Insurance Restructuring or Co-pay Caps? Testing Nuanced Messages In Charged Pricing Debate

The drug pricing debate isn’t fun for anyone in the biopharma sector, but it isn’t likely to go away soon. A recent Center for American Progress event highlights the challenges of finding the right message in a sound-bite focused climate – but also the benefits of engaging directly with critics.

The biopharma sector has a tough policy nuance to sell during the next two years: that restructuring health insurance to get rid of the separate and unequal treatment for drugs is a better solution than the seemingly simpler approach of setting an annual cap on patient co-pays.

The primary importance of the restructuring objective was enunciated by Amgen Inc. VP-global value, access and policy Josh Ofman during an April 26 appearance at a Center for American Progress panel discussion on drug pricing.

Ofman had to persist to make that point to the generally unfriendly forum presented by the CAP meeting. He tried a number of times but was only allowed to flesh out the argument towards the end of the meeting in answer to a question from the audience on Hillary Clinton’s support for a $250 co-pay cap. (Also see "The Campaign Against Drug Pricing: Candidates Can Only Hope Voters React As Strongly As Wall Street" - Pink Sheet, 25 Sep, 2015.)

Ofman said the cap is not “the solution to the real, underlying problem which is that the 3%-4% of our sickest, most vulnerable patients are being punished for their biology with coinsurance rates of 30%-40% in a large number of plans. That is not right. There is no clinical rationale for that; we have to address that core issue through better value-based insurance design.”

While the title of the CAP event was non-threatening (“Prescription Drug Pricing: Reforms to Pay for Value”), the tone was almost entirely unfriendly. The tough but relatively low-visibility setting offered by CAP, however, was a good forum to test some positions in the evolving pricing debate.

As the pricing discussion evolves from a campaign year issue to a likely post-campaign action item, more industry execs will find themselves in similar forums. The next few months – before anything of substance is likely to be undertaken – are a good time to continue to refine and test arguments in forums like CAP.

CAP is a Democratic-leaning think tank that has helped provide the underpinnings of many of the Clinton campaign’s drug pricing policies; it is likely that CAP will provide staff for both the Democratic campaign and a potential Clinton Administration.

Amgen’s Ofman was the sole representative for the drug industry at the event, and thus placed in the position of explaining and defending industry pricing practices at large.

Ofman was challenged on a host of issues, including the prices for new launched products, the rationale for price increases in the marketplace, and the lack of transparency on price calculation, net pricing, and how pharma companies redeploy cash from business operations.

His willingness to participate played well for Amgen, which was painted by other panelists as a relatively forward-thinking company – but it wasn’t an easy task.

Zeke Emanuel Takes Aggressive Tone

A large part of the unfriendly atmosphere stemmed from aggressive moderating by CAP senior advisor Zeke Emanuel, who used his trademarked fast-paced, interruptive approach to cut off speakers and dismiss positions that he assessed as pure rhetoric. He acted like a human buzzer, cutting off arguments that he deemed too long-winded or non-germane.

Emanuel, a former advisor to the Obama health care reform team and the brother of former Obama Chief of Staff Rahm Emanuel, can be expected to keep up that hectoring approach to drug price discussions through this round of public debate. If that translates into a health policy position in the next Administration, the pharmaceutical industry is likely to face Emanuel more frequently and with perhaps more than a sharp tongue to wag.

CAP VP-health policy, Topher Spiro, also defined the adversarial environment at the beginning of the session by challenging head-on the industry’s view that high prices defend innovation. He offered a litany of “not innovative” acts by pharma companies structured like a campaign-style response to pharma’s effort to make “innovation” the key definition of the industry:

“Not innovative to just merge two companies especially when it is to avoid taxes; nothing innovative about increasing prices above inflation for existing drugs; not innovative to charge such high prices that the resulting financial toxicity actually worsens a patient’s condition; nothing innovative about spending more on marketing than R&D; not innovative to have to resort to patient assistance programs …when the cost is still being passed on to everyone else through premiums.”

That tone and approach made it difficult for Ofman to get counter messages through, especially the more nuanced points like the call for insurance restructuring. That rhetorical challenge is important for industry to recognize heading into campaign season when simple messages tend to drown out nuance.

Emanuel abruptly stopped Ofman the first time that he brought up the idea of insurance restructuring. Emanuel charged Ofman with “filibustering” and using Capitol Hill-style talking points: “I didn’t know you were a Congressman yet,” Emanuel said sardonically. Ofman persisted and eventually made his point much later in the session in the answer to the question on Clinton’s proposal.

Ofman suggested that pharma is ready to push back on hospital complaints about price increases. He portrayed other parts of the health system, primarily hospitals, as taking advantage of current insurance design by charging insurers at higher levels than the contract prices at which the products were purchased.

