Expert Predictions: Generic Drug Costs, Biosimilar Impact, Policy Changes

How are generic prices changing, how will biosimilars impact costs, and what changes out of Washington should healthcare executives watch?  

Managed Healthcare Executive (MHE) asked Joe Fuhr, professor emeritus of economics, Widener University, Chester, PA; adjunct faculty, Thomas Jefferson University College of Population Health in Philadelphia, to weigh in.

Fuhr

Fuhr will be presenting “Ensure Market Adoption by Understanding Payer Perspectives” at CBI’s 11th Annual Oncology Market Access Strategy Summit, in San Francisco, February 28.

MHE: What are the influences that may affect generic drug price changes?

Fuhr: There is generally a strong relationship between price competition and the number of firms in an industry. This is particularly true of the generic drug industry. Overall generic prices have not been increasing. Pharmacy chains have been increasingly using their market power to play competitors against each other.

What has garnered considerable attention is the tremendous increase in prices for certain generic drugs, in some cases over 5,000%. While this does not greatly affect the overall drug budget it can have considerable adverse effects on those consumers who need these drugs, which can result in higher copayments and sometimes make the drug unaffordable even to those with insurance. There are various factors that can cause the price increase but the major one is lack of competition in the generic market for a particular product. This is due to low generic prices and low profit margins in some markets so that generic firms leave and only one firm is left. This creates a monopoly in the market and the firm now lacks competition and has the ability to significantly raise prices. Some other reasons for only one firm remaining is consolidation through mergers, low-revenue markets where firms leave and other firms do not enter.

MHE: Generic drugs used to be the salvation as less-expensive options. This is obviously changing. Do you think we will see performance models in Medicare/Medicaid that can impact this?

It is still true for the most part as discussed above that generics will still be a less-expensive option and result in considerable savings. As we go to more value based pricing, generics prices should be less than or equal to their value and should not increase greatly as a result of a lack of competition.

MHE: What impact will Medicare and Medicaid pricing models have on biosimilar adoption?

Fuhr: Medicare Part B initially had a separate J code for the reference product and a separate one for all the biosimilars for a particular reference product. This meant that the average sales price (ASP) would be calculated from all biosimilars and that all biosimilars would be priced the same. However, this would not allow a biosimilar firm to have control over its price in Medicare Part B and could greatly affect entry. Companies may not want to enter a market where they have no control over their price. This would particularly affect markets in which the biologic is physician administered and primarily administered to the elderly, which is the Medicare market. So, it could greatly affect biosimilar entry in markets where Medicare Part B is dominant. 

Also, the biologic market is different from the generic market in that there are no wraparound services provided for generics, which are generally pills. For biologics, not only must the medicine be developed but these medicines are injected so that devices must be developed, and thus a biosimilar company would have little incentive to develop a superior device since it will be paid the same as every other firm.

CMS has changed this rule and effective January 1, 2018, each biosimilar will have its own unique J code and thus control over its price.

Also, Medicare has a bill and buy system for Medicare Part B. Under such a system a physician buys the drug and gets reimbursed for the drug later. The price is set at ASP + 6% of the ASP of the reference product. The 6% of reference product assumes that the reference product is priced above the biosimilar and is set up so that the physician would have no financial incentive to use the reference product over the biosimilar since the 6% reimbursement will be the same regardless of which one is used.

The 6% of ASP of the reference price is the correct policy and CMS should be commended for realizing the potential competitive disadvantage that biosimilars would have if they were only given 6% of the biosimilar ASP. With this CMS policy, providers are financially neutral in their decision to use biosimilars or reference products.

There is six-month lag in determining the ASP since it takes that long for CMS to determine the price of the drug. Thus, physicians can actually lose money if the purchase price of the drug is above the reimbursement level.

As a result of the six-month lag in ASP for the first three quarters, the first biosimilar price is set at wholesale acquisition costs (WAC) + 6%. WAC does not take into account manufacturers’ discounts and thus biosimilars, even though discounted, could have higher prices than the reference product.

Also, with the issues concerning the biosimilar antitrust case, if the reference product has an exclusive arrangement with the insurance company, the insurance company may not reimburse the physician if he/she purchases a biosimilar.

CMS has set up a system of subsidies in Part D reimbursement when consumers are in the Medicare Gap, often referred to as the donut hole. When patients are in the donut hole they receive a discount on the reference biologic but not the biosimilar. This will give the originator biologic considerable competitive advantage over the biosimilars and encourage biosimilars users to switch to originator biologics even though the market price of biosimilar may be lower than the reference product. 

Thus, while the Medicare patient is in the donut hole, the patient has virtually no incentive to purchase a biosimilar. Also, if a patient were using a biosimilar before he/she was in the donut hole, the patient would switch to the reference product. These incentives are likely to affect large numbers of consumers because the high price of biologics means that many will at some point be in the donut hole. CMS must level the playing field in this portion of Part D.   

MHE: What changes coming out of Washington regarding Medicare/Medicaid pricing could be game changers?

Fuhr: The problem is that we have developed a very complex reimbursement system which boggles the mind and is very difficult to understand. You are dealing with an elderly population who are the beneficiaries and they are often very confused. If you ever look at the explanation of benefits, the list price versus what is actually paid are not even close. You have various discounts and really no price transparency.

There have been changes proposed to the ASP pricing. Currently, not all companies are required to report their prices, so the ASP price is not an actual reflection of ASP. It has been proposed to require all firms to report their prices.

Also, a Drug Value Program (DVP) has been proposed under which Medicare would contract with private vendors to negotiate prices for Part B drugs and providers would buy all their DVP products at those prices from their vendor. The vendors would receive a handling fee.

MHE: What do you see as a positive end game for both supporting revolutionary new drugs and not breaking the bank on costs?

We need to balance the dual and often conflicting goals of low prices and innovation. Pharmaceuticals, and especially biologics, are very expensive to develop. There are many failures involved, so firms need the profit incentive to develop new drugs. Some biologics cost over a billion dollars to develop and there is a considerable lag before any revenue is received. So, if R&D costs are a billion dollars, firms may need twice that amount to break even on R&D, and that does not take into account all the other costs involved.

Many of these drugs are lifesaving and have a tremendous benefit to society, but patients cannot benefit if they do not have access to these drugs.  Most pharmaceutical companies have set up support programs to help those who cannot afford to pay for the drugs.

So, the patent system and exclusivity for a specific originator is temporary and is needed to allow for a return on investment. Once it is no longer in effect, competition can drive down prices and give the pharmaceutical firms the incentive to generate newer better drugs. We have seen this in the generic drug market and it will take some time to evolve in the biosimilar market, but we should eventually see considerable savings as the biosimilar market matures.