When competition isn't working, FDA's Gottlieb recommends more competition

Capturing the Benefits of Competition for Patients

Speech by Scott Gottlieb, M.D., Commissioner of Food and Drugs
America’s Health Insurance Plans’ (AHIP) National Health Policy Conference, March 7, 2018


Congress has charged FDA with advancing policies that maintain a balance between encouraging and rewarding medical innovation and facilitating robust and timely market competition.

I want to focus my remarks today on access to generic and other follow-on medicines and, in particular, on the market for biosimilars – or follow on versions of branded, innovator biologics.

I firmly believe in the importance of market based incentives that encourage continued entrepreneurship, investment and risk taking – all leading to the discovery and costly development of new medicines.

At the same time, robust competition expands patient access to more affordable products like generics and biosimilars.

I’m concerned about that balance today. Because while we see a growing number of sponsors pursuing biosimilar development programs, the economics of development are currently unstable; and the pipeline of biosimilar products that we hope for could be dramatically affected by the weakening of market incentives to bring these products to patients.

In competitive insurance markets, savings from the competition between branded drugs, generics, biologics, and biosimilars should be passed along to patients, employers, and payors.

But I’m concerned that, in some cases, this isn’t the way markets are operating today.

Current rebating and contracting practices -- combined with the increased consolidation that we’re seeing in many segments of the drug supply chain -- has produced some misaligned incentives.

The top three PBMs control more than two-thirds of the market; the top three wholesalers more than 80%; and the top five pharmacies more than 50%. Market concentration may prevent optimal competition. And so the saving may not always be passed along to employers or consumers.

Too often, we see situations where consolidated firms -- the PBMs, the distributors, and the drug stores -- team up with payors. They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers.

In the long run, the interests of patients, providers, and manufacturers are not well served by these arrangements, precisely because these practices encourage large list price increases to fuel the pricing schemes.

And so, we continue to see a backlash against these Kabuki drug-pricing constructs -- constructs that obscure profit taking across the supply chain that drives up costs; that expose consumers to high out of pocket spending; and that actively discourage competition.

Patients shouldn’t be penalized by their biology if they need a drug that isn’t on formulary. Patients shouldn’t face exorbitant out of pocket costs, and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries, or is used to buy down the premium costs for everyone else. After all, what’s the point of a big co-pay on a costly cancer drug? Is a patient really in a position to make an economically-based decision? Is the co-pay going to discourage overutilization? Is someone in this situation voluntary seeking chemo?

Of course not. Yet the big co-pay or rebate on the costly drug can help offset insurers’ payments to the pharmacy, and reduce average insurance premiums. But sick people aren’t supposed to be subsidizing the healthy.

That’s exactly the opposite of what most people thought they were buying when they bought into the notion of having insurance.

Now I understand that there’s a perverse incentive to use that rebated money to lower premium costs, since most health plans compete on the sticker cost of their premiums. But we’re living in a world where financial toxicity is a real concern for patients. And every member of the drug supply chain needs to take responsibility for addressing it.

Bringing more drug competition to the market, and addressing the high cost of medicines, is a top priority of the Administration and of the Secretary of Health and Human Services.

And we’re working closely with Secretary Alex Azar on crafting policy options that can improve competition, access, and the chance for patients to benefit from safe, effective, and lower cost biosimilar alternatives.

Currently, PBMs and insurers profit from the spread between Wholesale Acquisition Cost (WAC) and the actual rebated price.  These rebates can amount to tens or hundreds of million dollars in annual PBM revenues.

Manufacturers typically tie these rebates to volume, or having a health plan maintain a drug on a preferred formulary status. So, if a health plan puts a biosimilar in that preferred formulary position, the plan might lose the rebates on their entire volume of the innovator biologic.

Here’s the rub.

When biosimilars launch, their initial discount is typically on the order of 15% or 20%. And unless the plan can switch all their patients over to the biosimilar, the cost of the lost rebates on the patients who remain on the original biologic won’t be offset by value of the discount on the biosimilar, and the smaller number of patients who are started on it.

This is especially true since the number of patients who’ll immediately migrate to biosimilar therapy is likely to be small, making it difficult for biosimilar sponsors to launch with deep, volume-based rebates.

This means that PBMs have a significant financial incentive to limit the uptake of biosimilars to continue the flow of large rebate payments.

And health plans have a big disincentive to switch to the biosimilar, and lose the incumbent rebates paid on the innovator biologic.

Everybody wins. The health plans get the big rebates. The PBMs get paid on these spreads. And branded sponsors hold onto market share.

Everyone that is, but the patients, who in the long run, don’t benefit from the full value of increased competition Congress intended.

I truly believe that we’re in the midst of an epoch of medical innovation.

The impact of the innovations we’re laying claim to will be comparable to the introduction of antibiotics in the mid-20th Century.

But patient access to these innovations will depend on reforms that require every incumbent in the drug supply chain to take greater restraint for putting patients at the heart of their decision-making process.

It will depend on steps we take, working together, to empower market competition based on delivering the best clinical outcomes. Doing this with the long run in mind. And patient care at the heart of what we do.

We’re not there today.

Instead, we have a lot of finger pointing that ignores shared complicity for pricing practices that are eroding trust in both payors and innovators.



By Don McCanne, M.D.

FDA Commissioner Scott Gottlieb, in this address to AHIP, the insurance lobby organization, explains how the pharmaceutical industry and especially the middlemen intermediaries are benefiting greatly from our supposedly market based system of financing drugs. But while the industry prospers, patients are ending up on the short end.

Clearly market competition is not working to benefit the patient-consumer. So Dr. Gottlieb says, "patient access to these innovations will depend on reforms that require every incumbent in the drug supply chain to take greater restraint for putting patients at the heart of their decision-making process."

But that is not the way markets work. They do not put patients at the heart of their decision making. They do not volunteer to place restraints on their profits. Profits are what drive businesses, and prices tend to be set at what the market will bear.

Yet Gottlieb says that we must work together "to empower market competition." No, in health care that does not work. Instead we need to empower our own government to distribute our resources based on patient need. The most effective, efficient and equitable way to do that would be to enact and implement an improved Medicare for all. The sooner the better.

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