Drug Manufacturers’ Suits Against Medicare Price Negotiations Ring Hollow

Passage in 2003 of the Medicare Modernization Act granted Medicare beneficiaries coverage, for the first time, to outpatient prescription drugs. The industry lobbied hard for the part D benefit, and it was a major boon for manufacturers, blasting open the gates for millions of seniors to receiving all sorts of outpatient drugs. This added hundreds of billions of dollars in revenues for the industry overall. It was paid for by the federal government, consumers (mostly through the deductible and coverage gap or donut hole), and insurers (i.e., consumers again, through premiums).bundled payments

In 2022, passage of the Inflation Reduction Act (IRA) formally allowed the Centers for Medicare and Medicaid Services (CMS) to negotiate prices on specific medications that it deemed high expense. That meant not simply expensive drugs but lower-cost agents that are taken by many people, resulting in high cost to Medicare. With the announcement of the first drugs subject to the act in 2026, the pharmaceutical industry (including PhRMA and individual companies like Merck, Johnson & Johnson, and Novartis) filed lawsuits  to prevent CMS from implementing the program. Their only true motivation is to forestall loss of revenue on lucrative products, such as Eliquis® (apixaban), Jardiance® (empagliflozin), and Xarelto® (rivaroxaban).

Applies Only to Drugs Approaching or Beyond Market Exclusivity Limits

All of the drugs targeted by the IRA’s price negotiation provisions will have been on the market beyond their intended market exclusivity: All have earned back their research and development (R&D) costs and all have been yielding consistently high profits for their respective manufacturers. For example, Xarelto was first approved in 2011, and by the time price negotiation produces benefits for Medicare, the drug will have been sold in the US for 15 years. According to Drug Patent Watch, the earliest date for generic entry will be December 2024 (I assume [but did not research] whether generics are actually being developed for this product). That would mean that competition should lower the price of the product in any case by 2026.

Another of these products, Enbrel®, should have been subject to biosimilar competition and lower prices by 2016. However, because of patent litigation Amgen may now extend its exclusivity to 2029, resulting in 30 years of marketing exclusivity and limited competition. The limited competition is the result of many other products in its anti-inflammatory class being introduced both as more effective and with additional indications. This has reduced the annual sales of Enbrel, and at the same time limited biosimilar development of other biosimilars for etanercept.

In subsequent years, CMS will announce additional products that will be subject to Medicare price negotiation, including those currently covered under Medicare Part B. Hopefully, the courts, and even the Supreme Court, will dismiss these suits outright, as Medicare’s ability to negotiate prices is neither unconstitutional or unreasonable.

Is Drug Innovation Truly Threatened?

The pharmaceutical industry is raising the usual objections or warnings, claiming that such negotiations will stifle innovation and have negative consequences for the industry. These claims are hollow. I say this from the developmental and economic perspectives.

Major pharmaceutical companies for many years have used a combination of R&D approaches to new drug innovation. The first is to innovate these products from scratch, creating the molecule in-house, and conduct all testing under their R&D departments. I’ve not seen an analysis of how much R&D is conducted in-house, but perhaps the majority of innovation has taken place through a second avenue. Start-up biotech companies develop the initial molecules, conduct the first phases of research, and are acquired by the major players for commercialization end marketing. This pathway for innovation will not be affected by Medicare price negotiation. To say that it might ignores the recent history of pharmaceutical innovation. The financial incentive for these new biotechs is too great to ignore: Acquisition by big pharma could be a multibillion-dollar carrot. That is how much pharma values start-up biotechs in bolstering their own R&D efforts.

Major pharmaceutical companies have threatened the loss-of-innovation argument in the past, and it hasn’t panned out. The amount of total revenues being reinvested into R&D by these major players is about 20%, but this may include acquisition of these start-up biotechs.

Stop Crying Foul and Pocket Your Profits

To forbid Medicare from obtaining price concessions and discounts (and God forbid even rebates) on behalf of its 66 million beneficiaries is inconsistent and anticompetitive. Another government entity, Veterans Affairs, has negotiated low pricing on its medications for decades. State Medicaid programs have done the same throughout the country. There’s no logical reason to exclude Medicare from achieving these aims, considering the size of the program and the limited scope of the IRA’s drug targets.

There’s little doubt that pharmaceutical companies will continue to receive a warm reception from investors, based on their historical returns. The threat to extended profits posed by the IRA is more than offset by the substantially higher price for pharmaceuticals paid in the US compared with elsewhere in the world. It could have been worse if the US decided to switch to a national tendering system, which is used in Europe.

