Hello, and welcome to the Votes and Verdicts podcasts, hosted by the policy and litigation team at Bloomberg Intelligence, the investment research platform of Bloomberg LP. This podcast series examines the intersection of business policy and law. I'm Doin Wright and analysts with Bloomberg Intelligence covering government healthcare policy. So for our topic today, the Inflation Reduction Act, specifically the drug pricing provisions and how the new law will impact
costs for employers, commercial payers, and employees. As you know from our previous podcast, we spent considerable time looking at how the IRA will impact life cycle management for drug companies. For example, how will the law impact the company's decision to pursue new indicators for existing drugs given the threat and timing of price cuts. We've had a discussion with the executive director of the Association for Accessible Medicines about
the challenges and opportunities for generic and biosimilar competitors. Now we'd like to discuss how the drug pricing provisions of the IRA could impact employers and the commercial market. Keep in mind the prices that Medicare negotiates with drug companies will be available for Medicare beneficiaries So should employers brace for higher costs as a result of the law or will there be some spillover effects that benefit the one hundred and seventy five million people with employer or non
group coverage. I think the answer to both those questions is maybe. But since it's twenty twenty three and these prices won't become effective until twenty twenty six, let's have some fun talking about it. And today I'm lucky to have Jeff Levinsure's an assistant professor at the Harvard Chan School of Public Health and Population Health leader in the Health management practice at WTW. Jeff has an MBA from Columbia Business School and a BA and MD from Boston
University and the School of Medicine. So Jeff, welcome to the Votes and Verdicts podcasts.
Thanks very much. Dwyane happy to be here.
So, Jeff, I'm really looking forward to this conversation because as much as we talk about the impact to drug companies, there are or that could be subject to price cuts. We don't often talk about some of the downstream effects of the law, specifically with the commercial market and employers. But before we do that, can you tell us about your work at Harvard, the Harvard School of Public Health, and WTW.
Sure, thanks very much so. At the Harvard School of Public Health, I teach course work around managing healthcare costs, certainly a relevant topic, as well as provider payment. And at wt W, the firm that was known as Bill as Towers Watson in the past, I'm the population health leader, So I'm giving advice to large employers about what to do about health health care and the health investment in
their employees. Previously, I worked as a physician leader and provider organizations and a health plan and I'm a primary care doctor by training.
And so what are you hearing from employers now about drug benefits?
Well, you know, I mean, employers are struck by the fact that we have the highest rate of medical inflation really in the last decade this year, and there's good reason to believe that's going to continue for the next
three or four years at least. And given that backdrop, employers are mainly thinking about costs, and very specifically, the two things that are top of mind for employers that sponsor health insurance right now are the cost of the newer antiobesity drugs, which you know, which which are very high and they're wonderful drugs, but they represent as much as ten percent of total outpatient pharmacy spending now and
much of that is new. And the other is concern about the very expensive gene therapies that are becoming available. You know, joy that there are now you know, insight cures for terrible diseases like sickle cell disease and hemophilia, And terror about what the possibility of a two or three million dollar bill could mean to a self insured employer.
So let's have a take a foundational look at this topic and this issue. Give us an elevator speech about what formularities are number one, and then two, how are they created for employer and commercial plans.
Sure, well, one thing to understand first is about almost ninety per of the drugs prescribed to members of health plans are generic. However, eighty percent of the total cost is actually in brand name drugs, So formulais are really
all all about brand name drugs. So pharmacy benefit managers, which are hired by employers to manage the pharmacy benefit, actually actually design and craft formulas with an item, making meds in each class available and driving volume to the pharmaceutical company that's willing to accept a lower net price for a drug that works well. So concessions on price can either be given as rebates or discounts, and in the brand name drug space, a lot of those concessions
are made in rebates. So we often think about the gross price of a drug, which is easy to find, and then the net price of a drug, which is what price the insurance plan and its members are paying after any discounts and after any rebates. So if a drug company wants its drug to be on a formulary's it generally will and there are competing drugs that could be on instead. A drug company is willing to give a give a larger effective discount to get more volume, and so.
Using control of this process. Do employers themselves have a large role here in terms of dictating which drugs are included or not included and is there a negotiation process that's involved.
You know, most employers don't have their own pharmacy and therapeutics committee. They don't hire a pharmacists, they don't hire doctors to do this. They actually hire a pharmacy benefit manager and they trust the pharmacy benefit manager to offer a formulary there's a tendency for PBMs to offer a
few different formulas. One that might be one that might be more restrictive and therefore lead to lower costs, but more members being forced to switch drugs when it's less restrictive, which will have higher costs, but more members will be happy because there won't be a demand for them to switch from a drug they're accustomed to potentially a different drug.
