Navigating inflation penalties, public perception, and pharmaceutical revenue management.

In 2015, Turing Pharmaceuticals CEO Martin Shkreli raised the price of Daraprim from $13.50 to $750 per pill, generating a wave of negative publicity and prompting the swift passage of Section 602 in the Bipartisan Budget Act of 2015 (BBA). This legislation imposes the same inflation penalties for generics as those placed on branded drugs.

Because generics have historically been a cheaper alternative to branded drugs, the prices in some cases decreasing over time, it was originally determined that a similar cost-control measure was not necessary. In reality, the omission of a similar inflation penalty for generics allowed drug prices in that market to rise more or less unchecked. Predictably, a large proportion of generics have progressed considerably above the rate of inflation in the past several years, with Turing representing the extreme end of price hikes.

While Section 602 will not prevent large price increases outright, the influence driving it—an increasingly informed and vocal public via social media—is likely to shape the future of pharmaceutical pricing practices.

In response, companies must become more aware of and sensitive to community sentiment surrounding drug pricing. Failure to develop a proactive plan to justify pricing decisions could negatively impact a company’s public image and, eventually, their bottom-line.

Navigating Inflation Penalties and Public Perception

To prepare for Section 602, manufacturers should first consider re-evaluating their overall pricing strategies, factor in long-term ramifications, and determine how inflation penalties on generic medications could affect a drug’s profitability. The timing and nature of concessions associated with product launches will have a substantial influence on baseline product pricing, and could affect the profitability of the product throughout its lifecycle.

Given their efficacy in the branded drug market, imposing inflation penalties for generic drugs appears to be a viable method of price control. A 2011 study by the Office of the Inspector General observed that the financial burden posed by the rising costs of branded drugs was mitigated by the provision of rebates from pharmaceutical manufacturers.¹

Generally, reforms in pharmaceutical revenue management are slow to take effect. By contrast, the swift passage of Section 602 highlights the impact that public perception can have on the speed at which these changes occur.

Price spikes in the pharmaceutical industry are not a new phenomenon, nor does this legislation effectively prevent them from happening. It seems clear, however, that as the public becomes increasingly more influential via social media, the practices of a pharmaceutical company are subject to more scrutiny as well.

Section 602: Important Next Steps

Revenue management executives at drug companies will want to take specific next steps before Section 602 comes into effect.

Today

Per the legislation, manufacturers will have to pay an additional rebate on top of the basic rebate for generic drugs. Like branded drugs, the incremental fee is defined as the difference between the current quarter AMP and the Baseline AMP adjusted for inflation. The designation of the baseline quarter for AMP and CPI-U is contingent upon the market entry date of the product. Drugs brought to market prior to April 1, 2013 will use the third quarter of 2014, while drugs introduced after this date will use the fifth full calendar quarter after the market entry date.^2,3

The first consideration for generic drug manufacturers will be which products fall on either side of the April 1, 2013 threshold, based on their market entry dates. After this point, the corresponding values for Baseline AMP and CPI-U should be retrieved so that data can be prepared for the amendment’s effective date, and sample calculations executed. Finally, manufacturers will want to determine whether the results of these calculations necessitate a restatement for AMP, particularly since either Baseline AMP (3Q 2014 or 5th full quarter) is currently within the three-year window for restatements.

Tomorrow

Most pharmaceutical manufacturers employ a Revenue Management System (RMS) designed to operate under specific parameters given the current governmental landscape. Generic drug manufacturers will need to determine the ease in which a change to the Medicaid URA formula in these systems can occur. For many platforms, this adjustment may constitute a simple formula modification, while others may require a more involved reconfiguration.

In all cases, it will be necessary to proactively test the functionality of the altered rebate calculation to ensure that the system-generated values match expected results. Otherwise, companies are likely to find themselves in a position where Government Pricing and Medicaid formulas are adversely affected upon Section 602’s effective date without any recourse but manual calculation. Given the prominence of AMP in pharmaceutical pricing and calculation, this could prove to be a real burden.

Future

While the far-reaching implications of this legislation will not be known for some time, it does raise important questions for manufacturers. Generic drug makers will want to consider reviewing their forecasting models, accrual workbooks, and price reporting. Many will likely require updates to be compliant with this legislation. Additionally, prospective gross-to-net calculations will have to factor in inflation-based rebates as a mitigating influence on bottom-line revenue. As a result, this may well impact contracting strategies for generics.

From a broader perspective, manufacturers will need to re-evaluate their overall pricing strategies, because the long-term ramifications of inflation penalties on generic medications could significantly affect the profitability of these drugs. Manufacturers will also have to consider the timing of generic product launches, acquisitions, withdrawals, price changes, and discounts based on their interaction with the new inflation penalty standards.⁴

Further down the road, other prices that are derived from Medicaid URA’s will have to be examined as well. The 340B ceiling price, which is used to determine rebate amounts for entities covered under the 340B pricing program, is calculated as the current quarter Medicaid URA subtracted from the current quarter AMP. Consequently, 340B prices for generic drugs may be lowered as Medicaid URAs become higher.⁵

Finally, given the convergence of all these changes with the AMP Final Rule, pharmaceutical manufacturers will want to ensure that plans for addressing this legislation consider the most comprehensive path forward in order to ensure the most optimal use of time and resources.

References

1. Office of the Inspector General. (2011). Medicaid Brand-Name Drugs: Rising Prices Are Offset by Manufacturer Rebates.
2. Congress.Gov. (2015). 114th Congress (2015-2016). H.R.1314 – Bipartisan Budget Act of 2015.
3. United States House of Representatives. (2015). Payment for covered outpatient drugs.
4. JD Supra Business Advisor. (2015). Jacquelyn Godin and Joseph Metro. Proposed Budget Deal Would Add Medicaid Inflation Rebates for Generic Drugs.
5. U.S. Department of Health and Human Services. (2015). 340B Pricing System.

About Robert Blank

Robert Blank, Senior Consultant at Alliance Life Sciences, provides comprehensive consulting to the pharmaceutical and biotech industries with customized applications that maximize revenue and improve business processes by optimizing contract strategy, pricing, management, and reporting.

This article can also be found in the April 2016 edition. 

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