Discussions of pharmaceutical spending are complicated and obscured by a lack of consensus of precisely how the totals are derived. By using different components, you can come up with totals that vary by as much as $150 billion a year. It is hard to have policy debates when basic assumptions differ so much.
An article in Health Affairs on July 31 attempts to demystify the subject and, with thorough research, comes up with its own, understandable aggregate figures. The article -- titled “Spending on Prescription Drugs in the US: Where Does All the Money Go?” – was the work of Nancy L. Yu, Preston Atteberry, and Peter Bach, all of Memorial Sloan Kettering’s Center for Health Policy and Outcomes (of which Bach is director). In February, the Pew Charitable Trustsalso did an analysis of various sources of pharmaceutical cost totals, but did not posit an estimate of its own.
The Five Common (And Different) Metrics for Drug Costs
The Sloan Kettering researchers began by looking at five commonly used metrics for 2016 and provide an invaluable table comparing them. The first figure is $323 billion, derived from IQVIA’s “Medicine Use and Spending in the U.S.” The lowest number among the five examples, the total includes both retail and non-retail sales of drugs, but it is a “net” figure because it adjusts for (that is, factors out) rebates by manufacturers, plus other discounts and price concessions (including coupons) and ever-growing fees.
The next total from IQVIA (formerly Quintiles IMS) is an aggregate or grossed-up one, again derived from manufacturers’ invoices for both retail and non-retail venues. By contrast with the net figure, this one “includes rebates that flow back to payers and PBMs, as well as other discounts and price concessions and fees.” The total of $450 billion does exclude “gross profits made by pharmacies for dispensing drugs.” IQVIA uses data from Securities & Exchange Commission (SEC) filings, plus direct reports by health firms.
The third metric -- $328 billion – comes from the widely used National Health Expenditures (NHE) data from the U.S. Centers for Medicare and Medicaid Services (CMS). These statistics include retail pharmaceutical sales, but not the costs of drugs administered in hospitals or physicians’ offices. The total is adjusted for rebates to payers and insurers but does not “factor in all manufacturer concessions included in the IQVIA estimates.”
The fourth total, Altarum Institute’s Health Sector Economics Indicators, also uses only retail (and not physician/hospital) pharmaceutical sales, with adjustments for manufacturer rebates only. It comes out at $348 billion -- nearly the same as the CMS number.
Finally, the researchers parse data from the Department of Health and Human Services’ (HHS) Assistant Secretary for Planning and Evaluation (ASPE), which in turn uses CMS’s NHE estimate for retail drugs and constructs “an estimate for non-retail drugs that is informed by the IQVIA and Altarum Institute data.” ASPE comes up with a total of $477 billion, composed of $343 billion for retail drugs and $144 billion for drugs administered by physicians and hospitals. The number does not factor out manufacturer rebates or other concession and fees. (It’s important to note that most of the concessions – that is, rebates and fees from PBMs – are in the realm of specialty drugs and that PBMs and specialty pharmacies are often one and the same. So the PBMs are giving rebates and fees to themselves. All four of the largest specialty pharmacy firms are either owned by PBMs or are in partnerships with them, according to the Drug Channels Institute).
The Researchers’ Own Estimate
Next, the researchers make their own calculations. They write:
Our analysis focuses on the revenue in the pharmaceutical sector, not the funding of it. Although we believe this is an important perspective from which to examine the prescription drug market, we recognize that these are indeed estimates and others will make (and have made) different choices in their approach to quantifying the overall market and its various sectors.
The researchers divide revenues into six categories, beginning with drug makers and then up the chain to the consumer.
Adding it all up, the researchers put a price tag of $480 billion on pharmaceutical costs – or, more accurately, on revenues to the various players in the supply chain. Of the total, just two-thirds goes to the companies that actually discover, develop, make, and market the drugs.
The authors recognize that the $323 billion that goes to manufacturers is “essentially 10 percent of total health care spending based on a CMS estimateof $3.3 trillion in national health expenditures for 2016.” Adding in all the shares of all the other participants, the total comes to 15%.
