Providers' solution for high drug prices: Make them ourselves

Four not-for-profit health systems last week announced they were taking on big pharma by creating their own generic-drug company. But experts caution it'll take years of navigating red tape and substantial investment before the operation stands a chance at lowering drug prices and alleviating shortages—if it does at all. In fact, previous attempts have fallen short.

"There are no new entrants to the market because it is so difficult to get into," said Michael Rea, CEO of Rx Savings Solutions, a company that sells software to health insurers and self-insured employers to help them lower their drug costs. "But having the capital source of hospitals is a great start—now they need to execute on the plan."

Intermountain Healthcare, Ascension, SSM Health and Trinity Health are working with the U.S. Veterans Affairs Department to pool their capital, expertise and 450 total hospitals to fight back against drug companies that unexpectedly hike the prices of decades-old, generic drugs with minimal competition. They also hope to create a more reliable source of supplies vulnerable to shortages, such as saline and sodium bicarbonate.

"Our goal is not to create a competitive advantage for the people who participate in this, it is about creating a company that has a social benefit of making sure that anyone who needs the medication we produce has it at their disposal," said Dr. Marc Harrison, president and CEO of Salt Lake City-based Intermountain.

Some group purchasing organizations have created private drug labels, and they contract directly with a manufacturing company to make a generic drug under their own brand name.

That provides a cheaper alternative to buying brand-name drugs and gives GPOs more control over the process, which is particularly helpful during drug shortages.

Premier officials said in an email that the GPO considered becoming a generic manufacturer but was deterred by existing competition, high costs and low margins. Vizient explored a similar venture but encountered the same obstacles.

While the health systems involved in this latest endeavor didn't specify what drugs the new venture will make, they want to provide both sterile injectables and oral medication either through their own Food and Drug Administration-approved manufacturing facility or by contracting with existing manufacturers.

Experts say contracting with or even acquiring a manufacturer would be more efficient, since building new infrastructure carries an array of challenges. Lou Fierens, Trinity's senior vice president of supply chain, said the group will likely rely on contracting, at least initially, to enter the market.

The news immediately dented share prices for generic-drug makers. Teva Pharmaceuticals and Endo Pharmaceuticals, both of which make sterile injectables, dipped 3.6% and 4.4% respectively by market's close Jan. 18. Valeant Pharmaceuticals saw a similar drop: 3.2%.

"I hope it's a wake-up call," said former CMS Administrator Dr. Don Berwick, a senior fellow with the Institute for Healthcare Improvement who is advising the health systems on the effort. "A wake-up call to the responsible components of the current pharmaceutical industry that are tolerating behaviors among their colleagues that should not be tolerated."

Analysts worked to temper concerns over the threat of new competition. Financial services firm Cantor Fitzgerald said that it will take years for the business to become operational, given how long drug approvals and plant inspections take. "We do not think it will impact the industry much, even if hospitals were ever successful in this endeavor," the report said.

Fierens said he expects it will take more than one year, but fewer than three. If, by that time, acute drug shortages are corrected, "Then we solved the problem," he said.

The relentless pressure on pharmaceutical companies to lower prices has not had much of an effect to date, said Bob Joyce, U.S. Bank's senior vice president and head of healthcare and food industries. That said, the sheer size of the systems involved has put the drugmakers on notice, especially given reports that Ascension, which continues to set its sights beyond hospital operations, is in talks to merge with Providence St. Joseph Health, a deal that would create the country's largest hospital provider.

Organizations across the industry often discuss how to cope with dramatic price hikes of widely used drugs coupled with enduring drug shortages, but solutions have been hard to come by.

Off-patent drugs are part of the dilemma. Valeant, for example, acquired the rights to two off-patent heart drugs and increased their respective prices 30-fold and 70-fold over three years. Cleveland Clinic found utilization across 47 hospitals decreased by 53% and 35% for nitroprusside and isoproterenol, respectively, which took a toll on patient safety and outcomes.

Hospitals and drug companies blame each other for the high prices. The Pharmaceutical Research and Manufacturers of America routinely highlights the degree to which hospitals mark up the price of drugs. It's drug companies, though, that are the subject of a federal antitrust lawsuit from attorneys general in almost every state accusing them of making illegal agreements to fix prices.

Fierens said this new operation will bring down prices simply by taking traditional drug companies out of the equation, replacing them with an outfit that ensures its profit margins are only high enough to sustain the business.

"What will be eliminated is the profiteering motive," he said.

The FDA has reformed policy to create more competition by expediting applications for generic drugs that have fewer than three competitors. The agency also published a list of sole-source drugs to spur applications and is working to clear the orphan drug backlog. The Association for Accessible Medicines, the trade group representing generic manufacturers, said competition is always good, but it's critical to ensure the right policies are in place to prevent the circumstances that lead to shortages in the first place.

Since the news was announced Jan. 18, several health systems have reached out to ask about partnering, executives said. The systems involved said they also plan to sell drugs to hospitals that aren't involved. While the VA will not fund the endeavor, it will offer "thought leadership" and may become a purchaser, Harrison said.

Cleveland Clinic is weighing whether it should partner with the new company or re-create the model itself, said Scott Knoer, the system's chief pharmacy officer. The Cleveland Clinic plans to expand its compounding facility to create IV products and other drugs in large batches as a reserve supply to be distributed throughout its system. Currently it only has approval to create the drugs to fill an immediate need amid a shortage.

"The more entries into the market the better; competition lowers prices. Hospitals are tired of unsustainable drug price increases and I like that this group is fighting back," Knoer said. Though, for the most part, generics usually don't have big price increases, he added.

Once the group commits to making specific products, prices on existing versions might plummet, Fierens predicted. If that happens, "society wins," and the business will honor its agreements. "If we happen to march down a road and magically the price drops by 300%, wonderful," he said. But that doesn't solve the supply issue, said Bob Ripley, Trinity's vice president and chief pharmacy officer. Trinity for the past several years has struggled to obtain even basic electrolytes that are critical to patients, like sodium bicarbonate and magnesium. Accessing injectable local anesthetics and opiate medications has also become a problem.

"It is about a stable, sustainable supply as much as it is about cost," he said.

Ascension CEO Anthony Tersigni said the group will look broadly at the drugs its patients are taking, then initially zero in on generics that have skyrocketed in price and those that are not available to patients.

"As pharmaceutical companies are increasing the age-old brand-name and generic-drug prices with little reason, we're going to be chipping away and saying, 'Where can we start?'" he said. "I suspect this will be wildly successful."