Improving Drug Affordability for the United States Populous through Alternate Business Models

Recent layoffs and closures in the pharmaceutical industry have been on the horizon for some time. However, it seems the signs have been ignored. Blame is being put on increased pressure coming from (Pharmacy Benefit Managers) PBMs and supply chain intermediaries on drug manufacturers¹ to lower their selling prices i.e. reduce profits. Simple laws of economics suggest that if companies cannot make the necessary profits under their prevailing business model, the easiest thing to do is to reduce expenses through curtailment of marginal or non-profitable businesses. Companies have to constantly tweak their business model to avert such situations. All said and done, if profits are not as expected, closures, shutdowns and layoffs are the only way to survive.

Recent articles^2,3 discuss some of the details of the supply chain profits. If the numbers are correct then it seems that collectively PBMs and intermediaries may be as or more profitable than the drug manufacturers. PBMs and intermediaries by putting pressure to lower selling prices, while retaining their profits, could be leading to increasing drug shortages⁴ and forcing pharma company layoffs and/or closures. If the current trend continues, price controls might be one way to make drugs affordable and they would create a turmoil for PBMs and intermediaries and make their future bleak.  

Drug Distribution Models:  

In 1999, Amazon⁵ tried an alternate distribution model: direct selling to the patients. This disruptive model did not come to fruition. It is possible that they had not crossed every “t” and dotted every “i”. Had they succeeded drug affordability might have improved. 

Earlier in 2018 two new proposals to improve drug affordability have been suggested. They are alliance of Veterans Affairs and Intermountain Healthcare (VAH)⁶ and alliance of Amazon, Berkshire Hathaway and JPMorgan (ABM)⁷. VAH alliance will only serve veterans but parts of the proposed model can be very effectively used by ABM alliance. ABM alliance is initially intended for the employees of the three companies but my conjecture is that it could be a stepping stone for broader distribution.

The ABM Alliance selling directly to the patient population of United States will be a tremendous disruption. It would be resisted by PBMs and intermediaries. The Alliance’s success without PBMs would be like PBMs loosing their goose that laid golden eggs. My conjecture is that PBMs will make every effort to be part of this alliance. If they do not succeed, they also have their swords drawn to kill the alliance through regulatory and political/legislative pressures. They do not want to loose their cash cow. My fear is that if they are included, the ABM alliance would not fully achieve its intended goals. It is my conjecture that Amazon has learnt a lot from its 1999 attempt and would use its experience in its current attempt. 

The VAH alliance will work directly with drug manufacturers. This alliance can handle its drug distribution. Reverse calculations⁸ can be easily used to introduce new innovative manufacturing technologies to lower costs and maximize profits of each participant. Since they are isolated from PBMs and other intermediaries, they have an excellent possibility of success. Success here will definitely change the drug affordability landscape and sow alternate improvement ideas. Regulators will have to facilitate innovation.  

Manufacturer’s Options:

Drug manufacturers have to consider their own alternates. They need to explore them for their survival, retain their profits, minimize drug shortages and potentially avoid layoffs/closures. Continuous manufacturing improvements and technology innovation will play a significant roll. They have to be an internal company decision rather than a regulatory directive. 

Regulators need to eliminate/minimize constraints that prevent continuous improvements and innovations. 

Incorporation of economies of scale are well known method to improve manufacturer’s technologies and profits. Again, companies have to decide. As said earlier regulators have to facilitate the process. 

Gains from manufacturer’s effort can be short lived till PBMs and others catch up and force them to lower their selling prices i.e. lower profits or drive them out of business. Generic drug companies, for their survival, have to figure out how to control their destiny. They will have to recognize that economies of scale have a drawback. They can result in reduced number of facilities making the same product through better technology, thereby resulting in layoffs.

Manufacturing technology innovation for the brand drugs during the life of the patent again has to be a company decision. Brands might have to overcome regulatory obstacles as they might have to make sure that the drug efficacy and performance are not altered. Since they work under a patent time limit, they might not entertain this route.

GEN (Creative Destruction⁹) Alliance:

The long-term existence of the generic pharmaceutical companies depends on altering/disrupting the current model. Generic pharma companies can create their own drug distribution model (GEN Alliance) to supply drugs at affordable prices to the United States populous. This model is based on the premise that the generic drug producers want to control their survival, “profit and loss” destiny and make drugs affordable with a reliable distribution partner. It is a reconfiguration of the current model in reverse. Since it is close to the existing model it has not been explored.

I believe that lack of sales of marginally better new drugs and expensive orphan drugs are causing a dent in the profits of PBMs and intermediaries. 

To counter that they are pressuring generic drug producers and threatening their very survival. They will also make every attempt to disrupt/kill GEN Alliance through regulatory and political/legislative effort. I hope they will think about their efforts to disrupt GEN alliance as they will be going after the same generic drugs suppliers who are their current suppliers. 

