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question did drugmakers’ net income increase after list price reductions for hepatitis c treatments, accounting for pharmacy benefit manager changes and 340b drug pricing program discounts?

Findings In this cross-sectional analysis of 112,630 Medicare Part D Hepatitis C treatment claims for 3 drugs in calendar year 2016, the manufacturer’s estimated net revenue increased by 28 % after manufacturers reduced the list price of these treatments. 340b healthcare organization net revenue for these 3 treatments was estimated to have decreased by 74% after these list price reductions.

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meaning that the manufacturer’s drug pricing decisions may be associated with the proportion of sales subject to both pharmacy benefit manager and 340b drug pricing program discounts.

importance Pharmaceutical manufacturers rarely reduce list prices on drugs, but 3 expensive hepatitis C treatments saw significant list price reductions in 2018. understand the momentum of these price reductions could inform policies to reduce drug spending.

Purpose of estimating differences in medicare part d program manufacturer and health care organization revenues after list price reductions for medicare treatments Hepatitis C, taking into account manufacturer discounts for eligible health care organizations under the 340b Drug Manufacturer Rebate and Discount Program for Pharmacy Benefit Managers.

Design, Setting, and Participants A cross-sectional analysis of Medicare Part D claims for hepatitis C treatments in 2016 was conducted. Data analysis was conducted in February 2019. Using observed price changes since 2018, calculated manufacturer and healthcare facility net revenue 340b for each drug before and after the 2016 usage-based price change, adjusting for estimated healthcare organization discounts 340b and the pharmacy. reimbursements from the benefits administrator. 340b healthcare organizations include hospitals, clinics, and other organizations that meet the federal standards to participate in the 340b program and were actively enrolled in the 340b program from January 1 through December 31, 2016. Manufacturer discounts for 340b healthcare organizations are based on the price of a drug before reimbursements to pharmacy benefit managers, and a reduced list price would reduce discounts to 340b healthcare organizations. Claims data at the health care organization level were obtained from the medicare part d provider utilization file, and health care organizations were matched against the office of service management pharmacy affairs information system and health resources to identify 340b eligible health care organizations. Eligible claims included claims for ledipasvir with sofosbuvir (Harvoni; Gilead Sciences Inc), sofosbuvir with velpatasvir (Epclusa; Gilead Sciences Inc), and elbasvir with grazoprevir (Zepatier; Merck). Healthcare organizations were considered 340b eligible if their practice address was a 340b registered entity for all of 2016.

Main Outcomes and Measures Discounts for 340b healthcare organizations and pharmacy benefit managers for each drug before and after the price change were the primary outcomes. Other results included by treatment and aggregate manufacturer and 340b health care organization net revenue for each drug before and after price change and the proportion of claims prescribed by 340b health care organizations for each drug. Estimated net revenue by treatment manufacturer for 340b health care organizations, non-340b health care organizations, and a weighted average revenue across all health care organization types.

results the 3 hepatitis c treatments evaluated had between 30% and 41% of claims prescribed by 340b eligible health care organizations, more than the 14% prescription rate of 340b for all medicare part d drugs. Based on 2016 usage data, it was estimated that list price reductions for Hepatitis C treatments in 2018 increased the manufacturer’s aggregate net revenue for 3 treatments by $181.9 million, an increase of 28%. aggregate net income from 340b healthcare organizations was estimated to be $181.9 million lower, a 74% decrease.

Conclusions and Relevance List price reductions for hepatitis C treatments may have increased drugmakers’ net income, due in part to lower discounts provided under the program 340b and the high proportion of sales subject to those discounts. Policymakers should consider the role of 340b discounts when evaluating policies to reduce drug spending.

