Drug Pricing and Reimbursement: Case for Decentralization

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Harry Salivaras is our regular contributor. He is currently in the final year of his undergraduate degree, in Neuropharmacology, at King’s College London. Following an internship in quality assurance for drug manufacturing at FAMAR Pharmaceuticals, Harry worked with the market access team at Elli Lilly on oncology medicines, reimbursement, and pricing models. Harry’s research interest is in decentralised technologies; in the article below he has applied classic principles of decentralised ledgers to drug pricing and reimbursement.

Drug pricing at the pharmacy counter bridges healthcare with one of the most ambiguous markets consumers face. Incremental price increases in pharmaceuticals in the past century have raised concerns to the extent by which healthcare in a free-market economy is rooted in luxury services, contra to a human right. Upon the deconstruction of the pricing and reimbursement of pharmaceuticals, decentralization represents a populist policy reform tool with the potential to re-align healthcare products with fair value.

The central dogma in Pharma stands on the grounds that increased prices drive investment, which in turn, drives innovation, leading to groundbreaking new drugs. In light of this, can this conviction shed light on the 100-fold price increase of oncology drugs over the last 50 years, the 500%  price increase of Mylan’s EpiPen from 2007 to 2016 from $100 to over $600, or the justification behind why drugs in the European Union are, on average, 40% cheaper than in the US?

Pricing of a drug in the US originates at the manufacturer, who then goes on to provide the drug to distributors (e.g. wholesalers, pharmacies and hospitals) that in turn provide it to patients. Patients obtain the drug through insurance or direct payments. The coupling mediators of this supply chain are the pharmacy benefit managers (PBMs), responsible for accepting and transferring rebates to insurers, upon receiving a commission. These rebates incentivize insurers to increase the position of the drug on formularies; lists that dictate the premium, and co-payments that patients incur when obtaining the drug. In theory, higher rebates lead to greater patient access and consequently more profits for the drug maker as the premiums are less for drugs higher on the list.

As such, the price is often a reflection of market tolerance as opposed to fair value. “Blockbuster” or cutting edge drugs facilitate significantly higher prices than drugs subject to competition such as generics. Nonetheless, in the US, government insurers such as Medicare receive either a 23.1% discount, or the greatest market discount the manufacturer is receiving.

In the European Union prices are determined with greater government influence. Variations amongst countries are present; however, a brief, general description of the overall EU drug pricing policy structure will be given in hopes of covering the fundamentals. For managing the uptake of lower priced medicines, the reference price system is used. Correspondingly, countries including Germany, Spain, Italy, Norway and Sweden use reference pricing to reduce the cost of drugs with therapeutic alternatives. This is orchestrated through the organization of drugs into classes; enabling the insurer to pay one amount, the reference price, equating to the lowest drug price in that class. Consequently, reference pricing is rooted behind the promotion of cost effectiveness in drug pricing. 

When managing the reimbursement of higher priced medicines, drugs are grouped into two categories based on managed entry agreements (MEAs), held between manufacturers and public payers. Such classifications are either financed-based (involving confidential discounts or price-volume agreements) or performance based (relative to health outcomes). Overall, the majority of EU countries impose price controls for medicines that are in part reimbursed by a public payer, with outlier countries, such as Belgium and Lithuania, imposing price controls for all medicines coming to market. Other exceptions include Bulgaria and Iceland, whereby the purview of price control policy applies only to prescribed medicines.

For new or on-patent medicines, the most common approach involves external reference pricing: based on the drug’s price in other countries, it allows for a set price point for the manufacturer and insurer to negotiate upon. Indicators for such negotiations include the drugs budget impact, its cost effectiveness, its additional value in relation to other therapeutic alternatives, and its overall therapeutic benefit. Accordingly, such negotiations are critical, for both insurer and the manufacturer, as they usually represent the largest market for the drug.

By looking more carefully at the subject matter, certain explanations can shed light on  to why drug prices are outpacing inflation, making access to such drugs an even bigger expense for both insurers and patients alike.

A key determinant of drug price quotes are provisions and confidentiality. Exemplifying this is the co-pay claw back phenomenon. In this context claw backs are prescription drug overpayments insured by patients, taking effect when drug co-payments exceed the cost of the drug for insurers or PBMs. Evidently, in 2013, 23% of prescriptions in the US involved copayments greater than the average reimbursement of $2.00 by insurers; with average drug overpayments amounting to $7.69.

Perpetuating this feedback loop are “Gag Clauses”. PBMs and pharmacists establish contracts containing provisions that prevent the pharmacist from informing the patient that the given drug is cheaper when purchased with cash as contra to when purchasing it via an insurance scheme. In view of this, such provisions facilitate claw backs towards the PBMs.

Concealing drug price contracts between pharmaceuticals and government/private insurers accounts greatly for the deviation of drug prices from fair value. Motivating this phenomenon is the direct benefit of maintaining high prices and price flexibility amongst payers by restraining them from demanding the lowest available price.

Revenues of patent holders are another indicator of the ways in which drug prices increase over time. In theory, patents stand as forward-looking policy tools that drive innovation associated with an increase in social value, through the promotion of financial returns for the investors. However, it is often the case that manufacturers can increase the time they own the rights to the drug by patenting different parts of the manufacturing process and drug’s intellectual property. Such patents can be filed at different times to defer generics.