“When we sell a drug to Memorial Sloan Kettering, the hospital might charge an [insurance] company two to ten times more for that drug,” Ofman explained. “The patient is paying the full copay on the list price – that ten times higher price – not the price that we sold it to them. The patient is being punished. While the government sets the ASP, that hospital is charging whatever it wants to the insurance company and the patient is paying an enormous co-pay as a result of that.”

Ofman’s specific reference to Memorial Sloan-Kettering was directed at another of the prominent pricing critics in the current policy debate, Peter Bach, who directs MSK’s Center for Health Policy & Outcomes. Bach was originally supposed to be a panelist at the CAP event, but cancelled.

Ofman similarly noted that insurance companies keep co-pays for patients high even though they are getting discounted prices from the manufacturer. “For insurance companies, we often negotiate with insurance companies large rebates around some of our largest drugs. The patient doesn’t take advantage of that,” Ofman said.

“The patient is getting charged a copayment or coinsurance on the list price, not on the acquisition price of the plan. This is very complex. Anybody who thinks that this is very simple is mistaken. There is a lot of complexity. If we are going to think about drug pricing, we have to think about it holistically: the insurance design and the value.”

Ofman has experience in representing Amgen and biopharma positions in adversarial policy forums – and experience in that setting may be vital heading into the next Administration. The CAP session is probably more likely to reflective of how future federal price setting events will sound than the relatively even-handed first effort by the Obama Administration last fall. (Also see "HHS Price Forum: Surprisingly Good Context For Pharma Ideas For Regulatory Changes" - Pink Sheet, 16 Dec, 2015.)

Rebuilding Alliances With Private Payors

The industry skepticism on co-pay caps is a bit surprising – but also potentially an important point for rebuilding alliances with the insurance sector.

The Clinton co-pay cap is clearly not a popular proposal for health insurers. Though, as America’s Health Insurance Plans President Marilyn Tavenner stressed during the CAP panel discussion, “not for the reasons you would think.”

Tavenner argued that the insurance industry’s opposition isn’t about protecting its profits or reducing costs, but about avoiding unworkable benefit designs.

When “you control a payment and you don’t deal with the underlying price issues – medical cost trend, pharma trend, whatever – then you just push it up in the premium,” Tavenner said. It is “like a balloon:” if you push down in one place, it rises in another.

Prices For Marketed Products Change With New Features, New Uses

That issue of the underlying cost of drug treatment was the primary focus of the discussion, with the dominant topic being calls for industry to more clearly articulate actual net prices and a value-based rationale for what those prices are.

Ofman distinguished between two pricing situations for Amgen: new product pricing and ongoing product lifecycle pricing. He got the better of Emanuel in a short back and forth on lifecycle pricing – by offering support for a very narrow policy of limiting price increases to inflation unless there is some updated indication or formulation work to justify a higher value.

Emanuel pressed Ofman to take a position against lifecycle price increases: “Would you agree to limit price increases year-to-year on branded drugs that correspond to either the CPI or increase in GDP? We have seen lots of increases that bear no relationship to economic growth and certainly no more innovation or no more added value.”

The Amgen exec responded by questioning the view that there is no further development on a drug after it is approved for marketing. Ofman said that the contention that “there is never an increase in value once a product comes on the market…is just not accurate.”

As evidence around a drug “evolves” with experience, Ofman said, “the numbers of indications often change dramatically; the devices that are associated with them become… easier to use and change dramatically; the formulations change; manufacturing changes. There’s a lot that goes on with a drug once it gets on the market.” Prices change to reflect the investments that are required, he argued.  Some Amgen drugs “have had seven new indications since they were launched. The value proposition has changed dramatically for some of those products and their price has as well.”

That led Emanuel to push further for a flat price commitment for existing products. “Would you agree that if none of that happens we ought to have price increases that are linked not to what a drug company wants but to either GDP or CPI?”

Once the discussion was linked to static products with no ongoing lifecycle development, Ofman found it easy to agree that it is worth at least considering a no-increase agreement. “It is worth thinking about where there is no activity, no evolution of their value proposition. Those ideas are worth thinking about.”

Launch Prices Decisions: Amgen, Valeant

Tavenner cut back to introductory prices as the key issue. She noted that price increases for marketed products are not the key concern to insurers. “I really look at the issue of what goes into the transparency and how a drug is priced initially as being the problem.” She pointed out that leveling prices after high launch levels is not particularly appealing to insurers. “If you are agreeing to hold to CPI or medical inflation and it is already ten times what the market would bear, what does that solve?”

How new products are priced will continue to be a standard question for industry execs for an extended period.

Ofman explained the basis for new product pricing as a combination of specific therapeutic sector analysis and support for Amgen infrastructure, particularly R&D. He did not tie the price directly to the costs of developing the one drug.

The discussion with Ofman demonstrates both the wisdom of not tying prices directly to individual product development costs and the downside of where that line of argument leads – to further calls for transparency. That transparency discussion cuts two ways – to the actual, net prices to different customer groups and to how companies redeploy the funds.

