The pharmaceutical industry and the broader health care services market currently are experiencing a series of trends that are likely to persist into 2023, said Adam J. Fein, Ph.D., CEO of Drug Channels Institute, during a Dec. 16 webinar titled Drug Channels Outlook 2023. These include pressure on insurers’ traditional coverage of generics from patient-paid prescriptions, ongoing 340B litigation and providers’ increased presence within the specialty pharmacy market. But the impact of the biggest disruption, the Inflation Reduction Act (IRA), is yet to come. In this second of a two-part series, AIS Health highlights these trends projected by the longtime industry expert.
Patient-Paid Prescriptions May Disrupt Insurers’ Approach to Generics
The issue of patient-paid prescriptions is “super fascinating and super interesting and super important,” maintained Fein. He noted that brand name drugs, particularly specialty agents, are driving spend with very few prescriptions. But most of the prescriptions, “the physical activity in the pharmacy and distribution system, in the claims processing system, are still generic drugs. And to some extent, we have this legacy of these generic drugs being covered by insurance because the brand-name versions of these are covered by insurance.”
Citing RA Capital Management’s managing partner Peter Kolchinsky’s analogy, Fein explained that when a drug goes generic, it’s akin to paying off a mortgage in order to live rent free. Before AbbVie Inc.’s Humira (adalimumab), Pfizer Inc.’s Lipitor (atorvastatin) was the best-selling drug of all time, with total sales in the U.S. of more than $100 billion. But its generics “can be purchased for pennies and pennies. We paid off the mortgage. And now we can use that drug forever, for essentially nothing. For basically a dollar’s worth of materials, you have a month-long prescription product. So one of the questions is, why do we still have this giant insurance apparatus sitting on top of these drugs that are very cheap and often getting cheaper?”
According to Fein, “plans and PBMs either are profiting from this or simply just not paying attention to it.”
But when patients pay for these agents via cash or a discount card, they are slowly chipping away at insurers’ long-time approach to covering generic drugs. PBM-driven discount cards such as GoodRx, Inc. or SingleCare “essentially rely on the fact that pharmacies have signed contracts with PBMs and agreed to fill prescriptions for generic drugs at a certain price,” he explained. “They never want to leave money on the table, so they set a higher price, the usual and customary price. But you and I can’t get access to those PBM rates; we get access to that cash price. And so although they [i.e., pharmacies] are willing to fill it for the lower price, if you go in there with cash, you have to pay the higher price.”
Such cards “operate as a form of spread pricing at the pharmacy. They charge the pharmacy a fee, and then give a piece of that fee…to the discount card vendor.” GoodRx, for example, earns approximately 15% of the retail price of the generic, he said, and “dozens” of similar companies exist. And “they’re solving one problem by essentially playing within the system,…[and] this is undermining how people think about their insurance.”
A variation on that is cash-only pharmacies, which are recognizing that “this entire system doesn’t make any sense.…These are cheap products; we’re going to buy them cheaply and sell them slightly less cheaply” without investing in overhead, said Fein, noting examples such as Mark Cuban Cost Plus Drugs and Blueberry Pharmacy. These companies, he contended, essentially are “call[ing] the bluff of everybody” and “challenging the very notion of what am I getting from my insurance?”
Citing IQVIA data, Fein explained that more than half of people with at least one discount card adjudication in 2021 were uninsured, which is to be expected. But among people with standard Medicare, almost one-quarter used a discount card. About the same amount of people with a high-deductible plan did as well. “Even people who don’t have a high-deductible plan, one out of eight will use a discount card at least once during the year, which means at some point during the year, they went to fill a prescription, and the price they would pay out of pocket through their benefit was less than the price they could get from a card that you download off the internet,” he noted. “Doesn’t that make you think something is going on here?”
This can be confusing for plans because members may appear to be nonadherent to their prescriptions when that’s not the case. “They’re just buying the prescriptions outside the plan because the plan is too expensive.”
