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`Rigged' System Blocks Lower-Cost Drugs, Head of FDA Says

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A “rigged payment scheme” between drug plans, insurers and pharmaceutical companies has blocked access to less-expensive versions of some of the most costly drugs in the U.S., the head of the Food and Drug Administration said Wednesday.

FDA Commissioner Scott Gottlieb aimed particular criticism at giant pharmacy benefit managers that contract with health plans to administer coverage of drugs, saying the industry’s tactics have stymied cheaper copies of expensive biotechnology drugs. Known as PBMs, the companies include Express Scripts Holding Co., CVS Health Corp. and UnitedHealth Group Inc.’s OptumRx unit.

“Consolidated firms — the PBMs, the distributors, and the drug stores; team up with payors,” Gottlieb said in prepared remarks at a conference in Washington that was organized by America’s Health Insurance Plans (AHIP). “They use their individual market power to effectively split monopoly rents with large manufacturers and other intermediaries; rather than passing on the saving garnered from competition to patients and employers.”

(Related: Drug Industry Lunacy: Who’s to Blame?)

The speech is some of the Trump administration’s broadest criticism yet of the health care industry amid an ongoing debate about the cost of drugs and company-led efforts to and deal with rising health care costs. Warren Buffett, whose Berkshire Hathaway Inc. has joined with Inc. and JPMorgan Chase & Co. to look at how the companies might address the issue, has called health costs a “tapeworm” eating at the inside of companies.

While the FDA has little or no power over PBMs, Gottlieb’s remarks make clear that administration health officials place the blame for high drug costs not just on biotechnology and pharmaceutical companies, but also on other parts of the complex medical supply chain.

Express Scripts shares fell 1.6% to $73.42 on Wednesday in New York, while CVS declined 0.2% to $67.51, and UnitedHealth shares advanced 0.5% to $227.27.

Threatening the Market

Gottlieb said the arrangements between PBMs, drugmakers, insurers and distributors threaten the new market for what are known as biosimilars, cheaper versions of complex biotechnology drugs. Unlike pills, biotechnology drugs are made from living cells, are injected or infused, and have advanced the treatment of many diseases. They’ve also come with record prices.

Biosimilars were meant to be a less costly alternative to the products, and Gottlieb called them necessary for a competitive market that works for patients. A 2010 law created a way for the FDA to approve the drugs and help doctors and patients decide how to use them. Their uptake has been slowed by what Gottlieb said were opaque contracts that favor the older, more costly drugs.

He described a system by which makers of the biotech drugs make exclusive arrangements with PBMs and insurers, who agree to cover only the old drug in return for rebates or discounts.

“The rigged payment scheme might quite literally scare competition out of the market altogether,” Gottlieb said. “I fear that’s already happening.”

Both CVS Health and Express Scripts said that they have aggressively advocated for bringing biosimilars to the market. CVS said it was quick to include biosimilars on its list of covered drugs, resulting in substantial savings.

Drugmakers are to blame for the lag in getting biosimilars to the market, Express Scripts said. “They continue to be delayed by drugmakers who engage in non-stop litigation and enter into settlements that delay their availability in the U.S.,” said Jennifer Luddy, a spokeswoman for the company.

AHIP, which represents insurers, blamed drugmakers for setting initial high prices for the biotechnology drugs, and then raising them as competition nears.

“Because of such pricing practices, the overall health care system as well as the consumers who need these important therapies won’t reap the much needed savings from biosimilars,” said Kristine Grow, a spokeswoman for AHIP.

The Pharmaceutical Care Management Association, which represents pharmacy-benefit managers, said it was unfair to blame employers and health plans who pay for drugs for seeking lower costs through rebates.

More on this topic

“Payers have an obligation to negotiate the lowest rates available, whether for a biologic or biosimilar product,” the industry group said in a statement. These payers — not the PBMs hired to do the negotiations — determine how the savings from rebates are allocated, it said.

Patient Costs

Drug plans have said that rebates make their way back to patients in the form of lower monthly insurance premiums, and have called the opaque contracts a necessary trade secret. On Tuesday, UnitedHealth said it would start passing a portion of them directly back to patients, which could lower out-of-pocket costs for people on particularly costly treatments.

The move was praised by Health and Human Services Secretary Alex Azar, a former executive at drugmaker Eli Lilly & Co. Gottlieb has previously worked for the drug industry as a consultant.

The federal government has proposed a similar policy to what UnitedHealth is doing for drug plans that serve people in Medicare, which the PBM industry opposes and has said will raise premiums for everyone.

Few of the new, less-expensive biosimilars have gained a foothold. Of the nine biosimilars the FDA has approved since 2015, only three are available for sale. Often that gap is blamed on disagreements over patents on the original drugs.

But Gottlieb said the payment arrangements “raise another, perhaps even more insidious barrier to biosimilars taking root in the U.S., and gaining appropriate market share.”

Pfizer Inc., which sells Inflectra, a biosimilar of Johnson & Johnson’s $6.3 billion arthritis drug Remicade, sued J&J last year for using exclusionary contracts to block its product.

Trump Administration

As President Donald Trump’s administration looks to tackle high drug prices, Gottlieb has taken the lead particularly by pushing for ways to speed low-cost generic drugs to market.

Those efforts haven’t just focused on drugmakers. A White House report from the Council of Economic Advisers on drug pricing last month called out PBMs as well and steered clear of Trump’s previous threat to have the government negotiate prices directly.

Unlike typical generics which can be 80% cheaper than a brand-name drug, biosimilars require more research, an expense that typically makes them about 15% to 20% cheaper than the drug they’re copying. This means the brand-name rebates continue to be attractive to PBMs and insurers who also get some of the cut.

“Payors are going to have to decide what they want: The short-term profit goose that comes with the rebates, or in the long run, a system that functions better for patients, providers, and those who pay for care.,” Gottlieb said.

He urged PBMs and insurers to instead make biosimilars the default option for newly diagnosed patients and help the FDA educate doctors about the safety and value of the products.

—With assistance from Robert Langreth.

— Read Trump Health Pick Has Blamed Health Plans, PBMs for Drug Costson ThinkAdvisor.

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