An inflection point comes for Pharmaceutical Companies

THOUGHT SPARKS

An inflection point comes for Pharmaceutical Companies Rita McGrath

RITA MCGRATH | THOUGHT SPARKS

The Inflation Reduction Act for the first time allowed Medicare and Medicaid to negotiate with drugmakers for pharmaceutical prices. It also contained a much less discussed provision regarding patent protections. The law sets different exemption times for “small molecule” drugs that can be taken in pill form and “large molecule” ones that have to be injected or infused. This has the potential to change the structure of incentives for the Pharma industry and not necessarily in a way that benefits patients.

The byzantine US market and pharmaceutical prices It has been quite a while since George Merck in 1950 declared "We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we remember it, the larger they have been."

RITA MCGRATH | THOUGHT SPARKS

The morphing role of pharmacy benefit managers But here’s where it starts to get weird. The price of a drug that you can find out about is the “list price.”

Sort of like the sticker price on a car. The manufacturer then negotiates extensively with Pharmacy Benefit Managers (PBM’s), who negotiate on behalf of insurers and payers. The original idea behind PBMs was that they would remove administrative burdens from insurers and the plan sponsors who actually pay for the whole system. Since that fairly innocent early idea, PBMs have become incredibly powerful, making much of their money on rebates that they negotiate. To appease them, many manufacturers raise the “list” price and offer a bigger rebate, which is unfortunate for those who actually do have to pay the list price.

RITA MCGRATH | THOUGHT SPARKS

But things are about to change – a little The Inflation Reduction Act essentially ends the most favored customer clause on a few drugs, granting the Secretary of Health and Human Services the power to negotiate prescription drug prices for Medicare patients. Part of the push to accomplish this has to do with the worrying growth of spending on pharmaceuticals after the benefit was offered under the Medicare Part D prescription benefit. It now stands at 18% of total pharma spend, according to the Kaiser Family Foundation.

But there are cases when payers take control Rather than putting itself at the mercy of Pharmacy Benefit Managers, Caterpillar’s Todd Bisping has been able to tame the growing cost of prescription pharmaceuticals. As I wrote about in Seeing Around Corners, following his guidance could create a watershed for payers, who seem to have the least amount of control over the system, despite the fact that they are the ones footing the bill.

RITA MCGRATH | THOUGHT SPARKS

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