Podcast: Leemore Dafny | Health Affairs

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On our 100th episode, Leemore Dafny from Harvard Business School joins Health Affairs Editor-in-Chief Alan Weil to discuss her recent research published in Health Affairs examining donations made by pharmaceutical manufacturers to patient assistance charities based on an analysis of drug spending among Medicare Advantage enrollees.

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EPISODE TRANSCRIPT

Alan Weil
Hello and welcome to A Health Podyssey. I’m your host, Alan Weil. Even patients with health insurance can face very high-cost sharing for expensive brand name medications. And we know that many people who are prescribed these drugs simply don’t fill the prescription because of the cost. One response by the pharmaceutical industry has been to fund charities that operate patient assistance programs to cover patients cost sharing.

Now, federal law prohibits payments to induce people to buy a specific service in a public program like Medicare. So these patient assistance programs have to meet certain standards to comply with the law. But for medical conditions, with only a few possible treatments, it’s possible to align the charitable contributions closely with the purchases in a way that benefits the manufacturer.

So how does this theoretical possibility of using charitable contributions to benefit the donor play out in the real world? The question of who benefits from pharmaceutical patient assistance programs is the topic of today’s episode of A Health Podyssey. I’m here with Leemore Dafny the Bruce V. Rauner Professor of Business Administration at Harvard Business School and Harvard Kennedy School.

Doctor Dafny and coauthors published a paper in the September 2022 issue of Health Affairs, examining donations made by pharmaceutical manufacturers to patient assistance charities based on an analysis of drug spending among Medicare Advantage enrollees. They found that donations made by leading pharmaceutical manufacturers are likely profitable. We’ll discuss these findings in today’s program. Now, Doctor Dafny, you were a guest on A Health Podyssey about a year ago.

Normally I would say welcome, today I’m going to say welcome back, but I’m also going to say welcome back to being my guest on the 100th episode of A Health Podyssey. It’s so nice to have you with me.

Leemore Dafny
Thank you so much for that terrific introduction. Alan, I am very glad to be with you and to be your 100th guest.

Alan Weil
Well, we’ve picked a great topic for our 100th episode. The financing of pharmaceuticals is so complex, but many people probably have had experience with either coupons or pharmaceutical patient assistance programs. Can you just start by giving me a thumbnail of what these pharmaceutical patient assistance charities do? How do they work?

Leemore Dafny
Absolutely. So as you mentioned, there are a range of programs out there to help patients pay their cost sharing associated with medications. And I have done research on some of the avenues that are available for commercially insured patients, specifically drug specific coupons. And in this paper, together with coauthors, I’m tackling specifically independent patient assistance charities, which is the way that Medicare enrollees can gain assistance for drugs that they’re taking.

Alan Weil
So maybe we should jump right into why it’s different for Medicare, and that gets at the Anti-Kickback Statute. The rules are different for Medicare than for private, and maybe you could explain why that is.

Leemore Dafny
Yeah, absolutely. So the rules are different, and that’s because federally insured individuals and anyone who wants to provide medical care or medical products to them, they face the Anti-Kickback Statute. And that was passed in 1972 because Congress was worried about fraud and abuse. And they were worried that any payoffs or kickbacks that could influence health care decisions or products being taken and such could result in patients receiving care or taking products that were potentially unnecessary, excessively costly of low quality could be dangerous.

So they enacted a prohibition and basically said any remuneration that is linked to a service that is a claim that is funded by the federal government, is prohibited.

Alan Weil
And that regime doesn’t apply to commercial insurance. So you can have coupons that guide people to certain products and reduce their costs, but you can’t use coupons in Medicare. Is that right?

Leemore Dafny
All of that is exactly right. So the commercially insured, they can take coupons that are issued by manufacturers. They can receive some form of compensation, it could be a meal even as part of receiving a medical service. None of that is allowed for federally insured patients.

Alan Weil
So this Anti-Kickback Statute is designed, as you say, it’s anti-fraud, it’s designed so that people aren’t induced to do something they wouldn’t otherwise do. What is it about that that then affects the structure of these charities?

Leemore Dafny
Yes, so all right, what this means is that manufacturers, if they want to help patients buy their drugs, if the patients are commercially insured, they can issue a drug specific coupon. They can also open what’s called a manufacturer’s sponsored patient assistance program, which is just organized a little differently, but if they want to help Medicare enrollees, they are not permitted as you know, to provide assistance directly for their own drugs.

But according to the Office of the Inspector General, they can make donations to third party assistance organizations, and they can earmark those donations for a specific condition. So what I’m studying in this paper is does that requirement that you donate through, you know, at an arm’s length to an independent charity, if you were just to adhere to that?

