Pharmaceutical Pricing Practices, Utilization and Costs - Meeting Summary. 6. Panel Discussions: Pricing Practices in the Pharmaceutical Market


Following the formal presentations, a diverse panel of about 25 stakeholders and researchers provided their perspectives on pricing practices in the pharmaceutical market. Their comments centered around several themes as noted below.

Different Prices for Different Purchasers

One panel member argued that the focus on different prices for different purchasers is misplaced. Aggregate U.S. drug expenditures are rising at double-digit rates, while hospital costs are going up only a few percentage points a year. Although a few integrated health systems and some PBMs are better at getting prices down than others, clearly something more fundamental is going on than just steering. Another panel member commented that Figure 1 showing different prices paid by different purchasers is static, but U.S. policymakers should be concerned with what is going to happen over time.

Rebates from Brand-Name Drug Manufacturers

There was considerable discussion of drug rebates offered to PBMs and other large purchasers by brand-name drug manufacturers.

  • Rebates to PBMs. A brand-name drug industry representative confirmed that a key consideration in a manufacturer's decisions to offer rebates is the purchaser's ability to drive market share toward specific brand-name products. Market share stipulations are often connected to incentives such as the inclusion by a PBM (or health plan or health plan sponsor) of a specific brand-name drug in its formulary or pharmacist and patient incentives to influence market shares of rebated products. PBM representatives on the panel explained that a PBM's ability to drive market share is a function of the willingness of the PBM's individual customers--health plans and health plans sponsors--to put into place formulary designs, copayment steerage mechanisms, etc., to drive the market toward specific brand-name products. PBMs' use of rebates and other strategies to control costs in their customers' prescription drug programs was discussed at length in the session Strategies for Controlling Costs and Increasing Value From Pharmaceutical Expenditures.
  • Medicaid rebates and best price. Under the Omnibus Budget Reconciliation Act of 1990, Medicaid programs receive rebates from drug manufacturers equal to the difference between the average manufacturer price (AMP) (i.e., the average price paid by wholesalers) and the manufacturer's "best price" (i.e., lowest price the manufacturer offers to any private purchaser at any time during the year). The minimum rebate to Medicaid must be 15.1 percent of the AMP.
  • Inability of retail pharmacies to negotiate rebates. A representative of a nationwide retail pharmacy chain that purchases $10 billion of pharmaceuticals a year reported that the chain has only a minimal ability to negotiate rebates with brand-name drug companies. On the other hand, the pharmacy chain is able to negotiate discounts with generic drug manufacturers.
  • Inability of cash-paying customers to benefit from rebates. Many panel members expressed concern about the fact that cash-paying customers, including Medicare beneficiaries, do not benefit from drug manufacturers' rebates and pay higher prices for prescription drugs. Physicians said that some Medicare patients and uninsured patients are unable to afford the medications they need. The question that arises is: How can we deliver the same price break to uninsured people? One panel member reported that a new group of purchasers has recently been entering the prescription drug discount stream--the cash card group. This is a group of about 5 or 6 million people, many of them seniors, who have cash cards from the American Association of Retired People (AARP), Readers Digest, or other organizations. People in this group do not have prescription drug coverage, but can use their cash cards to go to pharmacies and get discounts.

Relationship Between Brand-Name Drug Manufacturers' R&D Costs and Drug Prices

Noting that manufacturers' R&D costs are typically cited as the justification for the prices of pharmaceutical products, some consumer representatives on the panel suggested that it would be helpful to have more information about what drug manufacturers spend on R&D. They noted that a Nader group study of orphan drug trials found almost no relationship between what a company spent on R&D and the prices of the drugs. Furthermore, it was reported that a transatlantic consumer group with 65 member organizations recently passed a resolution asking the European Union and the United States to move toward more transparency in drug development costs, so that better data on drug development costs will be available to consumers and others.

Profitability of the U.S. Brand-Name Pharmaceutical Industry

With regard to the pharmaceutical industry's profitability, one representative of the retail pharmacy industry commented that he understands what Mr. Freeman said re: the industry's capitalizing R&D expenses over time, but the pharmaceutical industry's after-tax profits are 20-25% vs. retail pharmacies' profits, which are about 2-3%. Even if drug manufacturers changed their accounting measures, their profits would be very high. Another panel member commented that, while manufacturer's profits should not be exorbitant, if drug manufacturers are not allowed to make profits, they will bail out of the market.

Some panel members suggested that research is needed on the relationship between reimbursement or payment levels and drug manufacturers' profitability and innovation. Specifically, research is needed to answer the following question: What effect would extending full prescription drug coverage to Medicare beneficiaries have on drug prices and ultimately the profitability and innovation of drug manufacturers--and what are the tradeoffs?

