer deciding to roll back its price increases due to federal interference, other drug makers are likely to be cautious with their pricing strategies going forward.
PBMs and payers: Drug manufacturers set higher list prices in part because they inevitably must engage in complicated negotiations with PBMs, which work to secure rebates to place drugs on their formularies’ preferred tiers. With the transforming PBM landscape, in which the Cigna-Express Scripts and CVS-Aetna mergers are tentatively slated to be finalized by the end of 2018, any major change in drug pricing procedures or policies will have a significant impact on this industry. Nevertheless, these newly merged entities should emerge as strong players with much negotiating power, and pharma companies must price their drugs reasonably and demonstrate the value of drugs to gain favorable formulary coverage.
Patients: Although list prices set by pharma companies are often not what insured patients pay—with rebates, coupons, and other discount programs in play—these set prices have downstream effects for the rest of the industry and, ultimately, influence patients’ out-of-pocket expenses. Moreover, middlemen in the drug supply chain usurp the rebates they negotiate with pharma companies without necessarily passing the savings to consumers, meaning that sometimes patients have to bear the total cost of drugs themselves—which is more likely for those with high-deductible health plans.
Looking ahead: Pfizer might not suffer much financially from temporarily delaying its list price increases, but it could lead to increased scrutiny and less money for healthcare industry players such as drug wholesalers, PBMs, payers, and other pharma companies.
With many of the Trump administration’s drug pricing policy soon to be rolled out by the U.S. Department of Health and Human Services, pharma companies will no longer remain in the driver’s seat when it comes to setting or increasing their list prices The plan is expected to promote competition among drug manufacturers, increase transparency with respect to the highly opaque PBM-pharma transactions, and incentivize drug companies that slash list prices which should lead to lower out-of-pocket costs for patients. It is premature to predict the overall impact of the planned policy on drug pricing, but Pfizer’s move to put a hold on its price increases because of federal intervention could encourage the drug makers to price their drugs responsibly.
Shruti Desai is a pharmacy benefit market expert, and her work can be found in DRG’s PBM Profile series.