These companies are “potentially disruptive,” Fein asserted, “because it’s coming from the bottom of the market organically by people comparing prices for something that fundamentally shouldn’t necessarily be part of insurance.”
Within the generic market, “the next logical target,” he said, is “all the products that are brand-name products, patent protected, but sold at very deep discounts — what I would call the gross-to-net-bubble products. The products with 70%, 80%, 90% rebates off list price, where there’s enormous rebate dollars and fees flowing into the system. And often patients end up subsidizing the plan, especially if they’re in a high-deductible plan, where their out of pocket is not capped.”
340B Litigation Continues
The 340B discount drug market has seen a lot of action within the past two years, said Fein. In “the contract pharmacy market, essentially, the covered entities can buy 340B-designated drugs, outpatient drugs, at deep discounts,” he explained. “And this market has exploded since 2010. And half of all U.S. pharmacy locations are now 340B contract pharmacies.”
But in 2020, manufacturers started pushing back, saying that “this law doesn’t say anything about pharmacy, so we don’t believe it exists” and that they would provide discounted drugs for the contract pharmacies only if they provide data on the claims. These companies also are paying rebates to commercial and Medicare Part D plans, so they may be selling drugs at negative 200% margins, and “that’s not very sustainable.” Numerous lawsuits “and a range of mixed decisions” have been the result.
According to Fein, a resolution of this is unlikely in 2023. “But if you look at the complexity of the market, you also understand how hard it will be to extract 340B data,” he said. Among the hundreds of thousands of relationships between pharmacies and 340B covered entities “three-quarters of all of these relationships are with just five companies”: CVS Health Corp., Walgreens, Walmart, Cigna Corp. via Express Scripts and UnitedHealthcare via OptumRx. “Essentially, the large, vertically integrated players, the PBMs and their specialty pharmacies and the largest retail players, have become major players in the 340B program. And the profits have been substantial.”
But as the litigation has dragged on, some covered entities realized that they need “to get the money train rolling again,” so they have provided their claims data. Fein said that “reliable sources” have told him that “more than half of all the covered entities are providing” claims data. However, PBMs actually have benefited from this, Fein explained, because many pharma companies have said, “we’ll let you have this if you just designate a single contract pharmacy, and often the covered entity picks the specialty pharmacy that has access to the specialty drugs with the discount,” which ends up being one of the aforementioned five companies with the bulk of relationships.
An interesting dynamic is happening within the 340B space, where hospitals are the entities that have been perhaps the “most egregious about accessing 340B money,” said Fein. He pointed out that “87% of all 340B dollars go through the hospitals, and a big chunk of that is contract pharmacy.” The rest of the money goes to federal grantees such as community health centers or Ryan White HIV/AIDs Program clinics that are obligated to use the money a certain way.
The grantees “are very unhappy with what’s going on,” he stated. “And they feel they’ve been thrown in with the hospitals, and they are actually already starting to push back. So there’s actually been a division within the 340B community, between the federal grantees and the hospitals. And that’s going to start to become bigger.”
Some of these entities are pushing for the creation of a new drug discount program, known as 340C, that would be for federal grantees. This is relevant, he contended, because the Republicans now control the House of Representatives, and when they previously controlled it, they held many hearings on 340B, ultimately releasing a report that highlighted “several weaknesses in program administration and oversight.” In contrast, during the past four years of Democratic control, zero hearings were held.
“So 340B, like I guess everything else in our country, has become highly partisan, which is unfortunate because it makes it harder to solve the problem,” said Fein. “But it does mean you’re going to see a lot more attention on the program the next two years as the Republicans take over and start to revisit some of these issues.”
Providers Continue to Be Big Specialty Pharmacy Players
A fairly recent phenomenon is that providers are “among the biggest players” in the specialty pharmacy space, he observed, and “what’s been happening with 340B has accelerated it.” Fein outlined a tremendous leap from 2017 to 2021 in the number of accredited specialty pharmacy sites owned by a health system, hospital or physician office. “So essentially, the business of specialty pharmacy has become very tied in with the providers, who themselves are writing the prescriptions for specialty pharmacy.”
