Drug pricing remains a hot topic. HRI recently spoke with Phil Sclafani, a principal in PwC’s healthcare advisory practice, to talk about drug pricing and the complexities of how drug prices are set. (Click here to read Part 1 of this interview)
Can you walk through some of the ways in which it might be difficult for a pharma company to lower the cost of its drug or offer a drug at a low cost to a particular payer?
Let’s start by looking at a hypothetical example of how pharmaceutical prices are set and managed to answer the question.
Let's say the list price, or the Wholesale Acquisition Cost (WAC), of a hypothetical drug is $1,000 per month. And let’s say for a patient that has Medicaid for their insurance and then uses my drug, I—the pharmaceutical company—end up paying a 50 percent rebate based on the Average Manufacturer Price (AMP) and best price, and 10 percent of my units are sold to Medicaid at this price.
And then I’ve got Medicare, where in this example I sell 40 percent of my units at a 40 percent discount off WAC. At this point I'm left with 50 percent of my units in commercial, or cash, which can be at a mix of different rebate rates and noncontracted business based on negotiations with payers and PBMs. On top of this, I can have significant discounts in the channel going to 340B customers, pharmacies, specialty pharmacies, wholesalers, distributors, group purchasing organizations and others.
All of these discounts and rebates go into my gross-to-net, which can get pretty complicated with a lot of contracts and government discounts as we just discussed. And, although some may not categorize it in gross-to-net, I probably have to offer copay support and other financial assistance that continues to grow. I have marketing costs, a fully loaded sales force and a bunch of other costs that impact profitability and operating margin.
Now getting back to your original question, it's difficult to just lower the WAC price because it is the basis price tied to all these different discounts, rebates, fees, price protection clauses and other price concessions, which given all the different contract rates and mandatory discounts that can be out there, makes it really difficult to even forecast the impact of a WAC change. It’s not as straightforward as one would assume thinking a change in WAC would just flow through to the net cost and margin.
There’s also a payer and pharmaceutical benefit manager (PBM) angle to consider where they’ve already agreed to significant discounts in some cases based on the current WAC, so you'd have to renegotiate those contracts with every payer or PBM that you are contracted with, otherwise the net price would be much lower than currently agreed. It would be a huge effort for some companies to have to renegotiate upwards of 25-50 contracts, most of which probably contain all or multiple products that the company sells.
The concern here beyond the workload itself would be that opening up discussions on one product could impact many others when the customer looks at the overall contract. For Medicare, there are very long bid cycle timelines that start almost 24 months in advance, so making changes there is not easy, either.
Changing WAC also creates challenges in the supply chain where WAC is the basis price that's used for things like inventory management agreement fees and distributor service agreement fees and prompt pay discounts with wholesalers and distributors and is either directly or indirectly tied to drug reimbursement for a bunch of different players in the system—pharmacies in particular.
If I lower my WAC overnight, wholesalers make less on a dollar basis for the services you’ve contracted them for. One day they were getting 300 basis points on a $1,000 list price, and the next day they're getting it on $700. That means they're getting less money for doing the same thing they were doing before. For pharmacies, they already don’t make a ton of money from drug dispensing and could end up in a situation where they actually lose money with a WAC/AWP decrease.
Another issue: All of the inventory that I have in the supply chain could potentially be devalued overnight. I might have 2-3 weeks of inventory sitting at wholesalers and another week on pharmacy shelves. All of that inventory is potentially devalued depending how you’ve setup your contracts and manage your supply chain. You'd have to manage through that and then you know for a unit that a pharmacy bought at $1,000 they're now going to get reimbursed based on $700 when they dispense it tomorrow unless you put in a plan to true them up. This adds another wrinkle that they've got to manage.
So, there's just a lot of challenges to lowering WAC. I think that's why we've seen the strategy of pharmaceutical companies creating new National Drug Code (NDC) numbers for existing drugs they want to lower the price for, which allows them to set a lower WAC price without disrupting existing inventory or contracts (as much).
We’ve also seen some authorized generic strategies being used to similar effect. There really is no other great way to lower WAC price or lower pricing to the entire market at once. You can do it through all your individual contracts by customer as the industry has for many years, but again there’s a lot of challenges to lowering price to the entire market through WAC.
For more insight into drug pricing strategies, please see HRI’s new report, Creating a stable drug pricing strategy in an unstable global market.