Three direct-acting antiviral (HCV) curative therapies (ledipasvir with sofosbuvir [Harvoni; Gilead Sciences Inc], sofosbuvir with velpatasvir [Epclusa; Gilead Sciences Inc], and elbasvir with grazoprevir [Zepatier; Merck]) price experienced reductions of 60% or more in the second half of 2018.1,2 brand-name drug price reductions are rare; Even after generic competition, brand-name drug makers raise prices.3 Although pharmacy benefit manager (PBM) rebates can offset increases, some argue that such rebates drive price increases.4 program), which allows federally designated health care organizations to purchase drugs at a discount, drives price increases by reducing manufacturer revenue. actually higher after price reductions.

the 340b program was established in 1992 following changes in the drug market after the establishment of the medicaid drug rebate program.6 the medicaid drug rebate program uses a formula to determine the net price of drugs for the Medicaid program, and that formula requires drug manufacturers to extend the best price offered to any commercial buyer to the Medicaid program.7 After the introduction of the Medicaid drug reimbursement program, drug manufacturers were less willing to offer discounts to safety net institutions and government purchasers because a single discount to one health care organization could reduce the manufacturer’s net income for all Medicaid purchases.8 To remedy this unintended consequence, in 1992, the Congress approved a series of exclusions from the best price requirement, identifying a variety ity of health care organizations and government agencies to which manufacturers could extend discounted prices without activating the best price. As part of this exclusion, Congress required manufacturers to extend Medicaid net prices (340b discount) to these identified 340b health care organizations (separate discounts for government purchasers were established). 340b health care organizations include hospitals, clinics, and other facilities that meet federal standards to participate in the 340b program. currently, these discounts represent at least 23.1% of the average manufacturer price of a brand-name drug9, which is close to the list price of brand-name drugs10; these discounts are greater if the manufacturer has increased prices above the rate of inflation.11

Statute 340b identifies which healthcare organizations are eligible to participate in the program; the majority of discounted 340b sales go to disproportionate share hospitals,12 a federal hospital status based on the number of medicaid patients served by the hospital.13 other 340b-eligible health care organizations include federally qualified health centers ; health care organizations that participate in the ryan white program, which funds hiv care; family planning healthcare organizations; and hemophilia treatment centers, among others.14

When a 340b-eligible health care organization purchases a drug under the 340b program, the manufacturer must sell that drug to the facility at the discounted price.15 However, when the health care organization bills an insurer for that drug , is not required to bill the insurer at the discounted cost of the drug, which allows 340b healthcare organizations to bill insurers at the undiscounted rate. the difference between the discounted purchase price and the reimbursed price is retained by the 340b health care organization and is intended to allow those facilities to “stretch scarce federal resources as much as possible, reaching more eligible patients and providing more services.” complete”. 16

pharmacy benefit managers are contracted entities that administer the health insurance prescription drug benefit.17 Among other functions, pbms are generally responsible for creating the drug formulary for a given insurance plan, establishing coverage , patient cost sharing, and manage usage. . In this role, PBMs negotiates with manufacturers reimbursements to offset drug costs, using the leverage of formulary inclusion, patient costs, and utilization management. Under this model, the pbm will reimburse a pharmacy for the full cost of a drug, but will receive reimbursement from the manufacturer to reduce the net cost of the pbm to the agent. in competitive drug classes, pbm rebates can exceed 50% of the cost of the drug.18

when a pbm reimburses a 340b health care organization for the undiscounted cost of a drug, the manufacturer generally must pay the pbm the standard negotiated reimbursement for that drug to offset the pbm’s costs, even if the manufacturer sold the drug to the 340b health care organization at a reduced cost. If PBM rebates are high and 340B sales are a significant portion of total sales, these combined discounts could significantly reduce the manufacturer’s net income. In the HCV market, where both conditions appear to be true, we hypothesize that the manufacturer may prefer to lower the drug’s list price, reducing both the 23.1% 340B discount and the PBM rebate payment. The figure shows a simplified example of these transactions, using a hypothetical $100 drug with a reimbursement of $50 pbm.

This analysis determines the proportion of medicare part d hcv treatments that were prescribed at 340b healthcare organizations in 2016 and uses this market data to estimate manufacturer and healthcare organization revenue prior to and after HCV drug price reductions. In this section, we first describe our methods for determining the proportion of prescriptions from healthcare organizations 340b, and then detail our methods for estimating healthcare organization and manufacturer revenue, both at the treatment level and at the aggregate level based on the medicare part. use. For comparison, we calculated the proportion of 340B healthcare organization prescriptions for other Medicare Part D drugs, aggregated by therapeutic class. This study was approved by the Pew Charitable Trusts. This study was not submitted for institutional review board approval because it did not involve health care records and all data are publicly available, according to the US Department of Health and Human Services decision guidance. this study followed the strengthening of the reporting of observational studies in the epidemiology (stroboscopic) reporting guideline for cross-sectional studies.