“For-profit enablers of the business,” such as the Walgreens-owned Shields Health Solutions, whose hospital partners have billions in specialty pharmacy revenue, are driving this trend, which is “accelerating,” Fein observed. This has led many manufacturers to “acknowledge the fact that the world of pharmacy and trade and channels is not just about the retailers you might be used to. It’s about these other new kinds of entities that are driving this.”
Another change has been seen in “the business of a hospital and health system.” These entities have boosted their employment of physicians, including within specialty categories beyond primary care — in particular high-revenue specialties such as oncology, neurology and gastroenterology. This practice exploded during the COVID-19 pandemic, said Fein. Hospital consolidation — horizontal transactions — “has also been going up dramatically.”
Retail Pharmacy Market Must ‘Restructure Itself’
Another ongoing trend Fein identified is the “retail pharmacy shakeout,” not in the form of bankruptcies but rather fewer locations. The pandemic provided retail pharmacies “a bit of a break” in the administration of COVID vaccines. In 2021, “at the price the government was paying Pfizer and Moderna for their vaccines, they actually paid the pharmacies twice as much as they paid to manufacture the vaccine for just the administration,” he explained.
But the number of vaccines administered in 2022 dropped, which had a negative effect on the entities’ gross profits. “So this tailwind which has been benefiting pharmacies and benefiting their margins is essentially starting to dissipate,” he stated.
Pharmacies also have begun to understand that they need to improve their efficiency. “It’s very hard to make money when the majority of the physical activity of your pharmacy is dispensing $20 or $25 generic drugs. Increasingly, [among] ones that have discount cards, the profitability is even lower,” explained Fein.
The market needs to “restructure itself,” he asserted, pointing to shrinking numbers of CVS and Walgreens locations as evidence that this process already has started. In addition, “a push on micro fulfillment” and “growth of digital pharmacies” are underway as companies rethink their approach, and it remains to be seen how successful they’ll be.
IRA Will ‘Reset’ Economics, Incentives
Fein saved until last the topic that has been top of mind across the pharma and health care services industries since this past summer: the IRA, which was signed into law on Aug. 16, 2022. “There’s a lot to unpack here,” he declared, choosing to focus on the law’s impact on Medicare Part D.
The new basic standard Medicare prescription drug benefit is a “radical restructuring of what’s happening, the incentives inside the Medicare Part D program,” he maintained. Currently, in the initial coverage phase, beneficiaries pay 25% of the cost, while plans pay 75%. The catastrophic coverage phase starts at almost $8,000, with beneficiaries paying about $3,000 of that total, and beyond that, beneficiaries pay 5%, Part D plans pay 15%, and Medicare pays 80%.
But under the IRA, starting in 2024, beneficiaries have no out-of-pocket responsibilities once they hit the catastrophic coverage phase. And the out-of-pocket limit before that phase is $3,250 in 2024, with Medicare picking up 80% of costs and Part D plans 20% that year once a member enters the catastrophic coverage phase. Then in 2025, beneficiaries’ out-of-pocket spending will be capped at $2,000 going forward, and once the catastrophic coverage phase is hit, 60% of costs will be paid by the plan, and the remaining 40% will be split equally between manufacturers and Medicare. This year and next, manufacturers are responsible for 70% of costs within the coverage gap, a percentage that drops to 10% in 2025.
“The manufacturer liabilities go up substantially,” asserted Fein. “And you might think, ‘well, 10% and 20% — that’s not a lot, given what they have to pay now in the coverage gap.’ Well, actually it is. One, you have a lower threshold, and they’re paying at the beginning a greater amount of a lower amount. And also all the Low-Income Subsidy extra-help beneficiaries are rolled into these numbers, which they weren’t before, and that’s a big chunk of the Medicare market. So the manufacturers’ outright liabilities are going to go up.”