There are some jumbo employers that do have their own formularies, but for the most part, employers will accept the formulary that accept one of the available formulators for their PBM. Another consideration is that the formularies do determine what kinds of rebates employers will be able to get, so that they're willing to have a more restrictive formulary, then the drugs that are on that might get more business than
their competitors are probably discounted more heavily. So to the extent that employer wants to say, well, I don't really want any patients to be forced to switch drugs and have any kind of any kind of friction or abrasion, that employer will end up getting much less in the way of rebates.
And I think as I look at this topic, you can see depending on the drug, some drugs have rebates that are a lot less than others in the range can vary, and this might be the answer to this might be, well, it depends on the drug. But who has the leverage here when you're talking about drug manufacturers that want their drugs on the formulaitis PBMs that want to get the rebates. There's that tension. How has that tension resolved and who has the leverage?
Yeah, as you as you suggested, the answer is it depends. And if there's a drug that's pretty unique, it's the only drug of its class, it's really the only drug that accomplishes you know that it meets us meets a real clinical need, then the pharmaceutical company has has leverage and the pharmaceutical company is likely to give few price concessions because an employer pretty much has has to have
that on the formulay. Whereas if there is a drug that's part of a class where there are many available drugs, maybe even some that are already available generically the you know to you know the at that point, then the pharmacy benefit manager has substantially more leverage and can can
seek much much higher price concessions. So I think it all depends on really how much how much value is created by the drug and how much you know, unique and competitively differentiated value is created by the drug, and drugs that are, you know, drugs that create more value than the pharmaceutical company has substantially more leverage.
And so if I'm an employer, I've got this formularity working with a PBM, how often can I expect conversation between PBMs and manufacturers to occur in terms of what the price are going to be, what the rebates are, what does that look like?
Well, most commercial formularies are technically you know, they're technically created once a year. But as a practical matter, there are always new drugs coming on the market, there's new information becoming available about drugs, and so there are there, there are forms. There tend to be formulary changes somewhere between two and four times a year, depending upon you know, depending upon what you know, what what what is new?
I imagine at this point that the pharmacy benefit managers and the pharma pharmaceutical companies are maybe talking virtually all of the time. But but but but in general, you know, there is an attempt to be sure to not be changing formularies dramatically in the middle of the year, because that causes a lot more patient disruption.
And so when we think about healthcare policy specifically, looking at well, if you change reimbursement or coverage within one part of healthcare, it's going to impact another part of healthcare. And I know we'll get into this in a bit. I think this is a good segue for what's coming of next. But when we look at some of these commercial formulais are they influenced by what happens in the Medicare program or these two distinct conversations.
So it's a really good question. So there are a lot of Medicare plans. So there are eight hundred Medicare part y plans. There are four thousand Medicare advantage plans, about ninety percent of them have pharmacy benefits. And similarly, there are you know, there are you know, there are many, many PBMs, although there are three of them that represent over eighty percent of the total market. The big PBMs almost universally have you know, universally have both Medicare and
commercial contracts. I'm not at the negotiating table. So I can't tell you exactly how one impact the other, but I can tell you that if a if a pharmacy benefit management or has a good relationship with one pharmaceutical company is able to get good price concessions, they're probably going to be trying to do that on both the Medicare and the commercial side. So, uh, you know they're there. You know one one definitely does you know, have have have some impact on the other.
So that helps us tee up the big issue, which is how this is all going to impact how we'll see this impact from the IRA in the commercial markets. But before we jump into some of these i RA effects, maybe another opportunity just to develop a baseline understanding for our listeners. But what are we talking about with the i RA drug pricing negotiation provisions? How is it going to happen? What specifically is it?