And we can talk later about whether organizations are always adhering to that arm’s length requirement, but does that prevent effectively kickbacks from happening? And as you previewed at the beginning, we find a lot of evidence that in many conditions, even if you give at an arm’s length, the leading manufacturer would effectively be assisting purchasers of their own medication.

Alan Weil
Okay, so I know it’s a different context, but if I were to donate money to a school where my kid happens to go, clearly the money can’t flow to my kid. But the kid can get a scholarship from the school and it doesn’t negate that my contribution was just a donation to the school. So I get this notion that there needs to be distance and it can’t be totally targeted.

So what is it about the pharmaceutical market that makes it important to or makes it complex to understand whether or not these donations are actually coming back to the company?

Leemore Dafny
Right. So you’ve hit the nail on the head, unsurprisingly, Alan. And the key issue here is that the pharmaceutical markets for many, many of the conditions that are covered by these independent patient charities is very highly concentrated. What that means is a very small number of manufacturers have the lion’s share of sales within a covered condition.

And so if I’m a manufacturer and I account for 90% of the sales of drugs that treat a given condition, and I donate to an independent foundation that provides cost-sharing assistance to Medicare enrollees with that condition, they’re going to be taking my drug. And to the extent that they wouldn’t otherwise have taken the drug, but for the assistance that’s going to increase the utilization and spending on my drug and it could be very profitable for me.

Alan Weil
Okay, now we’re going to get into an example. This is sort of, this is a great topic where like, I wish we had a whiteboard and we could just show it to our listeners, but we don’t. So we’re going have to talk through this and what’s the leverage here that I want you to help us all understand is the cost sharing relative to what the pharmaceutical company gets paid when someone takes the drug?

Because that’s the lever, right? When you get a copay coupon, you think, wow, I the patient am saving $100 or $500 of what would have been the co-pay. But what’s the company getting when I use that coupon or in this instance, what’s the company getting when I’m able to afford my co-pay because I have charitable assistance?

Leemore Dafny
So really what you’re after here is how much of the total value of the drug sale, kind of net of rebates, everything the manufacturer gets back, what share of that is cost sharing that they would have to cover through a donation in order to get the sale? Or even if it’s, I have to kind of flag this, the federal law is what’s called a per se law doesn’t actually require that the sale wouldn’t have happened without the assistance.

It just requires that you’re providing some remuneration for a claim that’s made against the federal government. So I kind of just want to flag that. But in terms of the value, let me give you if I may, an example. Okay?

Alan Weil
Yeah, that’d be great.

Leemore Dafny
All right. So in our data, we look at all of the conditions that are covered by the seven largest patient assistance charities in 2010 and in 2017. Okay, and there were 87 such conditions in 2010 and I think 156 in 2017, no 154. So we then also looked at the top ten most expensive conditions in each year. And one of those is what I’m going to tell you about is short bowel syndrome.

Okay. So short bowel syndrome has a medication for its treatment that was introduced by Shire, later acquired by Takeda, and launched at a price of nearly $300,000 per year. Okay, before that launch we didn’t see a patient assistance program for it, but after that launch we did okay. And we calculate that because that drug is so expensive and cost sharing for Medicare enrollees in our sample is not trivial, but it’s relatively low relative to the cost of the drug, that if Takeda donated to the Patient Assistance Fund, enough to cover the cost sharing for every person who had short bowel syndrome.

Then it would have been a profitable decision so long as 5% of those patients were enabled as a result of that assistance. So as long as 5% of those sales wouldn’t have happened, but for the assistance then Takeda just donating for the condition would have made money.

Alan Weil
Okay. So I want to just follow this thread here. I’m a patient and this is a very expensive drug. I have insurance and so all I’m faced with is a co-pay, but that could be quite substantial. If I walk away, the drug company gets nothing. If they subsidize my co-pay and I then proceed to buy the drug, of course the drug company through the charity has had to pay me and probably a lot of other people for their cost sharing.

But my insurance company is going to pay the pharmaceutical manufacturer a very large amount for the drug, and that is what you’re measuring against all of the cost-sharing subsidies that they’re providing. Is that the, sort of the one side of the ledger versus the other side?

Leemore Dafny
Yeah. On one side is how much would the manufacturer have to cover in patients cost sharing? And on the other side as well, how much money do they take in? And the only modification I’d make to what you said is that we do subtract in 2017, it’s about 16% from the net sales to account for discounts that manufacturers give because we don’t have detailed rebate data.

But we know that some of these drugs have rebates and discounts and we know that Part D requires certain discounts, so we account for that.

