Hard on the heels of President Trump’s complaint in his State of the Unionaddress about “the injustice of high drug prices,” a new report says that total spending on medicines rose last year by only 1.5%.
Concerns about drug costs have been common among policy makers and within the media in recent years. But the truth about drug costs – and health-care costs in general – is often obscured by rhetoric.
Here are some key facts:
Drug Spending in 2017
The report from Express Scripts is a blockbuster. It shows that unit costs (that is, the cost of the average prescription, or what can be roughly called “price”) rose just 0.7% while utilization (how many prescriptions are issued per health-insurance subscriber) rose 0.8%. Unit costs rose considerably less than the Consumer Price Index, which, according to preliminary figures, was up 2.1% in 2017. In 2016, according to Express Scripts, unit costs rose 2.5% and utilization 1.3%.
The data are even more remarkable when you drill down. “Nearly half of our commercial plans saw their drug spending per beneficiary decrease in 2017,” reports the company. And spending on traditional medicines – that is, the vast majority of commonly used generics and branded drugs – actually declined by 4.3%, “due primarily to a 4.9% drop in unit costs.”
Meanwhile, spending on specialty drugs rose 11.3%, “the lowest increase we’ve seen,” according to Express Scripts. (The increase in 2016 was 13.3%.) The 2017 spending was driven, not by unit costs (which rose just 3.2%) but by increased utilization (8.1%) – a healthy development because it means that these advanced and effective drugs are getting to more Americans, mitigating the virulence of diseases and preventing long hospital stays and early death. (We will have more on the report in our next issue.)
The new Express Scripts numbers dovetail nicely with figures from Prime Therapeutics that we noted in Issue No. 22. Prime found that, for the first half of 2017, overall spending on drugs (both by Prime and its clients) for the firm’s commercial business rose 0.8%, and, again, the driving force was not increased prices but more use of medicines.
Average unit costs (that is, cost per prescription) fell by 2.8% while utilization rose 3.6%. For Prime clients, the unit cost of traditional drugs fell 8.6% while specialty-drug prices increased 3.7%.
Drug Spending in 2016
The data from the two PBMs are powerful, but, unfortunately, a breakdown of prescription-drug and health-care costs for the entire nation in 2017 will have to wait many more months. Still, there is little doubt about the trend.Competition is driving down the costs of traditional medicines and thus offsetting the effect of the costs of miraculous new medicines. As a result, we’re seeing total spending on drugs rising at less than the pace of inflation.
In Issue No. 24 of this newsletter, we examined a mass of data for 2016 presented in a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS).
According to the researchers, the increase in spending on prescription drugs in the United States in 2016 was only 1.3% -- by far the smallest rise in any health-care category. The increase for drugs contrasts with a 4.3% rise overall for national health expenditures (that 4.3%, by the way, is the smallest increase since 2013).
The report noted that annual increases in drug spending of 12.4% in 2014 and 8.9% in 2015 were aberrations, caused largely by pent-up demand for new drugs that cure Hepatitis C and by millions of uninsured Americans gaining access to medicines under the Affordable Care Act.
The researchers wrote that the 1.3% increase in 2016 “is more in line with the lower average annual growth during the period 2010-13 of 1.2% -- a rate that was driven by the shift to more consumption of generic drugs.”
HCCI vs. CMS: How to Reconcile?
But nothing is ever simple in the world of health-care costs. On Jan. 23, the Health Care Cost Institute (HCCI) issued its annual Health Care Cost and Utilization Report for 2016. That report looked at employer-based commercial health insurance data for Americans under age 65, and the increase in total spending was about the same as the CMS actuaries reported: 4.6%.
But the increase in prescription-drug spending was far different: 5.1% vs. 1.3%.
Why the discrepancy? Axios Vitals, an online news service, reported the high HCCI figure for drug costs; then, the next day, issued a clarification to provide “additional context to add to the institute’s math on price increases – specifically, drug prices…. HCCI tracked the rising list prices for pharmaceuticals but didn't account for widespread rebates. (Insurance programs often don't pay the full list price.)” Thus, wrote Sam Baker in Vitals, it is “worth noting that some of these price increases aren't always as steep in practice as they look on paper.”
To put it simply, the CMS data (like the Prime and Express Scripts data) subtract rebates from the PBMs, mainly to the employers who pay for commercial insurance; the HCCI data do not. (Imagine if you buy a car for $40,000 and the car dealer later sends you $5,000 as a rebate. What is the actual cost of the car? Clearly, it’s $35,000. Statistics that do not account for rebates give a foggy picture of total costs.)
Of course, if you are looking at year-to-year comparisons and rebates proportions stay constant, then there is no effect, but rebates have been rising. Citing QuintilesIMS data, Adam Fein reported in his blog Drug Channels that, while total undiscounted drug spending rose a little less than 40% between 2012 and 2016, off-invoice rebates, discounts, and other prices concessions more than doubled. “An excellent study by Berkelely Research Group (BRG) found that pharmaceutical manufacturers received only 62% of the list price of brand-name and generic drugs,” Fein wrote.
Pernicious Effects of Rebates
“Unlike care received at an in-network hospital or physician’s office, negotiated discounts for medicines are not shared with patients with high deductibles or coinsurance,” says the trade group PhRMA, which has been urging health plans to “share the savings” directly with patients rather than sending rebates to employers.
Rebates are not only unfair to consumers; they also foster pernicious incentives. In 2016, before he was nominated as Commissioner of the Food & Drug Administration, Scott Gottlieb told a congressional committee:
The problem is that our current system provides incentives for companies to push list prices higher, only to rebate the money later on the back end. Yet the rebates don’t benefit consumers equally, and they don’t necessarily help offset the costs paid by those who need a particular drug. The rebates eventually make their way back to health plans to help offset the collective costs of premiums.
But if a patient needs a particular drug, they will increasingly find that they are paying the full, negotiated price at the pharmacy counter. They never see the real ‘net’ price, after the rebate is applied much later. The rebate is paid to the health plan, not the patient buying the drug.
Gottlieb’s proposed solution is to replace after-the-sale givebacks with transparent up-front discounts. He is now in a position to help reform current practice.
Comparing Categories of Health-Care Spending
The Health Affairs article by the CMS researchers pointed out that prescription drugs accounted for 9.9% percent of total national health-care spending in 2016, compared with 9.7% in 2009. (Figure 1 of this Brookings Institution report shows that the 10% level is the same as in 1960.) Drug spending rose at a considerably lower rate than GDP in five of the seven years reported in the article. By contrast, hospital spending increased considerably faster than GDP in five of the seven years and about the same in other two.
Take a look at page 153 of the Health Affairs issue. It shows that in 2016, hospital expenditures were $1,083 billion; professional services cost $881 billion; and prescription drugs, $329 billion. In other words, hospitals account for about one-third of total health costs; doctors and other professionals, one-fourth; drugs, one-tenth.
Over the seven years covered in the report, hospital spending increased by $261 billion; drug spending, by $76 billion.
Meanwhile, the HCCI report shows one reason why hospitals deserve scrutiny.
“Surgical admissions,” says the report, “experienced a 16% decline in utilization from 2012 to 2016.” But, at the same time, total surgical spending over the period rose 9%. The average cost of a surgical admission was $41,702.
One reason for this trend may be that more simple surgeries are taking place in out-patient settings, while complicated and expensive surgeries are left for hospitals. Another is labor. A study by the Progressive Policy Institute found that rising labor costs, mainly at hospitals, “accounted for almost $65 billion in added health care costs in 2015, or 47 percent of the total increase in personal health care spending.” Hospital spending is more than triple prescription-drug spending. Where would you focus your attention if you wanted to control health costs in America?
The Value of New Medicines
In clarifying his Jan. 23 report on the HCCI study, Sam Baker of Axios Vitals wrote that some “expensive new drugs are far more effective than existing treatments. Improved products, of any kind, will always cost more.”
This may be the single most overlooked fact about drug costs. Let’s return to the new Hepatitis C drugs. In more than 90% of cases, these drugs cure the disease completely in only a few months. They are far more effective, with fewer side effects, than previous treatments. Yet reports on prices, or unit costs, of Hepatitis C medicines do not take into account the fact that these drugs are qualitatively different than their predecessors.
The acceleration of dramatic new discoveries – especially in the field of oncology drugs – makes this apples-and-oranges distortion even worse than in the past.
When politicians and journalists criticize the cost of individual specialty drugs, the response should be, “Compared to what?” What is the value of a breast-cancer drug that can extend the life of a patient by five years, compared to the previous gold-standard treatment? There are objective and subjective answers to such a question, and those answers – whatever they may be -- are far from zero. Innovation, by its nature, often raises prices because it offers something better.
The Power of Generics and Bio-Similars
But what makes medicines different from, say, surgeries, is that prices decline over time as patents expire, and more competitors appear. Express Scripts reported that 86% of its clients’ prescriptions are being filled with generics.
“When patents and exclusivity run out and generics enter the market, how much do they lower drug spending? A lot,” says a report from the Hutchins Center at Brookings. A 2014 National Bureau of Economic Research paper by Rena Conti of the University of Chicago and Ernst Berndt of MIT found “substantial price erosion after generic entry” – 38% to 46% for physician-administered drugs and 25% to 26% for oral drugs.
A study by Henry Grabowski, a Duke economist, and two colleagues, found that the average new drug has market exclusivity for about 13 years; then, in the first year that generic entry is possible, an average of eight competitors enter the marketplace if the drug’s gross sales are $250 million to $1 billion. The market share of the innovator drug drops to an average of just 11%.
Policies that increase competition from generics (which now account for about nine out of every ten prescriptions, up from one out of three in 1994) – as well as from biosimilars, which the FDA deems interchangeable with a sophisticated biologic product – may be the best way to constrain the cost of drugs while encouraging innovation through market forces.
New, miraculous medicines will, however, still be expensive – which is why insurance was invented. Currently, insurance for drugs, in a perverse twist, lets subscribers pay little or nothing for low-cost generic medicines while requiring them to contribute large amounts out of their own pockets for more costly specialty drugs.
Finally, the HCCI report reminds us that, if policy makers want to have an impact on costs, they should turn their attention toward the destructive effects of the rebates of which PBMs seem to be so fond and toward the categories where the money is: hospitals and out-patient care.
As we pointed out in our last newsletter, U.S. spending on prescription drugs rose only 1.3% in 2016, according to a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS). That was by far the smallest rise in any health-care category.
The growth rate for drug spending declined dramatically in 2016 from the previous two years (which were distorted by new drugs that cure Hepatitis C, for which there was pent-up demand) and was more in line with the 1.2% average annual growth rate from 2010 to 2013.
These figures offer a powerful rejoinder to politicians and pundits who single out the price of drugs as the culprit for rising health-care costs. But the rejoinder is even stronger when you realize that these numbers on spending don’t tell the whole story. The spending figures reflect changes in the price of drugs, yes, but also the volume of drugs used and the mix of drugs used, as newer products are introduced and older products become available in generic form.
“Revenue growth has been driven by new products and volume growth from existing products; price has been a net negative driver,” said a September report from the QuintilesIMS Institute.
