KFF Drug Cost Panelists Discuss Rebates, Compulsory Licensing and COVID-19 Vaccine Development

The speedy and largely successful effort to develop the COVID-19 vaccines was a success story and perhaps sets a good precedent, agreed members of a Kaiser Family Foundation panel discussing drug pricing today. But the panelists had a range of opinions on an assortment of other drug pricing issues and policies, ranging from rebates to international reference pricing to compulsory licensing.

The panelists includedKirsten Axelsen, M.S., a visiting scholar at the American Enterprise Institute and a former Pfizer executive and consultant to biopharmaceutical companies; Richard Frank, Ph.D., a senior fellow in economic studies and director of the USC-Brookings Schaeffer Initiative on Health Policy; and Rachel Sachs, J.D., M.P.H., professor of law at Washington University of Law. Larry Levitt, the foundation’s executive vice president for health policy, moderated.

The free Zoom webinar is part of a series the foundation is calling the Health Wonk Shop.

Here are four takeaways from the conversation:

1) COVID-19 vaccines are a government-industry success story.

Sachs called Operation Warp Speed an “incredible success,” noting that Moderna had never even brought a product to market before. She said the vaccine development effort was a demonstration of how government-set targets can spur innovation. Axelsen was similarly enthusiastic but credited industry, and particularly Pfizer, with deploying capital, accrued through prior success, toward vaccine development. Frank noted the federal government was a guaranteed purchaser of vaccine and that the development of the vaccines shows that government-business partnerships can be a win-win,.

2) Rebates, insulin prices leave out the consumer.

Asked about the proposed $35-a-month limit on insulin out-of-pocket costs for patients, Frank said that the prices that insurers pay for insulin is quite low. The problem lies in the gap between the list price, which is the price used to calculate coinsurance, and the net price paid by insurers. Frank returned to the difference between list and net prices when talking about rebates. He said rebate contracts are, in effect, performance contracts because the rebate amounts paid by manufacturers to insurers and their pharmacy benefit managers are contingent upon the amount of product purchases. The system of paying rebates encourages high list prices because the higher the list price, the larger the rebate, he said. The effect of the rebates is to reduce insurance coverage for the consumer, he said. “At the end of the day,” Frank said, “the consumer is the only person in this contractual set of arrangements that is left out.” But Frank also said, “private negotiation can be our friend,” leading to lower prices. He said one way out of the problem would be benefit redesign that would curtail high deductibles and replace coinsurance with copayments.

3) International reference pricing: A mixed bag of opinions.

The Trump administration proposed linking Medicare payment for Part B drugs — which are those administered by a physician or in a clinical setting— to prices paid in other countries. Sachs described how the rule — and another one concerning rebates — was challenged on procedural grounds and how those challenges could be overcome. Frank said the U.S. payers typically pay prices that are two to three higher than those paid in the European Union; he said international reference pricing would likely mean prices paid in the U.S. would go down some and prices paid in the EU, Japan and Australia would go up. Axelsen pushed back some on prices paid in the U.S., noting that Medicaid and the VA get discount that bring down the prices to levels similar paid in other countries. Axelsen also said the U.S. patients do benefit from high prices paid by payers in the country. Citing improved five-year survival rates for some types of cancer, she said, “You don’t get long life for nothing. The U.S. gets faster access to these medications.” She also said lower prices would diminish the number of drugs that pharmaceutical industry would develop. Sachs pushed back on that, nothing that Trump administration HHS Secretary Alex Azar gave speeches saying that research would not come to a grinding halt.

4) Compulsory licensing’s legal path — and opinion about its consequences.

Under certain circumstances the federal government can, for a licensing fee, force a patent holder to license its technology. Sachs explained the compulsory licensing provisions (sometimes called “march in” provisions) of the 1980 Bayh-Dole Act, which allowed universities and other organizations to get patents from federally funded research conducted in their organizations. She said there was also an older provision of federal patent law — Section 1498 — that could be used to enforce compulsory licensing. Either way, she said the licensing could only come into pay after the five- , seven- and 12-year periods that are prescribed under FDA regulations are over. Axelsen said use of compulsory licensing would add uncertainty and reduce investment in drug development for conditions such as HIV that affect disadvantaged populations.