Reference based pricing for pharmaceuticals. Podcast with ActiveRADAR CEO David Henka

September 12, 2018
David Henka, President & CEO of ActiveRADAR

Pharmacy Benefit Managers (PBMs) claim to keep drug costs under control, but their convoluted business models and tactics don’t always result in the best deal for employers. Reference based drug pricing is an interesting alternative approach. It’s used for drug cost control in other parts of the world and within the US for things like elective surgery.

“Rebates are like crack cocaine…”

In this podcast interview, drug pricing expert David Henka sheds light on the drug pricing world and describes the reference based approach employed by ActiveRADAR, where he is CEO.

Here’s what we discussed:

  • (0:17) How can we understand the recent dust-up between President Trump and Pfizer’s CEO? What provoked it?
  • (1:00) Why does Pfizer want to see the “blueprint” unveiled —isn’t that supposed to squeeze the drug companies?
  • (2:47) Say more about your “balanced billing” analogy.
  • (4:21) So is Europe like Medicaid, developing countries the uninsured, and the US a commercial payer?
  • (4:59) Isn’t freeloading just good negotiating?
  • (7:23) What about someone like Martin Skrelli, who said just push prices to their logical conclusion: instead of 10% why not 100 or 1000%?
  • (8:52) You mentioned the typical consumer is fairly protected due to fixed deductibles or co-pays. What is the role of PBMs in drug pricing?
  • (11:07)  Would eliminating rebates really drive down costs?
  • (13:37) What other techniques are PBMs using?
  • (15:45) ActiveRADAR is involved in reference pricing. What is it? What implications does it have for PBMs? Are their days numbered?
  • (21:54) Historically generics have helped keep prices under control. How is that working out now? How should we think about “generics” or “similars” for biotech products?

By healthcare business consultant David E. Williams, president of Health Business Group.

One thought on “Reference based pricing for pharmaceuticals. Podcast with ActiveRADAR CEO David Henka”

  1. Thank you, Mr. Williams, for this informative piece with Mr. Henka. I am a Masters of Public Health student at UC Berkeley, and I have learned quite a bit from this blog post! To begin this comment, I would like to mention that I am not fully versed on all of the topics described in this conversation, so please point out any incorrect or naïve ideas.

    It is so true that President Trump is a “provocateur.” I might add that he is often the provoked as well, which often results in making statements about conversations he knows little about. This is especially true when he Tweets, and I agree with Mr. Henka that Pfizer took the increasingly common approach of letting the President at least believe that he has made a deal. You are right to say that the blueprint is a mish-mosh of ideas; it seems more like an appraisal of the Trump Administration combined with a proposal for ideas that might work.

    I have noticed some inconsistencies with this conversation and American Patients First (The Trump Administration’s “blueprint” to lower pharmaceutical prices and consumer out-of-pocket costs). Mr. Henka mentions that it is an understatement to say that PBMs stance on rebates is opaque. The Trump Administration’s “blueprint” also recognizes this as a problem related to rising healthcare costs, but attributes it to shifting costs for consumers, who Mr. Henka argues tend to be immune to these cost shifts at least until they have exceeded the fixed co-pay levels and deductibles engrained in their contracts with plan sponsors. One method proposed in the blueprint to alleviate the obscurity of PBM rebates is simply to create “new incentives to reward drug manufacturers that lower list prices or do not increase them,” (American Patients First). I find this approach questionable, especially with regard to Mr. Henka’s point that elimination of rebates will not limit the maximization of profits by PBMs. Who is to say that pharmaceutical industries will take the U.S. Department of Health and Human Services’ incentives when the current rebate system paired with increasing list-prices for drugs allows pharmaceutical companies to reach their projections? Will the incentives essentially make up the difference pharmaceutical companies need to reach their projections? Is this not, in a sense, a bail-out of the pharmaceutical industry, the very level of this system the blueprint intended to target? Additionally, as Mr. Henka elaborates, PBMs like Express Scripts, CVS Caremark, and United Health Optum will not fall by the wayside if indeed these incentives do succeed in eradicating the rebate system. PBMs are not only large companies looking to maximize their profits, but also still vital players in the drug market – PBMs serve both the purpose of finding better prices for drugs and the purpose of processing information to make the process of finding the right drugs easier. They are indeed a “necessary evil.” I feel that while the American Patients First blueprint does question the shady workings of rebates to PBMs, it focuses more on making an effect on the drug manufacturer level of the market structure, and less on the PBM level.

    So how can we bring system-wide change to actively lower costs in a way that everyone wins? Perhaps we need to pay more direct attention to the PBM level of the system, as opposed to arbitrarily hoping that PBMs will somehow comply to a lack of rebates when list prices are lowered due to incentives provided to drug manufacturers. One approach may be to look at a more integrated system like the Kaiser Permanente Medical Group, in which the pharmacy benefit manager component, called the Medical Center Drug Utilization Group (MCDrUG), works with all other levels of the system (besides the drug manufacturers) in mind. Hence, the actions of these managers are more transparent. Mr. Henka explains that both pharmaceutical and PBM companies have plenty of people who are knowledgeable enough to find ways to tip-toe around a loss of rebates and maintain profit maximization, so if incentives are provided to drug manufacturers to keep list prices low, why not provide incentives to PBMs to take the place of rebates? This may relieve pressure on drug manufacturers (thereby inducing list price stability), and provide a means for the government to monitor this level of the system and ensure that rebates have an effect on lower net prices. Of course, the whole point of rebates is to convince PBMs to include drugs on their formularies, but government-sponsored rebates, as I will call them here, would only be activated in the case of an agreement between a drug manufacturer and a PBM company, so PBMs could still be allowed the freedom to explore contracts with different companies offering biosimilar drugs.

    A second approach is to begin employing tactics used by the rest of the global economy. This is another point questioned in the blueprint requiring specific attention. As Mr. Henka describes, large pharmaceutical companies balance their billing by making up their profit margins in the unregulated U.S. market. Maybe it is time for the United States to start restricting the prices of drugs. There are a countless number of problems that would arise, though, and I will just bring up a couple. The first is simply in implementation: it would be against the US free-market tradition. A policy like this would be heavily debated and would have serious implications for the financial future in this capitalist atmosphere. Part of the reason high list prices have had such an extreme effect on consumers is because uninsured citizens, and those who are still filling coinsurance or deductible requirements, are the consumers exposed to these prices. Thus, price restriction would likely need to be paired with an inclusive single-payer insurance system like those in many industrialized foreign nations. This would allow for a single government drug formulary, one that is more comprehensive than the current Medicaid formulary. Perhaps a system with limited restriction would be more plausible in the outset. Mr. Henka describes that even generic specialty drug prices have risen significantly, so restriction could start here to allow for biosimilar therapy innovation to catch up. A second problem with the restriction of list prices idea: innovation would likely be limited. Part of the reason generic drugs do exist is because drug manufacturers compete with each other. Even the American Patients First blueprint emphasizes increased competition through many means to create cheaper drugs. If drug prices were restricted, there would be no selective pressure to create other drugs with higher effectiveness. Certainly, consumers enjoy the benefits of better drugs, not just cheaper ones.

    Just a question about ActiveRADAR, Mr. Henka’s company: is ActiveRADAR considered a Pharmacy Benefits Manager? I understand the point that the company is “agnostic” toward particular drugs and instead focuses the cheapest drugs, but is that not the primary goal of PBMs in the first place? Therefore, how does ActiveRADAR compete in the marketplace?

    Thank you, again, for hearing-out my thoughts!

Leave a Reply

Your email address will not be published. Required fields are marked *