Specifically, the report found that growth in the use of existing drugs averaged 2.6%, increases in revenues from new drugs averaged 3.8%, and prices of existing drugs rose 3.3% but declined an average of 2.5% when newly available generics are included. Yes, declined . The lifetime trajectory of most drug prices, unlike the prices of other goods and services, is downward. Over time, new drugs face competition, both from branded competitors with medicines that attack the same disease, and from makers of generics, which reach the market when patents expire.
New Medicines and Total Drug Spending
Let’s focus on the effect of new drugs on total spending. Consider an intractable disease – for example, a form of cancer for which there has not been an adequate treatment. Now assume that a new drug is discovered that substantially increases the life expectancy of someone afflicted with that cancer. Suddenly, a number of patients – assume 50,000 – at last have a beneficial treatment for their disease. Say that the drug costs $2,000 a month. Thus, over a year this medicine adds $1.2 billion to total spending on health care. Rather than a loss to society, this spending is an enormous gain, extending and enhancing the lives of people with the disease.
Now let’s do some back-of-the envelope calculations. Altarum Institute’s Health Sector Economics Indicators brief for Dec. 15 was headlined: “New CMS data reveal lower health spending growth, led by prescription drugs.” During the past three years (Nov. 1, 2014, to Oct. 31, 2017, the period covered in the report), spending on prescription drugs rose from $307 billion to $351 billion. That is an increase of about $140 per American. These figures, however, do not include the cost of medicines administered in doctors’ offices or hospitals.Estimating those amounts for the three-year period, based on history and forecasts, brings the total increase per capita to around $180; let’s just round it up to $200, or less than $70 a year.
So here’s the question: Is it possible that new drugs alone, approved over the past three years, justify the increased costs? No doubt.
Over the three years, the Food & Drug Administration approved 124 new medicines. Here are a few examples , each from a different pharmaceutical company: Entresto (developed by Novartis), a treatment for chronic heart failure; Ibrance (Pfizer), for certain kinds of breast cancer; Keytruda (Merck), for non-small-cell lung cancer; Epclusa (Gilead), a cure for Hepatitis C; Tecentriq (Genentech), an immunotherapy for lung and bladder cancer; Ocrevus (Roche), a drug that staves off disability for multiple-sclerosis patients; Venclexta (AbbVie), for leukemia; Syndos (Insys), for treatment of anorexia associated with AIDS and nausea associated with chemotherapy; and Dupixent (Regeneron and Sanofi) for eczema.
Huge breakthroughs are occurring in cancer. Last year alone, the FDA issued 16 oncology approvals, medicines that fight cancers of the blood, breast, lymph nodes, ovaries and more. A report in June by America’s Biopharmaceutical Companies, in conjunction with the American Cancer Society, found that 248 immuno-oncological drugs are now in development. The medicines harness a patient’s own immune system to fight cancer, the way that system fights bacterial infections.
Overall, since 2000, some 500 drugs have been approved by the FDA, and, currently, nearly 7,000 medicines are in development, about three-quarters of them considered “first in class” treatments. Not all of these drugs will make it to market (the process is long and expensive), but the ones that do will provide a boost to health that is worth a lot more than $70 a year.
A New $850,000 Drug
Still, it is disingenuous to ignore the high price tag for individual medicines. Luxturna, for example, was approved on Dec. 19. Developed by Philadelphia-based Spark Therapeutics, it’s described by the FDA as the “the first directly administered gene therapy approved in the U.S. that targets a disease caused by mutations in a specific gene.” Luxturna treats children and adults with an inherited form of retinal dystrophy that affects 1,000 to 2,000 Americans and can result in blindness. FDA Commissioner Scott Gottlieb hailed the breakthrough, saying that “we’re at a turning point when it comes to this novel form of therapy.”
The treatment’s cost is $425,000 per eye. "It's wildly expensive,” said Dr. Steve Miller, chief medical officer of ExpressScripts, the nation’s largest pharmacy benefit manager (PBM). But, Miller added, “To be very frank, I think they've priced it what I'll call responsibly."
Why responsibly ? First, analysts were expecting a price of over $1 million, given the drug’s effectiveness. “Patients who participated in the [clinical] trial…described, in interviews and in testimony to a panel of FDA advisers, seeing snowflakes for the first time or being able to read again,” said a report on the CNBC website. Second, it’s a one-time treatment; the costs don’t recur. Third, Spark is negotiating to allow government insurance (such as Medicaid) to pay for the drug over time, on an installment plan. And fourth, Spark is offering a refund if the treatment does not work as advertised. As Bloomberg reports:
In an agreement with the Boston-area insurer Harvard Pilgrim Health Care, Spark will get the full price of treatment up front. If patients don’t get an immediate benefit -- measured at 30 days, or a long term one -- measured at 30 months, Spark will have to give some of the money back in a rebate.
The details of the rebate program have not been announced, but the strategy is in keeping with an innovation called “value-based pricing” – which should more properly be called “value-based reimbursement” since drug manufacturers are reimbursed by private and government insurers. The list price is far from what manufacturers receive under normal circumstances after insurers, hospitals, and PBMs take their debates, discounts, and fees.
A plan like Spark’s represents a positive innovation in the realm of health-care costs because it emphasizes the benefit side, not just the cost side: If the benefit (or value) is reduced, then the cost is reduced as well.
Value-based reimbursement puts the right framework on analyzing costs. It gets us thinking, for example, about the impact of medicines on the use of other health care services. Keeping patients out of the hospital and doctors’ offices, drugs reduce overall health-care costs for the nation. And a true calculation of value-based reimbursement would look not only at the present but the far-off future. A statin that reduces cholesterol eliminates heart attacks which, without the drug, might occur 20 or 30 years out.
Michael Porter’s Value-Based Prescription
Michael Porter, the Harvard economist, offered a prescription for value-based health-care system eight and a half years ago in the New England Journal of Medicine . He wrote:
The central focus must be on increasing value for patients — the health outcomes achieved per dollar spent. Good outcomes that are achieved efficiently are the goal, not the false “savings” from cost shifting and restricted services. Indeed, the only way to truly contain costs in health care is to improve outcomes: in a value-based system, achieving and maintaining good health is inherently less costly than dealing with poor health.
Right now, Porter writes, “The focus is on minimizing the cost of each intervention and limiting services rather than on maximizing value over the entire care cycle.” But if we put the patient in the center of the system and focus on how we can improve his or her health, we are likely to find that medicines are the key to reducing health-care costs throughout the entire system. Drugs provide not only innovation but also a model for holding down expenses through competition.
Despite the uproar from politicians over pharmaceutical prices, the increase in spending on prescription drugs in the United States in 2016 was only 1.3% -- by far the smallest rise in any health-care category. The stunning figure was part of a mass of data presented in a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS).
National health expenditures (NHE) rose in 2016 by 4.3%, the lowest rate since 2013. According to the article, “the slowdown was broadly based,” but the decline in the growth rate of spending on medicines was particularly dramatic.
The statistics show that the sharp rise in drug spending in 2014 and 2015 – at rates of 12.4% and 8.9%, respectively – was an aberration. “In particular,” said the article, “strong growth in spending for drugs to treat hepatitis C contributed to higher overall spending growth in 2014 and 2015.” In addition, during this period, millions of uninsured Americans gained access to medicines under the Affordable Care Act.
The Health Affairs article continued:
The 2016 rate of prescription spending growth is more in line with the lower average annual growth during the period 2010-13 of 1.2 percent – a rate that was driven by the shift to more consumption of generic drugs…. Despite these large fluctuations in growth rates over the past several years, retail prescription drugs’ 10 percent share of national health expenditures in 2016 is similar to the share in 2009.
Prescription-drug spending rose at a considerably lower rate than GDP in five of the seven years reported in the article (again, the outliers were 2014 and 2015). By contrast, hospital spending increased considerably faster than GDP in five of the seven years and about the same in other two.
Here is a comparison of increases in 2016 by spending category:
The Health Affairs article also reveals that drug utilization – that is, the number of prescriptions dispensed – increased 1.9%. Since total spending increased at a lower rate, unit prices for medicines actually declined in 2016.
The article also reported that total spending on generic drugs (including brand-name generics) declined in 2016. Generics constitute 84% of all prescriptions.
So why do Americans feel drug costs – and health-care costs in general – are high? The data have a good answer. It turns out that out-of-pocket spending, which includes consumer co-payments, deductibles, co-insurance, and spending for services that are not covered, rose 3.9% in 2016 -- the “fastest rate of growth since 2007 and higher than the average annual growth of 2.0 percent in 2008-15.” One major reason is the rise in the proportion of covered workers who were enrolled in high-deductible plans from 20% in 2014 to 24% in 2015 to 29% in 2016. “At the same time,” says the article, “average private health insurance deductibles for single coverage plans increased 12% in 2016.”
You might think that higher out-of-pocket costs may give workers an incentive to be better shoppers of health services, but research shows that they cause them to cut back on services they truly need, such as preventive care and medications. Those services help reduce costs in the future.
The new statistics confirm what any sophisticated analyst already knew: prescription drugs are a small portion of total health expenditures and can deliver a big bang for the buck (the hepatitis C drugs being a good example: they obviate the need for a liver transplant that can cost more than a half-million dollars).
But critics of drug spending persist. Consider a new report from the National Academies of Sciences, Engineering and Medicine called “Making Medicines Affordable: A National Imperative.” The report goes wrong at the start by stating, “Spending on prescription drugs has been rising dramatically.” It has not. According to the CMS actuaries, from 2010 to 2016, drug costs rose from $253 billion to $339 billion, or 30%. Hospital costs over the same period rose from $822 billion to $1.1 trillion, or 32%. Overall NHE rose from $2.6 trillion to $3.3 trillion, or 28%. In other words, drug spending is rising about the same as health spending in general and a bit less than hospital spending.
A study released in May by the IQVIA Institute for Human Data Science concluded, “Real net per capita drug spend has been relatively unchanged over the past decade.” Adjusted for inflation, spending by all parties (insurers, government agencies, employers, and individuals) on drugs per American was $811 in 2007 and $895 in 2016. That’s a compound annual growth rate of 1.1%.
The National Academies report also makes the claim: “Drug costs are a significant part of the nation’s total spending on health care.” It depends on what you mean by “significant.” Is 10% of total spending significant? Today, drugs represent 10.1% of total HCE, according to the Centers for Disease Control. In 1960, they represented 9.8%. Overall, hospital spending is triple drug spending, and physician and clinical spending is twice drug spending.
Also, it is critical to understand the forces responsible for increases in drug spending. As a September report from the QuintilesIMS Institute stated, “Revenue growth has been driven by new products and volume growth from existing products; price has been a net negative driver.” Specifically, the report found that growth in the use of existing drugs averaged 2.6%, increases in revenues from new drugs averaged 3.8%, and prices of existing drugs declined an average of 2.5%.
We hardly want to discourage the development of new drugs, and we certainly want people to use more medicines that make them healthy and keep them out of the hospital. So rising revenues in those areas are beneficial. Because of competition, especially from generics as branded drugs lose patent protection, drug costs – unlike costs in other parts of the health-care system fall over time.
