Taking a closer look at the Most Favored Nation Pricing Executive Order

Episode transcript

Find episode transcript below.

GLENN HUNZINGER: 

00:00:01:11 Welcome to PwC’s Next in Health podcast. I'm Glenn Hunzinger, PwC’s Health Industry Leader. Today, we're impacting a major development in healthcare policy this year. The Trump administration's new executive order on drug pricing focused on Most Favored Nation or MFN pricing.

00:00:17:09 The executive order comes with big implications for pharma, payer, providers and broader drug supply chain. Phil Sclafani is with me today to help us break down what MFN actually means. What's in the order? Who's affected and what industry leaders should be doing now to prepare, even amid the uncertainty. So, let's get into it. Glad for you to join us here, Phil.

PHILIP SCLAFANI:

00:00:40:23 Now, thanks for having me back, Glenn.

GLENN HUNZINGER:

00:00:42:22 Let's start with the high-level and big picture here. Phil, what is Most Favored Nation pricing? What is the executive order, and why do we see the Trump administration reviving that now?

PHILIP SCLAFANI:

00:00:53:06 Yeah, let's get into it at the higher level, Glenn. So kind of on the surface, Most Favored Nation goes to the concept that ultimately US patients shouldn't pay more than the lowest price paid in a group of peer countries. And if the executive order went into those peer countries as being those with about 60% GDP per capita of the US,

00:01:12:08 so a pretty tight list of high income, high healthcare cost countries relatively. The idea being, US prices are on average three times higher in the US than those other countries. So by way to show action on drug costs in an election year and be able to say that the US is not paying any more and think about it as maybe a response to some of the ‘global freeloading’.

00:01:35:01 So it's known that the US has higher prices and pays more for healthcare. And that goes back into funding innovation while foreign governments are able to negotiate steep discounts based on how they assess value of drugs and the way their healthcare systems work.

00:01:49:40 So bottom line, it's getting to the point where ultimately the executive order wants US patients to pay no more than the lowest costs in those countries and would get there through a negotiating mechanism. So if we go into a bit more detail, what's in the executive order directs HHS to negotiate with drug makers over 30 days.

00:02:09:09 So we're on the clock now with maybe 20-ish days left to negotiate lower prices compared to those group of 60% GDP per capita countries, if we're not successful. So if pharma hasn't voluntarily lowered prices within those 30 days, it mandates CMS essentially to start rulemaking and very vaguely and undefined what that is, we'll come back to it.

00:02:30:16 But there'd be some rulemaking now of how manufacturers would be compelled to offer those lower prices down to the most favored nation. There are also some terms in there that potentially could allow for drug importation from other countries besides Canada, so would bring in some lower costs from drugs purchased in those countries and imported in the US, and would also use other powers of the federal government.

00:02:52:11 So we're able to investigate anti-competitive practices, potentially limit exports of those drugs. And there were some allusions to potentially impacting drug approvals and reviews through the FDA and more broadly, just using the full power of the federal government to negotiate drug prices down. I do think it was interesting looking at this both ways, and it's a little bit unprecedented for the federal government to also say they would potentially help pharma negotiate higher prices in other countries.

00:03:22:01 And we'll come back to that too. Last piece I'll cover at the high level, this is envisioned as a bold kind of direct-to-consumer model. Right. So the executive order says those prices should be available for US patients to buy directly through some model that isn't defined,

00:03:37:00 but specifically cutting out the intermediaries or middlemen. So summarizing quick, MFN, everybody essentially bringing in those lower prices paid in those countries to here in the US and making those prices available directly to patients.

GLENN HUNZINGER:

00:03:50:08 That's super helpful, Phil. I think, the uncertainty we've already talked about is just affordability, access and quality of care. Everything's kind of going in one direction and needs to sort of swim together. And certainly, with the IRA and other aspects of constant push on drug pricing, we're already seeing some element of prices coming down.

00:04:11:07 But if you think about the pharma manufacturers and the impact here, let's just talk a little bit about how we see that impact playing out.

PHILIP SCLAFANI:

00:04:18:18 Yeah, it's a great question. Let's make the assumption that this does go forward. Maybe it will come back to what may happen with legislation or litigation before then. But if this was to go forward, I think the idea and the goal of the administration is that this is kind of a meeting in the middle.

00:04:31:50 It's like if a drug price in the US was 100 and it was 30 in one of these countries overseas, the goal really for the administration, we think, is to bring that ex-US price up. So negotiate the 30 up to, let's say 75, and then the US price would come down to that 75. And for a pharma manufacturer, things would balance out.

00:04:52:08 You're actually generating more revenue from the higher prices overseas, less revenue from the prices here in the US. And maybe things would stay essentially flat, allowing those money in profits to go back into R&D and innovation. That assumes the two things happening together.

00:05:09:10 But the risk for pharma is, you're facing the lower pricing, potentially in those ex-US countries, or the risk of having to exit some of those markets if the price can't come up and sort of having to choose a little bit which countries you're in to preserve US price. So ideal world,

00:05:23:16 in a perfect situation, if the administration got what it wanted, we'd have this balancing act of the ex-US prices coming up and the US price coming down. The US patients are now paying that lowest price available through the MFN, but pharma revenue stays relatively flat with the balancing.