Alan Weil
Okay. Well, that’s a pretty striking example. I’d like to talk to you about the policy implications, what this really tells us about the market and what we might do about it. We’ll have that conversation after we take a short break. And we’re back. I’m speaking with Dr. Leemore Dafny, about pharmaceutical manufacturers, contributions to patient assistance, charities. Now, before the break, we walked through an example where the price of a drug was quite high and a contribution to a charity to cover cost sharing.

Even if only a small number of the patients changed their behavior, from not purchasing to purchasing, could end up benefiting the company. I’m assuming, though, as you said before the break, that you drew an example from one of the top ten most expensive conditions and you used an example where the list price is $300,000. I know there are a lot of expensive drugs out there, but that’s not the norm.

So presumably, if you look at the whole of the 80 plus or 140 plus at the two time periods, you have quite a range of whether or not the potential benefits to the pharmaceutical company are as large. And you also have a range of whether there’s just this one drug for the condition or there are multiple.

So can you give me a sense of how, I guess what I’m trying to get at is, how typical the example you just gave me was.

Leemore Dafny
Absolutely. So one thing to note is I gave you that example where almost 100% of sales to treat a given condition were accounted for by one manufacturer. Across all of the conditions that are covered by patient assistance charities, we found that the leading manufacturer on average accounts for just over half of sales. Okay. So, if the sales are less concentrated, then it will be tougher for one manufacturer to find it profitable to donate at an arm’s length, enough to cover everybody’s cost sharing, cost sharing for all the drugs, treating the condition.

That means that the manufacturer will have to benefit from a greater percentage increase in sales than if it could donate to a condition that largely kind of just served its own medications. Right? So, we look at what’s called the breakeven inducement percentage, which is the percent of sales that would need to be induced as a result of the assistance in order to make it worthwhile for the very top manufacturer to cover everybody’s cost sharing. And for the top ten drugs right in 2002 that meet the median of that is 2%.

You only need to increase sales by 2%. And for short bowel syndrome, it was 5%. So that’s pretty typical of the top ten. But in 2017, if you look across all of the 154 conditions, the median breakeven is 22%. So you would have to believe, if you were to be able to, if you were to donate enough to cover cost sharing for all medications, your own medications would have to benefit in terms of an increase of 22% of sales in order for that to be worth your while.

Now, of course, this is Hume’s that you can’t actually direct funds to just your medications. And I should note there are a lot of lawsuits that are pending and some that have settled around manufacturers and assistance charities doing exactly that.

Alan Weil
So the idea here is that when and again, this is sort of a standard economics puzzle, if you offer a subsidy, some people will change their behavior because of that. Other people just take the subsidy and do what they would have done anyway. So it might be a high cost sharing, but I, you know, if I had to pay the full amount, I would have somehow come up with it.

And you don’t get an inducement from that. But in order for this to yield benefits to the manufacturers, they have to induce a certain amount of new behavior. You know, so this is a really thorny public policy challenge, and we’re not going to solve it here on this podcast.

Leemore Dafny
That’s too bad, Alan.

Alan Weil
Well, maybe you will. And I would love it if you could. But let’s tease this out just in a couple of different directions, because I think this issue is not going away. So, first of all, I guess the question I want to ask you is I want you to help me understand the puzzle, which is as an individual patient, it’s unambiguously good for me to get the assistance from this charity versus not.

I face a large copayment. I may or may not be able to afford it, but it’s less expensive if I have the help. So why wouldn’t we just want more of these?

Leemore Dafny
Well, because and there’s a similar story in research I’ve done for copay coupons, because what helps you at the counter may not help you or and certainly all of us in the long run, because somebody is left paying that total. Right? What sounds good isn’t always actually good for us. I think that’s pretty familiar to anyone who study, who studies health care or even is making a decision over what to eat for lunch.

And in the case of this, a cost sharing assistance by eliminating the pain at the pump, if you will, or the pain at the counter that relaxes any pricing constraint that pharmaceutical manufacturers face to try to make their drugs more affordable. And it also eliminates the possibilities that insurers have to try to direct your spending toward something that might be more cost effective or something where they’ve negotiated a better deal.

So the manufacturers don’t have an incentive to give any price concessions. So it kind of removes the tools, many of the tools that are in place to help constrain price growth. And ultimately those prices, they’re paid by someone. They’re paid by insurers, both federal and private. And they come out of our taxpayer dollars as well as our insurance premiums.

Alan Weil
But here’s the puzzle. Given our current pricing structure, which is very complex, what are the alternatives? And then, of course, I’m going to ask you the next question, which is if we could change some of our pricing structure to eliminate this weird dynamic, what would that look like? But let’s start with the more immediate. Based on your work and the existence already of a federal statute, what could we do differently to reduce this dynamic?

