The Bull Case for Specialty Drug Pricing

Richard

Average prices for traditional drugs (e.g. drugs for common chronic conditions, and for relatively non-serious acute conditions) grow rapidly because manufacturers steadily inflate existing drug prices over time. In contrast, average prices for specialty drugs (e.g. for less common debilitating and/or life-threatening conditions) have risen because new products (e.g. Sovaldi) tend to be launched at substantial premiums to the products they replace. Unlike traditional drugs, once launched the prices of specialty drugs tend not to rapidly inflate (though exceptions plainly exist)

Manufacturers’ ability to inflate traditional drugs’ (net) pricing faces serious threats: Medicare eventually is likely to make low-income Part D beneficiaries’ drug spending subject to Medicaid pricing rules, which eliminates any potential for real price gains on these sales (which are 55% of Part D sales, and 18% of total US drug sales).

Commercial payors are likely to shift toward co-insurance and away from fixed dollar co-pays; this too seriously limits manufacturers’ ability to achieve real (net) pricing gains on traditional drugs (because co-insurance makes consumer out-of-pocket costs grow at the rate of drug prices)

Specialty drugs face the prospect of new rebates (but not launch price pressure, see next). Beginning in 2018 – 2019, we believe Medicare is likely to require rebates on sales of higher margin products (e.g. drugs, devices) to beneficiaries in Parts A and B. And, as commercial beneficiaries opt for cheaper plans with more restrictive formularies and higher out-of-pocket cost sharing, this puts commercial formulary managers in the position of demanding rebates even from relatively unique and high-need specialty products

Crucially however, despite the likelihood of paying new rebates over the mid- to longer-term, we see no feasible means by which either public (generally Medicare) or commercial payors will put effective pressure on the launch prices of new specialty products

It bears emphasizing that Medicare has no authority to influence new product prices under current law, and that historic attempts to gain such authority have routinely failed. Under current law Medicare payment is contingent only upon: “… a determination that a service meets a benefit category, is not specifically excluded from coverage, and the item or service is ‘reasonable and necessary.’” And, to the specific question of whether CMS considers cost-effectiveness in determining whether a given product will be covered, they do not: “Cost effectiveness is not a factor CMS considers in making NCDs (national coverage determinations). In other words, the cost of a particular technology is not relevant in the determination of whether the technology improves health outcomes or should be covered for the Medicare population through an NCD.”

Because commercial payors (e.g. PBMs, HMOs) earn relatively predictable percentage margins on the baskets of goods and services they cover, within limits* commercial payors benefit when the ‘given basket’ includes products and services whose starting prices (before negotiations) are as high as possible.A 15% margin on a $10,000 drug obviously is worth more than a 15% margin on a $5,000 drug. The key to (commercial payor) success isn’t making the $10,000 list price drug into a $5,000 list price drug, it’s being able to buy the $10,000 drug for less than its competition

Thus as concerned as we are that traditional drug pricing power (specifically the ability to inflate prices of existing products) will be seriously impaired, we have very little concern that specialty drug pricing power (the ability to launch new products at substantial premia to the products they replace) faces any major threats in the near- to mid-term. New rebates that may be owed on specialty drugs are relatively far off (2018 – 2019 for Medicare), or will only come into place gradually (as a rough estimate, it should take 5 or more years for most commercial beneficiaries to move into cheaper plans where specialty drug rebates are likely to apply)

Our pricing thesis argues for holding companies with pending new product flow, which we systematically identify in our ‘SSR Health New Product Approval Portfolios’, published monthly

For our full research notes, please visit our published research site

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