00:05:39:06 I don't think there's any scenario where realistically, pharma takes a 50% haircut on price in the US or conversely, walks away from 50% of global business that's in these most favored nation market basket countries.

00:05:52:18 So it's really figuring out what is that balancing act going to look like. The other thing to think about is it's possible the way this MFN is effectuated, right. It could impact just Medicaid or Medicare. And potentially, some rulemaking through CMMI could make that happen without the need for legislation. It could be broadly defined as impacting government and commercial business.

00:06:13:12 And that potentially could end up in litigation if it gets there. Or we know some of those actions to try to impact the commercial private markets and necessarily go forward. But indirectly, there are ways this could impact the entire market, even if it is just a Medicaid or Medicare impact.

00:06:25:09 So we are monitoring the possibility that any most favored nation price could actually impact the Medicaid best price that pharma calculates, and is one of the key inputs into the 340B price. So there is the potential that MFN could impact revenue in the US in just the government channel,

00:06:44:08 and then sort of spill over to the commercial channel. When we think about the scale there, I mean, 340B sales were $66 billion net last full year, $124 billion at whack gross price and still growing plus 15 or so percent a year. So any further reduction on that 340 B channels, another big gross to net impact that we're monitoring for as well.

00:07:06:10 We also think about this could stack on top of the MFP price. So we've got MFP, which was from the Inflation Reduction Act and the Medicare negotiations that are already happening there. The MFN price could further lower those prices in Medicare and see a reduction there and some other impacts like that could be quantitative and certainly impactful.

00:07:26:16 The other pieces we are looking at probably a little bit more qualitative, but I think right now for pharma, it's incredibly difficult to imagine any large-scale M&A or significant deals just with this impact out there. The value of these assets could be down half as much if pricing were to go down and same

00:07:43:20 likely this is kind of reverberating through R&D organizations where you've got to maybe revalue some of the assets you had moving through the pipeline if you were anticipating the value of it was $100, and tomorrow it's $50. That's a significant rebasing of assets in the pipeline as well.

GLENN HUNZINGER:

00:07:58:15 It's a lot of moving pieces, Phil. And listen, I think you kind of nailed it by trying to put some of the context around the numbers, but maybe just to crystallize that thought, so prescription drugs is about 10% of the overall spending on US health. So let's call it 450 billion of the $4.5 trillion of spending. If you think about those pieces, I think you've sort of articulated about a 400 million of that is kind of prescription drugs.

00:08:24:06 But within that, you've got sort of the private health and sort of the Medicare and Medicaid, but maybe just crystallize that sort of 400 million and a bit of the bull's eye around the numbers you just mentioned.

PHILIP SCLAFANI:

00:08:34:11 Yeah, I think you hit the numbers on the head to think about the 450 billion in total pharma spend, a little bit less than 200 billion is in Medicare and Medicaid and some other government channels. And that's the part we think is probably most directly in play. There's potential through CMMI or other channels that the most favored nation could be implemented there and have that direct impact.

00:08:55:08 Seems less likely that it would hit the 250 billion or so of private or commercial spend directly. But that's where we do monitor for that indirect impact through the 340B side potentially, or so just having this out there, like there's a price in the market that's significantly lower than what a private commercial insurer is paying. There is the potential they would try to use that to negotiate additional discounts.

00:09:18:08 So when you stack all this, we're kind of watching the stacked bar build of what segments might MFN impact directly, indirectly. And then what's the spillover from there and how much of that 450 billion is in play? That's probably the key piece that we're looking for when there's the expectation of seeing some of the rulemaking after that 30-day period.

GLENN HUNZINGER:

00:09:39:01 Yeah. Well, it's a pretty sizable impact for pharma companies. How do we think about the downstream in for sort of the pharmacies, the payers and even the PBMs, which are now getting a bit of spotlight here?

PHILIP SCLAFANI:

00:09:50:20 Yeah, that was a big piece that maybe came a little bit out of left field on this. And you saw the market's reaction when this came out where pharma stocks were generally up and a lot of the health services players were down because of that inclusion of cutting out the middleman and things that allude to a new model.

00:10:06:14 So this is where I think that direct-to-consumer model is key. So you think about pharmacies and distributors. I mean, their business as a distributor is buying those products from pharma, running all the logistics and shipping the products around the country to all the hundreds of thousands of pharmacies. And then those drugs get the patients. The executive order contemplates that going away.

00:10:25:21 It's now a direct-to-pharma model that could potentially cut out some of those players. So that would be very significant. We see very limited direct-to-consumer models now, like with GLP ones and others, but certainly nothing on a large scale like contemplated, the executive order here. If you think about PBMs, again, sort of an interesting mix.

00:10:43:20 They potentially, if PBMs weren't involved in this, there'd actually be less spend going through. So a reduction in drug spend. But that would also potentially mean losing some of the rebates that they've negotiated with pharma manufacturers that are in turn sort of guaranteed to be passed down to their clients,

00:11:00:00 which are health plans and large employers. So it's a disruption to that rebate-driven model that the system is sort of built around for a lot of PBM models today as well.