But is that last 5% of health costs appropriate? That’s a question being asked more frequently – especially because, as the article states, the industry “is characterized by a complex and often opaque system of distribution and reimbursement, in which the business models of multiple intermediaries rely on revenue from fees, price mark-ups, and after-the-fact rebates.”
The researchers conclude by pointing, with apparent sympathy, to…
recent calls by Food and Drug Administration Commissioner Scott Gottlieb for greater transparency in price negotiations involving PBMs, distributors, drug stores, and payers; appeals by the pharmaceutical industry and government to limit the scope of the 340B program; and deliberations by CMS to begin instituting point-of-sale rebates to reduce the out-of-pocket burden on patients.
At this critical time, we can thank Nancy Yu and her colleagues for clarifying where the money goes – so that we can have an informed and intelligent debate.
Bringing Those Costs Up-to-Date
Altarum’s latest estimates put prescription-drug sales at $355 billion for the year ending June 30, 2018. That is an annualized increase of 3%. By contrast, the increase in spending for the 12-month period was higher for other categories of personal health care: 4.4% for hospitals, 5.7% for physician and clinical expenditures, and 5.9% for nursing care facilities. Remember that Altarum’s data do not include physician- and hospital-administered pharmaceuticals and factor out manufacturer rebates but not mark-ups, fees or other concessions made to the intermediaries.
Hospital expenditures for the year ending in June were $1.17 trillion – or more than the entire gross domestic product of all but 15 countries and greater than triple the Altarum-reported prescription-drug sales figure.
Ohio Health Agencies Boot PBMs
The Health Affairs article points to the “complex and often opaque system of distribution and reimbursement” in the pharmaceutical sector and the high level of expenditures that go to middlemen. On Aug. 14, the state of Ohio decided it had had enough with what is called “spread pricing” – that is, the wide gap between what pharmacy benefit managers get from state taxpayers for drugs and what those PBMs pay pharmacies for them.
According to an article in the Columbus Dispatch, Ohio Medicaid officials “directed the state's five managed care plans Tuesday to terminate contracts with pharmacy benefit managers using the secretive pricing method and move to a more transparent pass-through pricing model effective Jan. 1.”
The decision follows a study commissioned by a government agency that revealed “PBMs billed taxpayers $223.7 million more for prescription drugs in a year than they reimbursed pharmacies to fill those prescriptions,” according to an earlier article by Dispatch reporter Catherine Candisky. The article continued:
That 8.8 percent difference, known as the price spread, represents millions kept by CVS Caremark and Optum Rx…. Largely pass-through operations, PBMs are employed to negotiate drug prices with manufacturers and process drug claims. The study said PBM fees should be in the range of 90 cents to $1.90 per prescription. CVS Caremark billed the state about $5.60 per script; Optum charged $6.50 — three to six times higher.
Mike DeAngelis, a CVS official said that PBMs produce savings for Ohioans. He cited another state analysis that “determined that taxpayers would pay $133 million more annually for Medicaid prescriptions if PBMs were eliminated.” There’s no doubt that PBMs effectively hold down drug costs. The question is whether they have been profiting from the lack of public knowledge about those spreads.
CVS Caremark went to court to block the release of the Medicaid consultant’s study because, the PBM says, it contains proprietary information. CVS agreed to the release of the study’s executive summary, which contained the $223.7 million figure. Now, however, that court case may be moot with the announcement that Ohio will “be booting all pharmacy middlemen,” according to the Dispatch.
West Virginia’s Medicaid agency unilaterally kicked out PBMs last year, and legislators in both that state and Kentucky have introduced bills last month to have state agencies take over the role of PBMs. It’s doubtful that additional government authority and bureaucracy are the solution, but the questioning of the role of middlemen is intensifying.
Oscar Wilde once defined a cynic as “a man who knows the price of everything and the value of nothing.” The same might be said for some who comment on the price of medicines. They often forget the value: the lives enhanced and saved.