We conducted a cross-sectional analysis of data from January 1 to December 31, 2016 to model how changes in the cost of HCV treatments would be associated with the revenues of manufacturers and healthcare organizations during this period. The Medicare Provider Payment and Usage Data: Part D Prescriber PUF NPI Medication CY 2016 dataset was used to identify prescriber-level claims for individual medications.19 This dataset is organized by National Provider Identifier (NPI). , which uniquely identifies each prescriber eligible for reimbursement in the medicare program. each npi is associated with drug-level claims information for all drugs prescribed by an individual prescriber; Medications are identified by brand and generic name. each npi drug entry includes the number of beneficiaries for whom the drug was prescribed by that prescriber, the number of claims, the number of 30-day fills, the total number of days prescribed, and the total cost of the drug bill, among other data. For privacy reasons, only prescribers with 11 or more claims for a particular drug are included in the dataset; the number of recipients receiving the prescription is omitted if fewer than 11 recipients received the prescription from a given prescriber.

used the medicare provider payment and usage dataset: 2016 part d c prescriber summary table to match each npi to full address information. ) was used to identify facilities that were actively enrolled in the 340b program from January 1 through December 31, 2016.21 Only facilities that were actively enrolled during the entire study period were considered eligible 340b facilities. this database was also used to determine the type of entity covered by associated 340b registered at each address.

The United States Pharmacopoeia Medicare Model Guidelines Version 6.0, with a sample Medicare Part D drug data set, were used to identify the therapeutic class of brand-name drugs.22 This version of the data set applied to Medicare Part D benefit years from 2015 to 2017.

addresses by npi from the medicare prescriber summary data set were matched against the 340b covered entity database using address number, street name, city, and zip code; 340b eligibility status and type of covered entity were then compared to npi claims data. This process is similar to the NPI-based match used to exclude 340B claims from Medicaid23 reimbursement reports and the address-based match used to estimate 340B market share in the Medicare Part B program. 24 therapeutic class was compared with drug-only brand-name claim data, using the first word in the brand name; generic drugs were not considered in the analysis of therapeutic classes.

This cross-sectional study is limited to calendar year 2016. While reductions in list prices of HCV treatments by manufacturers occurred in 2018, this study only models changes in revenue that manufacturers would have obtained in 2016 if those price changes had been implemented by January 1, 2016. Claims data needed to model usage after the 2018 price changes is not publicly available, and 2016 is the most recent year for which Medicare claims level data is available.

We compared estimated manufacturer revenue, 340b health care organization revenue, and beneficiaries’ combined Medicare and drug costs before and after each drug’s price reduction. We also compared the proportion of brand-name prescriptions written at 340b-eligible healthcare organizations (340b market share) for the 3 HCV treatments of interest and for each therapeutic class.

We estimate the manufacturer’s revenue per course of treatment net of discounts for 340b and non-340b sales before and after the price reduction. We assumed that, before the price cut, the manufacturer offered discounts to PBMs who achieved a net price equal to the new list price after the price cut. this assumption is consistent with one manufacturer’s claim that the reductions “more closely reflect the discounts health insurers and government payers receive today”1 and another manufacturer’s claim that the reduction was based, in part, on in “the gap between the list price and the actual discount”. (net) prices paid in the market.”2 this assumption can also be understood as a revenue and cost model if the manufacturer had chosen to achieve the price reduction through a pbm rebate instead of a list price reduction . We assume that after the list price reduction, the manufacturer did not offer any further discounts to PBMs. the 340b discount is 23.1% of the average manufacturer price of a drug9; we use the list price of each drug as a proxy for the average manufacturer price.10 We present the manufacturer’s net revenue per course of treatment for each drug for both 340b and non-340b sales, as well as the weighted average net revenue by course of treatment for each drug adjusted for its share of 340b and non-340b sales, as calculated from 2016 medicare part d usage data.

