Drug pricing system broken: Where do we go from here?

Print 30 September 2016
Mari Serebrov / BioWorld

When it comes to how drugs are priced in the U.S., everyone seems to agree on one thing: The system is broken.

But before they can fix it, Congress and policymakers need to first understand how it is structured now and where the problems are. The trouble is, they don't know that they don't get it. That much was clear in a House oversight hearing Wednesday on the pricing of Mylan NV's Epipen (epinephrine), which was a missed opportunity to shed some light on a very murky subject.

Rather than listening and focusing on the questions that needed to be asked, many members of the Oversight and Government Reform Committee seemed more interested in venting their anger at Mylan CEO Heather Bresch over repeated price increases for the auto-injector and trying to force her to feel guilty for her nearly $19 million salary and corporate perks. (See BioWorld Today, Sept. 22, 2016.)

Yet Bresch did something few other biopharma execs have done, said Ron Cohen, president and CEO of Acorda Therapeutics Inc. and chairman of the Biotechnology Innovation Organization (BIO) executive board. Although he made it clear he wasn't defending the Epipen price increases, he said Mylan, which is not a BIO member, did pull back the curtain on how much it makes on each sale – something that's rarely done.

Bresch explained to the committee that while the wholesale acquisition cost (WAC) for an Epipen two-pack is $608, Mylan only receives $274 for each pack. Out of that, it pays $69 for the cost of goods, most of which covers the device that administers the epinephrine. The drug itself only costs the company 25 cents, she said. Another $105 covers related costs, such as R&D, marketing, patient-assistance programs, the school discount and free Epipen programs, awareness campaigns, lobbying, etc. The remaining $100 is counted as profit – $50 per pen.

BYZANTINE SYSTEM

So what happens to the other $334 that Mylan doesn't get? First of all, the difference probably isn't $334 because the WAC, or list price, is an opening bid in the negotiations drug manufacturers have with various parties.

"Virtually no one pays the list price" for a drug, Cohen told BioWorld Today. Instead, drug companies negotiate with pharmacy benefit managers (PBMs), the Department of Veterans Affairs, HMOs and a few insurance companies. As part of those negotiations, the drug companies offer discounts or rebates.

Since PBMs set insurance formularies and administer health plans, including Medicare Part D and employer plans, they control 70 percent to 75 percent of the drug market, Cohen said. And four PBMs dominate the scene.

To get their products good spots on the formularies, drug companies negotiate with each PBM. Those competitive, confidential agreements result in the companies offering the PBMs various discounts and rebates. The PBM then strikes agreements with insurance companies and pharmacies on drug pricing. It is up to the PBM to decide how much of the rebate and discount it keeps for itself, as the insurers and pharmacies don't know how much the rebate was and the drug companies aren't privy to how much is passed on.

Cohen used a hypothetical example of a drug with a list price of $100 to illustrate how the system works. If the PBM agrees to a 40 percent rebate, the drug company might be paid $100 for the drug, but it would then pay a $40 rebate to the PBM, along with administrative fees. The PBM then decides how much of the rebate it passes on to its clients, who also pay it administrative fees. When patients pick up the drug at the pharmacy, what they pay out of pocket will depend on their insurance coverage.

Bresch tried to convey that message to Congress Wednesday when she said, "We don't set the price when the customer walks up to the pharmacist." Although she hinted at the Byzantine system that determines how much a drug actually costs, she never explained it.

Rep. Buddy Carter (R-Ga.), the only pharmacist in the House, did point out at the hearing that "no one knows how much the pharmacy benefit manager gets," but he then erroneously pressed Bresch on how much Mylan gets in rebates from the PBMs. When Bresch said Mylan pays rebates to the PBMs instead of vice versa, Carter and Rep. Elijah Cummings (D-Md.) both expressed disbelief, revealing another congressional disconnect with how the system works.

Cohen said, "I'm not aware of any instance where a PBM would pay a rebate to a manufacturer." Instead, the manufacturers are the ones paying the rebates.

Cummings also scolded Bresch for expanding the patient-assistance program (PAP) and savings cards instead of simply lowering the price of the Epipen. "Even with withering bipartisan criticism from Congress . . . they never ever lowered the prices," he said of Mylan.

SUNSHINE NEEDED

Bresch tried to explain that expanding such programs was the only way to ensure the patient benefited, because Mylan couldn't guarantee that, if it lowered the price at the front end of the system, the savings would actually be passed on to the consumer.

Cohen agreed, saying drug companies "have no control over what the PBM, the pharmacy and the insurer are going to do."

PAPs and savings cards help the patient cover out-of-pocket costs and have been used by the biopharma industry for decades. But to make the system really work, "sunshine is the best antiseptic," Cohen said, adding that "the American public and our government need to see what's going on. . . . It's necessary that the entire system come clean."

That would mean getting PBMs, wholesalers, insurance companies and pharmacies, as well as drug companies, to be transparent about the pricing structure and their negotiations. "It has to be a systemic solution," Cohen said.

Instead of looking at the entire system, Congress is focusing on the hot spot of the day. Some of the solutions mentioned at the hearing included having the FDA consider price in the approval process, allowing Medicare to negotiate directly with drug companies, putting price caps on essential drugs and permitting reimportation of drugs that are cheaper in Canada and Europe.

While the ideas aren't new, various lawmakers noted that the public outrage at Mylan's 550 percent price increase for the Epipen over eight years is pushing Congress to finally do something about drug pricing.

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