00:11:09:16 And then maybe lastly, overall, as we talked about sort of an unknown, how much would this impact commercial versus government channels? So as we think about somebody going out for insurance as a patient in Medicare or Medicare Advantage, there is the potential those costs may go down in the future. But unknown what the private market would look like.

00:11:26:19 And again, we'll see how things shake out. But you look at it as pharma maybe reacted as things weren't very specific and detailed. So the market was up in pharma equities since the announcement. But this fear of disintermediation or being cut out for some of the pharmacies and distributors has driven the market down a little bit. If we look at at least what the street's saying about these potential impacts.

GLENN HUNZINGER:

00:11:46:20 It is no doubt there are a lot of moving pieces and a lot of things up in the air. And I think some of this is playing out sort of the game theory here. But what are you seeing companies do right now? And the ambiguity.

PHILIP SCLAFANI:

00:11:57:16 Yeah, I think scenario planning for sure. I think most of them needs to start with the industries on the clock in these 30 days to voluntarily lower prices. I don't think we see that happening in terms of every brand and pharma product in the country is not going to lower their price in those 30 days. So the expectation is we'll see some rulemaking come out and that's undefined

00:12:18:09 what that's going to look like. And then coming out of that rulemaking, depending what it says, I think there's the expectation of seeing some combination of litigation first and then potentially legislation needed or some kind of maybe pilot program through CMMI. So that's where the scenario planning starts. And then I think you're going into that global optimization of how much higher could Ex-US prices rise.

00:12:40:20 And then the US price is coming down, modeling out some of that best price and 340B exposure that we talked about a little bit earlier. Again, this kind of pricing and volume model, I think we see a lot working on now in concert with that definitely any in-process deals, licensing, acquisition, divestiture. I think folks are taking a really hard look at that and saying, what is the real value in the future of some of these assets in these deals?

00:13:05:16 Do we see a little bit of a freezing there? Revaluing pipeline assets, as I mentioned earlier, starting to form some of the strategic messaging internally to employees, investors, others, what's the messaging around. And then externally for pharma. How are they going to engage with payers and providers and patients around the response to this of, of course, wanting the healthcare system to get the best value, but certainly contemplate what might responses look like.

00:13:29:10 It had a message that and then last there probably goes without saying, but monitoring closely what's going to come out of the agencies, HHS and CMS for any updates there, as well as the courts for litigation that will come potentially from multiple players. And then maybe last piece to hit would be the verbiage and rhetoric. We are in an election year.

00:13:48:09 So to see what else comes out as some of the midterm elections are going to be important this year.

GLENN HUNZINGER:

00:13:52:19 Super helpful to hear that, Phil, maybe we can wrap this up here and maybe in 30 seconds, how do you see this playing out?

PHILIP SCLAFANI:

00:13:59:18 Yeah, and I think again, most likely we're in the 30-day window now. Let's see what comes out of rulemaking. Best guess that rulemaking will lead to a round of litigation from probably multiple players in the industry. It'll get tied up in courts for a little bit. And in the interim, I think we're likely to see a significant range of threats, right?

00:14:18:00 I mean, the quickest way to get action, which is what the administration wants. And again, considering we're in an election year, it'll be threats of the part of the executive order that said the full power of the US government, right. So if ex-US countries won't raise their prices to pharma, we could see threats of trade further going back to tariffs and pharmaceuticals, maybe withholding exports of other products and or pharmaceuticals.

00:14:40:23 I mean, the quickest way to action when the litigation happens will be threats like that both going outwardly to ex-US countries and then potentially to pharma here in the US to try to get those prices to meet in the middle. And maybe that's the last point I'd leave with, is I don't think the expectation here is if a drug costs 100 in the US and 30 ex-US that the price becomes 30, it's that that 30 maybe rises to 75 or 80 and the US price comes down to that 75 or 80.

00:15:08:00 We need to see things on both sides. So that would be my best guess. We see the rulemaking come out. Some litigation follows that quickly. And then, it's really threats and trying to use power and leverage to get to some middle ground of pricing, such that the US price ends up being comparable to those ex-US prices.

GLENN HUNZINGER:

00:15:23:15 Phil, as always, great insights. We’ll certainly be watching as this all unfolds, especially what happens after this 30-day window and how MFM sort of shapes itself. But there's no doubt there's one certainty is drug pricing continues to be a focus and certainly it continues to head in one direction. So appreciate you coming on here and sharing your insights.

00:15:44:01 I think a lot of good things for everybody to think about and a lot of practical advice. So thank you, Phil.

PHILIP SCLAFANI:

00:15:48:06 Thanks, Glenn. Really appreciate the opportunity to join here today.

GLENN HUNZINGER:

00:15:51:17 That's it for today's episode. Thanks for listening. For more on these topics and other health industry insights driven by policy, innovation and care delivery changes, please subscribe to our podcast at pwc.com/US/Next in Health podcast. Until next time, this has been Next in Health.

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