Vantage point – Turning point in the pharma-payer pricing struggle

Analysis

After two years of payer complaints, 2016 has seen the first glimmers of a dynamic response to the high prices of new drugs. US insurers are asking for more data to justify the costs and for pharma companies to share patient risk; and, at the extreme end, they are shutting out new drugs when the two sides cannot agree on a price.

“The market is becoming very practical and the payers are looking for collaborative solutions with the pharma industry,” says Dan Mendelson, chief executive of the health consultancy Avalere Health and a former White House budget official. “There are a lot of things that can be done now: value-based payments or compliance based payments, or other types of relationships so that the payer can understand what they’re getting for their money.”

New payer techniques come in the context of providers adapting to new coverage models under the Affordable Care Act (ACA) that make them accountable for medical spending. This pressure is moving upstream, as paying top dollar for pills and injections puts hospitals and doctors at risk of missing budget targets.

Several events have demonstrated the shifting momentum. Top of the list is Novartis’s agreement with Cigna and Aetna to vary reimbursement for the new heart failure drug Entresto based on its ability to reduce costly hospitalisations. This signals that payers are less willing to pay significantly more for an incremental change in pharmacological treatments unless they can come close to duplicating the healthcare benefit demonstrated in clinical trials.

Other events have included exclusive contracts that have played the new cholesterol-lowering rivals Praluent and Repatha off each other. The latter is now subject to value-based contracts with health plan Harvard Pilgrim Health Care and pharmacy benefit manager CVS. Additionally, the Medicare programme has taken its own steps towards integrated care and value-based pricing (Interview – Repatha risk-sharing could be just the beginning, November 13, 2015).

Finally, there is some belief that the Medicare programme might broadly start cracking down on spending. A governing commission called the Independent Payment Advisory Board (IPAB) enabled by the ACA has not been convened because of slow cost growth, but Bernstein Research’s Tim Anderson writes today that many observers believe that the threshold will be met in 2016 or 2017.

Should cost growth trigger appointment of the IPAB – sometime between May and July Medicare's actuary will make its assessment of whether to do so based on its calculations – members will likely be asked to take a hard look at prescription drug prices throughout the programme, Mr Anderson writes.

American Nice

Then there are the activities of the Institute for Clinical and Economic Review, or ICER, a non-profit advisory body that conducts US-oriented cost appraisals that are similar to government boards in Europe and elsewhere.

This last development has been responsible for giving payers public legitimacy when they need to justify to the public their need for price discounts.

“They really value the fact that we are an independent organisation and we do these things transparently and put everything out into the public domain,” says Steven Pearson, ICER’s president.

To that end, the organisation last year received a $5.2m grant to accelerate its work, allowing for publication of cost appraisal documents close to the time the FDA approves drugs. ICER said it planned 15 to 20 such publications in the first two years of the grant.

In November 2015 it published a report on Repatha and Praluent, approved in July and August respectively, and in December 2015 it published a report on Entresto, which was approved in July. The organisation assessed the cholesterol-lowering drugs as overpriced based on the value they deliver to the healthcare system, but Entresto was close to a good value-based benchmark.

ICER is becoming known as an “American Nice”, referring to the UK’s well-known cost-appraisal body. But Mr Pearson, who has served a fellowship at the UK organisation, describes ICER as a “uniquely American approach” to pricing issues that eschews government price-setting.

“We have a different mindset around cost-effectiveness,” he says. He adds that, while federal and state governments might be tempted to fund the work of ICER and other bodies that might emerge, “I still tend to think it makes more sense in the US context to have independent groups filling some kind of role.”

Proving Entresto’s worth

Entresto’s launch has disappointed pharma watchers with its slow pace, which its Swiss-based owner said was due to blanket formulary blocks.

These blocks have started to lift, but accompanying this easing have come the risk-sharing arrangements with Cigna and Aetna. In essence, Cigna and Aetna are asking that Entresto come close to matching the promised 21% reduction in costly hospitalisations compared with Vasotec that the Paradigm-HF trial revealed.

As EP Vantage pointed out at the time, the trial had some design weaknesses that suggest that the real benefit might be smaller. The Vasotec dose used in the trial was not the highest possible, and a run-in period excluded some patients with adverse events from the primary analysis, so the benefit might have been inflated (Translating trial to practice a big task for Novartis heart failure pill, September 5, 2014).

Physicians’ perception of Entresto as offering low incremental benefit was one factor contributing to its slow launch, according to a recent Leerink analysis, in which the investment bank downgraded Novartis and cut its price target 13%. In any case, drugs rarely perform as well in practice as they do in trials, so Cigna and Aetna are asking to be shown that Entresto can save them money.

