Price Transparency – Let the Light Shine

The past 18 months have ushered in momentous healthcare policy events – spanning from anxiety about the ACA’s repeal and its resulting vacuum of coverage to value frameworks and demands for policy action on price controls for companies that inflate pricing without apparent innovation.  Products in the crosshairs of disenchantment include EPIPEN™ (epinephrine injection, MYLAN / $MYL), DARAPRIM™ (pyrimethamine, TURING), and EMFLAZA™ (deflazacort, MARATHON PHARMACEUTICALS).  Somehow, with all the noise around these national issues, many have missed that the most significant policy proceedings have actually occurred at the state level – specifically around price transparency.

While academics and CMS officials grapple with a value-based framework (for more on this, see CBPartners assessment of the ISPOR task force’s update in a coming thought piece) for assessing the value of the latest oncology therapy, discontent brews around how some companies repurpose and reformulate last-generation active ingredients into new brands with incongruous pricing.  These actions, and the spotlight shone upon them, have distracted discourse from the more erudite topic of value-based pricing.  The energy that could have been spent on debating value for money for innovation, has instead been channeled towards these scandalous, but previously largely ignored instances of profiteering.  Policy-makers are right to monitor pricing so that this behaviour can be better understood.  However, these same lawmakers are grasping in the dark for any price that moves, and often miss the most critical aspect of healthcare market principles: the sensibly higher willingness to pay for innovation that improves quality of life, and often extends it.  By being global powerhouses of branding, major pharmaceutical and biopharmaceutical companies are easy targets for vilification.  As any superficially righteous politico knows: when seeking to translate outrage to political capital, the enemy must be familiar – and it often is for an underinformed public.

And so, the next paradigm of pharmaceutical pricing is dawning in the USA: transparency.  There is no escaping the inevitable need for policy-makers to convert the public’s attention and dalliance with populism by targeting the Martin Shkrelis of the world.  The actions undertaken by companies like TURING and MARATHON were impossible to ignore.  While the EPIPEN™ fiasco became unbearably fashionable once the mainstream media noticed, the situation was mismanaged and rapidly saturated $MYL’s corporate image – just last week, Senator Chuck Grassley threatened subpoena to obtain additional evidence, as the Department of Justice continues to deny that a nearly half a billion dollar settlement has been reached (despite media reports to the contrary).  Even if the mainstream audience’s appetite for these stories has tapered, legislators continue to chomp away, largely at the state level.  As the national debate appropriately distresses about a vulnerable MEDICAID population losing coverage, local government is taking action – albeit at times stabbing in different directions.  In parallel with cases of price increases coming to the spotlight, California, Vermont, and Nevada salivate (FIGURE 1) over the opportunity to make a difference.  While some of these states’ lawmakers have their hearts in the right places, others, like Governor Andrew Cuomo in New York, have jumped on the bandwagon with blatant disregard for practicality.

FIGURE 1. Major Pricing Transparency Legislation in USA

The only idea more outlandish was Nevada’s legislation (SB265) that intended to require price to be reported for any diabetes therapy when it exceeds the highest published price across OECD members – essentially creating state-level international reference pricing.  That bill was vetoed by Nevada Governor Brian Sandoval earlier this month, however a broader bill (SB 539) was signed into law this past week.  The new law is broader in the sense that PBMs and their rebating practices are pulled into the field of reporting, but the international reference pricing language was removed, which created a more practical and perhaps more effective bill that achieves a clearer field of vision into how pricing and total costs are shifting for those diabetes products that exceed the CPI medical care component (which, as of May 2017, was 3.3% for the previous 12 months).  Of note, this is the strictest limit observed among seriously considered state and national legislation, with most thresholds ranging from 10-25%, and not linked to an economic indicator like CPI.

The reprimand set forth for any company pricing above this benchmark is not simply reporting their justification for setting this price – but also reporting cost of goods, complete with clinical trial, manufacturing, IP management, and marketing costs, culminating with a declaration of net profits.  For those trapped within their local political bubbles, it may not be clear that such disclosure sabotages the integrity of the market, disrupts competitive dynamics, and betrays confidentiality underpinning investor relations.

Some state-level legislators exhibit strategic constraint of their dogmatic fervor.  For example, California State Senator Ed Hernandez proposed a bill last year that would simply require companies that increase a product’s price by more than 10% in one year to register the action with a state agency.  Remember that just nine months ago, ALLERGAN’s ($AGN) CEO, Brent Saunders, pledged that his company would restrict itself to exactly this policy without the threat of legal action.

While the original bill also required a justification and declaration of sensitive costs of goods detail, manufacturers would be able to create a narrative on why the price change was needed in order to fuel their engines of discovery and development.  The same arguments are made each day around the world, and there is no reason to believe that they would not be understood and accepted in the USA.  Factors that can legitimately be cited include cost-effectiveness, patient population size, risks undertaken, manufacturing capability maintenance, and management of supply shortage caused by production issues.  These narratives are defensible because they are true – and their rationality stretches beyond the boundaries of attaching a dollar value to one year of healthy living.  There is no shame in explaining to a customer that ensuring quality and safety amongst a dynamic patient population requires a modest, annual price increase.

The chronicle of pricing – the true motives for price increases undertaken by most of the innovative industry – must be better communicated by manufacturers to the public and in greater depth to the watchful legislators driving legislation forward.  These lawful attempts at pricing justification disclosure are not going away – and the industry should be grateful for the platform that lawmakers are creating to inform the attentive public of their truths.

While Mr. Hernandez’s bill did not survive without amendments that led to its eventual withdrawal, a new version of the bill has surfaced and is being deliberated at the state capitol.  Even if it does not pass, the first domino has fallen: former Vermont Governor Peter Shumlin, signed the first major pricing transparency mandate into law one year ago.  By the current standards of legislation, its teeth are blunt: simply requiring manufacturers of the top 15 highest expenditure products with price increases over 15% during the past year (or 50% over the past five years) to report rationale for their product’s pricing.  In most cases for the innovative industry, the reasoning for these actions are sound, and not something from which a manufacturer should hide.

The results from Vermont’s first test are in – and they are good news for the innovative industry.  Of the 87,000 unique products purchased by the state and evaluated through the new system, less than 10% of them exhibited an increased price by over 50% during the past five years, and less than 5% by over 15% during the past year.  Furthermore, many of these products that did exceed the threshold were supposedly low-cost generic products – indeed, the average price increase among generics was greater than that observed among branded therapies.

While generics’ lower prices mean that these increases may be smaller in absolute terms, the measuring stick is set to be percentage change – and until a dollar value can be placed on human life in the USA, this is the metric that will continue to take centre-stage for future pricing transparency law.  Such is the case for Senator John McCain’s bipartisan attempt at the national level, which would require companies to report and justify any increase over 10% during the previous year.

A new era of pricing in the USA is upon the industry – and the innovative industry should embrace it with pride.  The daylight that shines on pricing practices will root out the true culprits of pricing transgressions, while providing a platform for the value of innovation to have its time in the sun.