In dealing with health plans, drug companies are facing a new imperative – bargain or be banned.
Determined to slow the rapid rise in drug prices, more health plans are refusing to cover certain drugs unless the companies charge less for them.
The strategy appears to be getting pharmaceutical makers to compete on price. Some big-selling products, like the respiratory medicine Advair and the diabetes drug Victoza, have suffered precipitous declines in market share because Express Scripts, the biggest pharmacy benefits manager, recently stopped paying for them for many patients.
“There’s clearly more price competition in the marketplace,” Andrew Witty, chief executive of GlaxoSmithKline, said, talking about Advair in a recent company earnings call.
Executives of pharmacy benefit management firms say they must do something to cope with rising prices, particularly for specialty pharmaceuticals, which are used to treat complex diseases like cancer and multiple sclerosis.
Spending on specialty drugs rose 14.1 percent last year and by even greater amounts in previous recent years, according to Express Scripts. Most of that increased spending comes not from new drugs or new patients, but from price increases on older drugs that can often exceed 10 percent year after year.
Many other countries control drug prices in some manner, so drug companies have become dependent on increasing prices in the United States to grow.
Pharmaceutical companies rarely talk in detail about how they set prices or decide on price increases. They generally say that the price reflects the value of the medicine, which in some sense is a measure of what the market will bear.
They also say that insurers and government programs like Medicaid typically pay less than list price, though how much is usually kept confidential. If health plans are now winning bigger discounts or rebates, it will not show up in list prices but will help relieve pressure on insurance premiums.
That appears to be happening to some extent. Analysts at Credit Suisse estimate that the collective discounts and rebates for 15 large drug companies amounted to 31.9 percent of gross U.S. sales in 2013, up from 30.2 percent in 2012 and 19.7 percent in 2007.
How much bigger and broader discounting will become remains to be seen. Tim Anderson, pharmaceutical analyst at Sanford C. Bernstein & Co., said he had always been skeptical that pharmacy benefit managers could rein in prices.
“Express Scripts and other payers can talk tough whenever they want, but it only turns into reality when they have a drug company that is willing to break rank and play the price card,” he said. He said that drug companies, while not colluding, “have all looked at each other and said, ‘None of us needs to compete on price if we just hold the line.’”
But Anderson said that the recent developments with respiratory and diabetes drugs does suggest formularies are being tightened. Formularies are lists of drugs that a health plan will cover. Typically they try to wring discounts from drug companies by offering better placement in the formulary. A less expensive drug will have a lower co-payment to encourage patients to use it.
But drug companies now help patients with their co-payments through coupons. That removes the incentive for patients to use the lower-priced drugs and lessens the incentive for drug companies to bargain.
In response, some pharmacy benefit managers are dropping some drugs from the formulary, rendering the co-payment cards ineffective. If patients want that drug, they have to pay full price by themselves.
CVS Caremark, the second-largest pharmacy benefit manager, started excluding about 30 drugs in 2012 and this year is excluding about 70 from the formulary used by many of its employer clients. Express Scripts this year began excluding 48 drugs or medical products, including Advair and Victoza.
With exclusions, bidding to get on the formulary becomes more of a winner-take-all contest. The winning companies gain more market share because rivals are excluded, so “they are willing to give us greater discounts,” said Dr. Steven Miller, chief medical officer of Express Scripts.
He said the new formulary, which applies to more than 25 million people, would save about $700 million this year for clients who adopt it, or about 2 to 3 percent of their spending on drugs.
Jonathan C. Roberts, president of the pharmacy benefit management business at CVS Caremark, said there was an average combined savings for health plans and patients of $67 for each prescription switched from an excluded drug to a covered drug.
The new Express Scripts formulary went into effect for most patients in January and the effect on prescriptions was swift.
Advair sales in the United States plummeted 30 percent in the first quarter, while sales of AstraZeneca’s Symbicort, a rival that remained on the formulary, grew 20 percent.
Novo Nordisk executives said that overall sales growth for this year would be about 2 percentage points lower than otherwise because Express Scripts had excluded both Victoza and Novo’s mealtime insulin products.
Other pharmacy benefit managers say they use exclusions more sparingly.
“We are seeing an increased request for these narrower formularies and excluded drugs,” said David Lassen, chief clinical officer at Prime Therapeutics, a pharmacy benefit manager owned by various Blue Cross and Blue Shield plans.
But he and some other executives said exclusions could cause disruptions for patients who must switch drugs. They can be used only when there are several equivalent drugs available, lest doctors and patients complain.