To be sure, Entresto is a special case. It is being launched into a space with substantial generic competition, and despite its benefit in clinical trials it represents less-than-impressive innovation: it adds to the active ingredient in Diovan a second agent that was already known to reduce blood pressure.

Still, as a risk-based arrangement it represents an advance over the formulary exclusions that have plagued such therapy areas as diabetes. The pharma sector consultant Jack Scannell sees the old-fashioned approach having more of a short-term effect.

“Over the last year what is an apparent reduction in the overall rate of US drug price inflation is due to four therapy areas: long-acting insulin, short-acting insulin, COPD, and hepatitis C. In each of these areas there were enough similar products for formulary exclusion to bite and hit manufacturers’ pricing power,” says Mr Scannell, a former equity analyst.

“In most other therapy areas it was business as usual. However, as crowding gradually increases, you may see more opportunity and appetite for formulary exclusion in the US." He adds: “A bigger impact could follow structural reform: legislation that allows major government programmes to exclude drugs, or negotiate prices or change the incentives for prescribers.”

Changing buying patterns

One way those incentives are changing is in the spread of accountable care organisations, or ACOs. These are new healthcare systems enabled under the Patient Protection and Affordable Care Act, allowing for more coordination among hospitals, doctors and other health care providers to lower cost and improve quality for Medicare enrolees.

According to the consultancy Leavitt Partners, 782 had formed as of the end of 2015, and up to 105 million individuals, non-Medicare enrolees included, could be covered by ACOs by 2020.

As more integrated purchasers, the ACOs become another point of leverage on the pharma sector. If they achieve cost savings for the federal government’s healthcare programme for elders and disabled, the ACOs themselves get a share of the savings.

Those ACOs with commercial contracts are significantly more likely to manage drug benefits and costs actively alongside all other medical care, according to a survey published in the Journal of Managed Care and Specialty Pharmacy.

The authors hypothesise that these ACOs will manage drug spending by one of three methods: direct ownership of a pharmacy, shifting the responsibility for drug spending onto prescribing physicians, or greater integration of pharmacists in patient care.

Outside of the realm of the ACOs, Medicare appears to be getting more active in the realm of performance-based payments for some of the most costly drugs, those being mostly biological agents that must be injected or infused at healthcare institutions, but which do not require a hospital stay.

Part B drugs – so called because they are reimbursed under the programme’s division for coverage of services in outpatient settings – have been reimbursed on a cost basis. With growth in use of biological agents, spending on these drugs has increased, nearly doubling from $9.4bn in 2005 to $18.5bn in 2014, according to the US Health and Human Services Department.

Medicare has proposed altering its payment scheme from its current 4% add-on the average selling price to a 2.5% add-on plus a $16.80 flat fee.

This would have the effect of increasing reimbursement for the cheapest drugs but trimming it for the most expensive, reducing the incentives for physicians to use the costly products. According to the Medicare Payment Advisory Commission, Rituxan at $1.5bn accounted for the highest total expenditure of all Part B drugs in 2013, and with a per-administration price of $5,136 Roche stands to see some impact on revenue.

Programme administrators are thinking more long-term than just a change in the fee structure, however. The proposed rule also says the federal government wants to test value-based pricing strategies used in the private sector like reference pricing, outcomes-based risk sharing and reduction of patient coinsurance.

Given that part B represents 6% of all US prescription drug spending and 21% of Medicare’s, the sector will be paying close attention to any reimbursement adjustments; moreover, the government’s shift to value-based pricing could inspire more payers to negotiate similar agreements with pharma companies.

Biopharma’s innovation pace has been extraordinary in recent years, delivering 220 new products in the past five years, some of which represent significant advances in treating devastating diseases like hepatitis C, cystic fibrosis and melanoma. This has emboldened manufacturers to test budgetary limits when negotiating prices, justified by developmental costs, when payers and consumers look at the offerings differently.

“There’s a disconnect between the pricing strategy and the long-term economics in healthcare,” says Kevin Schulman, professor at Duke University’s medical school and director of its Centre for Clinical and Genetic Economics. “The industry’s not thinking about how it’s financing products. It just assumes the money will be there rather than fighting to offer a value proposition to the customer.

“Yes we have a p value and some clinical benefit but we need more than that to go back and explain to either taxpayers or to covered lives in an insurance pool why their health insurance premiums are going up. The market is turning and [pharma] has a choice to ignore that or get ahead of it.”

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @ByJonGardner on Twitter

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