Ban on Referenced Based Drug Pricing

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A Medicare and CMS Three-Sixty

[By Staff Reporters]rboa_16

According to Jane Zhang and Vanessa Fuhrmans of the Wall Street Journal, on January 10, 2009, the last days of the Bush administration saw a proposed ban that allows private insurers to charge Medicare beneficiaries stiff penalties if they choose brand-name drugs instead of cheaper generic drugs.

Referenced Based Pricing

Under reference-based drug pricing, the penalty for insisting on a brand-name drug often amounts to the price difference between the drug and the generic version, plus a copayment. In some cases, that leaves patients paying the full price of the brand-name drug. In contrast, buyers of brand-name drugs when there is no generic equivalent are charged just a copayment. Nearly 10% of drug plans used the pricing technique to steer beneficiaries to lower-cost generics 

CMS Announcement

Of course, the announcement from the Centers for Medicare and Medicaid Services came after lawmakers and patient advocates protested that reference-based pricing made it difficult for consumers to calculate drug costs.

CMS Renouncement

But, the agency reversed itself 360 degrees this week, proposing to ban such pricing for the 2010 drug plans. The WSJ reported that complicated formulas made it “very difficult to accurately convey the extent of expected out-of-pocket spending” for prescription drugs. And, “The basis for this decision is our belief that reference-based pricing may be inherently misleading to beneficiaries and inconsistent with our goal of improving transparency.”

The Pfizer-Wyeth Drug Deal

Following the ban, investors appeared skeptical about the just announced Pfizer-Wyeth drug deal. Pfizer will pay $68 billion for Wyeth, which is the biggest in the drug sector since 2000. The merger comes as Pfizer faces the difficult hurdle of dealing with patent expirations for some of its biggest drugs, including its cholesterol-lowering Lipitor, which makes up about 25% of the company’s overall sales.


The ban is part of CMS’s criteria for prescription-drug plans that insurers will offer for 2010. The criteria won’t be final until March, leaving a narrow window for the Obama administration to change them.


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7 Responses

  1. Did you know that the Senate Finance Committee just approved an amendment to require pharmacy benefit managers (PBMs) to report drug pricing, competition and how much savings are being passed on to consumers?



  2. Painkillers Darvon, Darvocet Withdrawn at FDA Request

    The maker of Darvon and Darvocet announced recently that it would stop marketing the widely used painkillers in the US because a new study links the active ingredient to serious and sometimes fatal heart rhythm abnormalities.

    The FDA requested the withdrawal and urged doctors to stop prescribing the drugs immediately. But, it advised patients to keep taking their medication while consulting quickly with physicians to find an alternative. Pain management experts said the drugs are easily replaceable. The decision follows years of controversy about Darvon’s dangerous side-effects

    Source: Andrew Zajac, Los Angeles Times [11/20/10]


  3. Gray-Market Drugs?

    Fifty-two percent of hospital purchasing agents and pharmacists reported they’d bought drugs from so-called “gray market” vendors during the previous two years, according to a just-released survey of 549 hospitals by the Institute for Safe Medication practices, an advocacy group.



  4. Generic Drugs Saved $1.46 Trillion From 2006-2015

    The Generic Pharmaceutical Association recently released a report on generic prescription drug savings and access. Here are some key findings from the report:

    • Branded specialty drugs are 1% of prescriptions but 30% of total drug spending.
    • Generics make up 89% of prescriptions but 27% of total drug spending.
    • 3.9 billion prescriptions dispensed in 2015 were for generic drugs.
    • Generic drugs saved $1.46 trillion in spending from 2006-2015.
    • From 2005 to 2015, generic savings increased 328%.
    • Medicare savings from generics totaled $67.6 billion in 2015.

    Source: Generic Pharmaceutical Association, October 19, 2016


  5. Update 2017

    Despite increased scrutiny over drug pricing the past several years and the desire for value-based pricing models, such arrangements between health plans and life sciences companies currently remain rare. Those who have experimented with value-based contracting cite several current challenges.

    However, as noted in our recent policy brief, the 21st Century Cures Act (Cures) clarifies the communication of economic evidence between health plans and biopharma companies and advances the application of real-world evidence (RWE). As a result, value-based contracts for drug pricing will likely become more common.

    Current challenges with value-based contracting for life sciences companies include:

    • Determining the appropriate measures of value to link payment;
    • Controlling for non-treatment factors that can influence outcomes;
    • Developing administrative capabilities to operationalize value-based care; and,
    • Capturing, integrating, and analyzing real-world data to analyze outcomes.

    Performance monitoring for such contracts requires new tools and technology as well as infrastructure that some biopharma companies really have not invested in over the past few years. The Cures Act clarifies the nature of economic evidence that can be shared with stakeholders including formulary committees, payers, PBMs, and others responsible for reimbursement. This change can help overcome the first challenge around determining the measures of value to link payment.

    The Cures Act also allows the FDA to accept new sources of evidence, including data that is collected in the real-world, outside of randomized clinical trials (RCTs). This RWE also can be used to track outcomes tied to payments as part of value-based contracts, helping to address another key challenge. According to our recent benchmarking study, 54 percent of biopharma companies are investing in building up their capabilities around RWE. As companies build capabilities to capture, integrate, and analyze RWE, we may see the adoption of value-based contracts increase.

    Moving forward, value-based contracts are more likely to be implemented for products that have measurable outcomes in specialty disease areas, where products are relatively new and the value has yet to be proven in the real world.

    Sonal Shah, PharmD
    [Senior Manager]
    Deloitte Center for Health Solutions


  6. Reference Based Pricing Research – Experience With Prescription Drugs and Procedures

    Reference Pricing is an insurance benefit design that encourages enrollees to favor providers charging low prices for non-emergency “shoppable” surgical procedures, diagnostic tests, and pharmaceuticals. Reference pricing can motivate providers to compete based on price as well as quality, and to pursue cost-reducing innovations.

    The Berkeley Center for Health Technology (BCHT) conducted a series of studies on the impact of reference pricing on consumer choice, provider prices, and savings for surgical procedures (orthopedics, ophthalmology), diagnostic procedures (CT scans, MRI scans, colonoscopies), laboratory tests, and prescription drugs, using health insurance data from insurers, self-insured employers, and employer associations.

    Reference pricing was shown to channel consumer choice toward lower-priced providers and products, and to significantly reduce spending. No effect was observed in utilization rates or in surgical complications. The implementation of reference pricing was associated with increases in consumer cost sharing for some services and products, and in decreases for others.

    Arnez Hinkle


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