The year 2017 was “an extraordinary year in the history of medicine,” wroteBernard Munos, a senior fellow at FasterCures, a center of the Milken Institute. “It was the year when scientists beat cancer, and U.S regulators approved the first therapy to fix a faulty gene.” He continued:
It was the year when scientists beat cancer, and U.S. regulators approved the first therapy to fix a faulty gene. It was also a year that kept us enthralled with a quickening drumbeat of breathtaking news detailing spectacular advances – trials seemingly curing patients of hemophilia A and sickle cell anemia, and breakthroughs raising similar hopes for Huntington’s disease, Lou Gehrig’s disease, and even HIV.
Those aren’t the only breakthroughs last year. The FDA approved a new treatment for a specific form of Batten disease, a rare disease that can cause progressive neurological impairments and more treatments are under development by several companies.
Munos writes, “What is remarkable about these successes is that they are not just lucky breaks, but the products of new technologies that are ushering us into a new therapeutic space of vastly expanded possibilities,”
It appears that 2018 will continue the innovation hot streak. So far this year, the Food & Drug Administration (FDA) has approved 21 new drugs, and the pace seems to be accelerating – 12 were approved in the two-month span from mid-May to mid-July. In 2017, some 46 drugs were approved by the FDA’s Center for Drug Evaluation and Research (CDER), the most in over 20 years. Theaverage over the past 10 years has been 31 drug approvals.
A Striking Variety: From Smallpox to
Melanoma to Migraines
What first strikes you in examining the latest list of new drugs is the variety. The most recently approved was TPOXX, the first drug to treat smallpox. Thanks to widespread vaccination, in 1980 the World Health Organization declared smallpox, which is highly contagious and sometimes fatal, eradicated. But, said an FDA press release, “there have been longstanding concerns that smallpox could be used as a bioweapon.” Now we can treat it.
On June 27, the FDA approved two drugs – Braftovi and Mektovi – to treat unresectable or metastatic melanoma. (An unresectable cancerous tumor is one that cannot be removed through surgery; an “metastatic” indicates a cancer that spreads from one part of the body to another. Melanoma generally refers to skin cancer, the fifth most deadly form of the disease and often fatal if it metastasizes.)
Other drugs approved this year treat urinary tract infections, severe forms of epilepsy, moderate to severe rheumatoid arthritis, migraine headaches, opioid withdrawal symptoms, a rare form of rickets, plaque psoriasis, HIV patients with limited treatment options, cystic fibrosis, prostate cancer, and cancer of the gastrointestinal tract and pancreas.
Progress Against Cancer
Progress against cancer in recent years has been remarkable. In a report on new drug approvals, the FDA’s Janet Woodcock, who heads the CDER, wrote:
2017 was also another strong year for making new cancer therapies available to patients in need. Among others, we approved new therapies for certain patients with acute lymphoblastic leukemia; Merkel cell carcinoma; certain forms of relapsed or refractory acute myeloid leukemia; certain forms of lymphoma; recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer; and specific forms of liver, breast, and colorectal cancer. We also approved the first cancer treatment based on a genetic feature of a cancer rather than the location of the body where the tumor originated.
The American Cancer Society reports that since peaking in 1991 cancer death rates have declined 26% (through 2015), indicating that 2.3 million cancer deaths have been avoided. “This decline translates to nearly 2.4 million deaths averted during this time period.” Drug treatments are not the only reason for the dramatic decline. Americans are smoking less, and cancer is being discovered earlier, but pharmaceutical advances are the most important factor, accounting for 73% of survival gains.
There have been dramatic increases in five-year survival rates for cancers where treatments using a new and unique mechanism for treating the disease have been developed, including for prostate, lung, breast, and colorectal cancer. As a result, according to the American Cancer Society (ACS) the number of cancer survivors has risen from 9.8 million in 2001 to 15.5 million in 2016 and is forecast to reach 20.3 million by 2026.