In truth, the IRA poses a greater threat to the biosimilar industry and biosimilar development than it does to other innovative biopharmaceutical companies.

The Value of Denying Valid Medical Claims

I’ve written about aspects of the patient journey in the past, and one thorny difficulty is the problem of inappropriate claim denials. Note, I used the word “difficulty” here, not “challenge” because there is no need for diplomacy here. When someone is seriously ill and needs medical care, and obtains that care within the insurer or plan network, wrongful rejection of claims (whether partial or in full) is a dreaded and wholly avoidable chapter in the patient’s medical journey. From the perspective of the insurer or health plan in 2023, the denial of appropriate, in-network care could be described in a couple of pejorative terms: (1) greedy and/or (2) incompetent.

As reported in Fierce Health Payer, claims filed in 2021 for payment by exchange plans were analyzed by the Kaiser Family Foundation (KFF), finding that some plans erroneously rejected 40% or more of payment claims generated by in-network providers. This is then automatically billed to the patient, who can then appeal the denial. Even after the appeal is filed, plans commonly deny the claim.

Within exclusive provider organizations (EPOs)bundled payments and health maintenance organizations (HMOs), referrals are required for nearly any specialty office visit or service. This is a common cause of denial of services (preferred provider organizations usually waive referral requirements when services are delivered in-network). Even if the specialty referral is obtained, this is no guarantee that the insurer will deny the claim: either incorrectly identifying a specialty provider as out of the plan’s network or failing to update the provider directory and listing the specialist as a network provider erroneously.

Across the country, average denial rate in 2021 for in-network services was 17% for these exchange plans. Celtic Insurance Company of Florida denied 42% of these claims. In contrast, Bright Health Insurance Company of Florida denied only 6% of these claims. According to KFF’s data, 56% of all insurers denied at least one-fifth of their incoming claims.

The reasons given for payment denial is of interest, as well. For example, Cigna Health and Life of Tennessee rejected 180,124 claims from members of its silver EPO plan, 37% of those for reasons of medical necessity. Overall, of the 44.7 million claims rejected for in-network services, 8% were for lack of prior authorization/referral, 13% for excluded services/benefits, 2% for medical necessity, and 76% for “all other reasons” (which includes out-of-network services). Examples provided by Kaiser counter each one of these reasons, including denial of epinephrine injections and steroid therapy for an anaphylactic reaction as “not medically necessary” or the insurer categorizing cardiac ablation for arrhythmia as “coverage for injections into the spine” (despite receiving prior approval for the procedure from the insurer). For the former, filing of two appeals did not resolve the issue.

Claims denials is a big revenue generator or saver, depending on how you view it, for insurers. Data from the analysis showed that only 0.2% of all claim denials were appealed (based on initial appeals only), regardless of whether the denial was appropriate. This contributes $11 billion annually in extra revenue to the insurance industry. I cannot estimate the amount of aggravation, waste of time and resources, and medical debt this causes patients. Claims denial rates should be of priority interest to consumers who are choosing an insurance plan.

As reported by KFF, “Consumers are not provided any information about how reliably marketplace plan options pay claims and plans reporting high claims denial rates do not appear to face any consequences.”

We are on the cusp of an artificial intelligence (AI) revolution in this country, and one might expect that AI applied to the process of claims review could improve the situation. Of course, this depends on the algorithm used by the individual insurer. One investigation, published in March by KFF, found Cigna’s use of an automated system allowed medical reviewers to make claims acceptance/denial decisions on 50 charts in 10 seconds. At this speed, a review of the patient’s records is not humanly possible.

Assuming an accurate algorithm is utilized, AI should only be used as a first step in the process—to pick out claims that seem to fail some basic tests, like out-of-network providers for a member of an EPO (which does not cover any nonnetwork services). Following this identification, the claim should be manually reviewed before a claim denial is sent. Clearly, the system is not working in several plans, and the external checks on the system are not being conducted as directed by law.

The Drug Industry Rightly Fears Judicial Overreach

I am appalled that this subject needs to be addressed.

The US Food and Drug Administration (FDA) isn’t perfect, but it is still the global gold standard for evaluating medicines for safety and effectiveness. The FDA, though not quite recovered from the self-inflicted damage caused by the Aduhelm® approval mess, is staffed by scientists who have done an admirable job of navigating the question of which drugs should be prescribed in the US. Who wants the judicial system deciding which medicines are safe and effective? No one. That’s right. Not a single thinking person would believe that the science-centric approach for evaluating pharmaceuticals, complex and otherwise, should be the purview of judges at any level of the system.