With generic medicines priced at more than 100 times their estimated cost of production, they also add to the price burden consumers are exposed to. In this case, when manufacturers diversify into developing both on-patent medicines and generics; as observed with the acquisition of Sandoz by Novartis. This enables tighter control of a drug on the market during its before, and after its patent expires. In spite of parent companies using subsidiaries to influence multiple domains of a market, the presence and regulation of such enterprises that manufacture generics is one of the primary contributors to cheaper drugs in the EU.

With the rising cost of technology, research and development costs for manufacturers are increasing. Manufactures use R&D costs as indicators when quoting prices to insurers and distributors. Costs in this bracket involve financial investments in research, clinical trials, while also accounting for financial losses incurred from drugs failed at some point in the discovery and development pipeline. Yet, this cannot clarify rising R&D costs for drug classes such as orphan drugs, involving smaller clinical trials and government grants. Other barriers embedded in price transparency are self-reported data. Since most R&D costs do not have to be disclosed — and when they are published, they are ambiguous — manufacturers are able to expense several acquisitions under R&D costs. Consider as an example, the acquisition of Pharmasset by Gilled for $11bn. For the manufacturer, this purchase leans towards an intangible business investment contra to an R&D expense. Therefore, manufacturers try to expense as much as possible under R&D costs just as a business owner acquiring a new house would write off the interest rates on its mortgage as a business expense.

Despite the above, manufacturers also face a lot of barriers in carrying forward drug price transparency: one such case are claw backs. In countries such as Greece and Belgium, when the healthcare spending of a state supersedes its allocated budget, claw backs or clawback taxes, are often imposed on manufacturers. Such policies allow the government to take back a percentage of the amount it has spent on reimbursing its citizens. This is the direct result of the lack of transparency between stakeholders, resulting in the discouragement of investment. Consequently, reimbursement and thus market access are greatly affected. 

Another anchor is long- and variable-time limits for pricing and reimbursement decisions. By way of illustration, US manufacturers in France have been facing delays on reimbursement approvals of as much as 566 days post market authorization. This conflicts with the 180 days required by EU law. Thence, delays in reimbursement decisions convey investment uncertainty for manufactures, prohibiting the direct competition that would ground drug prices closer to their fair value.

A promising solution, the blockchain database management system (DBMS) model, opposes issues of transparency, time-efficiency, and impaired cost-effectiveness in drug pricing. While the following outline will not detail the complete structure of a decentralized drug pricing system, it will set a case for it benefits in improving healthcare. No price transparency equates to no consumer trust. 

Traditional DBMS are set it place in order to simulate and judge claims on prescription drugs.  They allow users to interact with multiple databases in a centralized matter. To picture this, imagine a company server, containing the important data, with several computer connections that enable employees to log in via their personal computer. A centralized DBMS model hierarchically grants authority to its users.

Issues arise when employees with significant authority modify data resulting in illusory trust amongst stakeholders. A blockchain backed DBMS model involves a distributed ledger. This can involve a completely public database or a semiprivate one, provided by algorithms that facilitate data immutability and transparency. Since all stakeholders can view all transactions, accountability can be assigned to a particular stakeholder.

Applications of decentralized DBMS models are emerging amongst the healthcare sectors.  Companies with the same decentralized end-goal in mind including Pfizer, Genentech, and Chronicle, amongst others partnered and invested in Mediledger, an Ethereum backed platform facilitating distributed ledger track and tracing of healthcare products. In this way, it can ensure that no fraudulence occurs along the supply chain, thus jeopardizing the safety and quality of its products. With 30% of drugs sold in the world being counterfeit, such advancements mark a new era in supply chain logistics that will change the trail a drug follows.

Within drug pricing, quotes can be directly controlled through smart contracts on blockchain backed DBMS ledgers. Essentially, smart contracts allowing for the automation of decisions through pre-set algorithms, neglecting human input. In practice, a smart contract-based drug purchase involves validation by all stakeholders (manufactures, insurers, PBMs, and pharmacies), resulting in the consumer purchasing from the pharmacy with the cheapest drug listing. Benefits in the pricing and reimbursement process involve not only the reduction of transaction fees, a significant financial burden imposed by banks on companies, but also faster processing times for queries on rebates and reimbursement. According to NASDAQ, smart contracts are further able to identify discrepancies in chargebacks and rebates early on, ultimately derailing the traditional model.

Nonetheless, decentralization has not yet been applied within the cryptic act of drug pricing. Several issues emerge when considering its possible application. Particularly, it has never been stress tested to account for joint transparency amongst thousands of stakeholders. However, key advances of decentralization in supply chains and clinical trials do prove promising. Another element to consider is consensus. Stakeholders are unlikely to favor transparency as that is the method by which they can fulfill their fiduciary responsibility in maximizing profits for companies. Therefore, without government intervention through stringent policy, stakeholders will not easily give up on rising profit margins.

In practice, pharmaceutical companies within free markets function primarily as businesses that happen to sell medicines. In that sense, they abide by the same profit-centered decision making that general enterprises follow. The cryptic path of drug pricing is one that consumers ought to be aware of, in order to avoid being at the mercy of drug makers. With respect to the above, the case for a decentralized DBMS model that has been proposed represents only a mental framework and not a practical model to be applied. Context has been provided to relate this prospective framework to current healthcare systems. The model, therefore, stands more-so as a light at the end of the tunnel, illustrating how an emerging technology can disrupt consumers’ blindsight at the pharmacy counter.