Still, says ACS, “A total of 1,735,350 new cancer cases and 609,640 deaths from cancer are projected to occur in the US in 2018.” PhRMA, the association of biopharmaceutical companies, reported in May that 1,120 medicines and vaccines for cancer are currently in development by U.S. firms. All of those drugs “are in clinical trials or awaiting review” by the FDA. The average cost of developing a medicine that gains market approval in the U.S., according to the Tufts Center for the Study of Drug Development, is more than $2.5 billion, and some of the 1,120 cancer drugs will not be approved, but the sheer quantity and quality of research and development in cancer is staggering.
Some 132 drugs are in development for lung cancer, the leading cause of cancer death in the U.S., accounting for about one-fourth of the cancer mortality expected in 2018. Another 108 are being developed for breast cancer, the leading cancer diagnosed in women, with 266,000 new cases expected in 2018. Other drugs in the pipeline include: 137 for leukemia, 135 for lymphoma, and 90 for brain tumors.
Many of these new drugs deploy immunotherapy (which helped render Jimmy Carter free of melanoma that has spread to his brain) and personalized treatments. For example, CAR-T therapy genetically alters and boosts special immune cells to eliminate the disease. Says the PhRMA report:
A patient’s blood is filtered to remove T-cells, which are then altered in the lab by inserting a gene that codes for a receptor that targets a protein unique to cancer cells…. In 2017, the first CAR-T treatment was approved for certain pediatric and young adult patients with a form of acute lymphoblastic leukemia.
Last year, 16 of the 46 novel drug treatments approved by the FDA were personalized medicines, and 9 of those 16 were for cancer. Diagnostic tests are used to determine which treatments will work for which patient at the right time. In 2017, the FDA approved the first personalized gene therapies, two for blood cancers plus a personalized biosimilar medicine for HER2-positive breast cancer and the first approval for a medical based on a biomarker, no matter where the tumor is located.
Dramatic Decline in Heart Disease Death Rates
Declines in the death rate from heart disease in the U.S. is even more dramatic: a drop of 34% in deaths attributable to coronary heart disease from 2005 to 2015. The age-adjusted stroke rate declined 22% over the same period. Again, behind the improving statistics is a combination of advances in prevention, diagnosis, and treatment. Drugs have been essential, including the use of the anticoagulant warfarin to thin blood and reduce the risk of a stroke, medicines to lower blood pressure, and cholesterol-lowering statins.
There are now 200 medicines under development for cardiovascular diseases, including 42 for heart failure and 23 for stroke, according to PhRMA. One medicine in clinical trials has the potential to reduce heart attack or stroke by inhibiting the bromodomain and extra-terminal protein, or BET. Another uses gene therapy to target a tissue repair and regeneration pathway. PhRMA also reports on a novel treatment being tested for the potential to reverse brain damage from a stroke:
The treatment, a combination of a human activated protein (a protein that plays a role in regulating anticoagulation) and human stem cells, is administered to patients within a few hours of having an ischemic stroke. The transplanted combination stem cells mature into brain cells, helping to reverse brain damage.
Potential Breakthrough Drug on Alzheimer’s,
Plus 84 More
Heart disease costs an estimated $300 billion a year – about the same amount as dementias like Alzheimer’s Disease, according to the Alzheimer’s Impact Movement, and roughly the same amount that Americans, including government and private insurers, spent on all prescription drugs in 2015. Imagine not just the personal and family benefits but also the economic gains that a medicine that could reduce Alzheimer’s by half would achieve.
While deaths from heart disease have been falling, deaths from Alzheimer’s have nearly doubled since 2000. Billions of dollars have been poured into research, but progress toward a cure, or stopping the advance of the disease, has been slow.
Between 1988 and 2014, some “123 potential medicines for Alzheimer’s were halted in clinical trials, while just four medicines were approved.” None of the approved drugs can prevent Alzheimer’s from getting worse.
Then on July 5, the U.S. firm Biogen and the Japanese company Eisaiannounced “positive topline results from the Phase II study with BAN2401, an anti-amyloid beta protofibril antibody, in 856 patients with early Alzheimer's disease.” The study showed that the drug slowed the progression of the disease and “amyloid accumulated in the brain.” (Amyloid is a protein whose build-up is associated with Alzheimer’s.)
