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Takeaway: Changes likely to Medicare Part D and B, PBMs and intellectual property rules.

The Senate Finance Committee met yesterday for the first time in the 116th Congress and dedicated about two hours to pharma prices. What is beginning to emerge is concensus around changes to Medicare Part D, Part B and intellectual property protections. Not the price negotiations that serve as the baseline for much of the political narrative but meaningful nonetheless. Changes contemplated mean more liability for plan sponsors like UNH and HUM; margin pressure for PBMs and possibly wholesalers; margin compression for large hospital systems that administer oncology drugs; and threats to brand moats dependent on pay-for-delay and REMS shenanigans.

For those of you counting on the drug industry executives to "work with congressional leaders" as AMGN put it yesterday, they did not show.

Pharma had a bad day on Capitol Hill yesterday to match the one some had on Wall Street. Not only did the new Senate Finance Committee Chairman, Chuck Grassley use his first hearing of the 116th Congress to address the need for changes to the drug price regime, he was rewarded with broad bipartisan agreement on key areas. The icing on the cake was some righteous indignation spawned by certain unnamed pharma executives’ decision NOT to appear, preferring instead to hold private meetings with Committee members. 

The industry’s continued tone deafness will only exacerbate what are going to be significant political headwinds in 2019 and possibly 2020 that will also implicate Part D plan sponsors, Pharmacy Benefit Managers and hospital systems.

This first hearing, witnesses that included Dr. Mark Miller, former director of MedPAC and current vice president of Health Care for the Laura and John Arnold Foundation, Dr. Doug Holtz-Eakin, former CBO Director and President of the American Action Forum and Dr. Peter Bach, Director of the Memorial Sloan Kettering Center for Health Policy and Outcomes, highlighted several areas of agreement. They were:

  • Modernize Part D benefit design and plan flexibility
  • Eliminate back-end rebates in Part D and/or move to flat fee structure to compensate PBMs
  • Reduce ASP 6 percent add-on payment in Medicare Part B to lower amount or pay flat administration fee
  • Reduced patent and intellectual property protections

These are the same points around which we have noted building consensus since early last year. Of course, these changes are set against a political narrative that Congress should require Medicare to negotiate with manufacturers or establish price controls, leading the press to conclude the impact will be limited or, worse, ineffective. The truth is that these policy adjustments are significant to an industry whose price increases have been driven almost entirely by decisions made in Washington.

The witnesses offered these suggestions to Committee members in each of those areas for which there is some consensus:

PHARMA STOOD UP SENATE FINANCE YESTERDAY;  CONSENSUS FOR CHANGE MOVES ALONG WITHOUT THEM - 2019.01.30 Senate Finance1

Medicare Part D Benefit Design. The current plan design encourages a shift of liability from plan sponsors to Medicare. The witnesses suggested increasing plan liability in the catastrophic phase from 15 percent to 70 percent while reducing Medicare’s liability to 20 percent. To cover remaining costs, the manufacturer rebate program could move into the catastrophic phase.

A change in the benefit design will most likely result in an increase in plan liability for sponsors like UNH and HUM which has been falling in recent years as rising drug prices have pushed more beneficiaries, more quickly into the catastrophic phase where Medicare assumes most of the responsibility.

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Medicare Part D Plan Flexibility. The witnesses agreed that Medicare Part D could benefit from a host of options to make plans more flexible in managing the drug benefit. They stressed the need to separate policy solutions from sole source drugs from those that are more competitive. Some of the ideas discussed was a Netflix model whereby a state Medicaid program would “subscribe” to Hep C drugs under a multiyear agreement. More mundane ideas included flexibility in formulary structure to eliminate certain protected classes.

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Rebates, pharmacy fees and other forms of PBM compensation. While the current system of back-end rebates has the effect of reducing Part D premiums, it also results in an inversion an insurance plan’s purpose. Many people not dependent on expensive medicines benefit from lower premiums while a small number of people who require regular and often expensive medications are required to pay higher out of pocket costs. 

The witness all agreed that PBMs play a valuable role in Part D but should be compensated on a flat fee rather than as a percentage of list price. In the alternative, rebates and other forms of PBM compensation such as pharmacy price concessions should be shared with beneficiaries at the point of sale. These ideas are, of course being explored by the Trump Administration.

Although CVS has have indicated that they are not dependent on rebates, the discussion in Senate Finance and in Trump administration communications suggests that the policy choices go beyond rebates and apply to any form of compensation linked to list price of drugs. Regardless, recent estimates suggest that PBMs capture about $23 billion for the drug supply chain revenues, which is not insignificant given that three companies control 70 percent of that market.

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Part B physician and hospital compensation. Physicians, and frequently their hospital employers are compensated on ASP plus 6 percent (4.3 percent because of the sequester) for dispensing Part B drugs. The result is an incentive to prescribe more expensive drugs in greater quantities than might otherwise be the case when choosing among clinically suitable options.

Of course, a great deal of the incentive for hospital to acquire physician practices is related to the percentage add-on payment for Part B drugs. The ever-rising prices of the injectable and infusion drugs in Part B create significant financial incentives to gain and retain access to prescribing and administering physicians.

Sen. John Thune indicated that moving Part B administration to a flat fee was an idea whose “time had come.”

Reduce Patent and Intellectual Property Protections. The witnesses all agreed that the current drug industry practices of extending exclusivity beyond the 20 or so years contemplated by Hatch-Waxman, had to end. Dr. Holtz-Eakin even went so far as to suggest enforcement action in more egregious situations. Dr. Miller called for an end to pay-for-delay with effective penalties assessed to discourage the practice.

The issue of exclusivity is one very near and dear to Sen. Grassley’s heart. He has advocated for the CREATES Act which would prohibit brand name manufacturers from withholding necessary supplies of reference product from generic developers. Grassley was also the co-sponsor of the Preserve Access to Affordable Generics Act which would assess penalties for pay-for-delay agreements at three time the value received by the brand name company for the delay.

Brand name companies that like to boast about their patent protection and moat (looking at you, ABBV) had better come up with a Plan B as we expect bills on patents and intellectual property protection to move first. We anticipate the first legislation to clear boith houses before mid-year.

The most significant implication of the hearing is that it was occurring in the first place. In the previous Congress, the full Senate Finance Committee held one hearing on drug prices. Admittedly, the Chamber had its hands full with repeal of the ACA and tax reform, but the former Chairman Orrin Hatch and Ranking Member Patty Murray were generally regarded as pharma-friendly members and the hearing schedule probably reflects that.

Sen. Grassley, in a clear departure from his predecessor, made drug prices the subject of his first hearing titling it “Drug Pricing in American: A Prescription for Change, Part I” which unsubtly suggests more hearings soon.

The other important conclusion is that the pharmaceutical industry has better get themselves to the next hearing voluntarily. The Chairman indicated that if they were unable to do so, he would be more insistent. In Congress, members can insist with a subpoena. The industry’s decision not to show, when they should have taken their medicine, so to speak, and moved on suggests they believe they have lost control of the narrative and their legislative influence is on the defensive.

Either that or they are getting some bad political advice.

Call with questions. 

Emily Evans
Managing Director – Health Policy



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Thomas Tobin
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Andrew Freedman, CFA
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