New Proposal: Forget Biosimilars, Move to Fixed Price Formulas

Claiming that US savings would accrue from $200 billion to $300 billion within 5 years, a group of authors published in a Health Affairs blog a different concept for controlling the cost of biologic agents. They believe that biosimilars will never gain the savings intended by the Biologics Price Competition and Innovation Act (BPCIA). Savings of more than $87 billion for Medicare and Medicaid, they believe, could be a strong inducement.


Emphasizing that today’s biologics are a form of a “natural monopoly,” biosimilar manufacturers will be generally disincentivized to crack the market. The authors from Memorial Sloan Kettering Cancer Center and Massachusetts Institute of Technology explained that a natural monopoly is the result of a market where the barriers to entry are too high to encourage significant competition. The current biologic market exclusivity of 12 years, the cost to develop a biosimilar (relative to that for a generic agent), patent issues, and the barriers to substitutability have collectively limited the number of drug makers willing to enter the competition today. This natural monopoly has thus resulted in the marketing of only eight biosimilars in just four drug classes since 2012.

Addressing this issue requires a much more aggressive regulatory approach, they believe. After loss of market exclusivity, the price of biologic products should be subject to a formula that drops the price commensurate with the actual cost of maintaining the supply chain. They write, “The lowered price should equal the costs of production (including facility repair and replacement) and market distribution, plus an appropriate profit.”

Although the development of the formula can vary, they emphasize that transparency is the key element. “What is critical is that the formula be clear; be relatively easy to determine and audit; protect payers from prices substantially above the economic marginal production cost; and protect manufacturers from excessively low prices resulting from the government regulator exerting monopsony buying power.” The entity deciding on the lower price must also be a completely independent body, without connection to the manufacturers or the purchasers.


This approach would parallel how Medicare pays for hospital services; profit margins are not set by the manufacturers on drugs for which market exclusivity has expired. The assumption is that these drug makers will have long ago earned several multiples of the research and development cost, and can produce these agents at a profit for 70% to 90% less than current pricing.

This regulatory proposal has a couple of interesting positive features. First, it decouples patent issues from access to far lower drug costs (an essential, failed objective of the BPCIA). Second, it eliminates any discussion of rebates and rebate traps. Third, it removes any question of prescriber/patient discomfort with the use of biosimilars.


However, it does not answer the longer-term concerns: What happens when the manufacturer of etanercept, for example, decides that he or she does not want to spend their opportunity cost on producing a drug that produces now relatively low profits? That manufacturer will either stop producing (i.e., there will not be any etanercept available because there are also no biosimilar manufacturers of it) or sell the product to another drug maker, which may then have to essentially be regulated as an interchangeable biosimilar maker. That might even be an opportunity for EU biosimilar makers to obtain US marketshare.

Furthermore, what would happen to the biosimilar makers who have already exposed themselves to very high development costs and financial risk? For those currently marketing their products, the target pricing ranges are certainly well below the net prices they offer today. Are their interests in the specific biosimilars “bought off” by the government or reference biologic makers? The authors believe that this will need to be the case, and they set aside up to $20 billion of their $200–$300 billion savings for this purpose.


The reference drug manufacturers would strongly oppose this proposal, whereas the payers, providers, and patients will appreciate the price savings. It would be a bloody battle indeed, exposing biologic makers to widespread price controls.

True, the attrition in the biosimilar space is already high, and the regulation of biosimilars in different countries has not resulted in consistent outcomes. For example, several agents are approved for use in Europe but have gained little more than rejection letters in the US.

The need for such a proposal is further evidence that few are satisfied with access to biosimilars in the US and the price reductions that have been seen to date. The authors’ proposal offers a measure of “pricing justice” for those who are greatly frustrated with the games that have been played by an industry bent on serving their shareholders by retaining maximum profit margins until the bitter end. Yet it does have the potential to result in new drug shortages, and wipe out the biosimilar industry as we know it in the US.

Is this a sledgehammer approach? Absolutely. However, if the overall biosimilar situation does not improve rapidly in the US, this will likely not be the only proposal that moves towards a regulatory solution and away from competitive markets.