To estimate 340b of healthcare organization revenue per treatment, we assume that insurers reimburse 340b to healthcare organizations at the drug’s list price. revenue is the difference between the list price and the 340b price, or 23.1% of the list price.

Total combined Medicare and beneficiary costs per treatment were estimated as the list price of the drug net of PBM reimbursements. We do not calculate Medicare and beneficiary costs separately because beneficiary costs will vary significantly based on plan design and other medications used by the beneficiary.

Aggregate revenues and costs for each drug were calculated by multiplying the number of treatments prescribed in 2016 at 340b and non-340b facilities by the corresponding price per treatment. because the standard course of treatment for each of the 3 drugs considered is 12 weeks and the total number of HCV treatment requests in the data (112,630.0) varied by less than 1% of the number of 30-day refills For HCV treatment (112 696.6), we assume that one course of treatment equals 3 claims. although a limited number of patients may receive treatment cycles of shorter or longer duration, these variations in treatment duration are included in the total number of claims assessed, and the simplification of the division of claims into standard treatment courses is not affects the total income and costs presented. We present findings by course of treatment rather than claims because HCV drug costs are typically analyzed in terms of the total cost of treatment.

calculated the proportion of prescriptions written at 340b centers for each of the 3 hcv treatments, as well as for all medicare part d prescriptions (brand and generic) and for each therapeutic class (drug only). brand). For the 3 HCV treatments considered here, we calculated the proportion of 340B-eligible claims prescribed at each type of 340B-covered entity facility. For ease of interpretation, we have combined several of the types of covered entities into categories: (1) Federally Qualified Health Centers (FQHCs)-like and consolidated health centers; (2) the 4 types of ryan white entities (ryan white); (3) single community hospitals, critical access hospitals, freestanding cancer hospitals, and rural referral centers (other hospitals); and (4) black lung programs, Native Hawaiian health care programs, children’s hospitals, tuberculosis programs, and urban Indian health centers (other).

Analysis was performed with stata se, version 14.2 (statacorp). data analysis was performed in February 2019.

Of the 1.3 billion drug claims evaluated, 14.0% of agents were prescribed at a 340b eligible facility. Among the 2,913 unique drugs evaluated (brand and generic), 1,297 brand drugs (45.5%) were matched to a therapeutic class. Across all therapeutic classes, the proportion of eligible prescriptions for 340b ranged from 6.3% (ophthalmic agents) to 40.8% (antivirals). Table 1 shows the proportion of prescriptions eligible for 340b for therapeutic classes with more than 500,000 total claims for all brand name drugs within the class in 2016.

For the 3 hcv treatments that reduced list prices in 2018, the eligible share for 340b ranged from 30% (harvoni) to 41% (zepatier) in 2016 (Table 2). of 340b eligible claims, 75.1% were prescribed at hospitals with a disproportionate share, with smaller percentages prescribed at fqhcs and other entities.

Table 3 reports the revenue and treatment costs at the drug level for each entity before and after the price change. following the price change, the covered entity’s revenue of 340b per treatment cycle was reduced by 60% to 75%; the manufacturer’s revenue from sales to entities covered by 340b increased between 82% and 750% for each treatment; net costs to medicare and beneficiaries remained constant. After the price change, the manufacturer’s average revenue per treatment (weighted by the proportion of 340b and non-340b sales) increased between 19% and 28% for each course of treatment.

Based on 2016 usage data, the medicare part d manufacturer’s aggregate revenue for 340b and non-340b sales of the 3 drugs after the price change was estimated to be $181.9 million higher, an increase 28% on income under the previous price structure (table 4). 340b healthcare organizations were estimated to have had a revenue reduction of $181.9 million for these 3 drugs, a 74% reduction from the previous pricing structure. the combined net spending of medicare and beneficiaries would remain constant.

recent decisions by manufacturers to reduce the list price of hcv treatments appear inconsistent with the preference to discount high-priced drugs through rebates to pbms. Concomitant price reductions by multiple manufacturers may reflect factors unique to the HCV market. Manufacturers would not be expected to make pricing decisions that reduce net income, implying that list price reductions are likely to be financially advantageous to manufacturers. Our analysis suggests that, given the high proportion of 340B sales in the HCV market, lowering a drug’s list price generates higher net revenue for the manufacturer than the same price reduction through a reimbursement mechanism. This increase in the manufacturer’s revenue is because at a high list price, the manufacturer would have to pay a pbm rebate and a larger discount of 340b, but at a lower list price and no rebate, the manufacturer only faces a discount less than 340b.

