Drug Channel Entities Are Undergoing Raft of Changes

While pharma manufacturers for the most part are still adhering to their traditional business model, other entities in the drug channel are reorganizing, which will prompt drugmakers to be nimble as they adjust to the new reality. That’s one of the overarching themes moving into 2024 discussed during a recent webinar hosted by Adam J. Fein, Ph.D., CEO of Drug Channels Institute, which was recently acquired by HMP Global. In this second of a two-part series, AIS Health highlights the remaining industry trends projected by the longtime industry expert.

Independent Provider Practices Remain Dwindling Breed

Many local physicians are not in independent practices anymore, observed Fein, with hospitals and health systems being the largest employers of providers. But another group is in the mix: corporate entities, which include private-equity-backed rollups. “In other words, buying a whole bunch of physicians in a single practice field and building a large company,” he said. Examples include UnitedHealthcare’s Optum and Walgreens with its Village MD and Summit Health.

These entities have been most active in the field over the past few years. “Our numbers showed there were about 400 private-equity acquisitions of physicians in 2022,” said Fein, noting that the Federal Trade Commission is “not happy about it.”

However, “rollups still seem to be a pretty attractive strategy,” he observed. “One of the reasons they're attractive is they're an opportunity for private-equity firms who like to invest and buy something and then sell it to actually pay for someone else in the channel.”

Hospitals Have Changed Growth Strategy

According to Fein, “the vertical integration that hospitals have gone through is giving them enormous change in perspective,” and 2024 into 2025 will be “when hospitals really start leveraging their market assets or market access.” Not only will health system assets include physicians and practices, but also the market for outpatient drug administration, specialty pharmacies, retail pharmacies and home care, he asserted.

“So as much as we talk about the vertical integration of insurers, PBMs, pharmacies and providers, there's a parallel vertical integration going on, driven by providers who are becoming specialty pharmacies…and increasingly are looking to maybe get into the insurance business,” he said.

And these hospital vertically integrated channels are so-called frenemies: “You kind of have to partner with them, but, on the other hand, you’re competing with them.”

340B Continues to Be Issue

Fein noted that he had predicted in 2022 that 2023 would be the year that “Congress might actually tackle the 340B” Drug Pricing Program, but it did not. “I'm going to keep making that prediction, and one day it will come true, but I don't know when that is,” he said. In fact, he maintained, the battle over the program “is going to get even worse” in 2024.

As the program continues to grow, this “has led to not just hospitals making money” but also other stakeholders within the entire drug channel. “There's a lot of money sloshing around, and we can barely see what it is.”

An ongoing scuffle over who is actually a 340B-eligible patient has complicated the situation, where “you have this prospect of many more people becoming eligible and many more prescriptions being eligible for this.” In addition, “the covered entities have also gotten much more aggressive about their strategies” to drive 340B traffic to themselves.

However, transparency is coming to the 340B program, including from the Inflation Reduction Act (IRA), he maintained. “For example, there are no inflationary rebates on Part B and Part D drugs that are also eligible for a 340B discount, which means there has to be a disclosure of what prescriptions are we talking about? What products are we talking about? Manufacturers are going to offer the lesser of the Maximum Fair Price, the MFP, or the 340B discount so covered entities can choose. It's not clear how that's going to work. And, most interestingly, there's now going to be essentially a statutory prohibition on duplicate discounts in Medicare Part D for products that are subject to the negotiation process.…But it's not clear how that's going to work because there's no such system that exists now.”

Medicare PDP Continues Shift to MA

While much of the attention on the IRA is focused on its effect on innovation and the valuation of biotech companies, one change “is going to be bigger than people expect,” and that’s the “collapse of the standalone Prescription Drug Plan market,” said Fein.

He noted the drop in the average monthly premium for Medicare Advantage Prescription Drug (MA-PD) plans from 2023 to 2024 compared with the increase in premiums for Prescription Drug Plans, as well as the overall decline in PDP offerings.

In addition, multiple factors are contributing to Part D formularies having fewer incentives to prefer high list price/high rebate products, which will really go into effect in 2025, when derisked Part D plans are rerisked and on the hook for a larger percentage of the cost. So the 2025 bids, which are due in June, will have a “real shift in formularies and a real shift in preferences,…[and] this is all going to hit during the presidential election cycle.”

Gross-to-Net Bubble May ‘Deflate a Little’

Fein also broke down the manufacturers’ gross-to-net bubble — which is the gap between the revenues a manufacturer gets from sales at list prices and the revenues they get at net prices — reductions, the majority of which are from rebates, discounts and fees to PBMs and payers.

While he said he doesn’t think the bubble is about to pop, “I do think we're on the verge — perhaps the first time since I've been talking about it — to see the gross-to-net bubble start to deflate a little” due to a handful of factors:

• Part D plans’ preference for lower list price/lower rebate products.
• The Jan. 1 uncapping of Medicaid rebates, potentially requiring manufacturers to pay Medicaid for their drugs. “Now, you might think that sounds crazy, but again, we're in the bizarro world of pharmaceutical economics where things don't always make sense, but that creates a couple of really interesting incentives for the manufacturers.”
• Changes to manufacturer pricing strategies, such as those seen with the biosimilars of AbbVie Inc.’s Humira (adalimumab), some of which offer both high list price/high rebate versions as well as low list price/low rebate versions.
• The IRA’s MFP, which, when it goes into effect in 2026, “effectively pops the gross-to-net bubble for those products that are chosen for negotiation.”

Consolidation Efforts Will Focus on Patient Lifecycle

Fein flagged seven companies through which “roughly 50% or more of all U.S. health care spending flows.” But the horizontal consolidation that they have been undergoing is “getting harder and harder, not just because of antitrust reasons, but just because of sheer scale and manageability,” so some of them are “now starting to refine their focus.”

He projected that a focus on health care services will be seen over the next year among these companies. “Now that we’re focusing in on one part of the health care system,” they wonder, “how do we essentially go soup to nuts over the entire patient’s lifecycle?”