Controlling Competition: The Impact of Government Price Controls on Competition and the Market - #2
Updated: Jan 19, 2021
The second 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. (Part 1 here)
Executive Summary
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
A Tale of Four Scenarios
To further understand how GPCs would impact competition across the Medicare market, four unique market scenarios are defined and explored (see Figure 1 below). The nuances across these scenarios reinforce the importance of brand-specific strategies, as a one-size fits all approach will not work in a market with GPCs.
Figure 1: Overview of Selected Scenarios and Expected Outcome
HaydenCG will provide a point of view on how each would be impacted by GPC, and the potential impact on competition.
Under Scenario #1, all drugs would have GPC, significantly deviating from today’s competitive framework. As a result, payers will place brands with higher net prices on the Non-Preferred Tier to encourage use of the lowest net price GPC drugs first.
Under this structure, any remaining competition or contracting strategy will be in an extremely limited capacity. If payers implement prior authorizations and/or step therapy amongst GPC brands, manufacturers will have little ability to compete for preferred access. (Supplemental contracting could exist for Non-Preferred GPC brands to gain access to new patients, e.g., first and second line patient starts.)
Additionally, GPCs will likely create a significant barrier to entry for new launches given the extremely low net pricing, potentially stifling innovation and market competition that could lead to improved clinical outcomes for patients.
Under Scenario #2, the primary deviation from the competitive construct outlined in Scenario #1 is that payers cannot block products from the formulary. Although not required, it is likely that all GPC products will be on the GPC preferred tier (even with net price differences).
Competition would remain in the short term, but far less than today. Moreover, non-GPC brands would likely be competing for a sliver of the remaining market (after all GPC brands are utilized).
Non-GPC drugs will likely be disadvantaged versus GPC brands as payers seek the value from substantially lower net prices – and it is unlikely non-GPC brands will try to compete head-to-head with GPC drugs given the high cost of discounts/rebates. In many classes, clinical differentiation will reduce supplemental contracting amongst GPC and non-GPC products, thereby reducing competition over time (most products will be on a single tier within the GPC or non-GPC framework).
HaydenCG believes that the most likely scenario amongst those discussed in this paper is #3 – where a subset of products within the competitive class will be price controlled.
Under this framework, competition would remain, but in a very limited capacity. As GPC would shrink the portion of the market that maintains natural competitive forces (non-GPC brands), any competition would be to a far lesser degree than today.
Non-GPC brands will likely attempt to establish a “next in line” status, after GPC brands (i.e., Preferred non-GPC formulary status). However, depending on the number of GPC drugs in a class, competition would likely be limited to later line patients, which comprise a very small subset of the market.
Under the final scenario a subset of products within the competitive class would be price-controlled, but high contracting discounts already exist in the market. Under this framework, GPC brands will need to offer supplemental rebates to payers to match current net pricing and maintain or gain preferred GPC formulary status. Additionally, payers may demand lower net pricing than pre-GPC because passing discounts through to patients will increase payer costs.
Competition will remain, although reduced from the current dynamics. (This scenario maintains more competition because GPC net pricing is higher than current net pricing.) However, this scenario is far less likely to exist in the real world (if at all). Products would offer rebates to gain preferred GPC access and there is more opportunity for a non-GPC product to gain preferred status over or alongside GPC brands than other scenarios. However, since rebates will not be passed through to patients, non-GPC brands will be disadvantaged by higher Coverage Gap rebates and higher patient cost sharing (which are both based on list price).
Could there be a future world in which highly rebated categories (e.g., SGLT-2 class today) have very low US net prices, and due to selective launches and managing ex-US prices carefully, there are more situations like Scenario #4? The landscape would definitely change compared to today, so scenarios like this seem to be much more plausible in this future-world. At a minimum, any movement towards GPC will be very disruptive to the current state of play.
Check back in next week for Part III as we discuss macro trends, including the impact to pass-through rebates and discounts, the domino effect in the Commercial market, and how a reimbursement change in Medicare Part D could affect GPCs
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.
Our Contributors:
Katie Devane, Principal KDevane@HaydenCG.com
Dave MacDougall, Managing Director DMacdougall@HaydenCG.com
Jamie Sidore, Managing Director JSidore@HaydenCG.com