Leaders in the pharmaceutical industry fret that the order may affect their bottom line, and eventually, jobs in North Carolina. Analysts say that may be overstating the effects, both positive and negative.
By Rose Hoban
For years, President Donald Trump railed against high drug costs for Americans.
Last week, he finally took action that he says will bring down prices.
On Sept. 13, Trump released the text of an executive order designed to peg U.S. drug prices for Medicare recipients to what’s paid in other countries.
The order apparently was crafted this summer but, according to POLITICO, the text of the order was being negotiated with pharmaceutical companies throughout August. After negotiations between the White House and the pharmaceutical industry broke down, Trump pulled the trigger.
The executive order takes advantage of something that happens in most other countries that Congress has prohibited. In most other countries, governments negotiate with drug companies, using their size and buying power to get a better price on pharmaceuticals. In the U.S., a federal law governing Medicare prohibits that. Federal law also forbids the reimportation of drugs from places such as Canada, where prices often are lower because they’ve been negotiated. But there’s no law forbidding benchmarking the price to what another country negotiated.
Trump’s order prompted swift criticism from companies based in North Carolina and nationally with some saying it might not even truly lower the prices of drugs.
Industry analysts were more ho-hum, calling the little more than a road map to a future that may or may not even be enacted.
Cuts to research ahead?
Pharmaceutical companies immediately cast a dark light on the order, saying it would affect drug development and innovation and could lead to job loss.
Sam Taylor, head of the NC Biotechnology Center, said that if the order erodes pharmaceutical companies’ bottom lines, jobs could be lost in North Carolina as companies take traditional cost-cutting routes to make up for lost profits.
“One obvious place would be to cut manufacturing costs,” Taylor said. “It would involve limiting planned expansions of drug manufacturing facilities. Certainly, it would limit plans to add new jobs to the manufacturing side of the business.”
“Probably the first thing to be cut would be research,” he said, noting that Research Triangle Park is a hub for North Carolina’s dozens of biotech and pharmaceutical manufacturing and research companies.
But in the days since Trump signed the order, industry observers, both proponents and critics of the pharma sector, have cast doubt on the effects on patient pocketbooks and industry profits.
Will there be much change?
The details of the plan still need to be worked out, but the idea is that Medicare drug prices would be set to “the lowest price … for a pharmaceutical product that the drug manufacturer sells in a member country of the Organisation for Economic Co-operation and Development,” essentially the world’s most advanced economies.
Trump’s order is limited to drugs for seniors, as the federal government doesn’t have control over the purchasing and pricing for pharmaceuticals except in the Medicare program, which covers people over the age of 65 and some people with disabilities.
Medicare has several parts:
- Part A covers hospitalization.
- Part B covers care in physicians’ offices.
- Part D covers the drug benefit.
An earlier version of the executive order applied only to the prices for Part B drugs administered in doctors’ offices and clinics. But WhiteHouse.gov also includes a later, revised version of the order (both dated Sept. 13, 2020) that allows Alex Azar, the secretary of the federal Department of Health and Human Services, to develop a plan for applying the same payment model to seniors’ Medicare Part D drug coverage.
Industry representatives said the order was “irresponsible and unworkable,” and threatened innovation at a time when they say more is needed to combat the coronavirus that’s upended life around the world since January.
“The White House has doubled down on a reckless attack on the very companies working around the clock to beat COVID-19,” reads a statement from PhRMA, which represents the pharmaceutical industry’s largest companies.
Taylor argued that as North Carolina ranks second in the country in pharmaceutical manufacturing by the value of the drugs made, the state could be particularly hurt.
“Whatever revenue losses these drug companies have is going to have to come out of the pie somewhere,” Taylor said. “Certainly it would involve limiting planned expansions of drug manufacturing facilities. Certainly it would limit plans to add new jobs to the manufacturing side of the business.
“It would also probably mean a lot less research.”
Not so fast
Some industry analysts cast doubt on how much the order really would affect pharmaceutical companies. Stock prices for a dozen drug companies reviewed for this story all increased in the week after the order was issued. Stock prices for companies such as Novartis, GlaxoSmithKline, Pfizer and Merck, all of which have a footprint in North Carolina, crept up for the week after the announcement, then dropped Monday amid market uncertainty.
