Controlling Competition: The Impact of Government Price Controls on Competition and the Market - #1
Updated: Nov 16, 2020
The first in a three part series looking at the implications of H.R.3 styled price restrictions and mandated price concessions on the competitive landscape across the BioPharma landscape.
Government price control (GPC) policies have become more visible recently with the approval of H.R. 3 in the House of Representatives (Dec 2019) and a recent Executive Order from the President. While implementation can vary, HaydenCG believes that GPCs may lead to:
Elimination of or a significant reduction in voluntary rebates and price concessions between manufacturers and PBMs/Payers for price controlled drugs
Pressure to increase prices for non-GPC drugs to maximize revenue potential
Significant changes to the way manufacturers align global price corridors and potential limitations to access for certain medicines ex-US
Substantial reduction in patient support program investment including patient savings programs
Reduction in R&D investment due to reduced revenue to fund programs
Re-evaluation of drug development pipelines leading to a reduction in new product launches
Reduction in marketing and sales spend likely leading to lost jobs within manufacturers and cascading across health care
GPCs & H.R. 3
The pharmaceutical distribution and reimbursement system is a highly regulated system that has relied on natural competitive forces to manage the cost of medicines in the United States. This competition relies heavily on intense price negotiations between manufacturers, payers, and pharmacy benefit managers (PBMs), who administer the majority of drug reimbursement. Unfortunately, potential savings on a given drug realized through these competitive forces are rarely visible to the patient, and are typically leveraged to manage overall health care spend and reduce premiums. For example, drug manufacturers that market insulin products have more recently disclosed that net prices have reduced between 37-41% since 2012 as a result of increasing rebates to payers for formulary access(1). However, because patient cost-sharing is often tied to a drug’s list price, these net price savings driven by market competition are not realized by diabetes patients. The lack of net price transparency has led to heightened concerns about drug pricing because list prices, which are transparent, have steadily increased over the years while net price increases have been modest in most markets(1).
With this in mind, H.R. 3 provides a potential roadmap for how the government might look to implement price controls on a segment of the pharmaceutical market while attempting to maintain competition within the remaining non-government price controlled portion of the market. H.R. 3, has a primary goal of reducing patient and overall health care costs in Medicare Part D, but also includes changes that would impact private Commercial coverage and Medicaid. The Act gives HHS the ability to negotiate drug pricing within a narrow corridor of potential prices tied to an international benchmark –the low end being the lowest price of in any of the 6 comparator countries and the maximum being 120% of the average price in the comparator countries. If implemented, H.R. 3 price controls would result in HHS establishing price controls for a minimum of 25 drugs in 2023 (including all insulin products) and at least 50 drugs in 2024+.
At a minimum, the implementation of government price controls on a segment of the market will likely create substantial confusion and complexity for patients, CMS, payers, and drug manufacturers. More likely, the approach to mandated price concessions will have a variety of negative intended and unintended consequences. The focus of Part I of our analysis is to discuss the impact government price controls, similar to those proposed in H.R. 3, may have on the natural competitive dynamics that exist within the U.S. pharmaceutical market today.
Key Assumptions for a GPC Market
There is a lack of clarity across proposals to implement GPCs with H.R. 3 highlighted here as an example. Given this lack of clarity, HaydenCG has established a set of assumptions for how partial GPCs could be implemented in the U.S. pharmaceutical market (detailed in table 1). Establishing these ground rules will then allow us to consider how key players may operate in a world with GPCs. In Part III of this series we will discuss alternatives to these assumptions and the potential impact to the market.
A Government Price Controlled Market
Understanding how the market operates today is the first step to understanding how GPCs differ. In today’s market we observe payers preferring certain brands over others on their formularies based on net price negotiations. As illustrated in Figure 1, this results in patients moving through preferred brands as a first step in their treatment pathway.
Figure 1: Schematic of the current dynamic between Formulary Access and Available Indicated Patient Population
Under H.R. 3, it is expected that GPC brands would automatically have formulary access, but not necessarily preferred access. Payers may utilize their remaining available tools (such as step therapy and prior authorizations) to establish preference among GPC brands. This will create a patient treatment pathway through GPC brands based on net price, similar to how we see competitive rebates defining line of therapy today. As a result, GPC brands with the lowest net price would likely be preferred over GPC brands with higher net prices.
As shown in Figure 2 below, GPC brands will likely be forced to offer such low prices, that payers are apt to dramatically limit the portion of the market that is available to non-GPC brands, all but eliminating early line patient access to non-GPC brands. This might even mean that patients will be required to try and fail multiple GPC drugs with the same mechanism of action before gaining access to non-GPC drugs with alternative mechanisms of action. In many markets we expect that very few patients will be available in the treatment market after attempting all GPC brands. Thus, the remaining market for which non-GPC brands would compete is likely to be a sliver of the market they compete for today.
Figure 2: Schematic of the potential new competitive dynamics after GPC implementation
As a result of payer preference for GPC brands, it is likely that non-GPC brands will be non-preferred or blocked by payers, depending on the market.
HaydenCG believes that a multi-tier market structure, as illustrated in Figure 2, is likely to emerge where access to brands is defined by GPC status and net price of a brand. This will effectively change the market dynamic, leading to the elimination of most voluntary rebates and discounts from GPC drugs between manufacturers and insurers. Non-GPC brands will be left to compete for a sliver of the overall market. Competing, meaning to offer ever increasing rebates even while being restricted to the post-GPC remainder of the market, will eventually drive the value of the non-GPC portion of the market down to breakeven, and make it unattractive for any future innovation. This could eliminate or significantly reduce the ability to invest in patient support programs, R&D, and marketing, limiting the motivation for non-GPC brands to compete, and greatly reducing opportunities for new product launches.
Be sure to check out Part II & III as we discuss the impact to specific markets scenarios and macro trends to the industry.
Hayden Consulting Group
HaydenCG is the life sciences industry's premier Market Access and Commercialization strategic consultancy. Our focus is to deliver game-changing strategic guidance and analytical vision to transform the commercial trajectory of therapies, portfolios, and entire companies. Our services are designed to create competitive advantages, establish strong analytical foundations, build growth plans, and address BioPharma’s most pressing Access, Reimbursement, Policy, and Commercialization challenges. Follow us on LinkedIn.
Katie Devane, Principal KDevane@HaydenCG.com
Dave MacDougall, Managing Director DMacdougall@HaydenCG.com
Jamie Sidore, Managing Director JSidore@HaydenCG.com
1. Roland, Denis. “Despite Rising Prices, Big Pharma is Selling Drugs for Less.” The Wall Street Journal, 30 Jan, 2019, https://www.wsj.com/articles/novartis-seeks-growth-in-newer-drugs-amid-pricing-challenges-11548838137?mod=hp_lista_pos4.