Analysis has suggested that manufacturers and payers (including PBMs) often prefer to achieve discounts through rebates rather than list price reductions.4,25 Our analysis suggests that this preference may vary depending on the proportion of sales subject to discounts 340b. Because the manufacturer must pay both the 340B discount and a PBM reimbursement for 340B-eligible prescriptions, the manufacturer’s net income depends on the market share subject to these accrued discounts. the prevailing preference for discounts over list price reductions may hold at 340b’s average market share of 14%, but not when 340b’s market share exceeds 30% or 40%, as in the market for hcv.

this sensitivity to 340b market share is supported by pricing trends in the hcv market prior to 2018. the launch of initial hcv treatments was characterized by price matching and increasing, with the launch of the first product, sovaldi (sofosbuvir; gilead sciences inc). at $84,000; the second, harvoni, with an introductory price of $94,500; and the third, viekira pak (combination of ombitasvir, paritaprevir, ritonavir, and dasabuvir; abbvie), which launched at $83,319.26 subsequent product launches, however, had lower prices despite targeting more genotypes or having shorter treatment durations than existing therapies. epclusa was launched at $74,760.27 followed by zepatier at $5,460,028 and later mavyret (glecaprevir with pibrentasvir; abbvie), with a treatment duration of 8 weeks, at $26,400.29 manufacturers chose to launch subsequent products at lower prices rather than achieve the same net price through a pbm rebate, contrary to standard theory for manufacturer pricing strategy. Although the political attention to hcv pricing may be associated with manufacturers’ pricing strategy, the magnitude of 340b discounts within this class offers a market-based, rather than political, explanation for the decline in prices. hcv list prices.

While our findings that reduced list prices and 340b discounts increased revenue more than pbm rebates would appear to apply to all drugs, regardless of 340b’s market share, manufacturers may be more willing to accept lower income from sales of 340b in exchange for a long-term raise. revenue from ever-higher list prices. Manufacturers may face pressure from PBMs to increase both prices and discounts, although reductions in HCV list prices suggest that manufacturers can resist this pressure. Price increases on existing products can also be part of a pricing strategy for future products, setting floor prices near which newly launched products are priced. US Senate Finance Committee investigators identified this as part of the initial pricing strategy for Sovaldi and Harvoni, stating that “one of Gilead’s considerations for Wave 1 pricing, i.e. Sovaldi, was the potential to achieve a high price for wave 2, i.e. harvoni”26 and citing company documents arguing that “[at] any price, access for cycle 2 improves as cycle price increases 1, suggesting that cycle 1 will establish a reference price against which cycle 2 will ultimately be evaluated.”26

The nature of the hcv treatment market offers few strategic benefits to offsetting price increases with pbm rebates in an attempt to set a floor price for future product launches. The curative nature of HCV treatments and the relatively short duration of treatment (8-12 weeks) limits future sales potential, as the number of patients requiring HCV treatment and sales per patient are likely to decline. are limited to a single course of treatment. this regimen differs significantly from chronic disease markets, which may require lifelong maintenance therapy, or age-related disease markets, where the patient population is expected to grow. In these markets, the strategic value of existing drug price increases to serve as floor prices for new therapies may outweigh the revenue effect of the combined growth of 340B discounts and PBM rebates, even for markets with a highest 340b share.

Our analysis suggests that the association between the 340b program and manufacturer drug pricing decisions should be reconsidered. Although some manufacturers and other commentators have argued that mandatory discounts under the 340b program force manufacturers to set higher list prices to meet revenue targets,5 essentially transferring the value of the 340b discount to other payers, this theory of change The cost estimate assumes that manufacturers are underpricing their drugs relative to what the market will bear, which is inconsistent with a profit-maximizing strategy.30,31 Instead, our analysis suggests that a large market share of 340b for a product may encourage manufacturers to offer discounts through reduced list prices rather than PBM rebates, contrary to the idea that 340B discounts lead to higher prices. Proposals to reduce the size of the 340b program may therefore diminish the potential of the 340b program to restrict price increases or encourage list price decreases. Legislators should carefully consider the potential effects the 340b program may have on manufacturer pricing decisions as part of any effort to review the 340b program.

