Scott Gottlieb Discusses Policy Solutions for High Drug Prices at PBMI

At the PBMI 2017 Drug Benefit Conference, keynote speaker Scott Gottlieb, MD, spoke about the recent political trends affecting drug prices and offered a number of policy solutions that could be implemented to address this issue.

Dr Gottlieb is a resident fellow at the American Enterprise Institute, where he has studied government health care delivery agencies like the FDA and CMS. He also served as deputy commissioner for medical and scientific affairs at the FDA under President George W Bush. Additionally, Dr Gottlieb was a health care economics advisor to Mitt Romney during his presidential bid in 2012, and was recently nominated by President Donald Trump to head the FDA. 

Dr Gottlieb opened his presentation by discussing the current outlook on the drug pricing situation in the United States. He explained that the current drug pricing situation boils down to two sets of “secular” trends: changes in how drugs are priced, particularly who is paying for them; and changes in how drugs are being acquired, specifically who is making the coverage decisions. He noted that historically these factors have been largely driven by the health plans.

“If you go into any drug company, the discussion has always been ‘what will the payers think of the product?’ and ‘what will they think of the pricing?’” Dr Gottlieb said. “I think increasingly, the discussion is going to have to shift to ‘what are the providers going to think?’ Because, I think in the future the providers are going to be the payers—with deliberate things happening in Washington to sort of drive the market in that direction.” 

Trends Affecting Drug Prices

Drug pricing is going to continue to be a prominent political issue for many years, according to Dr Gottlieb. This is due to the fact that consumers are feeling legitimate hardship. He explained the issue of drug pricing is not a passing phenomenon, unlike in 2003, when drug pricing was a huge political issue but was ultimately subdued by the imposition of Medicare Part D. He noted that the current debate is more intense and its is unlikely that a sweeping legislative solution will come along and change the conversation. 

Dr Gottlieb identified current government spending on prescription drugs and the growing gap between drug list prices and their actual cost as the two factors driving drug prices higher. He cited research showing that federal spending on prescription drugs makes up more that 50% of all drug purchases. 

Furthermore, he suggested that only a small portion of the increased drug spend is actually the result of increased prices. He presented research showing that after about 2008, the relatively close margin between a drug’s list price and its actual price began to diverge dramatically. This revealed that while the perceived price of most drugs is growing at an alarming rate, the “real” price—after rebates, discounts, and PBM negotiations, has actually grown at a much slower rate. According to Dr Gottlieb, in 2015, while average list prices increased by 12.4%, the net price only increased by 2.8%. Additionally, in 2014, total invoice prices increased by $26.3 billion (13.5%), while manufacturer sales only increased by $10.3 billion (5.5%).

Dr Gottlieb recognized that while this revelation is good news for payers, it does little to help patients with narrow prescription drug coverage.

“I think what changed is the structure of health benefits,” Dr Gottlieb said. “And more people being shifted onto narrow network formularies, closed network formularies, and being out of pocket for that list price.”

He also noted that the massive increase in the public price tag leaves pharmaceutical companies open to political vulnerabilities, suggesting that this will lead to an effort to try and close the gap between the list price and the actual price paid. He added that pharmaceutical companies are currently pushing for this type of change in Washington, DC. 

Dr Gottlieb pointed to recent efforts by Johnson & Johnson to quell consumer concern by releasing reports showing that while their list prices were increasing, the net cost of the drugs were only increasing marginally. He noted that drug pricing is such a volatile topic right now, that efforts to clear up the pricing structure, such as these, can also have negative political impacts.

“If you go and look at all the news stories that were reported off of that data, it was all about their rising list price,” he said. “Here is a company, trying to sort of shed light on the fact that their prices really aren’t going up—yet all the stories reported on the list price. This kind of shows you that it’s a ‘no-win’ political environment.”

Local Leverage

Dr Gottlieb highlighted an upcoming shift in the way drugs are acquired as another trend affecting the prices of drugs. He posited that drug purchasing power is shifting from the health plans directly to the providers—and this will in turn change the prescription drug selling model. 

He said this shift is taking place as a result of MACRA laws forcing individual providers into local health systems. He explained that MACRA gives providers two options in terms of payment: the Merit-based Incentive Payment System (MIPS) and Advanced Alternative Payment Models (APMs)—and explained that providers almost always choose APMs because it shifts the enormous reporting and measurement burden onto a hospital system. 

“MIPS is the replacement for fee-for-service medicine, where doctors are supposed to be paid for performance, but really what they are being paid for is reporting, very complex reporting,” Dr Gottlieb said. “MIPs is untenable, it is very hard for even a sophisticated medical practice to comply with the reporting requirements.”

As a result, doctors are left with two options: try to enroll all of their patients under the umbrella of a Medicare Advantage plan—or sell their practice to a local hospital health system to comply with the parameters of APMs. He noted that the Medicare Advantage option is unrealistic because it is very difficult to forcibly move patients into a new health plan.