Yeah, so so so basically, the IRA prescribes very very specifically how this negotiation works. So the Centers for Medicare and Medicaid Services, which runs Medicare, chooses this year ten ten Medicare Part D drugs, It'll be it'll be fifteen next year, and then the year after that they start looking at medicare Part D N Part B. Part B is medicines that tend to be used in hospitals or in doctors' offices. Part D is medicines that people go to their local pharmacy to pick up. So, so the
first thing is they've choose choose medications. That's that's done. The ten medications have been announced and uh and then UH there is a process whereby h CMS Center Center for Medicare and Medicaid Services use goes you uses a series of criteria to determine what it thinks is a fair market price for our fair market value for each of these ten drugs that they're going to negotiate with
all ten pharmaceutical companies. Impact they have agreed to this negotiation, and so CMS will on the will on the basis of how much clinical value there is, how much research and development it took, how much of that was paid for by the government. You know, what are alternatives that could achieve the same clinical benefit would cost. So the cm is supposed to supposed to put all of that together, and on that basis they make a bid to the
pharmaceutical company. It's somewhere between twenty five and sixty five percent lower than lower than the existing cost, and then the pharmaceutical company has a period of time to make a counteroffer and to give justification about why they feel that the fair market price should be higher than what CMS has to do. So this will all be going on for the next year, and if the pharmaceutical company and CMS can't come to an agreement, then there are
pretty serious penalties for the pharmat pharmaceutical companies. So I think that it's likely there will be agreements, and those agreements will be announced in September of twenty twenty four, but then that price won't be in effect until January first of twenty twenty six. So it's a pretty long process. It's pretty prescribed, it's not there's not a lot of flexibility about how this should go, and it is mandatory that for the drugs that are that are selected, the
discounts will be will be reasonably serious. And I mean, another big difference between these kind of negotiations and the negotiations that pharmacy benefit managers have with the pharmaceutical companies is that the results of these are pretty much entirely public.
So we will in September of twenty twenty four, not only know what the agreed upon medicare price will be, and it's very hard to figure out sometimes what the agreed upon PBM prices are, just because there's there's a lot of rebates and other things going back and forth. But we'll also know what the background is about why CMS chose that price and in what way the pharmaceutical
company might have disagreed. So all of that information becoming part of the public record will actually, I believe, clearly have an influence on what the price is across the market, not just on Medicare.
Yeah, on that point, there's going to be considerable transparency into how CMS got to this. And I think when we get there, if we get there, I think we'll all be looking at, well, Okay, we know you set the price, but how exactly did you get there? And I think we'll all be looking through that. But you know a couple of things you mentioned earlier that there's there could be some serious discounts. As you mentioned, the law provides pretty much a ceiling and it does not
provide a floor. In other words, there's a maximum fair price, but there's nothing that says CMS can't go well below that, and I think that is a fear that drug manufactures pharma bile they've all expressed over the past couple of months, and so there's a bit of unpredictability there and we
will see how it plays out. CBO, which is the Congressional Budget Office, when they scored the proposal, they provided some additional clarity into their thinking in terms of how they got to a score and said, well, because Medicare has such leverage, they think the discounts are likely to be well below the maximum fair price. And we'll see
if that plays out or not. But also to your point about a rigid timeframe, I think it's interesting that it's it's very prescriptive, and I think that is more about, well, we don't know who the next presen is going to be and what their views on this process or the law itself, so we're going to be very prescriptive. Where I think earlier drafts of the law said up to up to ten, up to fifteen, up to twenty, and
this law is now very prescriptive. It is that specific number and discounts are this is your maximum fair price. So again you know some of your earlier comments, it's very rigid and I think people might have issue with this but very transparent process, though people might not like the process.
Well, I think that you know, clearly, when CMS is doing this negotiation, the IRA gives CMS some serious leverage and so so I understand that, you know, I understand that Pharma, you know, Pharma obviously is suing in at least six different courts to try to to try to try to stop this. You know, the IRA also gave
some real wins to the pharmaceutical companies. So so getting rid of the doughnut hole, so being sure that people don't pay first dollar for their drugs and medicare part dy, you know, after you know, after a relatively small number of months, and also getting you also putting a cap on how much people could at maximum spend out of pocket is going to actually decrease price sensitivity for a
lot of drugs. So I mean, you know, if you look at share prices of the pharmaceutical companies, they have done they have done fine, and they're not they're not doing badly. And uh, you know, I do think that there are some blockbuster drugs where there is going to be substantially less margin going forward, and we'll probably talk about it, but I think that you know, there are some incentives in this for pharmaceutical companies not to as
vehemently protect you know, some patent extensions and things. So yes, there are some losses for the pharmaceutical industry in this, but there also are some very substantial wins for the pharmaceutical industry. And you know, so I'm I'm you know, I actually I don't just respect, but I am thrilled at the kind of the kind of innovations and the
kind of progress we've made through pharmaceuticals. Really, I mean, pharmaceutical companies are responsible for almost all of the really big medical advances that have come since I've since I've been on the scene, so you know, making HIV a chronic disease, making hepatitis C treatable, even things like having over the counter drugs to treat ulcers. I mean, when I was in training, I saw people die of duadenal ulcers, and you know, nothing like that would happen now. So
you know, I'm happy for all this innovation. I think the pharmaceutical companies should be well well rewarded. And I think that even with you know, with some you know, with some decrease in margin that they'll see on some of these blockbuster drugs or some shorter, shorter patent exclusivity. I actually am confident that the pharmaceutical industry will actually do quite well, and some elements of the IRA will in fact give them more business.
