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How Federal Policies Impact Innovation and Costs of Pharmaceutical Therapies

By Marisa Salemme

Tuesday, May 17, 2016

On May 10, the Bipartisan Policy Center hosted its second public event on affordable medicines, following the first forum on April 13. BPC Senior Vice President Bill Hoagland gave opening remarks on the day’s topic: the role of federal government policy on pharmaceutical innovation, market competition, and costs. A public audience then heard from Gerard Anderson, PhD, from the Johns Hopkins University Bloomberg School of Public Health, who gave a keynote presentation.

Anderson provided an overview of federal pharmaceutical policy, primarily focusing on the role of government as purchaser. Acknowledging that the United States pays twice as much for brand pharmaceuticals as other industrialized countries, Anderson described various government agency pharmaceutical purchasing strategies. In Medicare Part D, private plan sponsors negotiate prices with pharmaceutical companies, sometimes through pharmacy benefit managers, and use formularies and other tools to manage costs, while in Medicaid states determine rates (and the federal government approves the method). Meanwhile, the Veterans Administration and the Department of Defense use a formulary and negotiate their own prices.

Anderson highlighted that the 340B program, which requires manufactures to offer eligible providers discounted prices for outpatient drugs, uses a formula based on average manufacturers cost and unit rebate amount. In addition to the different programs, each category of drugs—such as generics with or without competition, brand drugs, specialty drugs, and biosimilars—offer unique challenges for purchasers and policymakers.

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Addressing the rising prices of specialty drugs, Anderson noted their impact on both the government and beneficiary’s ability to afford life-saving treatments. Throughout his keynote address, Anderson posed interesting policy questions including how one would determine a “fair” price for drugs, whether the federal government should harmonize payment approaches across government programs, and whether pharmaceuticals should be included in bundled payments.

Closing his presentation, Anderson looked at value-based pricing, which will be the topic of BPC’s third and final forum on this topic.

Pharmaceuticals and Delivery System Reform

Following Anderson’s remarks, the audience heard from experts covering a wide range of viewpoints from both the state and federal level. Sheila Burke, a BPC board member, moderated a discussion with Tim Gronniger from the Centers for Medicare & Medicaid Services (CMS); Scott Gottlieb, M.D., from the American Enterprise Institute; Paul Howard of the Manhattan Institute; and Matt Salo with the National Association of Medicaid Directors.

In opening comments, innovative approaches to delivery system reform were discussed writ large. Tim Gronniger from CMS stated that there are over 50 models currently being tested to improve health care quality and payments in the CMS Center for Medicare and Medicaid Innovation (CMMI). He stressed that CMS is approaching pharmaceutical issues in the context of improving quality and affordability in the health care delivery system as a whole. The proposed CMMI demonstration would combine a partial flat payment for Part B physician-administered drugs with a 2.5 percent add-on payment (down from 6 percent today) of the drug’s Average Sales Price. During the discussion, it was emphasized that the proposed model’s intent is to lessen some of the financial consequences on prescribing decisions and remove the penalty for choosing lower cost products. Another panelist noted that while that model is controversial, there may be more promise with respect to some of the other value-based pricing strategies (such as indications-based pricing) that CMS has proposed in its rule.

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Panelists also stressed the importance of ensuring access to pharmaceutical therapies by patients. One speaker emphasized that state Medicaid programs are moving away from fee-for-service and towards paying for value, though determining the value of a drug is difficult to operationalize.

It was suggested that for curative pharmaceutical therapies, such as those for Hepatitis C, long-term payment structures could be considered that align pricing with outcomes. This coincides with the overall transition from volume- to value-based health care purchasing in America. However, the dilemma still exists for future expensive curative and specialty therapies: despite the potential for enormous downstream savings, the vast up-front costs may be prohibitive for state and federal budgets.

Overall, there was consensus amongst panelists that a single consistent system for drug pricing negotiations among federal agencies is likely not a viable option. One speaker pointed out that it could potentially reduce competition due to consolidation of populations that are currently part of different government agencies, and thus different drug pricing negotiation strategies are necessary. Other panelists concurred that within programs it is more important to look at total cost of care and negotiate for pharmaceuticals accordingly, rather than synchronize a singular payment approach across government programs that cover diverse populations.

The Drug Formulary

Speakers on the panel discussed how health plans have looked to narrow formularies as a way to control costs. One noted that this could be a reflection of changes in the overall health insurance market, where exchange plans are narrowing networks and employing other tools to rein in costs. Viewing the health system as a whole, it was acknowledged that there are options other than narrow formularies to control costs in health plans, such as better risk adjustment and robust beneficiary pools.

At the state level, Medicaid programs are subject to close regulation of the benefit design, which inherently takes away flexibility from the states to make individual decisions in terms of cost controls with pharmaceuticals. Panelist Matt Salo emphasized that CMS has put states in a difficult position by saying that they must “reasonably” try to provide medications to all beneficiaries who could benefit from them.

Approaches to Drug Approvals

The discussion also turned to the Federal Drug Administration review process for the different categories of pharmaceuticals. One panelist suggested allowing for the accelerated review of applications when a generic drug without competition is priced prohibitively high. Streamlined approval processes were laid out as an option for improving market competition, and where monopolies exist, expedited reviews for off-patent drugs were also suggested.

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Following up on Anderson’s questions related to the importation of pharmaceuticals, one panelist agreed that it might be permissible in situations where generic drugs without competition are priced very high, though others disagreed as to whether this should be considered.

Next Steps

One key takeaway from the discussion was a clear and deliberate transition towards payment for value in the U.S. health care delivery system. Later this month, BPC will examine further how pharmaceuticals fit into value frameworks with a third and final installment in the educational series on affordable medicines. We welcome feedback from stakeholders and policymakers as we continue our exploration in this area.


Please join us on June 16, 2016 from 1:00 p.m. – 2:30 p.m. for BPC’s third forum on affordable medicines. This forum will feature opening remarks by BPC co-founder and former Senate Majority Leader Tom Daschle and a keynote address by Mark McClellan MD, PhD, former FDA commissioner and director of the Duke-Robert J. Margolis, MD, Center for Health Policy. A panel discussion will follow examining how pharmaceuticals fit into value-based payment and delivery models.

KEYWORDS: BILL HOAGLAND, CENTERS FOR MEDICARE AND MEDICAID SERVICES, EDUCATIONAL SERIES ON AFFORDABLE MEDICINES, MEDICAID, MEDICARE PART D, SHEILA BURKE