Drug Price Wars – Rogue 45: The White House Statement

With the news of the White House’s Council of Economic Advisors (CEA) report to address drug pricing: Reforming Biopharmaceutical Pricing Home and Abroad being released last week, I felt it was only fitting to bring back this blog’s epic saga: Drug Price Wars.

In this “anthology” episode of the Drug Price Wars, we see that the CEA formed by our 45th President of the United States decided that biopharmaceutical drug reform should focus on two primary goals: 1) Reduce the prices that Americans pay now for biopharmaceutical products; 2) Reduce the price of health by raising innovation incentives for products in the future.  I would like to summarize the components of this report and provide a little commentary (since this is my blog, lol).

Reducing the Prices that Americans Pay

This section is broken down into the following claims by the CEA: 1) High prices induced by Medicare/Medicaid, 2) Price Manipulation, and 3) Pharmacy Benefits Manager (PBM) market.

Prices Influenced by Medicare/Medicaid:

The first argument focuses on the Medicaid Drug Rebate Program (MDRP) that requires pharmaceutical companies provide at least a 23.1% rebate of the average manufacturer price (AMP) for brand drugs.  The CEA states “if a large share of a given drug’s market is enrolled in Medicaid, a pharmaceutical firm has an incentive to inflate prices in the private sector so that it can collect post-rebate prices…” and then goes on to suggest that the Center for Medicare & Medicaid Services (CMS) could “revise the rules to specify how manufacturers calculate best prices determined after the sale and patient’s recovery” and “…provide more guidance on how value-based contracts and price reporting would affect other price regulations.”

The CEA is hinting at value-based contracting but doesn’t really say explicitly what we should do with the MDRP.  The mandatory rebates for Medicaid have been around since George H.W. Bush and the Omnibus Budget Reconciliation Act (OBRA) of 1990 and increased from 15.1% to 23.1% with Barack Obama’s Affordable Care Act (ACA).1  I’m confused because this is lumped under the “Reducing the Price Americans Pay” section of the report and value-based agreements aren’t guaranteed to lower the price we pay – the whole point of a complex outcomes-based contract is to pay for high value things and not pay for low value things.  Or as Michael Chernew and colleagues put it: “…the goal of the health care system is to improve health, not to save money.”2  If we eliminate the mandatory rebate to Medicaid tomorrow, we would certainly experience an increase in prices paid for pharmaceuticals by Americans in the short-run, but if replaced with the right mechanism of payment we could save money in the long run.

The second & third arguments focus on Medicare Parts B and D.  For Medicare Part B, the report cited several policy solutions that include revising physician reimbursement on Part B drugs to exclude drugs, move Medicare B drugs under Part D, or change how pricing data is reported to increase transparency.  For Medicare Part D, it suggested “requiring plans to share drug manufacturer discounts with patients; allowing plans to manage formularies to negotiate better prices for patients; lowering co-pays for generic drugs for patients; and discouraging plan formulary design that speeds patients to the catastrophic coverage phase of benefits…”

Woo boy…where to begin…

First, I’m good with separating payment to a provider/pharmacy from the drug product…but that significantly changes the market.  If pharmacies didn’t make a cut of the drug it would drastically change the investment in specialty pharmacy and would likely result in a need for a significant boost in the flat dispensing fee.

Second, requiring plans to share discounts with patients is a nice thing to say, but it may also mean you have no idea how the current market for health insurance works.  The discounts/rebates are meant to buy down premiums.  In other words, the monthly payment for everyone in the plan is theoretically lower because of discounts/rebates.  If you mandate some sort of direct discount/rebate mechanism, the insurance plan will simply raise premiums to account for this loss of revenue.  It isn’t rocket science, but it certainly isn’t as simple as “requiring plans to share discounts” as the CEA suggests.

Third, the CEA stated “allowing plans to manage formularies to negotiate better prices…”immediately after the previous statement literally made me spit up my coffee.  So, how does the CEA think the plan got the discount in the first place? It is crazy, because the paragraphs leading up to these bullet points actually made some great points.  It is true that current Medicare D plan requirements that mandate coverage for certain drugs along with the catastrophic coverage components do create perverse incentives.  Is the CEA suggesting we remove mandatory coverage requirements for protected classes?  If so…say it.  Is the CEA suggesting we mandate a pass through of rebates from the manufacturer to the patient?  If so…then what does the plan or PBM get for their negotiation.  Honestly, this whole section makes my brain hurt.

Fourth, “lower co-pays for generic drugs” seems pretty easy.  However, what was that whole value-based contract stuff if you then want to shift to incentivize generics?!?!  If a brand drug provides more “value” then lowering the cost-share for a less effective generic doesn’t even make sense.

Cut the Duration of High Prices by Price Manipulation

This section taps into the issues of a company buying up an old drug and jacking up the price when it is the sole supplier.  The policy solution focuses on expedited review for 2nd or 3rd in a class to promote competition.  I definitely think there are levers within the Food and Drug Administration (FDA) that could be modified to spur competition, but it doesn’t really eliminate these temporary market situations that enable Shkreli-style price gouging.