The QuintilesIMS study concludes, “Net revenue growth for prescription medicines will average 2–5% through 2021; growth will be driven by new and existing products and offset by patent expiries.” That’s similar to the revenue growth range of practically every industry in America.
Proposals That Will Harm Health
If you get the problem wrong, it is hard to get the remedy right. In the “National Imperative” report, the proposals to lower costs– which we have heard many times before – would, in many cases, make matters worse. As the dissenting view accompanying the report states, “The committee’s recommendations, if actually implemented, will lead to unintended consequences that will damage the health of people in the United States and damage the health of an industry whose innovations are essential to addressing unmet medical needs in the future.”
Among the remedies proposed is to have Medicare, all 50 Medicaid state programs, the Veterans Administration and other government programs negotiate drug prices as a single block, giving them more market power as purchasers. But the top three pharmaceutical benefit managers (PBMs) already have tremendous market power, and and recent results show they use that power to keep costs down even as utilization rises. Unfortunately, some of the mechanisms that the PBMs use operate on a foundation of perverse incentives (such as rebates) that can come at the expense of the health of patients. Importantly, recent data reveal that patients aren’t directly benefiting from the savings incurred by some of the schemes utilized the PBMs. Still, more government involvement in medicine-buying will inevitably lead to more limited choices and access to care for Medicare and Medicaid beneficiaries. That has been the experience in Europe and Canada.
There is no doubt that some drugs are indeed costly, but that’s why insurance was invented – to mitigate the pain of unexpected, big expenses. Unfortunately, the structure of health insurance policies is changing, with patients responsible for a larger proportion of the costs of advanced medicines. As we have pointed out before, the trend in insurance-policy design is to cover the cost of inexpensive generics almost entirely and to force patients to pay hundreds or thousands of dollars for specialty drugs. This is backwards.
As Adam Fein wrote last summer Drug Channels:
These benefit designs essentially discriminate against the very few patients undergoing intensive therapies for such chronic, complex illnesses as cancer, rheumatoid arthritis, multiple sclerosis, and HIV.
According to the Kaiser Family Foundation’s Annual Survey of Employer Health Benefits for 2016, more and more insurers are adding a fourth tier to their coverage plans. Last year, 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. And copayments (that is, what insured people pay out of their own pockets) are, on average, more than nine times higher for fourth-tier specialty drugs than they are for first-tier generics. That multiple has nearly doubled since 2004.
As a result, writes Fein, even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.” About one-fifth of plans with a specialty-drug tier have no limit at all on what a patient pays in coinsurance.
The Year Ends, the Myths Persist
This edition ends our newsletter’s first year, and, just as at the start of 2017, politicians and media are still purveying pernicious myths about health-care costs. But a flood of data shows otherwise. There is probably no better example of the prevailing misunderstanding than the conclusion of the prestigious National Academics that “spending on prescription drugs has been rising dramatically.”Our impression, however is that, slowly but surely, minds are changing.
No one denies that reasonable steps need to be taken to constrain spending – and the smartest step is to increase competition. We have a tried-and-true mechanism in generics and their analogue for sophisticated biologic products called biosimilars.
Our mission continues in 2018: to inject sanity and facts into the debate over health-care costs, so that decision-makers in the public and private sector can make wiser choices.
Issue No. 23 - Biosimilars Hold Hope for Lowering Drug Costs and Improving Patient Access, But Challenges Surface
Over the past decade, generic drugs have kept a lid on the cost of health care and increased the access of Americans to effective pharmaceuticals. The big question now is whether medicines based on more complex, previously patented biological products can have a similar – or even greater -- impact. Despite recent legislative changes, barriers remain to the kind of competition that is already having a beneficial effect on costs and increasing access in Europe.
The Generic Success Story
Today, about 90% of all U.S. drug prescriptions are filled with generics, compared with just 57% in 2004. The average out-of-pocket cost for a generic prescription is just $8, and many generics cost insured patients nothing at all. Express Scripts, the largest pharmaceutical benefit manager (PBM), reports that “prices for the most commonly used generic medications [are] down 8.7% this year  and 73.7% lower than the 2008 base price. As a result, the unit cost of the average commonly used medicines (as opposed to what are termed “specialty” drugs) fell last year by 2.3%.
A generic is a medicine that “works in the same way and provides the same clinical benefit as its brand-name version,” according to the Food & Drug Administration (FDA). It is the “same as the brand-name medicine in dosage, safety, effectiveness, strength, stability, and quality.” On average, generics come to market 13 years after a patented, branded drug, and that branded drug quickly declines in both price and revenues.
Cost Savings From Biosimilars?
Now, enter biologics. These are complex medicines, which, according to the FDA, “are manufactured through biotechnology, derived from natural sources or, in some cases produced synthetically.” Biologics treat a wide range of conditions, including rheumatoid arthritis, inflammatory bowel disease, and several types of cancer. Seven of the 10 best-selling drugs in the U.S. in 2015 were biologics, including such well-known names as Humira and Avastin, and global sales of all biologics are estimated to reach $390 billion in 2020, or more than one-third of today’s total pharmaceutical revenues.
It would seem logical that, just as generics have reduced the overall costs of branded, conventional, small-molecule medicines, the process would be repeated for biologics and biosimilars. A biosimilar is a medicine that has no clinically meaningful difference with its branded biologic and, as a March article in Scientific American put it:
People in medicine and policymaking have counted on what they sometimes call a “biosimilar revolution” to push prices down, much as generics have frequently replaced high-priced brand-name drugs in the past. Some have predicted cost savings from biosimilars in the U.S. and Europe to be as high as $110 billion by 2020.
But the analogy is not exact. Identical generic versions of small-molecule drugs can be chemically synthesized, but that is not the case for complex biologics. Manufacturing a biologic is a far more complicated, expensive task than making a small-molecule drug, and there are regulatory differences as well.
‘No Clinically Meaningful Differences in Safety and Effectiveness’
Still, as patents expire for biologics, biosimilar medicines are being developed to compete with their branded counterparts. A biosimilar is not completely identical structurally to the branded product, but it is “highly similar,” in the words of FDA Commissioner Scott Gottlieb and Leah Christi, associate director for therapeutic biologics in the FDA’s Office of New Drugs. An approved biosimilar, they wrote in October has “no clinically meaningful differences in terms of safety, purity and potency (safety and effectiveness) from — an already FDA-approved biological product, called the “reference product.”
Making a biosimilar requires an investment that dwarfs what’s needed for a generic small molecule drug. A biosimilar typically takes five to seven years to develop at a cost reported to be more than $100 million in some cases, not including regulatory fees. By comparison, a generic version of a small-molecule drug takes about two years at a cost of $1 million to $2 million. As a report by the Congressional Research Service (CRS) points out: “The biologic drug Remicade contains over 6,000 carbon atoms, almost 10,000 hydrogen atoms, and about 2,000 oxygen atoms.”
Some drug companies, nevertheless, are hard at work producing biosimilars that work the same as patented biologics currently on the market. Just asthe Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxman Act, cleared a regulatory path for generics, the Biologics Price Competition and Innovation Act of 2009, part of the Affordable Care Act, or Obamacare, has facilitated the development of biosimilars.
So far, seven have been approved by the FDA. The first, in March 2015, was Sandoz’s Zarxio, a biosimilar to Amgen’s Neupogen; the drug stimulates the production of white blood cells to fight infection for cancer patients. The latest approval is for Mvasi, developed by Amgen and Allergan and authorized on Sept. 14. A biosimilar to Genentech’s Avastin, Mvasi treats types of lung, brain, kidney, colorectal, and cervical cancers.
At the time of the approval of Mvasi, FDA Commissioner Scott Gottlieb said:
Bringing new biosimilars to patients, especially for diseases where the cost of existing treatments can be high, is an important way to help spur competition that can lower healthcare costs and increase access to important therapies. We’ll continue to work hard to ensure that biosimilar medications are brought to the market quickly, through a process that makes certain that these new medicines meet the FDA’s rigorous gold standard for safety and effectiveness.
Gottlieb’s focus on biosimilars is encouraging, but the U.S. is late to the biosimilars game and there are challenges.
Europeans Are Ahead on Biosimilars
The European Medicines Agency authorized its first biosimilars in August 2007 and so far has approved a total of 37 such products. A study by QuintilesIMS, published in May, found that European biosimilars have not only lowered health-care costs but also have increased patient access:
For most classes, there is a significant increase in consumption since biosimilar entry in countries which had low starting volumes. There are also some countries which already had high usage of classes before biosimilar entry, such as Sweden with Anti-TNF’s [drugs such as Humira and Remicade, which treat inflammation], which show a significant increase in consumption.
For a class of drugs termed G-CSF, which stimulate the bone marrow to produce white blood cells (an example is Neupogen), increased access in some European countries has been especially significant, with consumption rising 500% in Slovakia and 164% in Norway. The study adds:
The increased competition of biosimilars entering the market has an impact on not just the volume of the directly comparable referenced product, but also the volume of the whole product class…. All products in these therapy areas, including biosimilars, are contributing to this increased patient access.
What Is Hindering U.S. Progress on Biosimilars?
But it’s not merely the late start that is preventing the United States from gaining the full benefits of biosimilars.
Amgen’s biosimilar Amjevita was approved a year ago, with hopes it would compete with Abbvie’s Humira, America’s top-selling medicine. But the market launch was tied up in lawsuits, and last month Amgen agreed to a settlement that will delay Amjevita’s appearance on the market until 2023.
Meanwhile, Johnson & Johnson has focused on its relationship with insurance companies to limit competition for its biologic Remicade, which combats such illnesses as rheumatoid arthritis and Crohn’s disease, against Pfizer’s Inflectraand Merck’s Renflexis, both biosimilars approved by the FDA and on market in the United States. Inflectra and Renflexis seem to be fostering just the sort of competition Gottlieb and other policy makers want, lowering costs with the goal to increase access.
J&J’s efforts to defend the drug triggered a lawsuit in September by Pfizer. Originally, claimed Pfizer, health insurance companies had classified Inflectra at parity with Remicade (whose technical name is infliximab), meaning there was no reason to favor one drug over the other. “However,” said a Pfizer statement, “insurers reversed course after J&J threatened to withhold significant rebates unless insurers agreed to ‘biosimilar-exclusion’ contracts that effectively block coverage for Inflectra and other infliximab biosimilars.”
In other words, according to Pfizer, J&J was using its contractual relationships with insurance companies to block the use of a competitor’s product. “These anticompetitive practices are preventing physicians from trying and patients from accessing the biosmiliar,” said the Pfizer statement.
Wrote reporter Lydia Ramsey in Business Insider last month: “While there has been a lot of hope that biosimilars will help save the US healthcare system billions on costly, biologic drugs, it's taking longer than expected to get to that point.”
It is not hard to see why.
In addition to the obstacles that are the source of the Pfizer-J&J suit, biosimilars have to contend with misunderstandings by physicians and patients about the nature of biosimilars. The FDA’s website has made a good effort to show that, when it approves a biosimilar, it will work like a biologic and it does not differ in any meaningful manner in safety or effectiveness. But the FDA still has more work to do in providing education beyond a placement of materials on their website. While the FDA is one source for information, physicians also have to contend with information about biosimilars from a variety of stakeholders. Some of that information is misleading on the safety and efficacy of biosimilars.
