The battle over drug pricing: Finally a consensus?
09 October 2019
The U.S.: The World Champion Of Healthcare Spending!
• Fitch Solutions expects the U.S. healthcare spending to grow to $3.6tn in 2019 from $3.4tn in 2018, or 18% of GDP.
• Most Americans have private health insurance provided by their employers.
• Only 36% of Americans receive public health insurance.
• MEDICARE: for the elderly and retired.
• It provides health coverage to the 65+ (or under 65 but with a disability).
• MEDICAID: for low-income individuals and families.
• Although prescription drugs only amount to 10% of total healthcare costs, the high price of many drugs is a significant matter ahead of the 2020 U.S. election.
• U.S. prescription drug spending has been increasing faster than in most other countries.
• Americans pay the highest prices for drugs in the world!
• For 62% of U.S. voters, healthcare is the most or the second most important issue.
• Both sides (democrats and republicans) are proposing several bills to reduce prices, and may agree on a bipartisan plan.
The Pricing Drug Supply Chain: A Real Headache
• The U.S. is the only market in the world where drug prices are not controlled.
• If the government decides to change the rules, volatility in the stock market will be inevitable!
• Drug prices are set "behind the scene" through a complicated supply chain that involves three crucial players: pharmaceutical companies (i.e., drug manufacturers), pharmacy benefit managers (PBMs), and payers (private insurers, Medicare and Medicaid).
• PBMs act as middlemen and work on behalf of payers to negotiate discounts on the list prices of prescription drugs, called rebates.
• The drug manufacturer pays rebates to a PBM.
• The PBM shares the rebates with the payers (the insurance companies, but not with final patients).
• The rebates system aims at incentivizing PBMs and health insurers to include the manufacturer’s products on their formularies, i.e., the list of drugs and pharmacological therapies covered by a health plan.
• Different PBMs may negotiate different rebates, and this system remains very opaque.
• New drug pricing bills under discussion could require PBMs and drug manufacturers to disclose the discounts they are negotiating.
• Some more radical proposals also suggest that final patients should receive 100% of the discount.
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Change Is Coming!
• Both political camps have made several proposals since the beginning of 2019.
• Nancy Pelosi (democrat) was applauded by President Trump when she presented her plan, confirming the willingness to resolve the issue of high prices in a bipartisan way.
• The main proposals of Pelosi's Bill are as follows:
• Medicare would directly negotiate the prices of at least 25 drugs with an upper limit of 250 drugs per year.
• The government would target the drugs that represent the highest costs under Medicare taking into account both price and volume sold in the U.S.
• An upper limit on prices that would be set at 120% of the average price of the drug in six reference countries.
• Once the negotiated price is set, the drug maker may not increase the price faster than inflation in subsequent years.
• Under the Part D Medicare program, an annual out of pocket maximum would be established at $2'000.
• A more restrictive view from the version of the Senate Finance Committee bill, where the proposed amount was $3'100.
• Companies that do not meet the requirements would have to pay penalties corresponding to 65% of gross sales of the drug.
• The bill proposal is less ambitious than expected and should not target rare diseases drugs (that are typically very costly).
• Big pharma companies are the most exposed.
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Catalysts:
• A bipartisan agreement before the 2020 U.S. election is not a utopia anymore.
• Any deal would likely remove the uncertainty over pricing that has depressed pharma stocks.
• It appears unlikely that draconian measures will be adopted.
• With Trump's support, a compromise between the Senate Finance Committee bill and the Pelosi bill is likely to be found.
• The final bill could be less aggressive than anticipated by the market.
• Specific therapeutic categories (like cancer) remain protected by state legislation, and orphan drugs are protected by moral suasion.
Risks:
• A "no agreement" situation between the two political camps would lead to more volatility on the stock market.
• A price cap on orphan drugs and other strategic areas may still be added to the proposed bills.
• Extremely high prices for orphan drugs have recently made headlines and are becoming a public opinion debate subject.
Bottom line:
- Finding a compromise between the two political camps resulting in a bipartisan bill should be not as detrimental to the healthcare sector as anticipated.
- Drug stocks have been impacted negatively by the news flow about pricing discussions since the beginning of the year.
- Once the uncertainty over pricing and potential reforms will disappear, investor sentiment will significantly improve, and the healthcare sector may see a re-rating.
- Most innovative biotech companies are less impacted by a future bill on pricing than the largest pharma companies.
- Innovation will continue to drive the industry.
Sources:
https://theincidentaleconomist.com/wordpress/something-happened-to-u-s-drug-costs-in-the-1990s/
https://www.kff.org/other/state-indicator/total-population/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D National Health Statistics Group. (2017)
Wall Street Journal https://www.healthline.com/diabetesmine/pharmacy-benefit-managers-and-drug-pricing
Centers for Medicare & Medicaid Services
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