Hospitals and Insurers Team Up to Manufacture Generic Drugs

Unlikely advocates support lowering prescription drug costs
By Katie King Posted on February 19, 2020

In his State of the Union address, President Trump highlighted efforts to lower prescription drug costs, a signal that a larger legislative push is on the horizon.

And there’s no shortage of proposals from both sides of the aisle and among Democratic Presidential candidates. Some estimate that bipartisan drug pricing legislation could be included in the May healthcare package, but what is currently being done to combat rising prices?

The Generic Drug Supply Solution

When Civica Rx, the generic drug manufacturer backed by multiple health systems, launched in 2018, it was unclear how successful the not-for-profit would be in skirting the traditional pharmacy supply chain in an effort to lower prescription drug costs. Generic drugs have seen steep price increases over the past few years.

But Civica Rx has already made physician-administered drugs available at over 1,200 hospitals—about 20% of hospitals across the U.S.—pumping generic options into the delivery system. The concept’s long-term success hinges on tracking generic prescription rates and working with physicians to educate them.

It also hinges on the buy-in from other powerful industry stakeholders. Blue Cross Blue Shield Association and nearly 20 independent BCBS companies recently announced they would form a subsidiary of Civica Rx, working to lower drug costs from the inside of the supply chain. Unlike Civica Rx, the still unnamed spinoff will focus on single-source generic drugs dispensed at the pharmacy using a $55 million starting fund to launch the effort off the ground.

Providers and insurers most definitely do not see eye to eye on every cost issue (look no further than the surprise medical billing debate). The formation of the subsidiary brings together hospitals and insurers in a way that suggests industry incumbents are capable of effecting change throughout the healthcare system.

Pharmaceutical Companies Are Changing

While it’s hard to make a direct connection between movement among lawmakers to lower drug costs and a major shift in growth strategies among drug manufacturers, the timing is at the very least interesting.

Many drug manufacturers are changing their business models to focus on faster-growing products. Merck plans to consolidate almost 90 of its smaller products, like cholesterol medicines and contraceptives, which collectively brought in $6.5 billion in sales in 2019, into a new publicly traded company. By focusing on cancer and vaccines, and not on those products and treatments which have lost patent protection, Merck is looking to shed some legacy medicines with stagnant sales. Its cancer therapy, Keytruda, generated close to $11 billion in sales in 2019. By 2024, cancer drug sales will account for almost 40% of the company’s revenue.

Merck estimates that about 75% of its sales will come from outside the U.S., while national sales will come from patent-protected drugs.

In a similar move, Pfizer merged its off-patent drugs with Mylan and combined its over-the-counter drugs with GlaxoSmithKline. The moves signal that drug manufacturers are shifting their growth strategy to willingly rely less on a continuous cash flow from older products and more on riskier experimental therapies, which need to be approved by regulators. They’re betting on innovation through R&D to propel them forward.

The Drug Pricing Proposals on the Table

This is a snapshot of the range of current drug pricing proposals

1. Prescription Drug Pricing Reduction Act of 2019 

Would reduce deficits by more than $100 billion over 10 years, would reduce beneficiary cost-sharing in Medicare Part D by $25 billion, and would reduce Part D premiums by $6 billion…

  • Reduce the amount of spending that beneficiaries are responsible for during the initial phase for the benefit from 25% to 20%
  • Require drug companies to provide a new discount of 7% on brand-name drugs and reset the brand catastrophic discount to 14%
  • Direct insurers to offer a cap on the amount of out-of-pocket costs that a beneficiary has to pay in any month
  • Require Medicare Part D plans and their Pharmacy Benefit Managers (PBMs) to include concessions and fees they negotiate with a pharmacy in the price beneficiaries pay at the pharmacy

2. Lower Health Care Costs Act

(The proposal in its entirety) would save nearly $7.6 billion over the next decade primarily by reducing federal subsidies for healthcare and insurance…

  • Revise certain requirements in order to expedite the approval of generics and biosimilars, including requirements relating to citizen petitions, application effective dates, and labeling
  • Limit prices that pharmacy benefit managers (PBMs) may charge health insurers or enrollees for prescription drugs, based on prices paid by PBMs to pharmacies
  • Require manufacturers to submit a report justifying planned price increases

3. Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3)

Would lower government healthcare spending by $456 billion over the next 10 years…

  • Out-of-pocket costs would be capped through restructuring Medicare Part D
  • Require manufacturers to lower prices of all drugs sold to Medicare Part B or D if they have raised the prices faster than the rate of inflation or pay the above inflation amount back to Treasury as a rebate. A progressive amendment tacked on in December 2019 would extend those protections to drugs covered under employer-sponsored health plans.
  • Provide the Secretary of Health & Human Services with the authority to negotiate prescription drug prices for Medicare and the private market facilitated by the creation of an international pricing index.

4. Lower Costs, More Cures Act (H.R. 19)

Would save $28.3 billion in reinsurance payments and Medicare beneficiaries would save more than $10.6 billion in out-of-pocket payments…

  • Restructure Medicare Part D benefit, similar to the Senate Finance Committee’s proposed changes, by capping out-of-pocket costs and altering manufacturer and Medicare responsibilities by way of the plan design.
  • Incorporate transparency provisions, such as requiring manufacturers to provide notification of and explanation for the list price hikes that exceeds 10% in a single year or 25% in three years.
  • Provide financial protections to Medicare Part D beneficiaries, such as spreading their cost-sharing obligations out over a year and capping out-of-pocket expenses for insulin separately from the overall cap.
  • Adopt several bills aimed at combatting pharmaceutical company efforts to delay generic or biosimilar entry (i.e., the CREATES Act).

    What’s the same?
  • Out-of-pocket cost caps and/or price limitations are introduced.
  • Transparency is required in some form, whether through government negotiations or by adopting proposals to thwart efforts to delay generic or biosimilar drug entry into the market.

    What’s different?
  • Whether or not to reduce the amount of spending beneficiaries are responsible for during the initial phase of their benefit.
  • Whether or not to require manufacturers to submit a report justifying planned price increases.
  • Whether or not to include a mandatory discount on new brand-name drugs.
  • Whether or not pharmaceutical companies are prohibited from raising prices over time and/or from establishing high launch prices.
  • Whether or not the government has the authority to negotiate drug prices.
  • Whether or not to establish an international drug pricing index.
  • Whether or not Medicare Part D plans and their PBMs are to include concessions and fees they negotiate with a pharmacy in the price beneficiaries pay at the pharmacy counter.
  • Whether or not manufacturers have to lower the prices of all of the drugs sold to Medicare Part B, D, or employer-sponsored plans if they raise prices faster than the rate of inflation or pay the difference to the Department of Treasury as a rebate.

There will be more proposed solutions to come from lawmakers as well as the private market. What remains to be seen is how those efforts will work together given the variety of solutions. Be on the lookout for more on prescription drug pricing from The Council’s government affairs team.

Katie King Vice President, Health Policy & Strategy, The Council Read More

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