Washington Editor

WASHINGTON - The federal government is scrutinizing drug prices these days, essentially seeking more transparency, and many observers believe the interest should guide companies' plans for product launches.

"Because many biotech products tend to be priced high, companies need to be aware of these kinds of efforts," said Michael Werner, president of The Werner Group, a Washington-based life sciences consulting firm. "And they will continue, in various forms, from the government and private insurers."

That includes looking into reimbursement methodologies, considering direct negotiations on Medicare Part D drugs and comparative effectiveness studies, for example. Some of that results from the belief that growing drug costs are driving up overall health care expenses. A recent report by Government Accountability Office shows that spending on prescription drugs has increased more rapidly since 1997 than any other component of U.S. health care costs, totaling 11 percent of all health care spending in 2004. With that in mind, it's worth noting that efforts to more accurately pay for drugs - as part of a wider movement to more efficiently pay for health care in general - enjoy bipartisan support.

"Payers are going to want more data about drug prices and usage," Werner told BioWorld Today, noting that even though drug costs still represent a small percentage of overall health care spending, their prices are growing fast, with some big-ticket items at the top of the list. "That's what's making everybody notice."

For example, the Centers for Medicare & Medicaid Services (CMS) two years ago began basing its reimbursement of Part B drugs through a calculation of average sales price (ASP), a reimbursement methodology believed to be more accurate than the previous practice of using average wholesale price (AWP). Under that prior methodology, drug companies essentially established a product's AWP, making it more of a manufacturer's suggested list price, but analyses showed that the government was overpaying as a result.

The shift away from AWP is estimated to be saving billions in annual drug costs. On the other hand, ASP is based on data submitted quarterly by drug makers directly to CMS, includes price concessions such as rebates and discounts, and is limited to U.S. sales.

In addition, ASP pricing is available in the public domain.

New Method Still Developing

But since the use of ASP remains relatively new, CMS continues to examine the latest reimbursement methodology for setting payment rates for injectable drugs administered in physician's offices, and Congress also has been interested.

"The kinks are still being worked out," said Jayson Slotnik, director of Medicare reimbursement and economic policy at the Biotechnology Industry Organization.

An advisory group on the Medicare program, the Medicare Payment Advisory Commission (MedPAC), has looked into the effects of ASP on services from specialty physicians such as oncologists, urologists, rheumatologists and infectious disease specialists. As part of that scrutiny, MedPAC also has begun looking into bundling practices, whereby companies tie discounts on certain products to large volume purchases of others.

CMS wants to be sure that ASP accurately reflects market prices and that bundled price concessions in the calculation do not create inappropriate financial incentives. But the agency has yet to take action on how to allocate price concessions across drugs sold under bundling arrangements in calculating ASP, a sales tactic that has led to a high-profile anemia drug dispute between Amgen Inc., of Thousand Oaks, Calif., and Johnson & Johnson, of New Brunswick, N.J.

In the background of a federal antitrust suit between those parties, some on MedPAC's staff have questioned the practice, as have some on Capitol Hill. At a recent MedPAC meeting, the group recommended that the Department of Health and Human Services (HHS) clarify ASP reporting requirements for bundled products to ensure ASP calculations allocate discounts to reflect the transaction prices for each drug.

Drug makers soon will begin dealing with another example of transparency, courtesy of the Deficit Reduction Act of 2005, which is making companies file monthly reports on average manufacturing prices (AMPs) beginning New Year's Day. With those numbers in hand, the Office of the Inspector General within HHS will compare AMPs for Part B drugs to the ASP.

Part D Also Has Congress's Interest

Additional public discourse on pricing these days relates to products covered by Part D of Medicare. The incoming congressional leadership has publicized plans to offer a government-administered drug benefit to those beneficiaries, which would allow HHS to directly negotiate prices with drug companies by repealing the Medicare non-interference provision in an effort to lower the price of drugs for Part D beneficiaries, even though there is growing consensus that the plan is proving to be less expensive than many feared.

But critics of that effort abound, in Congress, at the White House and beyond, as they believe that could depress prices artificially and dampen investment and innovation in the process, therefore limiting patient options in the long run.

To quantify the argument, a group called the Manhattan Institute reviewed existing government purchasing programs and forecast that prices would decline by more than 35 percent in the next 20 years with direct federal negotiations on Part D. But the corresponding cumulative decline in research and development through 2025 would total about $196 billion, equal to about $10.3 billion per year, which correlates to 10 fewer new drugs per year, the report concluded.

Regardless of the prospect of direct government negotiations on Part D drugs, the industry is bracing for a climate with more pricing pressure and scrutiny. It doesn't matter whether a drug maker is producing Part B or D drugs, nor does it matter which party controls Congress, Slotnik said.

Many believe it's imperative for companies to demonstrate the value of their products, regardless of price, because the former calculation might justify the latter. To do so, they should begin collecting pharmaco-economic data early in a drug's clinical development for payers, in addition to efficacy and safety data for regulators.

"The industry has to keep its eye on value for money," Werner said. "As long as you can show that you're providing value, I think your product will be paid for."

Ultimately, such efforts could demonstrate to payers the need to look to savings elsewhere in the overall health care system, where perhaps truer inefficiencies exist.

"It's clear that patients really want all these new, innovative products," Werner said, noting the myriad therapies produced by a couple of decades worth of investment into medical advances. "They want investment in innovation to continue."