Adding to the complexity of the situation, biologics are generally administered by physicians, who have to contend with a complicated system of insurance reimbursement that may not support biosimilar uptake. Just last month, the Center for Medicare and Medicaid Services reversed its biosimilar coding and reimbursement policy under Medicare Part B to support the uptake of biosimilars. It will be important that other insurers support similar policies in the setting of physicians’ offices.
Biologics are life-changing drugs that require hefty R&D costs, long development times, and complex manufacturing. They are expensive. The best way to control the cost of these medicines and provide greater access is through legitimate competition following a period of patent exclusivity. We have seen the process work for generics, and it can work for bioimilars as well.
Still, if physicians don’t recognize that FDA-approved biosimilars work the same as biologics, they won’t prescribe them. Insurers, too, need to realize that in the long run, biosimilars offer cost savings and access that will help their clients. Policy makers should focus on ensuring that a competitive system can operate freely, and the FDA and other institutions must make it a priority to enhance education about these medicines. Biosimilars offer great hope, but they need active support from multiple stakeholders to help realize their potential.
Despite what you hear from politicians, most drug prices are going down.
That’s the clear conclusion of the mid-year report of Prime Therapeutics, one of the nation’s largest pharmaceutical benefit managers (PBMs). For its commercially insured patients, Prime says the unit cost of drugs – that is, the average price of an individual prescription -- fell by an average of 2.8% for the first half of 2017. At the same time, utilization – that is, total prescriptions written – increased by 3.6%. So, overall, spending on drugs by Prime’s commercial clients increased by 0.8% for the first half of 2017 compared with the same period last year.
As Adam Fein wrote on the Drug Channels blog:
The data demonstrate that public perception of outrageous drug spending growth has not caught up with 2017’s realities. Sorry to be the bearer of non-fake news.
Prime, which recently entered into a partnership with Walgreen’s, is a PBM for more than 20 million Blue Cross-Blue Shield members in 14 states. Its report confirms other recent reports that drug prices are rising minimally.
For example, during the full year 2016, members of the CVS Health PBM experienced unit-cost increases in 2016 of only 1.2%. Total spending rose 3.2% because of more utilization, but 38% of commercial clients saw their spending on drugs decrease. Express Scripts reported that unit costs rose 2.5% in 2016 and total spending, 3.8%. “The average member out-of-pocket cost for a 30-day prescription was $11.34, only a 9-cent increase from 2015,” reported the PBM, which is the nation’s largest. For CVS members, prescription-per-month costs fell 39 cents. (Insured families pay about 15% of the total cost of medicines.)
Drilling Down on the Prime Therapeutics Data
But let’s get back to the Prime mid-year update, issued on Oct. 12, and do some drilling down.
Prime divided up its report among commercial, Medicaid and Medicare clients. For commercial members, the unit cost of “traditional” drugs, including generics – which account for about nine out of ten prescriptions – and commonly used brand-name drugs, declined a stunning 8.6%. Even after accounting for increased usage, total spending on traditional drugs dropped 5.1%.
The unit cost of “specialty” drugs – highly advanced medicines, often administered in hospitals and doctors’ offices and treating such diseases as cancer – rose 3.7% on average. Utilization of specialty drugs rose 11.5%. Remember that for health costs overall, an increase in the use of these powerful medicines is a good thing. Patients taking innovative drugs have a better chance of avoiding expensive stays in hospitals, whose share of total health-care spending is more than three times greater than that of medicines.
For Prime’s Medicare Part D clients, the mid-year report was even better. Overall, unit costs fell 0.7%, utilization rose 0.6%, so total spending dropped0.1%. Here is the breakdown:
Prime also has Medicaid clients. For them, results were even better – thanks to decreases in unit costs for both traditional and specialty drugs. Overall, despite a 1.8% increase in utilization, Medicaid-client spending dropped 1.8% for the first half of 2017. Here are some details on the traditional vs. specialty breakdown:
The reduction in unit costs for specialty medicines for Prime’s Medicaid clients appears to be the mainly the result of a 35% drop in spending on Hepatitis C drugs, a category where competition has accelerated and where the medicines are quickly curing patients, who then have no need for the drug.
Top Spending Categories: Diabetes, Autoimmune, Cancer
The top spending category is diabetes, which ranks first for Medicaid and Medicare among Prime clients and a close second for commercial clients. Overall, one in every seven dollars of spending, according to the report, went to diabetes.
Among conditions treated by commercial clients, autoimmune diseases (such as rheumatoid arthritis, psoriasis and Crohn’s) ranked first. In fourth and fifth places were cancer and multiple sclerosis. Together, these three conditions represent one-quarter of all Prime patient spending – and all those conditions are treated with specialty drugs. Spending on such medicines is rising: by 25% for autoimmune, 20% for cancer and 4% for MS during the first six months of 2017 compared with the same period last year. By contrast, for six of the seven other top 10 drugs on the Prime list, spending fell.
The best antidote for rising prices is competition, which is having a powerful effect on traditional drugs. But specialty drugs are another matter. They are often biological products, and, as we noted in our last newsletter (see Issue No. 22 here), the competitive process that has worked with generics for traditional medicines is often thwarted for biologics. If policy makers truly want to have an effect on drug prices, they should turn their attention to clearing a path for biosimilars.
The Role of Drugs in Overall Health-Cost Increases
Altarum Institute’s Center for Sustainable Health Spending last week came out with data through Sept. 30, and the numbers provide important perspective on the real role that drug spending plays in overall health costs.
For example, let’s compare spending over the two-period ending this September. According to the Altarum data, total national health spending rose by $288 billion. Of that increase, hospital spending accounted for $76 billion; physician and clinical spending, $65 billion; and pharmaceuticals, $31 billion. A category termed “Administration and net cost of health insurance expenditures” registered an increase of $33 billion.
Here’s another way to look at the two-year rise…
Calculations based on Health Sector Economic Indicators, through September 2017;
Altarum Institute’s Center for Sustainable Health Spending
These figures, of course, do not say anything about the quality of the treatment provided. For drugs, at least, innovation is providing helping people live better and longer. That extra $50 or so a year is buying better medicines.
By the way, health spending overall increased 4.3% for the year ending Sept. 30, compared with an increase of 3.7% for GDP – not a lot of difference.
Still, there’s good reason to be worried about how much we spend on health care – now 18% of GDP or about twice as much as the average developed nation. This difference is exaggerated by the lack of social spending in the U.S. compared to other countries. Spending on family benefits and incapacity accrues to good health, and, as a proportion of GDP, France, for example, spends half-again as much as the United States. Still, we can’t address costs coherently unless we peel away the mythology and look straight at the facts.
It’s Not Surprising That the U.S. Spends More on Health Care Than
Other Countries; We’re Richer
The focus on how much we spend on health care, however, is distracting us from concentrating on the real problem: how we spend those health-care dollars. At 18% of GDP, the U.S. does indeed spend more than any other country in the Organization for Economic Co-operation and Development, or OECD. But this should not be surprising.
First, when one adds in social spending, which includes family benefits, incapacity and other activities that impact health, the proportion of total spending to GDP is about the same. The U.S. devotes about 19% to social spending while many countries in the OECD spend over 25%., including Denmark, at 29%, and France, at 32%. Second, the fact that the U.S. spends more on health care is entirely expected when one considers the wealth and income of the United States. For example, the per-capita GDP of the U.S. is 46% greater than that of the average nation in the European Union and 39% greater than Japan’s.
Richer nations naturally tend to spend more on things that improve overall quality of life. And health care – along with education and entertainment -- tops the list. So the fact that the U.S. spends more on health care proves only that the U.S. is a wealthy country. What we really need to know is what is causing the inefficiencies in our system and what do we need to do to fix the problem. We can’t address costs coherently unless we peel away the mythology and look straight at the facts.
First Study of Multi-Year Cancer Costs
A good example of a clear-eyed view comes from a study by Gabriela Dieguez, Christine Ferro and Bruce Pyenson of the research firm Millman Inc., presented Nov. 7 to the Cancer Innovation Coalition. The study represented the first multi-year research into the costs of cancer. Specifically, the researchers examined records of 145 million Americans with commercial insurance and looked at treatment for lung, colorectal and breast cancers, starting a year before diagnosis and ending three years after diagnosis.
Over the entire four-year period, a patient with lung cancer incurred $282,000 in costs; with colorectal cancer, $165,000; breast cancer, $101,000 (all cancers in the study were diagnosed in 2011). Out-of-pocket costs were $11,000 for lung and $8,000 for both colorectal and breast cancers.
The researchers also examined the categories in which the costs were incurred, and the results are eye-opening. The costs of “chemotherapy, chemotherapy administration, and related drugs (including related outpatient and professional services)” were, of course, roughly zero before diagnosis. About a year later, cumulative cancer-drug costs had slowly increased to about 20% of cumulative total costs and levelled off there for the remaining two years of the study. By contrast, cumulative hospital inpatient, professional services (unrelated to chemo), and facility costs peaked at over 80% of total spending shortly after diagnosis, then levelled off a year later at 60%.
As for monthly out-of-pocket (OOP) costs, let’s use colorectal cancer as an example. Those monthly costs peak in the month of diagnosis at $914, then quickly drop to about $100. Cancer drugs accounts for an average of about 10% of OOP costs for the entire three-year post-diagnosis period.
The cost of cancer drugs gets a great deal of publicity, but, in reality, the Millman researchers show, those costs represent a small proportion of total treatment expenditures and an even smaller proportion of out-of-pocket costs.
Again, to get health-care policy right, we need to deal with fact and not myth.
A Flawed Study Fails to Refute the Basic Fact That Drugs Are Risky and Costly to Develop.
It’s Time to Focus on Supply and Demand.
Developing a drug is a risky and hugely expensive undertaking. Some 90% of publicly traded biopharmaceutical companies are not expected to make a profitthis year, and, profitable or not, such companies require massive investments in research and development.
How massive? The most thorough study of what it costs to a develop single new drug was conducted by three PhD economists: Joseph A. DiMasi, director of economic analysis at the Tufts Center for the Study of Drug Development, Henry G. Grabowski of Duke, and Ronald W. Hansen of the University of Rochester. Their papers on the subject go back to 1979 and have been cited by other researchers, including those of the U.S. government, to analyze policy questions. DiMasi and Grabowski wrote the chapter, “R&D Costs and Returns to New Drug Development: A Review of the Evidence,” in The Oxford Handbook of the Economics of the Biopharmaceutical Industry.
Tufts Research, Published in 2016, Examined 106 Drugs at Random
The most recent estimates of the three researchers were published in the May 2016 issue of the Journal of Health Economics. They looked at the research and development costs of 106 randomly selected drugs from a survey of 10 pharmaceutical firms.
These data were used to estimate the average pre-tax cost of new drug and biologics development. The costs of compounds abandoned during testing were linked to the costs of compounds that obtained marketing approval.