Dr Gottlieb pointed out that APMs have the side effect of creating large, local, health systems with enormous prescription drug purchasing power. He posited that these primary care health systems will be able to leverage their power to negotiate the drugs they want/need onto formularies for the right price. 

“It changes the selling model,” he said. “You have to start to think about how do I go into a local market and represent to a health system what it means to have a certain formulary designed to a certain market.”

Dr Gottlieb added that he anticipates that this change will happen very quickly, as instances of providers consolidating under local health systems have already outpaced industry expectations. 

Policy Solutions

Dr Gottlieb highlighted policy solutions he felt could ease the burden of high drug pricing. However, with the FDA Commissioner seat still vacant at the time of the conference, he was careful not to comment on anything too controversial during a Q&A session—given his delicate proximity to the Trump Administration.

Dr Gottlieb’s proposed solutions included increasing generic drug competition, altering Medicare Part B, increasing pricing flexibility based on outcomes, and allowing drugmakers to price discriminate based on channel partner. 

In order to expedite approval and increase marketplace competition, Dr Gottlieb said that the approval process for complex generic drugs needs to be retooled. He explained that a complex generic is any generic drug with a complex delivery system or treatment mechanism that deviates from the standard oral therapy.

“For all of these drugs the traditional process for approving generic drugs doesn’t work real well,” Dr Gottlieb said. “The generic drug law was written at a time when most drugs were simple chemicals—you swallowed them, they got into the blood, and got to the desired organ. But if the drug works locally on the tissue, measuring how the drug gets into the bloodstream isn’t going to approximate its effect. So we have this whole category of complex drugs, where companies frankly have monopolies in perpetuity, because competitors cant bring a generic drug easily onto the market.”

He proposed reforms that would allow the FDA to look at broader compliments of clinical data in order to approve complex generics faster. 

Dr Gottlieb’s second solution focused on pricing competition in Medicare Part B. He explained that in 2014, Medicare Part B spent $21 billion on prescription drugs, with 6 drugs each exceeding $1 billion in spending—with the combination of the 6 drugs making up 36% of total spending. He noted that these 6 drugs have ample amounts of competition on the marketplace. 

“I think you are going to see more and more discussion around trying to move Part B into a competitively bid system and create price competition,” he said.

Another policy solution proposed by Dr Gottlieb revolved around easing regulatory barriers for outcomes-based drug pricing. He envisioned a scenario where an oncology drug is priced higher for a first-line cancer treatment—where it is producing more value—than as a third-line treatment—where it is being using in a palliative setting. 

He noted that CMS reporting requirements currently discourage this practice, because drugmakers are required to report their “Medicare best price,” but if a drug is offered at no cost in a low value situation, the “best price” becomes free. He added that making this change is “not a very hard thing for the CMS to do.”

He added that the biggest issue impeding outcomes-based pricing is that the Office of the Inspector General (OIG) can interpret these contracts as illegal kickbacks. 

“The OIG has been unclear about how they will interpret these things,” Dr Gottlieb said. “They’ve publicly said ‘come forward with some value-based contracts, we want to do these things, and we’ll interpret it as we see it.’ But if the negative side of the interpretation is jail, then a lot of companies don’t want to take that risk.” 

Signposts for Future Policy?

During a Q&A session, Dr Gottlieb’s answers revealed the direction that future government policy could lean towards under his potential leadership at the FDA.

When asked if the Trump Administration will combine Medicare Part B and Part D, Dr Gottlieb excused himself from answering for the President, but added that general discussions in Washington, DC are focusing on moving Medicare Part B into Part D. 

“Could this happen? I think it could,” he said. “The focus is on part D, because it’s more spending for sure—but it’s not growing as fast as Part B. I think that the political focus could shift to trying to move Part B into a competitive dynamic and taking advantage of all the things that should be giving us a much more competitive market.”

Dr Gottlieb also defended his stance on drug pricing transparency when asked why he thought it was bad policy.

“Transparency oftentimes becomes the argument when you don’t have a really good policy idea,” he said. “The Sunshine Act, which forced transparency around private, legal transactions that drug companies engaged in with providers sounded like a good idea. But what it has done is its discouraged scientific collaborations, it’s forced a lot of doctors to move away from working clinical trials.”

He explained his view that forced transparency does not get the results that those who propose it are attempting to achieve. He posited that forced disclosure would ultimately either result in inactivity or development of more complex payment systems designed to thwart the system.

“I’m very skeptical that it is going to have any effect,” he concluded. “If the idea of forced transparency around how PBMs contract with intermediaries gains any political traction, it could become very hard for policymakers to oppose it, because its seen as transparency. Who is against transparency? Who is against disclosure? Even though in certain contexts, forced disclosure ultimately discourages the very activity that you wanted to take place.” —David Costill