And I think, you know, how do you respond then to concerns of well, this is going to mean this innovation moving forward? You know, one way to think about it is, well, CBO has said, we do anticipate there'll be fewer drugs, whether it's ten, fifteen or twenty. I think Pharma has its own study that says possibly over
one hundred. Do you think that it's less it's more about we won't see those drugs, or do you think we'll see some of these drugs come on the market a bit more slower because some of these drugs are in the additional indications of existing drugs, Or maybe we'll see a drug come on the market for that second indication instead of that first indication because of the clock. And right now the game is all about the clock when it starts and when those discounts are applied.
Well, you know, doing a couple thoughts. One is the Congressional Budget Office said that this would lead to one fewer drug in the first decade and thirteen fewer new drugs in over over three decades. So and just in perspective, that's I don't know, they expect to have like thirteen hundred new drugs over over over three decades. Obviously, if the drug that didn't get developed was the drug that could cure you and you were me, we would be
very disappointed by that. But you know, also of all the new of the thirty eight or so new drugs that are approved every year, a lot of them don't represent like quantum leaps. Some of them do, but a lot of them don't. I think that, I think again, there there will be plenty of margin in the pharmaceutical industry.
And you know, in some areas there'll be somewhat more margin just because of getting rid of of caps that we really needed to get rid of on our getting rid of very high expenses we really needed to get rid of, for for for for some Medicare beneficiaries. So I'm I'm you know, I'm optimistic. I think we'll continue. I think that pharmaceuticals will continue to be a place where money invested wisely will you know, will have substantial returns.
I also think that, like we've seen some excellent reporting about pharmaceutical companies already, you know, delaying a potentially new, better drug to try to to try to get you know,
to try to get longer exclusivevity on that. There's been very good reporting on Gilead and uh, you know which which put which put discov on pause so that they could you know, sort of run the that's a that's a drug used for HIV therapy and for prep for for for preventing HIV infection in people at high risk and uh, you know, basically there's a small advantage of a newer drug discov and uh it's just a different salt of one of the two drugs in it, and they they they sort of sat on it for you know,
at least half a decade, maybe longer, and you know that probably wasn't you know, probably what it would have been good if it came out sooner. So I do I don't think that this is a new problem that the Inflation Reduction Act negotiation is going to create. You know, If anything, the fact that this might encourage pharmaceutical companies not to uh not to not to argue legal legally quite as vociferously against the against the end of exclusivity.
Might actually you know, make more drugs, you know, more really excellent drugs available to people, you know, people sooner. So I mean, you know, I I I think we'll do okay in this. But again, like you know, it's it's going to be a long time before we can actually tell whether you know tell, Well, that's no.
And to your earlier point, you know, we've seen the industry come up with some pretty good innovation. Uh. But where Democrats would say, and which is why they passed the bill which became law, are they affordable? And so when we look back at what the I rate did, why are these prices or that why will the negotiated prices only be available for Medicare and not the commercial market wide? In Congress say everybody can have access to these negotiated prices.
Well, first of all, when Medicare was passed in the early sixty there simply wasn't a drug benefit. And obviously since the nineteen sixties what drugs are able to do has just you know, has just become so remarkable that you know, any any kind of an insurance plan that doesn't have a drug benefit is clearly obsolete. So there was a big argument with Medicare Party about whether that
whether Medicare would be allowed to negotiate prices. And in the end, that is why Medicare Party was pretty much supported by Republicans in the House and not supported by Democrats, who you'd think would have wanted to wanted to expand you know, wanted to expand coverage. It's been it's been a public policy sticking point. Actually, you know, since Medicare
PARTI started paying for prescriptions. It's been a sticking point because Medicare pays for about a third of all of all of all pharmacy costs, and you know, they're if they're paying for a third of all pharmacy costs, wh shouldn't be negotiating. So, you know, as part of the Inflation Reduction Act, the people who believes that believe that Medicare is a very large, very large purchaser of drugs should negotiate ultimately won the day. But you know, the
pharmaceutical industry does very very effective lobbying. They clearly did not want this to apply to uh, apply to you know, to non governmental payers. And I think that you know, wrapping up the Inflation Reduction Act was a very hard thing with an enormous number of moving pieces, and people who were thrilled to see Medicare and negotiating prices were not willing to sacrifice that to to insist that employer
sponsored health health insurance companies were brought along. I think obviously purchasers would rather be it rather, you know, be guaranteed lower prices than have to negotiate for them. But you know, as I've said, I'm I'm guardedly optimistic that we'll actually see some you know, some as you call them, spillover effects, and that there will be some benefit for
employer sponsored health insurance as well. But I think that I think that there's a there is you know, there's a genuine reluctance to to have the government step in, and many people deeply believe that the markets should determine what prices are. And I think that the compromise of letting the government step in for the government's spending was it was a good compromise to make two years ago.
