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Production Plus Profit Pricing (P-quad) FAQ

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Originally published on 08/17/2021

Biologic drugs account for a small share of the market but enormous share of drug spending, primarily because of the high monopoly prices set by manufacturers and the ability to charge those high prices beyond its exclusivity period. In 2019, Bach and Trusheim argued biologics are effectively natural monopolies. Two years later, they come back with more data and more details, starting with a biosimilars market update, evaluation of the cost and ethics of running biosimilar trials, a modeling analysis by Milliman commissioned by DPL to evaluate savings from a Production Plus Profit Pricing (P-quad) policy compared to the current environment of relying on biosimilar competition, and a policy solution described in this report that would mitigate such sizable biologic drug spending.

FAQ

What is P-quad?

P-quad, an ode to Captain Ahab’s doomed ship ‘Pequod’ in Moby Dick, aims to have original manufacturers lower the cost of biologic drugs to its cost of production and distribution while incorporating capital expenses and depreciation plus a statutorily guaranteed profit of 10% or 20%. P-quad would apply to drugs that are beyond their FDA exclusivity period (12 years), which could save payers billions of dollars.

How do you incentivize manufacturers to continue production and distribution under the P-quad model?

A guaranteed profit of 10-20% is a sizable margin to incentivize manufacturers or alternatively a viable buyer for making and distributing the product. The manufacturer would not be allowed to simply discontinue production and distribution without transferring full ownership and capabilities to another firm. The generous profit margin exceeds those of other industries.

What are potential savings from the P-quad policy?

The Drug Pricing Lab engaged Milliman to conduct an independent analysis of the Production Plus Profit Pricing (P-quad) policy proposal. The Milliman analysis estimates the projected spending on U.S. biologic and biosimilar drugs under a reference scenario where there is no biosimilar entry or competition, the existing ‘status quo’ scenario under the current biosimilar environment, and the Drug Pricing Lab’s P-quad policy proposal.

This Milliman analysis estimates net biologic spending under three different scenarios (no biosimilars, status quo, and P-quad) separately by healthcare market (e.g., group insurance, Medicare Parts B/D, Medicaid, and on-exchange individual) and stakeholder (e.g., plan sponsor, federal government, beneficiaries). This Milliman report should be read in its entirety to understand the assumptions, limitations, and findings. More details on the premium impact by market, stakeholder considerations, assumptions and methodology, and limitations can be found here.

From a system perspective, the Drug Pricing Lab concludes P-quad could generate savings between 2 and 5 times as great as the current biosimilar environment across the plan sponsors, federal government, and beneficiaries. From a patient perspective, the Drug Pricing Lab concludes P-quad could decrease insurance premiums and out of pocket expenditures at a greater level than the current biosimilar environment.

When would P-quad pricing start?

P-quad pricing would begin 12 years after the initial marketing approval of the biologic or expiration of the FDA exclusivity period for biologic drugs set forth by the Biologics and Price Competition and Innovation Act.

Policymakers could consider lengthening the exclusivity period for drugs that are for small populations or rare diseases. Exclusivity extensions should not be granted for new indications of minor modifications to the product or its delivery – those changes should improve returns during the period of existing exclusivity if they are of value.

How would cost be tracked and reported?

Manufacturers do not currently report costs of production on a per unit basis, but they do have insight into that data, which is integral to their planning and reporting of their ‘cost of goods sold’ (COGS) on their financial statements and the basis for P-quad. Requirements for P-quad reporting of cost would only apply to well established drug franchises for which companies will have already logged a dozen years or more of history. This is important for two reasons: (1) process improvements and efficiencies would have been wrung out and reached a plateau, and (2) the knowledge of the product cost structure will be mature.

Cost could be tracked and reported through mandatory reporting, as it is under the “DRG” system, where US hospitals report the direct and indirect costs of caring for patients admitted for different conditions to CMS to inform the hospital inpatient care reimbursement.

Another method could be to allow manufacturers to report the costs of producing their marketed biologic drug in the same way they currently report their costs of production to calculate prices for their investigational new drugs (INDs). Under this policy, manufacturers submit documentation of the costs of production they seek to recover and a statement from an independent certified public accountant verifying the disclosure.

Lastly, policymakers would be able to evaluate cost reports and gauge their legitimacy by reviewing the reports from multiple different companies to uncover outliers that could then be audited. This is currently done for hospitals.

How would the P-quad price affect the US market?

Once the P-quad price has been determined, policymakers have a variety of options available to ensure it becomes the market benchmark. The Wholesale Acquisition Cost (WAC), or the manufacturer’s selling price, would be set to the P-quad price, and the savings would effectively pass through to the patients in the form of lower out-of-pocket costs and premiums. Language from The Elijah Cummings Lower Drug Prices Now Act (or H.R.3) offers a roadmap for how the government might ensure companies set their prices at an agreed level or be subject to sizeable penalties.

P-quad priced biologics would have only one price in the US and be given a new ‘zero-rebate’ category for Medicaid Drug Rebate Program (and thus 340B hospitals) or when acquired by the Big Four—the VA, Department of Defense, Public Health Service, and Coast Guard. If policymakers elected to reconcile prices after-the-fact and achieve the same general outcome, they could allow or require all payers to adopt a maximum allowable cost (MAC) for dispensing or reimbursement, with any shortfall to the pharmacy being charged back to the manufacturer.

Another mechanism would be to extend federal rebate and discount programs to the commercial sector, such as expanding 340B discounts for post-exclusivity biologic drugs to all providers where discounts would be set to P-quad prices or extending Medicaid drug rebates so that all payers would achieve net prices equaling the P-quad price.

What else could be done to encourage more biosimilars makers to enter the market?

  • Policymakers could simply implement P-quad and assume biosimilar competition would drive prices and profits down to economic cost levels. Biosimilar manufacturers could continue to lower their prices if they have a lower cost base.
  • Policymakers could guarantee existing biosimilar manufacturers the same price as the reference product, which would likely result in a small windfall for the biosimilar manufacturers whose more modern production methods likely entail lower costs.
  • Policymakers could set the product class ceiling price as the average of all product class manufacturers’ P-quad prices, which would generate continued savings, avoid legacy windfalls from higher than needed cost ceilings, and encourage cost efficiencies.
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Research & Insights

We conduct non-partisan, independent research, and make our work accessible and informative to policymakers and the general audience alike. Browse our featured research or explore our work by article type.

Production Plus Profit Pricing (P-quad) FAQ
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The Drug Pricing Lab engaged Milliman to conduct an independent analysis of the Production Plus Profit Pricing (P-quad) policy proposal. The Milliman analysis estimates the projected spending on U.S. biologic and biosimilar drugs under a referent scenario where there is no biosimilar entry or competition, the existing ‘status quo’ scenario under the current biosimilar environment, and the Drug Pricing Lab’s P-quad policy proposal. 

This report was commissioned by Drug Pricing Lab.
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