Texas District Court Judge Matthew Kacsmaryk’s ruling that mifepristone should be withdrawn from the market attempted to thinly mask the real basis for the action: his antiabortion leanings. His line of reasoning in overturning FDA’s decision in approving the drug 23 years ago on the basis of safety and effectiveness is absurd, possibly laughable.

As further evidence of the judiciary’s inability to (1) review this on a scientific basis and (2) comprehend the potentially vast implications of such an action, a federal appeals court preliminarily ruled that, without fully evaluating the safety evidence, the FDA “cannot deny that serious complications from mifepristone.” It pointed to the agreement that patients must sign before receiving it that use of the drug has risks. The New York Times reported that “the court also said that the FDA was incorrect in saying that mifepristone was comparable in safety to ibuprofen. ‘FDA’s own documents show that mifepristone bears no resemblance to ibuprofen,’ the court said.” What? Any healthcare professional will tell you that ibuprofen, when taken chronically and under certain conditions, can cause gastrointestinal bleeding, leading to serious health consequences. Does that mean it should be taken off the market, as well? The court is willing to conflate the experience of mifepristone, which is most often taken in combination with misoprostol, with that of ibuprofen, an analgesic.

Pending a full review by the Appeals Court (two judges appointed by the Trump administration and one by the Bush administration), this issue will likely be escalated to the Supreme Court. If the Appeals Court decides to uphold the Texas judge’s action, it will deal the FDA, the drug industry, and separation of powers a crippling blow.

If the Appeals Court decides to not trample the FDA’s authority, despite the Supreme Court’s recent Dobbs ruling, it should decline to entertain the appeal. The Supreme Court is already facing a crisis of credibility and confidence, and undermining the FDA, whose authority was formally established by an Act of Congress in 1962. Essentially, Congress has passed legislation saying that the FDA is the only entity qualified to make such decisions.

The Court would not question the overall constitutionality of the FD&C Act. Chief Justice John Roberts has long favored narrow rulings to avoid upsetting major legislation. There can be no narrow ruling if the decision to order the withdrawal of a drug is based on something other than scientific rigor. We all have preconceptions of how some of the justices would vote given the opportunity. Are they considering the wider implications? They had better.

The drug industry has reacted with apprehension, justifiably. What other FDA decision could be challenged in court if mifepristone is taken off the market? The only ones who benefit in that case are the lawyers.

From Wellness Apps to Prescription Digital Therapeutics

Throughout its development, the US healthcare system has been attracted to new and shiny technologies like bees to honey. This is a significant reason why the cost of healthcare rises over time. It is also one reason why value-based care initiatives show smaller savings than hoped—the downward pressure they exert on the cost curve is overcome by the upward pressure maintained by a steady stream of new and more expensive technologies.

Prescription Digital Therapeutics, the Next Frontier

Digital health applications have had a rockier road to acceptance than traditional pharmaceuticals, and that is mainly for two reasons: (1) lack of data on their effectiveness and (2) lack of reimbursement. The reason for the former is simple—evidence for their efficacy is not generally required for FDA authorization (if they are authorized at all). The reason for the latter is also straightforward: Are they covered under the medical benefit, pharmacy benefit, something else, or not at all? Responses to the question are rather vague, ambiguous, and disparate.

When manufacturer activity picks up in specific area of medicine, so does funding for awareness campaigns, drug advertising, and funding for additional research. Examples of this well-worn paradigm include the migraine arena with the approval of the triptans in the 1990s, rheumatoid arthritis and the approval of anti-TNF inhibitors in the 2000s, and Crohn’s disease and interleukin inhibitors in the 2010s. General and specific digital health applications can be expected to follow this trajectory, especially noting the involvement of Google, Apple, Amazon, and other extremely deep pockets.

That is not necessarily the case with PDTs. Manufacturers of digital health applications that are aimed at treating a disease, like substance-abuse disorder, opioid-abuse disorder, depression, insomnia, post-traumatic stress disorder, and more, are not large pharma companies, but smaller entities with more experience in the coding world than in reimbursement and coverage.

Approximately 20 manufacturers have either brought their PDTs to market or are currently developing them. These manufacturers are smaller concerns with more limited resources than conventional pharma companies. For the next few years, a good portion of their resources will be spent expanding awareness of these new treatment options.  

First, PDT manufacturers need to focus their efforts on differentiating themselves from other digital health applications, including unregulated wellness apps. Second, they must emphasize their use of cognitive behavioral therapy, an accepted method for treating behavioral health disorders. Third, they are approved by the FDA as “software as a medical device,” and it will take a bit of explaining to attain recognition by payers and plan sponsors about what this term means for reimbursement and coverage. Finally, they need to spotlight the prescription-only feature for access (and adjunctive nature of their treatment). This is no small task for an industry that saw its first FDA authorization the second half of 2017.

