Janus Henderson: What lower drug costs in the US mean for healthcare

Ever since Hilary Clinton tweeted about rising drug costs during the 2016 US presidential campaign, concerns about drug-pricing reform have cast a shadow over healthcare stocks. President Trump’s election did little to allay those fears. Entering office, he accused the pharmaceutical industry of “getting away with murder”, and fired off tweets, one of which declared drug pricing would “come way down”. Each time, healthcare stocks sold off.

In recent weeks, investors have had more insight to how the Trump administration might actually address drug pricing. In the recent Bipartisan Budget Act (BBA) and the White House’s budget proposal for fiscal year 2019, legislators focused on reforms that would lower out-of-pocket drug costs for beneficiaries of Medicare, the national health insurance programme administered in the US for people over the age of 65 and younger people with a ‘disability’ status. Those reforms include increasing manufacturer discounts in the coverage gap, or “doughnut hole”, in Medicare Part D plans and sharing drug rebates with patients. In a speech in early March 2018, Dr Scott Gottlieb, M.D., commissioner of the Food and Drug Administration (FDA), discussed the agency’s efforts to improve market access to generics and biosimilars (generic versions of complex biologics).

Fixing the market, not drug prices

What’s not on the table? Negotiating drug prices directly with drug manufacturers. Instead, the US government wants to help create incentives to bolster market competition – incentives that regulators argue currently are lacking or being hindered.

In his speech, Dr Gottlieb criticised consolidation within the pharmacy, distribution and pharmacy benefit manager (PBM) industries. Facing little competition, he argued those powerful players are able to negotiate lucrative rebates on branded drugs, which are then given prime placement on plan formularies. Lower-cost generics and biosimilars also have rebates but the discounts tend to be smaller, making the drugs less appealing. What’s more, these companies, along with insurers, tend to pocket the rebates rather than pass the savings onto patients. Dr Gottlieb said, “these Kabuki drug-pricing constructs…obscure profit-taking across the supply chain…and actively discourage competition”.

With more attention being paid to these “constructs”, some companies are taking action. Starting next year, UnitedHealthcare and Aetna, two major insurers, will begin sharing drug rebates with consumers in fully insured commercial group plans. Amazon.com has secured wholesale pharmacy licenses in 12 states, suggesting that the e-commerce giant might one day begin distributing pharmaceutical drugs. In January, Amazon also announced a partnership with Berkshire Hathaway and JPMorgan Chase to form an independent healthcare company to try to lower costs for their employees. Mergers and acquisitions have increased, as insurers combine with PBMs to lower expenses. Last year, CVS Health, a large retail pharmacy and PBM, said it would buy Aetna, a major insurer, and in March, Cigna, a managed care firm, said it would purchase the PBM Express Scripts.

Impact to investors

What does this all mean for investors? For the moment, we think it could alleviate the number of tweets we get from Trump, potentially reducing some volatility for the sector. Both Congress and the White House are targeting Medicare, which makes up only one-fifth of all healthcare costs in the US. But those efforts could be sufficient for Trump to claim “victory” over drug prices, at least in the near term. 

Glossary

Medicare part D plan = a subsection of the medicare programme whereby the cost of prescription medication of beneficiaries is subsidised by the US Federal Government.

Formulary = a list of all the prescription drugs that are covered by an insurance plan. The list of drugs placed on the formulary is decided by drug plan and healthcare professionals.