The researchers determined that the average out-of-pocket cost per new compound approved by the Food & Drug Administration was $1.4 billion.
They then capitalized out-of-pocket costs incurred during the process at a discount rate of 10.5% (in other words, this was the annual cost of the capital that was deployed for the research and could have earned money elsewhere). That exercise yielded a pre-approval cost estimate of $2.6 billion. They then added post-approval R&D costs and finished with an estimate of $2.9 billion, all in 2013 dollars.
DiMasi and his colleagues did not simply say: OK, here is what was spent for R&D on a particular drug that was approved by the FDA. They appropriately added in costs for drugs that underwent costly R&D but were not approved. The Tufts study, as it is often called, also appropriately adds in the cost of capital – standard operating procedure for an analysis of this sort.
Critics, who sometimes have a political agenda – see, for example, this press release from 2001, issued by Ralph Nader’s organization – have attacked the Tufts research for years, offering much lower figures for the cost of developing a drug. But the critics’ work has been consistently inadequate.
Study by Two MDs Looks at 10 Drugs That Were Out-of-the-Gate Winners
In this vein comes a study published by JAMA Internal Medicine on Sept. 11 by Vinay Prassad of the Oregon Health and Science University and Sham Mailankody of Memorial Sloan Kettering Cancer Center. Both are medical doctors (Prassad also has a master’s degree in public health), but neither is an economist. And it shows.
Prassad and Mailankody took what can only be called a quick-and-dirty approach. That is not necessarily a disparagement. Great economics papers are often simple and elegant. In this case, the researchers looked at only 10 drugs, produced by 10 companies. Each of the companies received FDA approval for its drug between 2006 and 2015 and had no drugs on the market prior to the approval. The authors used filings with the U.S. Securities & Exchange Commission to determine R&D spending by the companies during the period when the successful drugs were under development.
They found that the median cost of R&D was $648 million. They added another $109 million for a 7% per annual cost of capital or $145 million for a 9% cost of capital. Either way, their figures are less than one-third those that DiMasio and colleagues came up with.
The study, however, contained serious deficiencies. Quoted by STAT News, Bernard Munos, a senior fellow at FasterCures, said, “The study starts with a good intent, but suffers from severe flaws that invalidate its results…. An informed debate on R&D costs and drug prices must rest on rigorous analyses. This one fails the test.”
The biggest problem is that Prassad and Mailankody focus only on winners. They looked at small companies that each gained FDA approval for their first drug. Of course, such companies will have lower costs than companies that have several successful drugs and many more drugs that fail to gain approval.
Study Understates the Cost of Clinical Failure
Failure is norm for developing cancer drugs. These 10 companies were exceptions – and good for them, but bad for anyone trying to make important policy decisions based on their experience. Between 1998 and 2014, only 10 drugs were approved by the FDA for lung cancer, compared with 167 unsuccessful drugs in the clinical development pipeline. That is a success rate of just 6%; for melanoma, the success rate during the period was 7%; for brain cancer, 4%.
The authors say they accounted for failures by including R&D costs associated with all the not-yet-approved drugs in the portfolios of the 10 companies. But even if all those drugs fail, the companies in the study would achieve an astounding success rate of 23%.
As DiMasi himself, interviewed by STAT News, put it:
There are a number of serious flaws with this study…. Most importantly, it includes only a small set of companies that were relatively successful in development during the period they analyzed. As a result, it inadequately adjusts for risks across the industry and so undercounts the costs of investigational cancer drug failures.
Derek Lowe’s blog In the Pipeline, published by Science Translational Medicine, writes that neglecting to account adequately for the cost of failure “sinks the entire paper.” He continues,
We have in this business somewhere around a 90% failure rate in the clinic. Picking companies’ first approvals disproportionately selects for the fortunate ones who succeeded their first time out. In other words, this estimate ignores (as much as possible) the cost of clinical failure, and that cost is one of the central facts of the entire drug industry.
Evidence of this “central fact” is that companies are willing to pay huge sums in order to avoid failure risks. In 2011, for example, Gilead Sciences paid $11 billion to purchase Pharmasset, a company that was developing – but had not even gained approval for – a Hepatitis C drug.
Out of 127 Attempts, Just 4 Medicines for Alzheimer’s Symptoms
By downplaying failure, the Prassad-Mailankody study misses the main dynamic of drug discovery. Only 0.2% of molecules show enough promise for testing in humans and only 20% of medicines starting phase I human clinical trials receive FDA approval. Since 1998, there have been 127 projects started by the biopharmaceutical industry for treatment of symptoms associated with Alzheimer’s Disease, and only four medicines have been approved. But failures provide lessons that lead to innovation – as recent approvals for lung-cancer medicines have shown.
Another example of how years of failed research can lead to improved care is in Chronic Myelogenous Leukemia (CML). After the approval of the first breakthrough therapy for CML and multiple agents afterwards, the five-year survival of patients afflicted with this deadly disease has increased from 31% to 89%. This achievement is due to the resiliency of researchers undeterred by initial failure.
To gain FDA approval for a single product, researchers, on average, test more than 10,000 promising compounds. More than 200 scientists work for close to 15 years, conducting more than a dozen human clinical trials involving over 3,000 patient volunteers.
Other Problems With the Prassad Study
There were other problems with the Prassad-Mailankody study as well. It did not include early R&D costs, nor the post-approval costs that were cited in the 2016 Tufts study. In addition, it understated capital costs at 7% to 9% while the Tufts research used 10.5%, based on a widely accepted capital-asset pricing model. And, by focusing on smaller companies, the researchers gave a distorted picture by minimizing failure. Large, established biopharmaceutical companies have significantly higher failure rates because they stay in business after several iterations of unsuccessful tries. On the other hand, smaller companies that do not succeed immediately tend to quickly faze out of the arena of medical research.
More important, unlike Prassad-Mailankody, the Tufts study is a serious piece of research, built on detailed evidence developed over many years. In a section of their 2016 paper, the authors carefully examine and respond persuasively to the arguments of their critics. The 2016 paper is the fourth in a series of analyses of drug costs by DiMasio and his colleagues, and it found that out-of-pocket costs had increased at an annual rate of 9.3% between the 1990s and the 2000s and early 2010s.
It is an undeniable fact that developing a new drug is expensive and getting more so. Companies that develop successful drugs are rewarded, and then plow their profits into more R&D in the hopes of developing future successful drugs.
The three largest U.S. pharmaceutical companies by revenues last year produced average returns on total capital of 15% and returns on share equity of 20%. Those returns are good but hardly out of line with other well-run companies, such as Microsoft, with capital returns of 20% and equity returns of 31%, or Procter & Gamble, with returns of 15% and 19%, respectively.
Drug-company returns are absolutely necessary for new research. After all, the funding (the nearly $3 billion per drug) comes from private investors. They won’t invest – and innovation won’t be forthcoming – without the generation of adequate profits.
In the end, we can’t have a meaningful discussion of health-care costs unless we approach the basic facts in a rigorous, dispassionate fashion. The Tufts study has done that, and, try as they might, critics can’t lay a glove on it.
Americans are choosing a new kind of health-insurance policy – one that may appear to lighten their financial burden but, for many families, is actually increasing it, possibly to the detriment of this country’s overall health.
The new policy has grown popular because premiums for traditional policies keep rising. The alternative is what the insurance industry calls a “consumer-driven health plan” or CDHP. Its features are a high deductible before insurance kicks in, high co-payments and co-insurance after beneficiaries get beyond the deductible, and often a tax-advantaged health savings account (HSA) or a health-reimbursement plan funded by an employer.
“Consumer cost-sharing for medical care and medications is high and getting higher,” reported the Center for Value-Based Insurance Design recently. “The average deductible for employer-sponsored single coverage increased by more than 250% between 2006 and 2016.” In 2016 alone, the average deductible for employees with single coverage jumped 10.1%. according to a new report by the State Health Access Data Assistance Center (SHADAC) at the University of Minnesota.
Some 57% of large employers (at least 1,000 workers) offered a high-deductible (HD) plan in 2016, up from just 8% in 2005, according to the latest employer health benefits survey by the Kaiser Family Foundation. For all businesses, the proportion of enrolled employees in such plans jumped from 30% in 2013 to 43% last year.
The Kaiser study found that the annual premium for the average HD policy with a qualified HSA plan in 2016 was $16,246, or 13% less than a non-HD policy. Of that $16,246, the employee paid an average yearly premium of just $3,930, a 31% reduction from a traditional policy. (On top of that, employees contributed an average of about $100 a month to a tax-preferred HSA.)
These new HD policies have produced a revolution, but what are the consequences for America’s health?
Drug Insurance Has It Backwards
We can divide overall health-insurance coverage into three big categories: hospitals, pharmaceuticals, and professional and other expenses. The actuarial value – that is, the percentage of total average costs for benefits that a plan will cover – is 72% for hospitals, 71% for professionals and other, and just 54% for drugs.
This configuration makes little sense. Drugs are what you take to avoidhaving to go to the hospital. A rational health insurance plan would weight drugs at least equally and probably more heavily than hospitals and doctors.
Medicare has the same problem. Hospitals represent 40% of total Medicare spending and only 9% of the average recipient’s out-of-pocket costs: a ratio of 4.4. But pharmaceuticals represent 12% of total spending and 19% of out-of-pocket costs: a ratio of 0.6!
No wonder Americans feel so burdened by drug costs: Their insurance policies discriminate against medicines.
Dive deeper and you find the problem is compounded. The typical policy has its coverage backwards. Insured Americans pay from zero to a few dollars for a monthly prescription for generics, such as statin drugs to lower cholesterol, but they can face out-of-pocket expenses well into the thousands of dollars for a specialty cancer drug.
Isn’t insurance supposed to reimburse big, unexpected costs that you can’t manage? Your auto insurance pays you when someone wrecks your car, not when you need an oil change.
The few patients with chronic, complex illnesses like cancer and multiple sclerosis should be the ones who benefit from insurance; instead, they are the victims of an upside-down system, as
Adam Fein explains in the June 1 edition of Drug Channels.
The Tyranny of Tiers
Insurers, through their pharmaceutical benefit managers, apply different benefits to different “tiers,” or drug categories. As the tiers rise, patients usually shoulder a heavier burden in coinsurance or copayments.
The complete details can be found in the Kaiser Family Foundation’s Annual Survey of Employer Health Benefits for 2016. One highlight is that more and more insurers are adding a fourth, fifth, or even sixth tier. Last year, 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. Another highlight is that copayments (that is, what insured people pay out of their own pockets) are, on average, more than nine times higher for fourth-tier specialty drugs than they are for first-tier generics. That multiple has nearly doubled since 2004.
As a result, writes Fein, even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.”
Here is what insured patients pay for a month’s prescription in a typical five-tier plan, according to BCBS Network of Michigan website:
Tier 1: Preferred, commonly prescribed generic drugs: $3 to $5, depending on the terms of the specific policy.
Tier 2: More expensive generics: $10 to $20.
Tier 3: Preferred brand-name drugs: $35 to $47.
Tier 4: Non-preferred brand-name and generic drugs: 45% of the drug’s retail cost.