Added Value to Adjunctive Therapy?

There may be a value-based aspect to PDTs. Consider that PDTs are not very expensive (although generally out of the range of uninsured patients or those paying out of pocket—probably up to $1,000 per prescription). They are not meant to be used as exclusive treatment; patients should be under the active care of a health professional and receiving live counseling, pharmaceutical therapy, or both. They are intended to improve the effectiveness of overall care and patient engagement. For example, a PDT for substance-abuse disorder seeks to improve abstinence rates and avoid recidivism. For the employer, that may translate into greater productivity, less disability, and less absenteeism.

The evidence for several of these PDTs is promising. Employers are only now awakening to the potential of PDTs to address important, stigmatizing conditions, with on-demand education and treatment modules.

Technical coverage and reimbursement questions will have to be resolved; for instance, can utilization of a PDT be tracked through pharmacy management, especially without a national drug code? They do carry unique device identification codes, but PDTs are not devices like glucose monitors. Will patients’ PDT data be reviewed and not simply relayed to the healthcare team? Will patients only be able to get a prescription through certain providers (e.g., will a nurse or pharmacist be able to prescribe it)?

This is a burgeoning treatment modality and worth tracking, with the introduction of PDTs for several new indications in the near future.

Federal Trade Commission to Investigate PBM Practices

Scrutiny on pharmacy benefit managers (PBMs) has just been ratcheted up considerably. The Federal Trade Commission (FTC) announced on June 7 the launch of its investigation into PBM practices, targeting the largest players. This investigation comes at an extremely crucial time for the biosimilar industry, as manufacturers prepare to negotiate with these same PBMs for coverage of adalimumab biosimilars.

The PBMs are the chief purchasers of medications for commercial plans and Medicare part D members. They negotiate drug pricing contracts with drug manufacturers for the vast majority of the insured population in the US. They are another unique feature of global health systems: No other advanced country allows private middlemen to serve such a role.

A 90-Day Deadline

The FTC will send “compulsory orders” to CVS Caremark; Express Scripts, Inc.; OptumRx, Inc.; Humana Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc., who purchase medications and make pharmacy coverage decisions for approximately 90% of the commercial and Medicare part D insured population.

According to the FTC, these PBMs will be compelled to “provide information and records regarding their business practices,” which are notoriously opaque. The investigation will focus on how these PBMs affect access and affordability of prescription drugs. The FTC’s deadline for compliance will be 90 days from issuance of the orders.

“Although many people have never heard of pharmacy benefit managers, these powerful middlemen have enormous influence over the U.S. prescription drug system,” stated Federal Trade Commission Chair Lina M. Khan in the FTC’s release. “This study will shine a light on these companies’ practices and their impact on pharmacies, payers, doctors, and patients.”

How Do Net Prices and Rebate Contracts Buy Coverage?

At the center of the FTC investigation of PBMs is the PBMs’ encouragement of rebates to negotiate low net prices, and how this results in barriers to coverage of other drugs. For example, a PBM may allow a drug manufacturer exclusive formulary coverage for their drug if the rebates offered are sufficiently attractive.

This is potentially a huge obstacle for makers of adalimumab biosimilars. AbbVie passes millions of dollars in rebates to PBMs at present in exchange for Humira® coverage. Biosimilar manufacturers who seek PBM coverage must contend with the PBM’s lost or reduced Humira rebates if their biosimilar is to be covered exclusively or at parity with the reference product. Further, how are these rebates passed along to payers and ultimately to patients?

The Influence of PBMs

“In these roles,” says the FTC, “[PBMs] often have enormous influence on which drugs are prescribed to patients, which pharmacies patients can use, and how much patients ultimately pay at the pharmacy counter. Many of these functions depend on highly complicated, opaque contractual relationships that are difficult or impossible to understand for patients and independent businesses across the prescription drug system.”

In addition to the impact of rebates, the FTC will also review practices that involve the PBM’s relationship with the pharmacy network, including reimbursement; their use of prior authorization and other administrative tools to manage access, and the PBM’s specialty drug policies.

This inquiry is the next step in the FTC’s request for information about PBMs issued in February (and elicited 24,000 public comments). It is not known when the FTC’s investigation will conclude or whether it will immediately impact the negotiations for the multitude of adalimumab biosimilars to be launched in 2023. However, this inquiry may begin to pry open the lockbox on PBM practices. There will certainly be more to report on these developments.