Plans’ liability also “goes up dramatically,” he noted. With the current benefit structure, “both the plans and the manufacturers had a lot of incentive to get people into that catastrophic phase,” where most of the liability is with the government. “And that’s why the government reinsurance component for Part D has been exploding. And that’s been a big driver of things like the gross-to-net bubble.”
CMS also, for the first time, will be able to negotiate drugs for Medicare. The maximum fair price (MFP) and inflation rebates will be based on the non-federal average manufacturer price (non-FAMP). But a lot of unknowns still surround the process, including which drugs will be negotiated. Whether the drugs chosen for negotiation is based on net cost or gross pre-rebate cost “has very different implications,” Fein asserted. And the MFP will affect out-of-pocket responsibilities for beneficiaries, as well as pharmacies’ reimbursement.
“So right now for let’s say [for] our top…gross-to-net-bubble products with high list prices and big rebates, the patient progression through the phases of the benefit is based essentially on a gross-to-net list price, the gross price,” he explained. “Now they will be based on the MFP.”
This, he said, will have multiple implications. For one, “the plans have been re-risked. They were essentially de-risked under Part D as the gross-to-net bubble inflated, and now they are going to be re-risked.” In response, plans likely will “crank up utilization management; they’re going to crank up formularies. They’re going to think about ‘how do I keep people below that $2,000? How do I keep them in the coverage gap?’ The plans’ preferences are going to start to change in the Part D market, especially in the Part D standalone PDP prescription drug plans. ‘How do I prevent people from progressing higher in these tiers where I have more at risk? Because otherwise, I’m going to have to raise premiums a lot.’” That said, he notes, there is a limit to how much those premiums can be raised until the end of the decade.
In addition, manufacturers and plans may find some high-list-price, high-rebate drugs less appealing, said Fein. “Let’s say a high-list, high-rebate product becomes an MFP product. It essentially becomes like a pop-the-gross-to-net bubble kind of product, becomes a low-list-price product. But if it doesn’t, plans may actually…have different preferences” focusing on preferring a low-list-price drug to keep members in lower Part D tiers. And this will appeal to members, since those lower prices will be what any coinsurance and out-of-pocket responsibilities they have will be based on.
This may not be an issue with Medicare Advantage, which has the medical benefit, but the Part D PDPs may struggle with how to make “this market viable.” He projected that “by the end of this decade, probably about 75% to 80% of all seniors eligible for Medicare are going to be Medicare Advantage not PDPs,” which could cause plans to exit the PDP market.
This also may result in “tighter formularies,” stated Fein, noting that Medicare has a lot of rules around this. He said he expects that there’s going to be “a lot of lobbying to loosen up those formulary rules, like the protected classes, the number of drugs you have to cover per class. But if you are a manufacturer competing with a product that has been negotiated, you’re going to have to offer substantial rebates just to stay in the game. And the plans know this. So the amount of rebates that they’re going to demand is going to be high. These negotiated products are going to have to be on the formulary,” although it isn’t clear exactly where.
Pharmacies and “to some extent wholesalers” will be impacted by the MFP being the basis for reimbursement. This means they’ll need to implement “a mechanism for pharmacies to reconcile the price they’re buying it at and…this discounted price that just the Medicare prescriptions are being reimbursed at. We don’t really have that kind of a chargeback or pricing mechanism baked in yet.”
Manufacturers will need to think about the non-FAMP, maintained Fein, pointing to a Health Affairs article co-written by former CMS administrator, as well as former FDA commissioner, Mark McClellan, M.D., Ph.D. In particular, pharma companies will need “to think about how to increase and manage that non-FAMP in a way that allows them to anticipate and possibly defer some of the impact on net prices from Medicare negotiation.”
Ultimately, said Fein, “the IRA is going to reset drug channel economics and incentives far beyond Medicare. It’s going to change how you think about Medicare; it’s going to change how you price products, how you think about the commercial market and how you think about rebates in the commercial market and how you think about the metrics that are going to be used to calculate things like inflation rebates and the MFP price for the manufacturers.”