Tier 5: Specialty drugs: between 25% and 33% of the cost.
As you can see, these policies are exceptionally generous for the least expensive drugs and generous as well for “preferred” drugs, that is, medicines for which the insurer has negotiated lower prices than for clinically equivalent non-preferred drugs. But specialty drugs can require large outlays from insured patients.
One of the most-prescribed drugs in the U.S. is atorvastatin, the generic equivalent of Lipitor, for patients with high cholesterol. According to Drugs.com, an uninsured person can purchase atorvastatin for as little as $18.46 for a 90-day supply from a pharmacy. As a tier-1 drug, atorvastatin costs between $7.50 and $15 for the same amount of pills from a typical insurer. What is the point – besides marketing – of such a negligible reimbursement?
By contrast, Express Scripts, the largest pharmaceutical benefit manager, reports that in 2016, the average prescription for specialty drugs to treat inflammatory conditions like rheumatoid arthritis and Crohn’s Disease cost $3,600 per month, or more than $40,000 a year. The average specialty drug for multiple sclerosis cost $5,100 per month, or more than $60,000 per year.
Consider an anti-inflammatory specialty drug at $40,000 annually. Assume you have already met your policy’s $3,000 deductible. Your obligation is $10,000 and $13,333 for the drug over the course of year. Out-of-pocket maximum spendingper year in the Marketplaces created by the Affordable Care Act are $7,150 for an individual and $14,300 for a family, and, according to the Kaiser survey, one-third of HD plans have maximums above $5,000 and half have maximums above $4,000.
For most Americans, meeting such coinsurance requirements (that is, the part they themselves pay) for specialty drugs is a significant financial hardship.
Dangerous Consequences of High-Deductible Policies
The big problem is not merely the out-of-pocket cost itself. It is what patients do to avoid the cost. When it becomes too high, patients don’t pay it.
The Center for Value-Based Design notes that while “cost-sharing is a useful tool for payers and purchasers to encourage prudent use of health care dollars,” putting too heavy a burden on patients can have “deleterious consequences.” We will get to the question of “prudent use” shortly. Focus now on the “deleterious consequences.” Numerous studies show that patients tend to cut back on their use of medications, and result, says the Center, is often “increased acute care utilization and poorer health outcomes.”
Research has consistently found that patients simply don’t fill prescriptions when costs get too high – no matter how beneficial the drugs may be. A study in the Journal of Oncologic Practice by Sonia Streeter and colleagues found that “abandonment” rates for cancer-drug prescriptions soar when the out-of-pocket costs exceed $100. The researchers found that one-tenth of new oncolytic prescriptions went unfilled and that “claims with cost sharing greater than $500 were four times more likely to be abandoned than claims with cost sharing of $100 or less.” And this is cancer, a disease that everyone knows is frequently fatal.
Consider two studies of how patients with diabetes (America’s costliest disease, with $101 billion in spending in 2013) responded to policies with high deductibles.
Research by David Rabin of Georgetown University and colleagues, published in the journal Diabetes Care in February, found, “Private insurance with a deductible substantially and problematically reduces medical service use for lower-income insured respondents with diabetes who have an HD [an insurance policy with a high deductible: more than $1,000 for an individual and $2,400 for a family]; these patients are more likely to report forgoing needed medical services.” A separate study by James Frank Wharam and five colleagues, published in March in JAMA Internal Medicine, found that low-income Americans with a diagnosis of diabetes who had high-deductible health plans “experienced major increases in emergency department visits for preventable acute diabetes complication.”
Some 27% of Americans with a CDHP policy in 2015 did not file a single health-insurance claim. Take a look at Table 3 here. According to the Wall Street Journal, “The reason, say economists, is likely twofold: Healthier workers who need less medical care find high-deductible insurance more attractive, and higher out-of-pocket costs associated with the plans dissuade workers from seeking care in the first place.”
The latter reason should raise concern. The Centers for Disease Control, for example, found that 8.5% of holders of high-deductible policies said that they had delayed seeking care in the past 12 months; that is more than double the rate for holders of traditional policies.
How Does Cost-Sharing Affect Health Decisions?
A study in the Journal of Occupational and Environmental Medicine in 2009 analyzed claims from a national employer that started offering only CDHPs. The result was “lower utilization” for outpatient and inpatient visits and lab services and “lower adherence” for medications.
A more recent and more granular approach to the issue of HD policies and health-care decisions came in a working paper two years ago by four scholars, including Amitabh Chandra, director of health policy research at the Harvard Kennedy School of Government. Published by the prestigious National Bureau of Economic Research, the paper’s title was: “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics.”
The researchers received access to data from a business with 75,000 employees that had recently switched from an unusually generous self-insured health plan that covered all employee expenses to a more conventional plan with a $3,750 deductible. To ease the transition, the unnamed company – which was apparently Microsoft – subsidized each employee with $3,750 for an HSA.
Overall, employees reduced their spending by an average of 13% compared with spending under the previous plan. And the sickest employees reduced spending even more – by an average of 20%. Here is what was disturbing: the primary reason for the reductions was not bargain-hunting but cutbacks in care.
The authors of the study wrote, “We find no evidence of consumers learning to price shop after two years in high-deductible coverage” – despite their new incentive to find the lowest price for equivalent treatments and thus cut their out-of-pocket expenses. Instead, the research discovered “outright quantity reductions whereby consumers receive less care.” In other words, consumers avoided using the health-care system. One of the areas of cutbacks was preventive care: “Specifically, for example, consumers reduce colonoscopies by 31.6% and care that is considered preventive with a prior diagnosis (e.g. diabetes) by 12.2%.”
The most striking behavior was skimping during the period when employees were below the deductible. The authors calculated that the decline in spending during this period was 42%.
Even worse, employees who were sickest were the most likely to reduce care when under the deductible – even though they almost certainly knew that, based on their health history, they would exceed the deductible later in the year. In aninterview with Vox, one of the authors, Jonathan Kolstad of the University of California at Berkeley, explained,
“People who are the most likely to go past the deductible also cut back by the most, and they did that entirely under the deductible," Kolstad says. "They respond to the spot pricing [the price of receiving care right then], and that leads to a very large reduction in care. We don't find any evidence they look for a lower cost. They just don't go.”
Looking at all employees, the researchers found, “Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g. preventive services) and potentially wasteful care (e.g. imaging services).” Cutbacks averaged 9% for inpatient care, 9% for outpatient, and 25% for emergency-room care.
But perhaps most troubling was a reduction averaging 16% for pharmaceuticals. Medicines often prevent patients from landing in the hospital, where costs are especially high.
That result also emerged by earlier work by Paul Fronstin of the Employee Benefit Research Institute and colleagues, who looked at the effect of a change from an employer that switched to a CDHP-only plan on workers and dependents with one or more of five chronic conditions. These researchers looked only at use and adherence to medicines and compared their data with findings from a control group that stuck to a standard preferred-provider-organization (PPO) plan. The research, published in the American Journal of Managed Care in December 2013, found that a CDHP “full replacement was associated with reduced adherence for 4 of the 5 conditions” (hypertension, dyslipidemia, diabetes, and depression, but not asthma/COPD) when compared with the control group on the PPO. The conclusion: “If this reduced adherence is sustained, it could adversely impact productivity and medical costs.”
As for those medical costs: A study published in Health Affairs found that an extra $1 spent on medicines for patients with congestive heart failure, high blood pressure, diabetes and high cholesterol can generate $3 to $10 in savings on emergency room visits and hospitalizations.
A 2012 study by Ashish Jha of the Harvard School of Public Health and four colleagues found that “improved adherence to diabetes medication could avert 699,000 emergency department visits and 341,000 hospitalizations annually, for a saving of $4.7 billion. Eliminating the loss of adherence (which occurred in one out of every four patients in our sample) would lead to another $3.6 billion in savings, for a combined potential savings of $8.3 billion. These benefits were particularly pronounced among poor and minority patients.”
Research shows clearly that public-policy and industry practice should be directed at encouraging people to fill their prescriptions and take their medicines. We seem to be moving in the opposite direction.
Reconsider Whether These New Policies Help or Hurt
The trend toward high-deductible policies with insured families paying an especially large proportion of the bill for specialty drugs is accelerating. While there may be some benefits to this shift, there are potentially massive liabilities. The main one is that Americans – including the sickest among us – will reduce needed care, including medicines. This change in behavior could, in the end, lead to more spending, with later, more expensive interventions. It will certainly exacerbate the main driver of health-care costs: poor health.
Policy makers as well as insurers and providers should consider carefully whether it is time to discourage this trend and, instead, set good health – which in the long run will reduce overall costs – as the top national priority.
For more information,
Pharmaceuticals are often portrayed by politicians and the media as the main drivers of health-care costs. When we look at the relative share of spending, however, we find that hospitals are the largest category, by far. According tonew data from the Altarum Institute, annual hospital expenditures totaled $1.133 trillion through June. That compares with $708 billion for physician and clinical spending and $359 billion for prescription drugs.
Another way of measuring this spending is against gross domestic product. Hospital costs are 5.9% of GDP; physician and clinical, 3.7%; pharmaceuticals, 1.9%.
If policy makers really want to try to control health-care spending, they should focus where the money is: America’s 5,564 hospitals, most of which are non-profits. The hospital sector seems to offer excellent opportunities for cutting or restraining overall health-care costs – especially considering that the key metrics for hospital use are dropping. Still, lowering costs won’t be easy. The place to begin is a nuanced, careful discussion of how American spends its hospital dollars.
More for Less
In late June, H-CUP, the Healthcare Cost and Utilization Project, a federal-state-industry partnership, issued a report titled, “Trends in Hospital Inpatient Stays in the United States, 2005-2014.” The results are shocking. While the U.S. population has been rising – and the population of seniors has been rising even more – inpatient hospital stays have been falling, from 38.2 million in 2010 to 35.4 million in 2014 (the most recent year for these data). Surgical inpatient stays dropped from 8.1 million in 2008 to 7 million in 2014, a 12.5% decline in just six years.
This trend applies to both men and women and cuts across all age groups. For example, the Centers for Disease Control reports that between 1975 and 2015, the proportion of women aged 45 to 64 who had at least one hospital stay in the past 12 months fell from 12% to 8%.
The H-CUP study found that, between 2005 and 2014, total hospital stays declined 6.6%, but the average (mean) cost per stay, adjusted for inflation rose a total of 12.7%. The cost of a maternal (childbirth) hospital stay rose 12.8% (again, adjusted for inflation); neonatal stay, 19.2%; surgical, 16.4%; injury, 17.1%.
Inflation during the 2005-2014 period totaled 19.3%, so, in terms of actual dollars paid out, hospital costs rose by about one-third in less than a decade.
A Quiet Revolution
A combination of factors is reducing hospital stays. For example, better medicines to treat high cholesterol and blood pressure mean fewer people are suffering crippling heart disease. The H-CUP study found that over the nine years “the number of stays for coronary atherosclerosis and other heart disease decreased by 63 percent (from 1,076,100 to 397,000)… Stays for congestive heart failure decreased by 14.4 percent (from 1,053,100 to 901,400).”