This study has several limitations. First, there could be errors in the matching process to identify 340b-eligible physicians, and not all prescriptions from 340b-eligible physicians can be filled under the 340b program. however, the relative distribution of 340b-eligible prescriptions among therapeutic classes in our analysis is consistent with the theory that therapeutic classes with a high percentage of 340b may have different price incentives, and we have no reason to believe that any errors in the coincidence would disproportionately affect one therapeutic class more than another.

Second, the medicare dataset used only includes prescribers with 11 or more claims for a particular drug. this limit means that prescribers who prescribe a drug infrequently will be omitted from the database. these omitted prescribers may vary from those included in your location, which could skew the estimated market share of 340b for individual drugs or therapeutic classes. For example, the 2016 Medicare Part D Drug Expenditure Dashboard reports 141,708 Harvoni claims,32 but our database only includes 104,750 claims. however, we cannot estimate any disparity in epclusa or zepatier claims because the dashboard only includes drugs with claims in both 2015 and 2016. however, we have no reason to believe that omitted prescribers vary inconsistently in the distribution of its 340b share by drug or therapeutic category, supporting the variation in 340b market share seen across therapeutic classes.

Third, Medicare beneficiaries may see different prescribers than non-Medicare patients, and our estimates of the proportion of 340b-eligible prescriptions for a therapeutic class or individual product may not reflect 340b-eligible participation. in the broader market. however, the variation seen in the medicare data likely reflects the relative distribution of 340b eligible participation in the therapeutic class by all payers, even if actual participation within a particular therapeutic class may differ.

These potential limitations in accurately identifying the proportion of 340b-eligible prescriptions may affect our calculations for manufacturer treatment-weighted average revenue and estimates of total revenue for manufacturers and 340b health care organizations. however, the limitations do not affect individual treatment revenues for manufacturers and 340b healthcare organizations before and after the price change, as they are set according to the 340b discount formula. therefore, although our estimates of total revenues could be affected by any misestimates of 340b’s share, the effect of treatment revenues suggesting a market-based reason for manufacturer list price reductions is not considered. is affected.

in markets where a higher than average proportion of prescriptions are eligible for 340b discounts, such as the hcv treatment market, manufacturers may prefer to reduce list prices rather than offer the same level of discount through pbm rebates. Such list price reductions increase manufacturers’ revenues while decreasing healthcare organizations’ revenues 340b. Efforts to revise the 340b program should consider potential effects on manufacturer drug pricing decisions.

Accepted for publication: May 15, 2019.

Published: July 5, 2019. doi:10.1001/jamanetworkopen.2019.6541

correction: This article was corrected on August 23, 2019 to correct numerical errors in table 3 and table 4.

Corresponding Author: Sean Dickson, JD, MPH, West Health Policy Center, 1909 K St NW, 730 Ste, Washington, DC 20006 (sdickson@westhealth.org).

Author contributions: mr. Dickson had full access to all study data and takes responsibility for the integrity of the data and the accuracy of the data analysis.

concept and design: both authors.

data acquisition, analysis or interpretation: both authors.

manuscript writing: dickson.

critical review of the manuscript for important intellectual content: both authors.

statistical analysis: dickson.

administrative, technical or material support: reynolds.

supervision: reynolds.

Conflict of interest disclosures: none reported.

Funding/Support: This study was supported by the Pew Charitable Trusts.

Role of Funder/Sponsor: The Pew Charitable Foundations had no role in the design and conduct of the study; data collection, management, analysis and interpretation; preparation, revision or approval of the manuscript; and decision to submit the manuscript for publication.

Additional Information: The study was completed and the manuscript was submitted for review while Mr. Dickson worked at Pew Charitable Trusts; manuscript revisions were completed after mr. Dickson will be moving to the health policy center of the west.