Vantage view – Doing what's possible on drug prices

Grandiose plans to rein in the price of prescription drugs in the US have shrunk to targeted initiatives to reduce beneficiary cost-sharing and expenditures in government health programmes. President Donald Trump’s 2019 budget plan proposes a series of alterations that would, on balance, shrink federal drug spending by less than 1% of the total.

Among the proposals is one that would see Medicare beneficiaries share in manufacturer rebates, which would have the effect of making it appear to patients that prices have been cut but would in reality raise US government spending. Missing from the debate, of course, is the notion of using government fiat or purchasing power broadly to restrain prices, something Mr Trump had promised after being elected in 2016.

In his state of the union address Mr Trump said of prescription drugs: “Prices will come down substantially. Watch.” Defining the meaning of “coming down” and “substantially” is taxing, of course – in the absence of market disruption either in the form of competition or government intervention it is hard to imagine the prices of patent-protected pharmaceuticals being reduced.


But Mr Trump’s claim found its expression in the budget plan released earlier this week. This document is always an aspirational one, as Congress sets government spending targets and authorisations. However, proposals contained in the budget can make their way into law, especially when the political aims of legislative leaders align with the White House.

Most significant for biopharma is a proposal that will allow Medicare pharmacy plans more flexibility in setting their formularies – exclusions are limited in certain therapy areas like oncology, epilepsy, HIV and mental health. Separately, budget proposals would loosen first-to-file generic exclusivity for companies that have had their applications rejected.

On the Medicaid side, the budget proposes a pilot to allow states to negotiate prices directly with manufacturers. It would also tighten up definitions in the best-price programmes that allow certain branded drugs to be categorised with generics and thus reduce the rebate owed.

Taken together, those four proposals would reduce US expenditure on drugs by $7.7bn between 2019 and 2028. By comparison, the Centers for Medicare and Medicaid Services forecasts that that the two health programmes will spend $2tn on prescription drugs in 2016-25.

Proposed savings and projecting spending for drugs in US health programmes
2019-2028 savings ($m)
Increase Medicare Part D plan formulary flexibility 5,517
Reform exclusivity for first-to-file generics 1,788
Medicaid direct negotiation pilot 85
Reform Medicaid best price rebates 319
Total proposed savings 7,709
Total Medicare drug spending 2017-2026 1,484,200,000
Total Medicaid drug spending 2017-2026 484,400,000
Total spending 1,968,600,000
Sources: Office of Management and Budget, Centers for Medicare and Medicaid Services

Far cry

This is a far cry from the hard line Mr Trump promised a year ago, when direct negotiation with drugmakers or price controls was viewed as a realistic possibility, and when every anti-pharma tweet seemingly had the effect of depressing share prices in the sector.

When these budget proposals emerged on Monday the Nasdaq biotechnology and S&P pharma indices, the barometer of the small and big-cap companies, rose 2% and 1% respectively, possibly reflecting the largely benign impact of the proposed changes.

What the White House budget has done, however, is propose some Medicare programme changes that could give the appearance, to patients at least, that prices have come down. Most importantly, the way in which it proposes to alter cost-sharing for part D – the outpatient pharmacy programme – could leave millions of beneficiaries believing that drug prices have in fact dropped.

The main proposal is one that passes through a share of manufacturer rebates to beneficiaries, something that Lilly's chief executive, David Ricks, has been advocating – Lilly has such a pass-through mechanism in its employee health plan. In essence, it would reduce beneficiary cost-sharing and make drug prices appear to have fallen, but with the effect of raising US expenditures by more than $42bn over the 2019-28 decade, by altering government reimbursement formulas.

This would be clawed back through a separate proposal that would impose costs on patients who enter a coverage gap called the doughnut hole. The proposal would eliminate manufacturer rebates from the calculation of cost-sharing, thus keeping beneficiaries in the doughnut hole longer. This proposal, which would effectively make the doughnut hole larger, saves $47bn over the 10 years.

Finally, an out-of-pocket limit on those beneficiaries who spend through the coverage gap and enter catastrophic coverage would again make it appear that drug prices have fallen. This proposal would cost $7.4bn from 2019 through 2028.

Taken together, the interaction of these three cost-sharing changes would end up costing the US government only $2.4bn over the 10 year period.


These proposals are modest enough that almost any president could have proposed them, and certainly do not bear the hallmarks of a politician who once promised to use the government’s buying power to lower prices (Fickle Trump showers disappointment on biopharma's golden day, January 12, 2017). 

The sector’s charm offensive over 2017, combined with commitments to invest in US manufacturing and give post-tax-reform bonuses to employees seem to have soothed Mr Trump’s ego.

Prices of drugs that were launched in 2017 were in many cases below expectations – witness, for example, Roche’s Ocrevus, which in previous years would have come in at a premium – and in other cases were subject to “outcomes-based” pricing schemes that reduced payments for non-responders.

Yet, through the 12 months of 2017, the prescription drug consumer price index rose 2.8%, ahead of the 2.1% average for all items measured by the US Bureau of Labor Statistics, signifying that, even in a year of caution for big pharma, medicines were still consuming an increasing share of household budgets. And new government projections released yesterday indicate that annual prescription drug spending growth of 6.3% a year over the next decade will outpace every other major category of health care services.

Mr Trump’s new proposals might have an effect on the margins, but the forces that have led to rising drug prices have not been addressed.

To contact the writer of this story email Jonathan Gardner in Virginia at [email protected] or follow @ByJonGardner on Twitter

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