So when I think big picture, whenever I have conversations about how to lower health care costs, to change this trajectory of Medicare spending. I always come back to one central point, which is, probably do something, but that money has to come from somewhere or some body, some entity. In other words, taking away one dollar in health care
spending means lesser hospitals, doctors, insurance companies, et cetera. Which is why it's truly hard to tackle health care spending because you have a lot of stakeholders out there, and I think there's this viewpoint that if you're making these significant cuts to drug prices for the Medicare population, those losses by drug companies have to be recouped somehow or some way, And it reminds me of a headline I saw the other day from an older article as the
bill was going through Congress, which is the IRA means increased drug prices for commercial plans. And so wanted to dive in a bit on this because we've heard from employer groups that have expressed concern, and they expressed this concern during the debate over what was then built back
better and turned into the Inflation Reduction Act. That limiting negotiated prices to Medicare leaves the door open to cost shifting where these manufacturers, especially those that are impacted by these lower prices, will try to recoup these losses through higher prices in the commercial market. Is this a realistic scenario?
I think that concern is clearly overstated. And here's why. Pharmaceutical companies actually higher among the best economists around. The best pharmacal economists to determine what the optimum price is, and the optimum price is the one that gives them the most margin. And if they set the price too low, then they're leaving money on the table. They're getting paid less than they could be paid, so they might have lower revenue than they should have. But if they set
the price too high, it'll actually adversely impact utilization. Fewer people will use it, and at some point, you know, they've set it so high that they'll lose enough business
that they'll actually make their margin worse, not better. So, if you believe that the drug companies have been have have actually aired, and they've they've not been maximizing shareholder value, and they've not been setting these prices at the optimum so far, and they've been setting them too low, and therefore they could raise them and not adversely impact their utilization. If you believe all of that, then you would be
worried about this sort of cost shifting phenomena. But realistically, I think that the drug companies have been setting prices in a way that maximizes their margins, as you know, as their shareholders would want. And I don't I don't think that making less money on a few blockbusters is something that gives them either more leverage or creates more demand in other markets that will allow them to increase
their price without decreasing their their utilization. So I don't think that the drug companies are in a position to in a position to do this, and you know, but I do. I do think like in the in the you know, in the political argument around this, it is valuable for the drug companies to have people believe that they have the ability to to do this kind of cost shifting.
But we have heard these stories and these arguments that, especially when it comes to Medicare, if you reduce Medicare payment for a service, whether its hospital services or something else, pick a sector that there is ultimately it justifies higher costs elsewhere or increasing prices elsewhere. Is there are there examples where we've seen this type of cost shift.
Sure, I'm really glad you brought this up. So in the in the nineteen eighties and nineteen nineties, there was this phenomena that healthcare policy people called the cost shift hydraulic And each time there was a Medicare bill to try to save some you know, decrease the deficit or save the federal governments some money. So each time Medicare lowered its fee schedule, it seemed like commercial costs were going up and you could sort of just superimpose them,
and it looked like, yes, there was cost shifting. When economists started looking at this into the later nineteen nineties into the two thousands, they actually found that this went away. And the difference is that in the eighties and early nineties, hospitals were largely being paid by based on their charge master what they were billing, and so if they could simply raise their prices, and if they raised their prices,
they would just get paid more. And you know, starting you know, starting in the nineteen nineties and beyond, hospitals increasingly had been paid on fee schedules, and so if they want to raise prices, they have to wait till the next time a contract is open to do it. So they so. So Since then, it turns out that when Medicare lowers its price its fee schedule, it actually saves money for for commercial providers. And it does it
in two ways. One is that most fee schedules are in some way or other based on Medicare fee schedules. So if medica our fee schedules are not going up as rapidly, it actually helps make other fee schedules not
go up as rapidly. The other, the other, you know, the other thing is that when hospitals saw you know, saw saw less Medicare revenue in their future, they actually they actually built fewer new buildings and things, so there was less capital expense, fewer but fewer bond payments due and as a result, they didn't have to raise their
rates as much. So again, I mean, I I think that there is a there are a lot of unknowns here, but in general, uh, if the government as a payer lowers low, you know, lowers its price or doesn't raise its price as much as it otherwise might have. Other parties can only raise their prices if they have the leverage to do it. And then you always have to ask yourself the question, well, did they have the leverage before. And if they had the leverage before, why didn't they
raise their prices before? And so I'm I am, I'm I'm not a believer that that we will be skeptical.
