The U.S. pharmaceutical industry emerged mostly unscathed from President Trump’s highly anticipated blueprint to combat rising prescription costs, thanks to the plan’s sidestepping of changes to a Medicare program that benefits the drugmakers.
The firms had grown increasingly concerned the Trump administration would seek to adjust the rates that the federal health insurance program uses to pay for treatments that must be administered by a physician, commonly known as Medicare Part B.
Former President Barack Obama had previously attempted to do just that, and the pharmaceutical industry spent millions of dollars combating it. They were ultimately successful, and the proposal was dropped. The series of actions proposed by Trump on Friday would make a subtler change that experts say is tame by comparison.
While the reimbursement method is complex, Medicare essentially pays for doctor-administered drugs under a formula that currently equals the average sales price plus 6 percent. While Obama proposed reducing that payment to 2.5 percent plus a flat fee, the Trump administration is aiming to curb increases in the average sales price. The proposed change would tie increases in that yearly average to inflation.
Skeptics say drug companies can get around it by simply increase the list prices of their products. Investors appeared to concur. The S&P Pharmaceuticals Select Industry Index, the portion of the larger market index that tracks the sector, climbed more than 2.5 percent after Trump’s speech.
The pharmaceutical lobby, however, is already attacking the blueprint. In a statement, the Pharmaceutical Research and Manufacturers of America said changes to Part B “could raise costs for seniors and limit their access to lifesaving treatments,” a similar argument the group used to push back against the Obama proposal.
The intense focus on the program is a result of the significant shift in the business model of pharmaceutical companies over the past few years.
Instead of blockbuster drugs like Lipitor that could be used by a large segment of the population and generated billions for patent owners, manufacturers are focusing on treatments for smaller disease groups, which some have labeled as precision medicine. Most are intended to address complex illnesses such as cancer, all of which are covered under the Medicare Part B program.
“Those incredibly expensive cancer drugs, the precision medicines that you need to be in the hospital and under a physician’s care to receive, those are the money makers. Not the drugs you take home and take,” said Ken Kaitin, the director of the Tufts Center for the Study of Drug Development. “That’s the soft spot right now where there is leverage for government to get involved.”
Often referred to as biologics because they contain living organisms, the medicines tend to impact only a small patient population. Pharmaceutical companies, however, can make a hefty profit by charging hundreds of thousands of dollars for the treatments.
Pfizer Inc.’s oncology business, for example, reported U.S. revenue growth of 19 percent, to $1.13 billion, in the quarter through March 31. The company’s stock climbed 1.23 percent to $35.46 after Trump’s speech.
The growth shows no signs of slowing down, either. Merck & Co., which last year won approval for its groundbreaking lung-cancer treatment Keytruda, reported first-quarter sales of $1.4 billion for that drug alone. With a patent that lasts until at least 2028, the Kenilworth, N.J.-based company has years left to profit from it. Merck’s stock jumped 2.34 percent to $59.40 on Friday.
While such treatments are lucrative, price tags on prescription drugs in general have elicited backlash from hospitals, health insurance providers and lawmakers, and the industry has struggled to break through the criticism.
“There have been a couple of very expensive new drugs recently that also happen to offer pretty tremendous health benefits,” said Andrew Mulcahy, a health policy researcher at RAND Corp. “What’s the right way to think about our willingness as a society or as a health system or payer to cough up to pay for some for those expensive specialty drugs?”
The poster child for the backlash was Gilead Sciences. In 2011, the brand-name manufacturer purchased a smaller company that was developing a breakthrough treatment for Hepatitis C. After the acquisition, Gilead won regulatory approval for the drug and began to market it for around $1,000 a pill.
The outrage was instant, and Gilead struggled to effectively communicate the benefit of the treatment, which cured patients of Hepatitis C and saved them thousands in future medical bills.
The incident highlighted another phenomenon in the pharmaceutical industry. Despite their constant war cry over the price of research and development, brand-name drug manufacturers are no longer the ones conducting most of the groundwork to bring new products to market.
Instead, they have partnered with or acquired smaller companies that developed the products and need help marketing.
“They’re completely dependent on these smaller companies,” Kaitin said. “This really creates issues for the large pharma.”