Since it is reconfiguration of the existing model, many from the get go could say that it is cumbersome and unworkable. If it was easy and not disruptive, it would have been already done. It needs to be considered, reviewed, modified and exploited. We need to explore methods to make drugs affordable. Since many parts of the process exist, I believe that is  implementation should be easy.  

In the GEN Alliance some of the leading generic companies could band together and approach Amazon or Walmart or a similar entity to supply the necessary prescription drugs there by minimizing the price differentials discussed in Panel B of reference 3 and reference 4. The Alliance could be formed through their association or outside their association. Reliable distributor/s will be critical to their success. Companies will have to adhere to the prevailing laws and regulations. For this model’s success, like the ABM Alliance model, the current mutually subsidized healthcare system may have to be modified. 

I am confident that in the GEN and ABM models approved FDA drugs can be imported and significant monies can be made by selling drugs to the populous at much lower prices than the current prices. Price comparison of drugs, Table 1, in India and the United States¹⁰ shows the price differential of randomly selected drugs. Sales price in India includes manufacturers and pharmacy profits. Prices in US in Table 1 are what a patient pays with and without insurance. If all goes well drug prices could be reduced by 50% or more. Improved drug affordability could also increase sales. 

My conjecture is that through GEN alliance generic pharma companies will become masters of their destiny i.e. P&L, longevity. Competition on product quality, technology, costs and exceeding regulations will become the cornerstone. My expectation is that best of the best in each category will participate in GEN Alliance. With affordable drug prices, we all will be on a new turf.    

Nuances of VAH, ABM and GEN models:

Economies of scale, manufacturing technologies and product quality will play a significant role in all three models.

In each of these models, companies will compete on manufacturing technology and quality to gain shelf space with distributors. 

Amazon while working through its own ABM alliance could also approach the selected GEN alliance companies it sees fit to form a longterm relationship. VAH, ABM and/or GEN models if executed properly will work and would be a win-win.  

As I eluded earlier changes in the current mutually subsidized healthcare system might be needed. This task could be a challenge and in our political/economic system could be equivalent to trying to climb Mt. Everest bare feet with no oxygen. PBMs and other intermediaries will throw every barb at the participating companies. However, small successes at initial stages will make believers and hopefully generic drug prices in the United States will be realistic and out of the clutches of PBMs and intermediaries who in the name of service have artificially jacked up their prices.

An ultimate method to make drugs affordable would be to eliminate the drug coverage from the mutually subsidized healthcare system. Political and economic pressure would be tremendous. Pharmacies will have to sell drugs at affordable prices otherwise no one will buy them. Everyone will pay real prices. There will be brouhaha about this thinking but this is an ultimate method to make drugs affordable. Patients will also have to make life style choices. Such an effort would be a major disruption to the US economy. 

Drug affordability is a painful issue and has been ignored for a longtime. In mutually subsidized healthcare system prices have risen under the guise of convenience. It needs to be addressed. Even the most financially blessed feel the pain with current drug and healthcare prices.  

Girish Malhotra, PE

EPCOT International

1. Koons, Cynthia, Why We May Lose Generic Drugs, Bloomberg Businessweek, April 11, 2018, accessed April 18, 2018 
2. Sood, N; Shih, T; Van Nuys, K; Goldman, D; The Flow of Money Through the Pharmaceutical Distribution System, June 14, 2017, Flow of Money Through the Pharmaceutical Distribution System, Accessed March 1, 2018 
3. Grant, Charley, Hidden Profits In the Prescription Drug Supply Chain, The Wall Street Journal, February 26, 2018, Accessed February 27, 2018 
4. FDA Drug Shortages, https://www.accessdata.fda.gov/scripts/drugshortages/ Accessed April 24, 2018
5. Ross, Casey: Amazon failed to disrupt the prescription drug business with Drugstore.com. Could a second try succeed? statnews.com, April 26, 2018, Accessed April 26, 2018 
6. Leading U.S. Health Systems Announce Plans to Develop a Not-for-Profit Generic Drug Company, www.businesswire.com, Accesses March 1, 2018
7. Triple Threat: Amazon, Berkshire, JPMorgan Rattle Health-Care Firms, The Wall Street Journal,  January 30, 2018, Accessed January 31, 2018
8. Malhotra, Girish: May Day May Day: Can Someone Help and Lower Drug Prices?, Profitability through Simplicity, May 1, 2015, Accessed May 1, 2018
9. Creative Destruction, https://en.wikipedia.org/wiki/Creative_destruction, Accessed April 26, 2018
10. Malhotra, Girish: Opportunities to Lower Drug Prices and Improve Affordability: From Creation (Manufacturing) to Consumption (Patient), Profitability through Simplicity, March 9, 2018, Accessed April 25, 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 ⁹ 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, 79^Th 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 Consumers, The 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