Yeah, So then is it possible then that the reverse could be true here when we think about the prices that are going to be set in medicare that there could be some spillover effect where we see commercial market, employer markets some of those prices adopted by adopted in that area.
I I, uh, that's my that's my feeling about it. I think that I think that we'll we will see spillover effect. We will see that that employer sponsored cut, you know, pharmacy benefits will will will see benefit. I also want to say, I don't want people to think I'm too overly optimistic. This means that costs won't rise as much as they otherwise would rise. I don't think that this means that that, you know, that we will
see a dramatic decrease in in pharmacy costs. So, just to sort of put it in perspective, these drugs represent about fifteen and a half percent of commercial drug spending, these ten drugs alone, so obviously if if, if they cost less, that that's going to matter in a material way. So but but again I mean I H yeah, I believe that when these go down in price for for Medicare, that will go down in price for you know, for other payers as well.
And so going back to an earlier point you made in the transparency angle of all of this, we know that Medicare is going to publish the price in September twenty twenty four. A couple months later, they'll be what we think will be detailed justification for that price remans to be seeing how detailed it will be, but we'll have a sense of Okay, how did you get to from A, which is where we are now, to Z,
which is the price we'll see next year. Do you think all of that information is going to be helpful for the commercial markets to I guess accelerate or be a catalyst for this spillover effect? Or is this kind of information already out there already, but because it's coming from the government a huge payer as part of this process, that it might carry more week.
Yeah, well, there are some there are some parties out there that are already doing this kind of research. The Institute for clinical effectiveness research. IICER is probably the pre
eminent one doing this. They put out a cost effective price for many new drugs, and and even though the actual prices are often higher than what they say is the cost effective price, I actually think these are looked at and I think to some extent, these might actually create a bound that that doesn't allow doesn't allow prices that are you know, doesn't allow prices or even higher. So so, so, yes, there's already some information out there. I think that this will, as you said, be influential
because this is from a very large purchaser. It'll be a variety of different different pieces of data, including some that IICER doesn't doesn't necessarily consider. And yeah, I think that these will have ins on prices outside of Medicare.
And then then the question is, Okay, how exactly will I, as an individual not in Medicare benefits? Is it through lower premiums? Is it through or cost sharing? How how does this work for me? Because I think within the Medicare population it may depend on whether you have coinsurance and that would be pretty significant. Though you layer on top of the party redesigned like there's a lot going on there. We don't have that in the commercial market.
So how would I as an employee benefit, especially when you think about the fact that these prices aren't going to be implemented until twenty twenty six.
Yeah, so I asked, the first thing is, don't count any don't count any difference for the next two opening rollment cycles, right, I mean, yeah, this is gonna take a while, but uh, you know, in general, I think that that for many employers, what this does is it takes a little bit of pressure off of cost of a premium increases. So, you know, employers can employers can either use any savings to be sure that premiums don't come up more, or they can use any savings to
decrease cost sharing. Decreasing cost sharing benefits people who have medical claims and therefore disproportionately benefits people who are sick. Decrease, you know, not increasing premiums is something that everybody sees. I think. I think for many employers, uh, you know, they're working hard to be sure that their employees can afford to afford the premiums to buy insurance. And I think that there will be some priority to put things there.
But to some extent, also, money is fungible, so you know, if there's something that doesn't go up as much as you expected, and you know, it gives you more freedom to not make other difficult decisions like increase the premium or like you know, increase cost shifting.
But I go back to this conversation about what this means for innovation and whether this isn't interfering with the competition we have now. So when you look at the the way the laws set up, you have the maximum fair price, it's twenty five at least twenty five to six percent off current prices. Think the's thing about generics and biosimilar for a second, and you know, one of the conversations we've had here is, well, as a biosimilar
manufacturer or generic manufacturer, I've started this process. You know, it's twenty twenty three October twenty twenty three. I've started my process years ago in terms of going through the R and D, deciding where to go, what to target, going through the R and D, and I've probably thought, Okay, I'm going to come at come on the market at
X minus ten fifteen. And now you have a scenario where that could be higher than what many care says is the price for the drug, and so I do wonder if there's going to be some kind of disincentive, at least initially maybe for some of these competitors to come onto the market. And I bring that up because one of the ways to lower costs for people is
to have competition through generics and biosimilars. Is there any concern there that these lower prices would would hinder reduce this competition, would result in higher prices or is that a little far fetched?