“I don’t think Wall Street sees this as being feasible,” said Markus Saba, a professor of marketing and the business of health at UNC Chapel Hill’s Kenan-Flagler School of Business.
Saba, a former pharmaceutical company executive who defends pharma pricing regimens, said it’s not clear how the order would actually work. “And if it does work, I don’t think it affects that many medications. So at the end of the day, I don’t see where the ‘there’ is, I don’t see the savings.”
Saba explained that drug pricing is exceedingly complicated, layered with rebates, pharmaceutical company giveaways, negotiated government prices and price clawbacks. He argued that this order would also affect a very narrow slice of the health care economy in the U.S.
“Pharma is only 15 percent of the [health care] spend,” he said. “Part B is a small percent of that, I’ve looked at stuff that says it’s either between one, up to seven percent of the pharma spend. Even within that, there are not that many drugs that you’ll find are cheaper overseas.”
He argued the U.S. government already gets a pretty good deal on medications, in particular, on brand name pharmaceuticals.
“[The government] buys at the lowest ‘average selling price’ in the U.S. and they get a 23.1 percent discount off of that,” Saba said. “And then they get a clawback on any price increases over the consumer price index since the time the product was launched.”
He also made the point that on Part D, more than 80 percent of the drugs dispensed under that program are generic drugs that are already cheaper than the brand names.
So, who ends up paying those high prices for drugs? Saba argued that it’s people who have high deductible health plans, whose deductibles reset at the beginning of the year.
“You know, for a $6,000 deductible, that’s a lot of money for people who just barely afford insurance,” he said.
Few people in North Carolina understand better how drug prices affect seniors than Gina Upchurch, who launched Durham’s Senior PharmAssist a quarter-century ago to help Medicare patients get access to medications.
The language of the executive order instructs Azar to create rules for administering the order, Upchurch pointed out. That’s a process that could take months.
A similar order signed by Trump several years ago to allow for the reimportation of drugs purchased in other countries never came to fruition. Trump’s newest order instructs Azar to do something but doesn’t give a timeline, or tell him exactly what to do, according to Upchurch.
“It just says you have to start looking or developing and potentially implementing rulemaking, so that’s sort of loose,” she said. “And then it says ‘selecting for testing,’ so it’s telling you it’s not going to be fully applied to begin with. And then it says ‘a model pursuant,’ so it’s a model, it’s not, ‘you’ve got to.’ They want some groups to try it first or whatever.”
She also said that under the current payment model when costs get pushed down in one place, they pop up somewhere else.
“If you’re going to throw major disruption to that, you’ve got to see it’s like whack-a-mole, you put it down in one place, where is it going to pop up?” she asked.
Both Upchurch’s and Saba’s primary critique of the executive order was that it does nothing to address many perverse incentives in Medicare’s system of drug pricing.
For instance, when a doctor administers a drug in his or her office, payment follows the “average selling price plus 6 percent,” meaning a doctor gets paid 6 percent over the cost for the drug alone. Saba said this incentivizes physicians to use the most expensive drug, usually a newer, brand name drug, over a drug that’s cheaper.
One clear example of this is the explosion in the use of Lucentis, an injection given to slow the progress of macular degeneration, which causes blindness, over an older drug Avastin, which provides similar outcomes and is just as safe. Lucentis has a list price of about $2,000 a shot, meaning a doctor would receive $120 for using it, whereas Avastin has an average price of about $50.
“I personally don’t think they’re professionally making that decision,” Upchurch said. “But the way that it’s designed, these more expensive medicines are something you would consider because it’s going to be covered for your patient. And you could make money off of it, support your other things that you try to do in your office that aren’t covered.”
Upchurch said a better policy intervention for seniors would have covered more of their costs at the beginning of the year before they’ve reached their deductibles. She also talked about an earlier policy proposal that would have passed the cost savings from rebates along to patients, but that policy got bogged down in politics.
“What’s driving up your Medicare costs in a big way is the Part B and Part D subsidies that come from general revenues of the government,” she said. “We have to do something to either get control of the prices, or you’re gonna have to decrease the benefits.
“In my mind, you know, if you’ve got all these people that are used to the status quo, and how much money they make, it’s going to be a really big uphill battle to say ‘that’s got to give, you can’t make so much money anymore.’”