Perspectives on the "Value" of Perscription Drugs

Some panel members challenged Dr. Freeman's comment that the brand-name prescription drug industry prices its products to the value of consumers, noting, for example, that brand-name drugs are not priced to the value of an elderly person on an $8,000 income who needs three prescriptions to treat a chronic disease. A drug company representative responded that the drug industry does not sell directly to these patients. Furthermore, even if the prices were cut in half, the affordability problem for uninsured low-income people would remain. Some physicians and researchers agreed, noting that the introduction of ever-more costly drugs will only exacerbate the affordability problem for low-income patients. The fact that there are multiple, and often conflicting, perspectives on the value of prescription drug utilization and expenditures was discussed further in the session on Pharmaceutical Utilization Issues.

Problems With Coompetition in the U.S. Pharmaceutical Market

Economists on the panel agreed with Dr. Schondelmeyer's observation that in order to understand competition in the U.S. pharmaceutical market, it is important to look at the level of competition in each therapeutic class. One economist reported that the general economic literature indicates that duopolies do not do very much for competition. He suggested that the goal in the prescription drug market should be to get four or five competitors in each therapeutic class.

Several questions arose with respect to competition in the U.S. pharmaceutical industry, including:

  • Why isn't there more competition within therapeutic classes when three or four or more brand-name drugs are somewhat substitutable?
  • Within those pharmaceutical market segments where there is competition, why are the full benefits of competition not being realized?

Wall Street analysts on the panel reported that the generic industry remains quite competitive, even though there has been a lot of consolidation in the generic industry in the last 5-10 years. Historically, the generic industry has suffered from fratricidal competition. To encourage the development of new generic drugs that will ultimately create a more competitive marketplace, purchasers need to make sure that they operate in a way that helps keep the generic industry alive.

Another question that arose in the discussion of competition in the U.S. pharmaceutical industry was: What do we know about how the launch of generic drug products affects prescription drug utilization and costs? Some panel members, including researchers and representatives of PBMs and the generic drug industry, noted that brand-name drug manufacturers often have developed a new brand-name product with improved efficacy or reduced side effects by the time the patent on an old brand-name product expires. If patients switch to the new brand-name product, the patent expirations on their older products will not lead to as much generic competition. A representative of the generic drug industry said it would be useful to conduct research on the following question: What happens over time to a therapeutic market when there are generic product entries? Are there shifts in volume from one brand-product to another brand-product within the same therapeutic class?

Finally, one panelist asked: What do we know about how the launch of new over-the-counter (OTC) drug products affects prescription drug utilization and costs? A Wall Street analyst suggested that drug manufacturers launch an OTC version when they need to breathe new life into a product. The marketing expenses associated with the launch of OTC products are huge; and many OTC products are not profitable for several years. Some panelists noted that there is often continued use of brand-name prescription drug products even after a product comes out in an OTC form. At least for people who have prescription drug coverage with low copays, it may be cheaper to get the brand-name drug (with a low copay) than to pay out of pocket for the OTC product. Furthermore, the OTC product is typically less potent than brand-name product, so people may prefer the brand-name product. Finally, some OTC products have indications that differ from those of the prescription products (e.g., OTC form for heartburn vs. prescription form for ulcers). Some panelists said that it would be useful to conduct research on how the launch of OTC products affects prescription drug utilization and costs within therapeutic categories.

Transparency of Prescription Drug Prices

There was disagreement among panel members about Dr. Schondelmeyer's recommendation that prescription drug prices be made more transparent. Some panel members--including consumer representatives, health care purchasers, and researchers--said that it would be useful to have more transparency of prescription drug prices and drug manufacturers' R&D costs. Price disclosures could be made via any of a number of vehicles: publishing prices in the FDA Orange Book or parallel publication, publishing prices via commercial price databases, publishing prices on the Internet, disclosing actual net price on all invoices, or disclosing actual net price in all purchaser contracts. Other panel members--including drug industry representatives and some researchers--questioned whether price transparency should be required in the pharmaceutical sector, noting that it is not required in other sectors.

Pricing and Value of Brand-Name and Generic Drugs

Some panelists asked whether the enormous differences in the prices of brand-name drugs and generic drugs really represent a difference in value. One panelist suggested that the use of generics could be promoted through techniques used to promote brand-name drugs (e.g., sampling or detailing).

What Additional Information would Improve the Performance of the U.S. Pharmaceutical Market?

An economist on the panel commented that although there is a sentiment among economists that more information is better than less, when one competitive condition is absent in a market--as it is in the U.S. pharmaceutical market--getting more of one element isn't necessarily better. A question policymakers should ask, therefore, is: What kind of additional information would improve the performance of the U.S. pharmaceutical market? This question elicited numerous responses, which are summarized in Strategies for Controlling Costs and Increasing Value From Pharmaceutical Expenditures.