The report also points to “growing efforts to reduce unnecessary hospitalizations, greater use of chronic disease management programs, and a shift toward outpatient treatment.”
The CDC refers to changes in Medicare, which “implemented a prospective payment system for hospital care which paid a flat rate per case based on diagnosis rather than reimbursing costs.” In other words, hospitals had less financial incentive to put patients in beds and keep them there. Also, says the CDC, “technological innovations have reduced recovery times and allowed some formerly hospital inpatient procedures, such as laparoscopic surgery and cataract removal, to take place in outpatient settings.”
Becker’s Hospital Review, a trade publication, reports that “there was an average of 2,174 outpatient visits per 1,000 people in 2014, up from an average of 2,000 visits in 2007, supporting the trend of inpatient surgeries moving to the outpatient setting.”
The results are nothing short of a quiet revolution. From 1990 to 2014, says Becker’s, the average length of a hospital stay fell from nine days to just five. Those five days, however, aren’t cheap. The average cost for an inpatient stay(not counting procedures such as surgery) at a non-profit hospital during a period that long is about $12,000.
The CDC reports that, from 1975 and 2014, the number of hospital beds at community hospitals (which account for 85% of all U.S. hospitals) fell from 4.6 per 1,000 population to just 2.5. The occupancy rate for those fewer hospital beds declined from 75% to 63%. Emergency room visits are also falling, a decline that began even before the Affordable Care Act was implemented.
In addition, the total number of U.S. hospitals dropped from 7,156 to 5,627 from 1975 to 2014, a period when U.S. population rose by 100 million.
Resolving the Paradox
But, again, if demand for hospital beds is declining, why are costs rising? On page 316 of that same CDC document that shows a shrinkage of hospitals and overnight stays, it’s reported that hospital spending rose from $50 billion in 1975 to $981 billion in 2014. Inflation alone can’t explain that near-20-fold increase.
There is no single answer for exploding expenditures. One factor, certainly, is a health-care reimbursement system that has grown more and more complicated. As The Economist magazine reported in its Aug. 12 issue:
That complexity contributes to costs. America spends vastly more on administration [than Europe]: 8% of health spending versus 2.5% in Britain. As of 2013, Duke University hospital had 400 more billing clerks (1,300) than hospital beds (900).
These bookkeeping entanglements also affect physician efficiency. A time-and-motion study published last year in Annals of Internal Medicine found:
For every hour physicians provide direct clinical face time to patients, nearly 2 additional hours is spent on EHR and desk work within the clinic day. Outside office hours, physicians spend another 1 to 2 hours of personal time each night doing additional computer and other clerical work.
Another factor is the increase in overall labor costs. Despite fewer hospitals and fewer beds, employment at hospitals rose from 4.5 million in May 2007 to 5.1 million seven years later, according to the Bureau of Labor Statistics – an increase of 13%. By contrast, total U.S. employment during this period rose just 4%. Salaries and other labor costs are also rising. For example, Cleveland Clinic, the 13th largest hospital in America, last year spent $4.5 billion on “salaries, wages and benefits,” or 63% of its total expenses. Compensation costs there rose 13% in a single year.
Research by Michael Mandel, published May 28 with data from the Bureau of Economic Analysis, found that rising labor costs – mainly associated with hospitals -- accounted for 44% of the increase in health care spending last year. “All told,” wrote Mandel, chief economic strategist of the Progressive Policy Institute, “the increase in labor compensation for health care workers is 4x the increase in net spending on pharmaceuticals.”
Yet another reason for increased costs is consolidation. Between 2011 and 2015, the number of physician practices owned by hospitals increased 86%. Four out of 10 physicians are now employed by hospitals. Both physicians and hospitals are responding to economic incentives. For example, as the publication Medical Economics reported last year: “Medicare pays more for the same services delivered in the hospital outpatient setting versus the physician office setting.”
A study published in Health Affairs in 2014 found “that an increase in the market share of hospitals with the tightest vertically integrated relationship with physicians--ownership of physician practices--was associated with higher hospital prices and spending.”
In testimony before a California state legislative committee last year, Paul Ginsburg, an economist with the Brookings Institution, concluded: "Health care markets are becoming more consolidated, causing price increases for purchasers of health services, and this trend will continue for the foreseeable future despite anti-trust enforcement.”
There is no simple answer to the paradox of hospital costs, but it is clear that the best minds in America should be focused on it. According to the Centers for Disease Control, between 2000 and 2015, annual spending on health care rose by about $1.8 trillion. Two-thirds of that increase came from three parts of the system. Spending on…
If you wanted to solve the problem of rising costs, where would you look first? The answer jumps out – especially when you realize that people are spending less and less time in hospitals having surgery or lying on their backs recovering.
It stands to reason that an unhealthy person will demand more from a health-care system than a healthy person. Illness can strike anyone at any time, but certain behaviors make people more vulnerable to diseases – especially chronic diseases that are expensive to treat.
Consider the three most costly conditions in the United States. According to a major study published in JAMA last December, Americans in 2013 spent $101 billion on diabetes, $88.1 billion on ischemic heart disease and $87.6 billion on lower back pain. Some 90% of all U.S. health spending is devoted to patients with at least one chronic condition, according to a RAND Corporation reportthis year.
The JAMA study’s authors, led by Joseph L. Dieleman of the Institute for Health Metrics and Evaluation in Seattle, noted that diabetes, ischemic heart disease, lower back pain, plus several others among the 20 most costly conditions…
have an underlying health burden nearly exclusively attributable to modifiable risk factors. For example, diabetes was 100% attributed to behavioral or metabolic risk factors that included diet, obesity, high fasting plasma glucose, tobacco use, and low physical activity. Similarly, IHD [ischemic heart disease], chronic obstructive pulmonary disease, and cerebrovascular disease each have more than 78% of their disease burden attributable to similar risks.
Any serious, systematic discussion of health-care costs has to look at the demand side – at the unhealthy behaviors that cause Americans to spend more than one-sixth of our GDP on health care – by far the highest proportionof economic output among all developed countries.
Perhaps our high rate of health-care spending is not as confounding as many think. Paraphrasing James Carville’s famous comment about Bill Clinton’s election, we might conclude, “It’s the health, stupid!”
The Impact of Obesity, Drinking, and Smoking
on Disability and Longevity
Two new studies show the powerful effect of unhealthy behaviors. Research by Neil Mehta of the University of Michigan and Mikko Myrskyla of the Max Planck Institute looked at the impact of smoking, obesity, and alcohol consumption on disability and longevity. The results were published in the August issue ofHealth Affairs.
Using data from the Health and Retirement Study, the authors examined a sample of 14,804 respondents ages 50 to 74 in 1998 and looked at the average (mean) age at the first incident of disability among those in the sample. (Disability is a good marker for significant and expensive disease. It was defined as having a limitation in at least one of five daily activities: dressing, bathing, getting in or out of bed, walking, and eating.) Mehta and Myrskyla then looked at metrics involving obesity, smoking, and alcohol consumption.
The authors judged that the effects of behavioral risks on health were “massively damaging.” For example, women who were obese became disabled, on average, at age 63 while women who were not obese, did not smoke, and who used alcohol moderately did not have her first incident of disability until age 75.2 – so the penalty, compared with an obese woman, was 12 years; for men, the penalty was seven years.
(Obesity was defined as having a body mass index of 30 or greater. An example is a woman who is 5 feet-5 inches and weighs 180 pounds or more.)
The authors also found:
A fifty-year-old woman who has never smoked, is not obese, and drinks moderately will live until she’s almost 89, roughly twelve years longer than a fifty-year-old obese woman who ever smoked and does not drink moderately. For men, the difference in life expectancy between these two categories is slightly more than eleven years.
The researchers discovered as well that “people with multiple behavioral risk factors not only live shorter lives than those without these factors but also experience an extended time disabled.” “By contrast, compared to the whole U.S. population,” those who “had never smoked, who were not obese and who consumed alcohol moderately…experienced a delay in the onset of disability of up to six years.”
While cigarette smoking is on the decline, rates of having smoked -- among middle-aged Americans, especially -- are still high, about one adult in six. (Separately, the Centers for Disease Control has found that disabled people are 50% more likely to smoke cigarettes than non-disabled.)
Obesity continues to plague this country. In 1990, just 11.6% of Americans were obese; today, the figure is 29.8%. One reason is lack of lack of exercise. According to the United Health Foundation, “For the past 15 years, the prevalence of physical inactivity among adults has hovered around 25%.” Meanwhile, excessive alcohol use is causing “fetal damage, liver diseases, hypertension, cardiovascular diseases, and other major health problems.” The U.S. is suffering an annual average of 87,798 alcohol-attributable deaths and 2.5 million years of potential life lost. Mainly because of opioids, drug-overdose deaths have tripled since 2000.
Meta and Myskyla found, incredibly, that “nearly 80 percent of Americans reach their fifties having smoked cigarettes, been obese, or both.”
The irstudy does not look specifically at the costs of treating disability-inducing diseases, the costs of housing or otherwise caring for disabled seniors, or the loss to economic production of their absence from the work force. Clearly, those costs are enormous.
How Weight Gain Contributes to Chronic Disease
The second new study, published as an original investigation in JAMA on July 18, looked at the effects of weight gain on health. The nine authors – most of them affiliated with the Harvard Medical School – examined 118,000 men and women from age 18 or 21 to age 55. They found that “moderate weight gain from early to middle adulthood was associated with significantly increased risk of major chronic diseases and mortality.” Specifically, compared with those who maintained their weight from early to middle adulthood (gaining no more than 5.5 pounds), those who gained a moderate amount of weight (5.5 to 22 pounds) had increased incidence of type 2 diabetes, cardiovascular disease, and obesity-related cancer.
For every 11 pounds gained during those 35- and 37-year periods, Americans have:
Comparisons With Other Countries
In neither study, did researchers compare outcomes with other countries – though it would be a good idea for the future. We can see, however, from other research that in the United States the prevalence of both unhealthy behaviors and chronic, disabling disease is higher than other nations.
For example, according to the Organization for Economic Cooperation and Development, “Obesity rates among adults in the United States are the highest among OECD countries.” While smoking rates are fairly low, “by contrast with many other OECD countries, overall alcohol consumption per adult in the United States has gone up since 2000. Whereas alcohol consumption per capita in the United States was more than 10% lower than the OECD average in 2000, it is now equal to the OECD average.”
Also, according to the United Nations Office on Drugs and Crime, the United States, with 4% of global population, accounts for 27% of the world’s drug-related deaths. Our rate of deaths per million people is about 10 times that of Western Europe. Drug use, of course, leads not only to death but, more commonly, to other diseases and disability.
As for the effects of these unhealthy behaviors…
A Commonwealth Fund study looked at the proportion of adults in 11 countries that had multiple chronic conditions. The conditions were joint pain or arthritis, asthma or chronic lung disease, diabetes, heart disease, and hypertension. (Many of these conditions are deeply influenced by unhealthy behaviors.) Researchers found that the U.S. the leader among low-income adults. More than 41% Americans in this category had multiple chronic conditions compared with 23% in France, 24% in Germany, and 32% in the U.K. Among all other adults, the U.S. topped the list again, with 25% of Americans having multiple chronic conditions, far ahead of Canada, in second place, at 18%.