Leemore Dafny
So the short term thing that this research suggests, okay, kind of let’s start small and then let’s build from there, is that the regulations that currently allow pharmaceutical manufacturers to make donations to charitable organizations that then turn around and cover patient’s costs for using their drugs, that guidance is insufficient to prevent there being kickbacks to the donors.

So my recommendation there would be to rescind that guidance and have pharmaceutical companies be accountable for the AKS. They’re not permitted to provide assistance for the purchase of their own medications, whether or not it goes through an independent foundation. So that’s what I would recommend. If we were having this conversation Alan, even I think ten days ago, it would be a little different.

Alan Weil
Yes. I was going to take you there, so please do.

Leemore Dafny
I suspected as much so as we both know the new Inflation Reduction Act includes provisions regarding drug pricing and also Medicare enrollees out of pocket spending. Which is going to be capped at, I think it’s $2,000 in 2024. Am I right on that?

Alan Weil
Yep.

Leemore Dafny
So what that means is that they are not going to have to pay more than that amount and therefore rescinding this guidance would not hit in the same way that it might have done in the past. Because there will be, you know, that the amount for which you’re on the hook will be much lower for those people who were in the worst circumstance.

And I’m not going to say $2,000 isn’t a lot of money. I’m just going to say that the warped incentives that result from this would have less implication for seniors than it might have.

Alan Weil
Right. I don’t hear you saying $2000 isn’t a lot of money. What I hear and this is sort of why I asked the earlier question, is that this whole dynamic exists because of our copayment structure. Which under Medicare can still leave significant out-of-pocket costs at the time of purchase of drugs, many of which are, you know, medically necessary and highly beneficial.

And we’ve built a health care system where that’s part of what we just take as a given that there will be this cost sharing. And if there were less of it or imagine, none of it, none of the dynamic that you studied would take place, you’d have to go find something else to study it. I don’t know what that could possibly be, so capping the out-of-pocket doesn’t eliminate the hydraulic, but it certainly changes the nature of it.

Leemore Dafny
It really does. And I want to highlight that research suggests it will be beneficial to have different tiers of cost sharing amounts conditional on, depending on the drug. Okay. There’s lots of times that cost sharing isn’t a good thing to have, but especially if there are therapeutic alternatives for the same condition. Having different amounts of cost sharing, say $15 versus $30 can help to steer patients toward the drug for which a PBM is negotiated a lower price, and that’s healthy competition and using modest amounts of cost sharing to enable lower prices.

So having a cap that isn’t zero can really facilitate those kinds of negotiations. So eliminating all cost sharing would certainly be appropriate for certain medications and for one option for essential medications and so forth. But having some room there that is not offset by pharmaceutical manufacturers through coupons are cautioning assistance programs is an important discipline, a mechanism that the market needs.

Alan Weil
Yes, that sounds like the business school professor in you, and I appreciate that perspective. And I don’t want to lose something, though, that you mentioned a moment ago, which is if you changed the opportunity for gains to the manufacturers, presumably their incentive to contribute to these charities would go down. I mean, they’re rational business actors.

And so if they don’t think they’re generating business for themselves or they’re not permitted by new structures to do that, presumably their interest in these programs would be lower. Right?

Leemore Dafny
Yes, I think it goes in both ways. Okay. On the one hand, if cost sharing is lower, than patients are likely to buy their drugs anyway. That’s your point. Right? So maybe they won’t need to donate. On the other hand, covering their cost sharing is cheaper now. Right? So I think the net effect is ambiguous. Certainly they would be needing to donate less period.

But kind of the return on that investment, I think is not clear.

Alan Weil
That’s interesting. So you will still have something to study even with the passage of this new law. So that’s good. I don’t want to put you out of business here.

Leemore Dafny
No. And remember, there are all of those commercially insured patients.

Alan Weil
You can study them till the cows come home.

Leemore Dafny
There you go. For, you know, many provisions of the law really just don’t apply. So. Yep, so don’t you worry.

Alan Weil
Okay. I won’t. Well, Dr. Dafny this is such an important topic and we are hitting it at exactly the right time, as you note, because the policy has just changed. But the dynamics here of financing of patient behavior, of manufacturer behavior, of pricing behavior, the negotiating power of insurers, it’s incredibly complex. And you’ve, I think, contributed to moving us from sort of what we all knew, which is theoretically these can be beneficial to actually data to showing us that in many instances it’s pretty clear that they are beneficial and that’s a real contribution to the field.

It’s not the final answer, but it’s very important new information as we try to set policy going forward. So I thank you for the analysis, the work, for your clarity and for taking on a tough topic and for being my 100th guest on A Health Podyssey.

Leemore Dafny
Alan, thank you. It really is a pleasure to be here with you today. And let’s see if I can’t be the 200th guest.

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