Controlling Competition: The Impact of Government Price Controls on Competition and the Market - #3
Updated: Jan 19, 2021
The third and final 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, Part 2 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
Key Macro Trends
Alongside Part I and Part II which outline our perspective on the impact of government price controls, it is also important to understand the overall impact to the pharmaceutical industry. Four key markets trends expected from government price controls are outlined below. While some of these trends may be intentional, others are likely unintended consequences of government price controls that should be included in the discussion of the impact these steps have on the market.
Table 1: GPC Key Macro Trends
Impact of Market Assumptions
Throughout Part I and Part II, HaydenCG has delineated a number of assumptions to establish a framework through which to assess the impact of GPCs on the pharmaceutical industry. It is important to highlight that, if different, these assumptions could have a significant impact on the competitive dynamics within the market. These include:
GPC drug access: If GPC drug access were mandated to maintain parity across all GPC brands (e.g., fixed low copay, no step therapy requirements) the market dynamics as described in Part I and Part II would change, impacting the potential for competition. The GPC drugs with a higher net price have an advantage as they gain the same access but have slightly better margin than other GPC brands. In the market dynamics reviewed previously, this would remove the GPC tiering and only one tier would exist. In the short term, this will be a positive for some brands. Over the long term, the same incentive exists for GPC brands to increase net price ex-US to increase margin in the U.S. This only further discourages competition in the pharmaceutical market. Non-GPC brands would see little to no change in terms of the potential for competition as payers would still be incentivized to limit the remaining market available to non-GPC brands.
Pass through rebates across all discounts: This is the best approach to lowering patient cost, but payers will likely resist pressure to pass through discounts beyond GPCs as it increases their costs. If price control methods require pass through rebates for all discounts (GPC and voluntary rebates), then non-GPC brands would potentially be more competitive with GPC brands, since all rebates would lower patient cost-sharing at the point of sale. In markets with multiple GPC brands, the impact would likely result in non-GPC brands having to match the established GPC net price. In markets where only 1-2 GPC drugs exist, there may be less leverage from payers and non-GPC discounts may be slightly lower than the GPC net prices.
Medicare Part D reimbursement structure changes: There are many discussions in process today about changing the structure of the Medicare Part D benefit (e.g., establishing an annual patient spend limit and/or removing the Coverage Gap). These are important considerations and will influence the impact of GPC but may not significantly change the overall competitive dynamics reviewed earlier. The greatest impact to strategy will likely be felt by non-GPC drugs considering rebates to gain access. The change from Coverage Gap rebates today to other statutory rebates will influence the rebate offer these drugs pursue.
Impact to the Commercial market: Assuming the negotiated price is available to Commercial payers the Commercial market may adjust similarly to Medicare Part D. However, without the mandate to accept GPC, payers will have more flexibility in markets where GPC pricing is similar or higher than current net price leading to differing market dynamics.
GPCs, Looking to the Future
In five years, what could the market look like? With the implementation of government price controls, we expect that there would be significant changes to competitive dynamics, and that adjustments to the “new normal” will be in motion. As a greater portion of brands are government price controlled over time, most therapeutic areas are likely to be impacted. Below are a few of the key longer-term trends that may develop.
Brands adjust price strategies
New products will be substantially impacted by GPC. Many may either decide not to launch in the countries included in the pricing index or discount far less to ensure a higher net price in the U.S. In addition, launch pricing in the U.S. will be higher as the ability to increase price over time is limited. With the potential for all/most rebates to be passed through to consumers, the motivation to start at a higher list price and rebate some back will be strong.
All products may adjust pricing strategy to narrow the global pricing corridors, potentially achieved by increasing ex-U.S. price over time and/or by exiting ex-US countries known for low pricing levels.
Pipelines are managed more aggressively
Manufacturers apply expectations of the impact of GPC on the valuation of pipeline products and make major cuts to pursue far fewer launches. Investment in therapeutic areas without substantially large populations of unmet needs are greatly reduced or eliminated. In general, far fewer products are launched as the return on R&D investment precludes it. Likely, the U.S. government will need to step in and invest far more heavily in early/mid stage R&D as the resources required are not available from pharmaceutical manufacturers.
Brand marketing models adapt
Cost containment efforts lead to major changes in sales and marketing strategy. For example, manufacturers may limit investment in disease awareness, provider education, and patient support services (e.g., coupons, nurse educators, advocacy group support, etc.). In addition, current trends will be accelerated to convert personal promotion to virtual platforms and machine learning/ artificial intelligence is used to inform micro targeting strategies focusing on higher margin prescriptions.
Across all 3 papers in this series, HaydenCG reflects that government price controls will be hugely disruptive to the industry. This is not a surprise – many have been saying this for years without controversy. What we see more clearly is how that disruption will occur. Not just in terms of lower margin for branded pharmaceutical companies, but also limited availability of drugs globally, reductions in patient support, lower awareness and education on diseases and therapies. While the current pricing and reimbursement model creates numerous mis-incentives and dis-incentives that drive economic theorists crazy, throwing it all into a government-mandated formula is the ultimate “throw out the baby with the bathwater” approach.
While a Democratic House and Executive, and Republican (likely) Senate might portend gridlock, in fact both parties have spoken extensively about the need to lower the costs of prescription drugs. Details though have been scant. With HR 3 having passed the House, and awaiting a Senate vote/revision/counter, it could become the basis for future legislation. Buckle in.
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