Yeah, well, I mean a couple of thoughts. One is that biosimilars are you know, are are used very widely in the europe in market. They generally cost way way less than sixty percent less than less than the generic I'm sorry, less than the brand name manufactured by manufactured biologic drug and there's no shortage of competition to you know, to to do those So I'm, you know, I think that, I mean, I don't think that the opposition to this
is coming from generic manufacturers or biosimilar manufacturers. I think that there's a good reason for that. What the IRA does is it actually potentially smooths the path to having less years of legal wrangling to put in you know, to put to bring to market a biosimilar, and so I think that, you know, this, this could get us more biosimilars more quickly, and then you know, what does
this do ten years out? Again, pretty pretty speculative, But but it seems like these you know, it seems like there is going to continue to be a need for biosimilars, and uh, you know, and uh and given the high fixed cost, you know, given the high fixed cost and low variable cost of drug manufacturing, even of biologics, I don't I think that, uh, I think that we could We should expect that, uh, you know, that we will get lower prices and we will not see a uh
you know, we will not see a loss of competition in the biosimilar space.
You hinted at something like maybe less patent litigation or you can say patent ligation, but less litigation potentially, And it's something we talk about here as well. As manufacturers have spent a lot of time and money preventing competition
through patent litigation. And I wonder if we're about to see a scenario where, in select cases, some of these manufacturers might be more willing to encourage or at least be open to at least one competitor on the market, because that by definition means it does not qualify for
a negotiation under the IRA. Now the guidance, when you look at the final guidance, there are all these stipulations about what is generic competition, and I think there are some questions as to whether CMS overstep their bounds in terms of their interpretation of the law of what is generic and what is I believe the term is marketed generic. But I do wonder if we will see a bit of a c change to a more welcoming environment by some of these brand manufacturers.
Yeah, I think that's the hope. And you know and think I think that's the hope. That we'd like to see a bio somewhere available when you know, when the patent would allow it. We don't want to see it seven or ten years later.
Right. So with all this talk, I have to go onto this subject in our final question because there's a huge debate now in Congress about what to do about the sector that wasn't directly addressed in the IRA, and those are the pharmacy benefit managers. And for many Democrats and even Republicans to bipart is an issue this seems to be the another way to lower prices or at least provide an avenue for employers and employees and others, an avenue to some of these savings that we're seeing
through rebates. So beyond the IRA, what are policies in your mind that can be implemented to continue to drive down or prices? Uh, specifically within the PBM sector. Are we looking at more transparency, are we looking at policies targeting rebates, outcomes based pricing? What? What do you think some of the next steps are that you think Congress can tackle?
Yeah, well, I mean clearly, this is a place where there's an enormous amount of opacity and uh. And so to some extent, the answer about like where can we where you know, where can we take money out of
this system? Well, we know there's money in the system because we've seen this gradual increase in the difference between gross price and net price, so you know, so, so there is there is money leaking out that's not going to the pharmaceutical companies or or it's going to them, but then they're paying it back to some other parties. So I think I think rules that would shine a light on that and make that more uh, you know,
more transparent. Are probably an important first step. They're not they're not sufficient, but they are they are an important first step. So I think sometimes sometimes people don't realize how destructive rebates are to the whole idea of ensuring people for when they're sick. So essentially, if there's a drug that's very expensive, but then there's a very high rebate to it, people who get prescribe that drug pay their cost sharing when sometimes people are indeductible, they pay
one hundred percent. Sometimes they're in co insurance, they pay twenty percent, but they they they're paying based on this marked up price. And then there's a rebate that's returning a bunch of this to the to the health plan. But that rebate is probably being used to keep overall
premiums down. And so now you have a diabetic on three diabetes drugs who's spent seven thousand dollars out of pocket again the IRA, if they're on Medicare, that will that will make that less of a problem, not necessarily commercial plans. So so I mean, I'm going around a long way and saying this, but but rebates are really problematic. They're essentially having the sick people subsidize the healthy people, which is exactly the opposite of what we want in
health insurance. So, you know, I think the first step is probably shining a light on this, and the second step is probably to just get the prices to be lower. And the pharmacy benefit managers do some important things and you know, be sure that they just get you know, I'd rather see them get paid fees as opposed to getting paid, you know, a piece of a rebate, because that leads to that leads to a series of bad incentives.