“At Amgen, what we do,” Ofman explained, is start with a “value assessment. We will use experts around the globe to help us and we will come up with some estimation of what think the value this drug brings to the market place. Then we look into the market. What are the market factors?  There are prices that exist in the market. What is the competitive dynamic; what are the market factors?”

That is followed by “pretty extensive research with payors, providers and patients about what they are willing to pay for the drug. Then we come up with a price anchored in value.” At that point, Ofman said the company looks at the price versus support of ongoing company efforts “we ask ourselves is that a sufficient return to continue to fund what at Amgen is a $4 billion R&D engine and we set our prices that way.”

Ofman did an effective job of separating the pricing decision from the development costs for individual products. However, his comments on the role of new products as supporting an overall corporate endeavor highlight that the pricing policy debate is headed further toward a focus on how companies use the returns from successful products.

Compare And Contrast With Valeant

Ofman’s approach, however, lose some its positive impact when compared to related comments two days later at a Senate Aging Committee hearing on Valeant Pharmaceuticals International Inc.’s pricing.

The Senate hearing was even more adversarial as an investigatory event and Valeant presented a tempting target as a company at the nadir of its reputation. The hearing featured two Valeant executives (one an ex-exec) and the large hedge fund investor, new board member William Ackman from the Pershing Square Capital.

Valeant’s defense of its pricing decisions was a different situation — repricing for recently acquired older products, not NMEs, nor even modified or improved products.  While the situation is different, the shared commonalities of the defense were very clear – and probably detract from the line argued by Amgen.

The industry has spent a lot of effort distancing itself from Valeant. The pricing descriptions, however, share features that will sound very similar to those outside the industry.

Michael Pearson, Valeant’s previous CEO who maintains a transition role at the firm under a consulting agreement, explained several times how Valeant pricing decisions are made in general and for two of the specific products at the hearing, Isuprel and Nitropress.

In an exchange with committee chair Susan Collins (R-ME) on the “justification” for Isuprel and Nitropress prices compared to the low production costs that the committee collected from Valeant ($17 million net sales for Isuprel in February 2016 from a cost structure that included $40,000 for direct cost of goods for the product) Pearson explained Valeant’s market analysis process.  

“When we set prices,” Pearson explained, “we look at costs of substitutes, costs of alternatives; we look at the supply and demand. I agree that the price increases were too aggressive but in terms of the analysis done by the company it is looking to make sure that there are alternatives. We also assist heavily in patient assistance programs” which he put at over 8% of total corporate revenues (more than $1 billion from total sales of $12 billion).

Later in a similar exchange with Virginia Democrat Tim Kaine regarding the pricing of Syprine, a drug for Wilson Disease, Pearson said: “We use money that we earn on products where we do not have expertise from an R&D standpoint, we funnel that money into R&D and manufacturing in other areas. Unlike most pharmaceutical companies, we don’t pay dividends or buyback many shares. So all of our money gets recirculated. Most pharma companies will give a dividend to shareholders. We take all of our money and take it to invest in ophthalmology, dermatology and GI where we do have expertise.”

That’s a torturous argument from Valeant: a company built on the model of low R&D expenditures. There is also the use of the unfortunate term, “recirculate,” to describe the use of revenues collected.

That’s the type of description that does no service to the industry arguments about efficient re-investment of returns from successful products and further undercuts descriptions of pricing such as Ofman’s to CAP.

Dueling Views On “Transparency”

On transparency, Ofman focused on keeping prices to individual customers private and limiting the extent of disclosure to SEC filings.

Emanuel pressed Ofman whether transparency would promote or inhibit competition. In the discussions with individual customers, Ofman said, it would chill a very intense, effective process.  “Right now there are powerful set of marketplace-based approaches. We operate in some very complicated diseases states with multiple competitors. These are some of the fiercest negotiations that I have ever experienced between PBMs, health plans, manufacturers. If you were to reveal all of the competitive nature of the data from within those it would inhibit competition and I think you have heard many economists writing about these.”

The Amgen exec suggested that the use of funds is well addressed in public filings. “Right now in our SEC filings, there is a lot of information about our R&D expenses.”

Tavenner put that in perspective versus the increasing amount of disclosure that insurers and Part D plans have to provide. “I think we will move more towards transparency – even on this issue. It will be a mixed bag. If you have plans that have narrow networks, you are going to reveal the cost improvements that you made, maybe in general terms.” Noting the increase demands on information from insurers, she suggested that the public is going to expect more information from other participants in health care. “The public is going to demand more and more transparency.”

The transparency argument does offer support for one industry priority: allowing for earlier communication with plans about new products.

Ofman made that argument early on in the panel discussion, urging reforms to the so-called FDAMA 114 provisions for formulary communications. Even in the relatively hostile context of the CAP meeting, no one challenged the assertion that companies should be able to have those conversations with health plans. (Also see "Lilly, Anthem Singing Same Tune On Value-Based Pricing, Communication Policy" - Pink Sheet, 9 Feb, 2016.)