All opinions are my own.

Friday, March 9, 2018

Opportunities to Lower Drug Prices and Improve Affordability: From Creation (Manufacturing) to Consumption (Patient)

Since the beginning of 2018 “doing something” to curb ever increasing drug prices has picked up steam. I call two recent announcements 1-4 to be “constructive destructionist” 5 and if successful could have an everlasting impact and game changing influence on the pharma landscape. With their success we should expect additional entrants. 

Till recently, many have talked and proposed legislations but whenever rubber has met the road the tires have gone, or go flat and the blame games started. We have to accept the fact that anything being proposed by the legislators or put on the ballot box is not going to come to fruition. This is due to pharma lobby having significant influence on the electability of the legislators who want to stay in office for eternity. This combination has been deadly against the needs of the constituents who want justifiable lower drug prices. 

Recent initiatives are opportunities worth a review. Each presents a game changing opportunity to improve drug affordability, improve product quality, revenue and profits for the pharma landscape. In the United States drugs are acquired through two major systems, Veteran’s Affairs is for the veterans and rest of the country through mutually subsidized healthcare systems and that includes Medicare. Veteran’s Affairs along with selected Health Systems 1 (VAH) and Amazon, Berkshire Hathaway and JPMorgan 2-4 (ABM) are set to cause a perturbation to the existing mutually subsidized system when it comes to their employees. They could be start of a revolution against ever increasing drug prices. I am presenting my perspective and opportunities they present.  

Veteran’s Affairs:
There are about seven million participants in the Veteran’s Affair (VA) system. Some of us may not know but VA has its own methods for acquiring drugs at discounted prices 6. Its drug acquisition plan is unique and most likely is not entertained by the pharmaceutical companies because number of drugs offered are restricted and pharma and supply chain profits are lowered. However, pharma companies have acquiesced to avoid wrath of the US government and the country. Following guidelines have to be followed.  

Unlike Medicare, in which beneficiaries can choose drug plans, each with its own formulary, the VA offers no choice. Serving as the sole purchaser of drugs, the VA maintains a single national formulary that physicians must follow. The VA formulary is created through access restrictions on drugs. For drugs to be covered on the formulary, their makers must list all of their drugs on the Federal Supply Schedule (FSS) for federal purchasers at the price given to the most-favored nonfederal customer under comparable terms and conditions. Additionally, drug makers must offer the VA a price lower than a statutory federal price ceiling (FPC), which mandates a discount of at least 24 percent off the non-federal average manufacturer price (NFAMP), with a rebate if price increases exceed inflation.”

Even with VA’s restrictive purchasing program, February 2018 announcement1 presents generic drug producers to capitalize on an opportunity to expand their markets (other Mutually Subsidized and Medicare systems) and increase profits and revenues. Since the healthcare systems are going to be directly working with the manufacturers, it is a unique opportunity for them to capitalize on values economies of scale and innovative manufacturing technologies 7, 8.

Mutually Subsidized Systems:

VAH and ABM alliances should use reverse calculations 10 to encourage manufacturing companies to innovate. Economies of scale and “what if” analysis can be used to improve manufacturing processes. Upside of the effort is going to be higher revenues, higher profits and lower drug costs. FDA and other regulators will have to be open  minded and proactive to make sure innovative manufacturing practices are adopted on a timely basis and commercialized 11, 12    

Figure 1 is a schematic of the supply chain that is applicable to patients in Medicare and mutually subsidized healthcare systems.  

Pharmacy benefit managers (PBM) 13, for simplicity I call them middlemen, facilitate distribution of drugs to most outside the VA system. Manufacturing and cost of API and their formulations are simple to understand 10, 14. However, under the current system pricing from formulations to the patients becomes murky and complex. However, the mystery is being slowly unraveled 15-19. States are also taking steps to contain rising prices 20, 21 

Figure 1

PBMs have made every attempt to make sure that the cost details are not readily available and the patients pay the highest drug prices. UnitedHealth 22 has announced a possible peak in the PBM “Black box”. However, till the beans of this initiative are counted and everything is black and white, it is too early to grasp the impact.      

It is interesting to note that PBMs block direct import of drugs by the patients from e.g. Canada and other countries but the same drugs are imported and sold at a significantly higher price in the United States. Explanation given is the safety of the drug. This also could be considered an artificial way to keep prices up by using scare tactics. Uniform global drug standards will greatly help but they would be a challenge to establish. 

From drug price information collected in India and in US 14 (with regular insurance, Medicare and NO insurance) one can easily see the reasons why PBMs have discouraged ABM Alliance 2 to take a peak in the “Black Box”. Most can conjecture that PBMs do not want anyone to negotiate and jeopardize their profits. Sood etal 16 and Grant 17 have done an excellent review of the PBM price structure. Price multiples of between 100-1500 times from manufacturing to patients 14, 16, Table 1, should be an eye opener for the negotiators in VA and ABM Alliance. As has been said earlier economies of scale and better technologies can significantly lower these multiples. 

Table 1

Drug Price Reduction Opportunities:

Using Panel B for the money flow16 illustration, it is interesting to note how a $18.00 drug gets to the patient in the current system and sells for $100.00. 

Using sound principles of economics, chemical engineering, chemistry, economies of scale and good manufacturing practices a 20% reduction in manufactured cost will translate to about $80.00 to the patient if no improvements are done to the current PBM supply chain “Black Box”. 20% or better cost reduction in the supply chain should not be considered an out of reach of possibilities. Combined cost reductions in manufacturing and supply chain would mean that a current $100.00 drug would cost about $65.00 to the patient. I am sure $35.00 cost reduction is worth the effort. 20% cost reductions in manufacturing and in the supply chain each are not out of the realm of reality. Effort would be needed. Everyone from “Creation (manufacturing) to Consumption (patient)” will benefit financially. 