You know, I think that there's been an effort, but it's honestly not gotten very far to make rebates at the point of sale. So then then that would that would mean that the sick person who's getting the expensive drug it's not really as expensive it looks, would actually not have not have to overpay. That's not I that's that's a good idea, but it's it's it's it's it's hard to execute, and it's not been put forward in many places. And then well, go ahead.
On that point, I think, correct me if I'm wrong. The Trump administration tried to move forward with this type of proposal within the Medicare program. And I think if we saw and this is probably just and maybe it was an AHA moment for a lot of people because when they try to do it within Medicare, their costs Evaluation agency said, oh yeah, this is going to cost us.
I think it was close to one hundred billion dollars over ten years, because well, those rebates are being used to lower prices for premiums, and so if you don't
have that valve, then premiums go up. Government pays seventy five percent percent of departy premiums, so it ended up being a net loss for government, which I think as you're talking about this and shining a light on how this whole process works, it was an painful reminder that maybe we all don't know how the drug supply chain works in terms of where all this money is going.
Right, No, that's and and similarly, you know, employers are in a somewhat similar situation that you know, if if they can get a million dollars back and they put it to lowering premiums, they're paying eighty percent.
Of the premium So so they are in much the same position. But still we have this problem that you know that that with rebates. We have people who have more medical needs are actually paying more than you know, more than you know, more than they should. They're not just and obviously people have more medical needs. They've already like lost because they have more medical needs, and now they lose again because they're subsidizing overall overall lower premiums.
So again it's not it's not like this is easy. You started you started out by talking about the fact that you know, one person's uh, you know, one person's high medical expense is somebody else's revenue. In this instance, one one person's sort of setting the system right does mean that some other some other people feel more pain from the system. Trade offs are really tough.
And that is our healthcare system.
That is our healthcare system. You know. The one other thing, because you asked me, asked me about sort of other things that people have talked about. You know, there has been talk about outcomes based pricing. So if somebody you know, takes a million dollar drug and the drugs supposed to do something, if two years later it's clear the drug didn't do something for that person, that there would be
a refund. And I think a lot of pharmaceutical companies actually like this conceptually and uh, but as a practical matter in the real world, it doesn't work very well because people are often you know, they often are ensured by a different insurer, a different employer two years later when it's clear. It's sometimes hard to define whether a drug really stopped working or whether it really didn't stop working. Who should collect the refund? Where should you know, you know,
where should it go? These are all really difficult to do. So and realistically, if pharmaceutical companies do that, presumably what they do is if there's a ten percent chance something won't work, they should actually put that, put that the premium for that into the cost of the drug in
the first place. So, for instance, if there's a million dollar drug, there's a ten percent chance it wouldn't work, they should charge one point one million for it, knowing that you know, one in ten times they would have to refund it. So I I mean, I think the real issue with those super expensive drugs is we need the largest possible h well, we need lower prices, but we also need the largest possible risk pool. So you know, having an employer with five thousand employees be at risk.
I mean, they definitely need to buy reinsurance. It's it's just too small a group and there's too much randomness in the world. So so we just want to be careful that we're not having businesses fail because they had they had a sick employee or a sick kid of an employee. That's that's just not I mean, we want businesses to succeed or fail based on their business, not based on based on whether they happen to have somebody who has has a really expensive disease.
Well, this is a topic that I think we're hearing Congress discuss. I know we're hearing quite a bit about what to do with PBMs and that that sector of our healthcare system. And while there was some optimism we might see some movement by the end of this year. It might not be realistic given some of the challenges right now, especially in one chamber of Congress, but I think we might see.
Some a speaker list chamber, yeah right.
But I do think there might be an avenue or an opening to do something early next year. But it's not going to solve all of our problems. And I feel like we've had such a great discussion over so many points we could probably have us podcast dedicated to one of these issues or one of these questions. So I hope we have an opportunity to come back and
talk through these issues a bit further. And you to Jeff's earlier point, the process for Medicare negotiations is a long one, at least over the next twelve months, and these prices don't become effective until twenty twenty six, but then there's twenty twenty seven and twenty twenty eight the process that will play out there. So again, I do hope we have an opportunity to circle back on this, and with that, I think we'll wrap up this episode
of the Boats and Verdicts podcast. Jeff, thank you for taking the time today, and thank you to the listener for joining us. As well as a reminder, you can read all of our BI research on the Bloomberg terminal at BI go. Thanks for listening, and have a great day.