A study by the International Diabetes Federation found that 11% of Americans aged 20 to 79 suffered from the disease – a total of 30 million patients. The U.S. had two-thirds the number of diabetes patients of the other 37 developed nations combined. The U.S. rate was more than double that of such nations as Belgium, Italy, Australia, and the United Kingdom.
The results of unhealthy behaviors are also evidenced by infant mortality, where the U.S. ranks 29th of the 35 developed OECD countries, and life expectancy at birth, where the U.S. ranks 26th, behind nations with much lower incomes per capita, including Slovenia, Chile, and Greece.
Again, the trend is not good. In 1970, life expectancy in the U.S. was one year above the OECD average; today it is 1.7 years below average.
What Can Be Done?
To bring health-care costs down, Americans have to get healthier. The Mehta-Myrskyla study of the benefits of a healthy lifestyle concludes that “the high prevalence of risky behaviors poses a formidable challenge to achieving improvements in population health.” Still, they write:
Evidence shows that population-level behavior profiles can be responsive to large-scale and high-level policy efforts, with some of the most convincing evidence coming from anti-smoking campaigns…. There is also solid evidence of the effectiveness of financial ‘sticks’ such as taxes on cigarettes, alcohol, and potentially beverages and foods associated with obesity.
America is the most unhealthy rich country on earth – and not because of medical resources. Thanks to vast investments in research and development, we produce the best medicines; our acute-care hospitals are unmatched; our physicians are considered the most skilled and innovative. But our resources are being overwhelmed by demand from people whose conditions are often the result of their own unhealthy behaviors.
To change these behaviors, we need to change the incentive structure across the health-care system. Today, that structure is built around sick care, with a focus on treatment and services rather than wellness. There is no accountability for one’s own health. A better structure would compensate physicians for health outcomes and patients for healthy behaviors and choices. Only when we take these steps, will we begin to bend the cost curve in health care and improve outcomes, especially for non-communicable diseases.
Changing unhealthy behaviors is not easy, but the effort must become a major focus of efforts to lower health-care costs.
On a morning in late June, Chris Cuomo was hectoring Sen. Dick Durbin (D-Ill) on CNN’s “New Day” for not doing enough to rein in drug costs. “Senator,” said the TV host, “drug prices are statistically the biggest reason that prices go up.”
Cuomo added, “Look, it's sticking out there as this big, ugly number. It's like 70%. You'll see estimates, that that's how much drug prices are going to go up. [You’re] fighting on all of these other fronts but ignoring the biggest number.” Cuomo concluded, plaintively, “It’s hard to get the people behind you when you don't go after the biggest, you know, the biggest factor in the room.”
Chris Cuomo’s ignorance of the facts about health-care spending is appalling, and he’s hardly alone. Politicians and media figures have been criticizing drug costs for years without showing evidence that they understand the data. The mythology is that powerful.
Just for starters, the “biggest factor in the room” is not prescription drugs but hospital care, which, according to the Centers for Disease Control accounts for three times as much spending. In fact, drugs don’t even rank second. That honor goes to a category termed “physician and clinical services,” with spending double that of drugs.
As for rising costs: pharmaceuticals rank far down the list. For the year 2016, according to the Center for Sustainable Health Spending of the Altarum Institute, here are the increases:
In other words, spending on drugs rose just five-tenths of a percentage point faster than GDP while hospital spending rose nearly two points faster.
“Pharmaceuticals accounted for only 11% of the rise in health care costs in 2016,” according to Michael Mandel, chief economic strategist at the Progressive Policy Institute and former chief economist at Business Week.
And Cuomo says that drugs are “the biggest reason that prices go up”? Hardly.
Not only are drug costs a minor part of the overall health-cost picture, but also the growth of spending on prescription medicines has been slowing.
A recent report from the QintilesIMS Institute projects that “moderating price increases for branded products, and the larger impact of patent expires, will drive net growth in total U.S. [drug] spending of 2-5 percent through 2021.” That 2% to 5% is a far cry from Chris Cuomo’s 70%.
How to Explain the Paradox
So how do we explain the paradox? Drug costs aren’t out of control, yet so many people seem to think they are.
For the answer, we have to distinguish among types of drugs and gain a better understanding of how health insurance works….
For the vast majority of prescriptions that Americans fill, prices are not rising. In fact, they are falling. Look at the 2016 Drug Trend Report, issued by Express Scripts, the largest of the pharmaceutical benefit managers with 83 million members.
Express Scripts divides prescription medicines into two categories – traditional and specialty. For traditional drugs – for instance, statins for lowering cholesterol, amphetamines for attention disorders, diabetes medicines like Lantus and Januvia – average unit costs actually declined, down 2.3% from 2015 to 2016. For specialty drugs – anti-inflammatory medicines like Humira and Enbrel, cancer drugs, and new medicines like Harvoni, that cure Hepatitis C – average unit costs rose at a much faster rate: 6.2% These specialty drugs are also being used more by patients, and total spending on them increased 13.3%, compared with a spending decline of 1% for traditional drugs, including increased use. (The fact that more people are using these drugs is, by the way, a good thing: It means that lives are being saved and lengthened. Before Harvoni, for instance, there was no effective cure for Hepatitis C, a disease that often led to liver cancer or a transplant or death.)
The spending experience of Express Scripts is reflected in the data of the other large PBMs.
As for patients themselves, the QuintilesIMS study found that only 2.3% of all prescriptions required payments by patients of more than $50, and the average amount paid for any prescription in 2016 was just $8.47, down from $9.66 in 2013.
As Carolyn Johnson wrote May 5 in the Washington Post:
There’s widespread outrage about soaring drug prices, but a new report shows that people are, on average, actually paying less for their medications than they did a few years ago.
Johnson also pointed to a Peterson-Kaiser Health System Tracker report last year, which “found a slight decline in personal spending on prescriptions” between 2013 and 2014 (the latest year in the study). In fact, overall out-of-pocket payments by enrollees in health plans rose only from $142 to $144 over a decade.
Out-of-Pocket: 15% for Drugs, But Just 3% for Hospitals
But these numbers must be read in context. On average, out-of-pocket spending as a proportion of total drug costs is very high compared to other parts of the health-care system: 15%, compared with just 3% for hospital costs, according to the Centers for Disease Control.
Those are average figures. Out-of-pocket costs, in real life, are far more of a burden for Americans who need specialty, as opposed to traditional, medicines. If that sounds crazy, blame the structure of insurance policies.
For Traditional Drugs, Competition Puts a Lid on Prices
A major reason overall costs have been held down is competition – especially because of greater use of generic drugs. A report by the U.S. Department of Health and Human Services last year noted that in 2014, prices fell for 65% of the generic drugs prescribed to Medicaid patients. Also last year, an IMS studyfound that the price of generic medicines dropped 79% on average within 12 months of entering the market for the period 2011-13 but only 44% for the period 2002-04.
Said Dr. Gottlieb on CNBC on June 28:
We don't play a role in drug pricing, but we do affect drug competition in terms of getting new drugs on to the market, and create competition to older drugs, particularly with generic drugs.
Specialty drugs, however, are another story. When patients are prescribed one of these innovative medicines, they often have to pay a great deal out of their own pockets.
A System of Tiers
Insurers, through their PBMs, apply different benefits to different tiers. For example, they might pick up the entire tab for drugs in the generic tier and provide more support for preferred brand-name drugs in a slightly higher tier. As the tiers rise, patients usually share more of the burden in coinsurance or copayments.
Specialty drugs are on high tiers, so patients have to pay more for them, and the spread between low and high tiers is widening. As Adam J. Fein explains inDrug Channels: “In 2016, copayments on the fourth tier [were] 9.3x more expensive than those on the first tier, compared with 5.9x in 2004.” The result is that even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.”
Yes, many of these policies limit out of pocket maximum-dollar payments, Fein points out, but, he writes, “one in five workers is in a plan with no out-of-pocket maximum for fourth-tier and specialty drugs.” And look at Medicare Part D, which, with its “doughnut hole,” has no limit on out-of-pocket spending after a patient reaches $8,017.
Writes Fein in his June 1 letter:
These benefit designs essentially discriminate against the very few patients undergoing intensive therapies for such chronic, complex illnesses as cancer, rheumatoid arthritis, multiple sclerosis, and HIV.
What kind of insurance is this, anyway? Insured patients pay zero for generic statin drugs that they have been taking for years but face out-of-pocket payments of tens of thousands of dollars a year for a cancer drug after getting a shocking diagnosis out of the blue.
Health Insurers Have It Exactly Backwards
No wonder politicians are hearing from constituents, and no wonder Chris Cuomo is confused. Health insurers have it exactly backwards, and average Americans are suffering as a result. Insurance is supposed to protect you from the unexpected, from crushing expenses that a household budget can’t manage. Instead, in the United States, health insurance is structured to pay a large proportion of small expenditures while often leaving patients to fend for themselves – or to get help from a charitable foundation – to pay for the big, devastating costs.
Despite these backward policies, some advocates want public policy to exacerbate the situation. Steven Brill, for example, wrote recently in the Washington Post that the Affordable Care Act should be changed to allow insurers to raise the ratio of rates between older and younger Americans from 3-1 to 5-1, to give older Americans greater government subsidies to pay for part of that increase, and to slap “controls on the price of prescription drugs” to pay for the subsidies. Price controls in the U.S. would have the same effect as in Europe and Canada: limiting the access of seniors to the most effective medicines.
Finding ways to reduce health-care costs is a great idea – but only if we look at the facts squarely and recognize where the problems really lie.
The Four Myths
Now, let’s review the myths:
Spending on medicines is out of control.
False. Spending is currently rising between 4% and 5% a year, a rate that is projected to moderate through 2021. Last year’s increase in drug expenditures was lower than the increase in hospital and physician costs..
Prescription drugs are “the biggest factor in the room.”
False. As of April, annual spending on prescription drugs was $355 billion, compared with $1,121 billion for hospitals and $706 billion for physicians and clinical expenses.
Drug prices are crushing most Americans.
False. Most Americans are not being crushed, but all Americans recognized that they could be if they get sick. Average out-of-pocket cost of a prescription is less than $10 – and dropping. Some 88% of prescriptions are for generics. But insurance policies force patients to pay a big chunk of the cost of specialty drugs for such diseases as cancer.
Drug companies are at fault for Americans going broke paying for specialty drugs.
False. The problem is not the price of these drugs, but the way insurance policies are structured. Insurers pay a higher proportion of the cost of old-line generics than they pay for complex specialty medicines. This is the opposite of how insurance is supposed to work.
This is not to say that policy makers should sit on their hands. The best ways to modulate prices are to increase competition among drug manufacturers – as Dr. Gottlieb wants to do – and to pressure insurers to act as real insurers rather than pre-paid plans for already low-priced drugs.
Finally, policy makers should focus on the big-ticket parts of the health-care system – in-patient and out-patient care – rather than on the part that has accounted for just 11% of the spending rise last year.
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