Panel B is Courtesy Sood etal 16.  

Business Model Change:

Accelerated 2018 chatter is not going to let up. It seems that the pressure to make drugs affordable or lower drug prices will continuously increase. Dan Akerson, ex CEO General Motors, said it well that If you don’t attack your own business model, trust me, somebody else will. 

So far pharma companies and PBMs have stuck with their models of creating new drugs and along with PBMs selling them at the highest price participants can afford in mutually subsidized systems. Essentially no effort has been made to improve their methods to lower drug costs. In the last few years big pharma companies have relied on orphan drugs or marginally better drugs to improve their revenues and profits. These are not going to sustain major pharma companies for the long haul.

Since generic drugs, an ever-increasing need, in the United States are distributed through PBMs, in our mutually subsidized healthcare systems even they are priced highest level Table1. We have to recognize that Pharma/PBMs major customer base is dependent on affordable drugs. Pharma/PBM business model has to change. It is time.  

There is a need and it seems that PBMs and associated companies are trying to cater to the shareholders 25 rather than the patients who are the basis of their existence. With success of VAH and ABM Alliance we could see spread of drug price reductions. Pace could accelerate. As they say “cat is out of the bag” and the question is how pharma industry and PBMs are going to participate for everyone’s benefit. My conjecture is outliers will cause a change and it will happen sooner than expected.  
Girish Malhotra, PE
EPCOT International 

  1. Leading U.S. Health Systems Announce Plans to Develop a Not-for-Profit Generic Drug Company, www.businesswire.com, Accesses March 1, 2018
  2. Triple Threat: Amazon, Berkshire, JPMorgan Rattle Health-Care Firms, The Wall Street Journal, January 30, 2018, Accessed January 31, 2018
  3.  If Amazon And Buffett Lift Veil On Health Prices, Insurers Are In Trouble, Forbes.com, January 31, 2018, Accessed January 31, 2018
  4. JPMorgan to Banking Clients: Joint Health-Care Venture Is No Threat, WSJ.COM, February 4, 2018, Accessed February 4, 2018
  5.  Creative destruction: https://en.wikipedia.org/wiki/Creative destruction Accessed January 31, 2018
  6.  D’Angelo, Greg: The VA Drug Pricing Model: What Senators Should Know, The Heritage Foundation, April 11, 2007, Accessed March 5, 2018 
  7.  Malhotra, Girish:  Chemical Process Simplification: Improving Productivity and Sustainability John Wiley & Sons, February 2011
  8.  Malhotra, Girish: Innovation In Pharmaceuticals: What Would It Take & Who is Responsible?, Profitability through Simplicity, November 28, 2017, Accessed March 5, 2018
  9.  Malhotra, Girish: Could Amazon (A), Berkshire Hathaway (B) and J.P. Morgan Chase (M) be the Anti-Ballistic Missile (ABM) Needed to Control/Curb Rising Healthcare Costs? Profitability through Simplicity, February 9, 2018, Accessed February 27, 2018
  10.  Malhotra, Girish: A Blueprint for Improved Pharma Competitiveness, Contract Pharma, September 8, 2014, Accessed February 28, 2018
  11. Malhotra, Girish: Can the Review and Approval Process for ANDA at USFDA be Reduced from Ten Months to Three Months? Profitability through Simplicity, March 25, 2017, Accessed March 5, 2018
  12.  Malhotra, Girish: ANDA (Abbreviated New Drug Application) / NDA (New Drug Applications) Filing Simplification: Road Maps are a Must. Profitability through Simplicity, May 11, 2017, Accessed March 5, 2018
  13.  What Is a Pharmacy Benefit Manager (PBM) And How Does A PBM Impact The Pharmacy Benefits Ecosystem?www.truveris.com, August 15, 2017, Accessed February 27, 2018
  14. Malhotra, Girish: Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability, Profitability through Simplicity, January 18, 2018
  15.  Why Your Pharmacist Can’t Tell You That $20 Prescription Could cost Only $8, The New York Times, Accessed February 26, 2018
  16.  Sood, N; Shih, T; Van Nuys, K; Goldman, D; The Flow of Money Through the Pharmaceutical Distribution System, June 14, 2017, http://healthpolicy.usc.edu/Flow_of_Money_Through_the_Pharmaceutical_Distribution_System.aspx, Accessed March 1, 2018
  17.  Grant, Charley, Hidden Profits In the Prescription Drug Supply Chain, The Wall Street Journal, February 26, 2018, Accessed February 27, 2018
  18.  Profits Are Hidden in the Prescription Drug Supply Chain, The Wall Street Journal, February 26, 2018, Accessed February 27, 2018
  19. Grant, Charley, White House Eyes Role of Middlemen in Drug Price Fight, The Wall Street Journal, February 12, 2018, Accessed March 1, 2018
  20.  On Drug Pricing, States Step In Where Washington Fails, The New York Times, February 27, 2018, Accessed February 27, 2018
  21.  House Bill 4005, 79Th Oregon Legislative Assembly -2018, Price and Cost of Prescription Drugs, February 26, 2018, Accessed March 5, 2018 
  22. UnitedHealth Will Pass Drug Rebates Directly to Some ConsumersThe Wall Street Journal, March 6, 2018, Accessed March 6, 2018 
  23. Private conversation with Mr. Jack Harding Jr., Harding & Harding Associates, North Canton, OH March 1, 2018
  24. Private communication with a Pharmacist at a leading pharmacy, February 26, 2018
  25. Herper, Matthew: Cigna's $54 Billion Purchase Of Express Scripts Could Upend The Prescription Drug Market, Forbes.com, March 8, 2018, Accessed March 9, 2018


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