Competition in the Pharmacy Benefits Manager Market

Cleaning up the spit-up coffee was a waste because it immediately came up again when I reached this paragraph.


I couldn’t believe the CEA explicitly called out PBMs and cited that “three PBMs account for 85 percent of the market.” This seemed to provide a clear signal that the CEA was on #TeamPhRMA in the Drug Price Wars.  That language is like nails on a chalkboard in board rooms over at the major managed care companies.  So what does this mean?  Should we expect the Federal Trade Commission to revisit its previous decisions regarding the competitiveness of the PBM market?

If I am the CEO of a PBM, I would immediately strike back with my stockpile of evidence attacking pharmaceutical manufacturers that demonstrate ridiculous price increases (especially in areas with no innovation).  If I am the CEO of a manufacturer, I double-down on my lobbying efforts because it seems to be working.

Reduce the price of health by raising innovation incentives for products in the future

The second goal is broken up into 4 sub-sections: 1) underpricing in foreign countries; 2) underpricing domestically; 3) lowering costs of developing new drugs; and 4) lowering costs that develop drugs that would increase price competition.

Underpricing in Foreign Countries

This is a great line for political reasons, but I struggle to understand how it will actually work.  Are you really telling me if other countries paid more for drugs right now that a for-profit pharmaceutical company would lower its prices in the US so that the total sales would be about the same?  My initial thought is: Well, wouldn’t the for-profit drug manufacturer want to maximize its profits by charging the highest possible price for goods in the US and overseas?  If I am an investor in said drug company, I would expect them to do what a for-profit entity is supposed to do.

Am I missing something here?

Underpricing Domestically

This section tackles 340B – so if you are a “covered entity” under 340B and you are benefiting from these substantial discounts, you should probably sound the alarm.  I think they do a great job outlining some of the challenges and issues with the expansion of the 340B program raised by Dr. Rena Conti and Dr. Peter Bach, which raise great points on the unintended consequence of a program designed to stretch the dollars for these covered entities.

So let’s hypothetically eliminate 340B drug pricing tomorrow – then what happens?  Currently, the 340B program is a carrot for health systems that provide outpatient services and qualify as a covered entity.  If you eliminate it altogether, what is the incentive to provide any service to areas of low income or patients that can’t pay for services?  I don’t see lululemon stores popping up in the low income areas of West Baltimore, I see them opening in the wealthier Harbor East shopping area downtown.  Help me understand what will incentivize a for-profit hospital to open up a clinic in an area where individuals do not have the discretionary dollars to spend on their health.  I agree that reform in this area is needed, but I don’t think that 340B is an example of “arbitrary underpricing” as this report suggests.

Reducing the Cost of Drug Approvals

The last two arguments focus on major changes at the FDA.  I want to tread carefully here.  I spent a little time thinking about some of the recent challenges with the drug approval process in a paper with a mentor, Linda Simoni-Wastila, and I think the CEA report does a pretty good job summarizing some of the complexities in this process.3  I think that a publication of the “off-patent” drugs that send a signal to drug manufacturers which products the FDA will expedite abbreviated applications is a good idea.  I think that addressing biosimilars is also a good idea.

With that said…does a lower cost of innovation guarantee a lower consumer price?  I still struggle with this issue because a business interested in making a profit by its very nature target a price that will maximize profit.  That is the point.  The point is not for a firm to simply cover its costs.  In a market with an elastic demand, a lower price raises the demand at a rate that increases the total revenue.  In a market where the demand is relatively inelastic, raising the price doesn’t really impact the quantity sold at the same rate and the potential for increasing total revenue is much higher.  So if I own a drug molecule that cures a disease that would otherwise kill someone, wouldn’t the demand for that molecule be pretty inelastic?  Wouldn’t it be rational for me to price that drug as high as possible, knowing that the quantity demanded wouldn’t change?

Ok, ok…I’ll stop.  I need to get some real work done today and I’m sure most of my readers gave up a long time ago.  Hope to see you again for the next episode of the Drug Price Wars…


  1. Health Policy Brief: Medicaid Best Price. Health Aff. August 2017. doi:10.1377/hpb2017.8.
  2. Chernew ME, Rosen AB, Fendrick AM. Value-Based Insurance Design. Health Aff. 2007;26(2):w195-203.
  3. Mattingly TJ, Simoni-Wastila L. Patient-centered drug approval: The role of patient advocacy in the drug approval process. J Manag Care Spec Pharm. 2017;23(10):1078-1082. doi:10.18553/jmcp.2017.23.10.1078.
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Joey Mattingly, PharmD, MBA is an assistant professor at the University of Maryland School of Pharmacy located in Baltimore, Maryland. Joey has managed retail and long-term care pharmacy operations in Kentucky, Illinois and Indiana. Leading Over The Counter is a blog of Joey's views and opinions on the topics of pharmacy leadership and management and do not represent the University of Maryland, Baltimore. Joey can be followed on Twitter @joeymattingly.

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