The Biogen-Eisai medicine still has a Phase III hurdle to surmount before FDA approval, but as of last year there were another 84 medicines for Alzheimer’s under development. Effective treatment is urgently needed. Alzheimer’s early costs could reach $1.1 trillion by 2050 and, experts say, “could single-handedly bankrupt Medicare in a matter of decades.” But if a new treatment were introduced in 2025 that delays the onset of Alzheimer’s by just five years, it “would reduce the number of individuals affected by the disease by 5.7 million by mid-century and save all payers, including Medicare, Medicaid and families, more than $220 billion within the first five years,” according to a study titled “Changing the Direction of Alzheimer’s Disease.”
A Robust Pipeline
No one can tell for certain which drugs will be approved when, but a monthly update by Prime Therapeutics, a large pharmaceutical benefit manager (PBM), in June listed 27 medicines for which the FDA is likely to make a decision before the end of the year. Again, the variety is striking. There are drugs for schizophrenia, dry-eye disease, malaria, acne, ADHD, pneumonia, HIV, postpartum depression, and many more. Another PBM, Optum Rx, has compiled a list of dozens of medicines in the current pipeline, including treatments for anorexia, Parkinson’s, breast and lung cancer, autism, liver cancer, leukemia, asthama, tuberculosis, and more.
Generics and Biosimilars, Plus Comparison
Meanwhile, the FDA last year approved 1,027 generic drugs, 214 more than the record set the year before. Generics help keep a lid on overall drug spending, and, under Commissioner Scott Gottlieb, the FDA is instituting reforms to spur generic competition.
Gottlieb on July 18 announced a “Biosimilars Action Plan,” which, he said in a speech, “is aimed at promoting competition and affordability across the market for biologics and biosimilar products.” Biosimilars are treatments based on biological products, which in turn are composed of proteins, nucleic acids, or living entities such as cells and tissues. Biological products are among the most advanced and innovative treatments, and, because of their complexity, among the most expensive. They represented, as Gottlieb noted, 70% of the increase in drug spending between 2010 and 2015.
Savings from the introduction of biosimilars “range from $54 billion from 2017 to 2026 according to a study by RAND, to as much as $250 billion from 2014 to 2024,…according to a survey by Express Scripts,” said Gottlieb. But the pathway to market for biosimilars has been difficult. Fewer than one-third of FDA-approved biosimilars are actually available in the market. (We’ll discuss the Biosimilars Action Plan in our next letter.)
The FDA has approved a total of just 11 biosimilars, but the pace is quickening; five were approved in 2017 and two so far in 2018. The U.S. lags far behind Europe, which approved 16 biosimilars in 2017 alone.
Europe, however, lags far behind in developing innovative new medicines. A study published in March in JAMA by Irene Papanicolas, Liana Woskie, and Ashish Jha of the Harvard T.H. Chan School of Public Health, found, “With respect to a measure of innovation, the United States and Switzerland had the highest number of new chemical entities at 111 and 26, respectively.” Nor is it an accident that, of the 11 countries studied, the U.S. had the highest pharmaceutical spending per capital, with Switzerland second.
Drug companies operate on a simple model: their current medicines generate profits that are then plowed into research and development for new medicines. Reduce the revenues and the profits, and it stands to reason that you will reduce R&D and access to the flow of new medicines, which, after all, are where the value and mercy lie.
For more information,
Issue No. 31: Taking Dead Aim at the Role of Pharmacy Benefit Managers in Raising Drug Costs(Plus the Gag Rule and More on 340B)
President Trump’s May 11 speech on lowering drug prices took aim at pharmacy benefit managers, or PBMs. He didn’t mention them by name or acronym, but his intention was clear. “Our plan,” he said, “will end dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
He added, in unmistakably Trumpian language: “We’re very much eliminating the middlemen. The middlemen became very, very rich. Right? Whoever those middlemen were – and a lot of people never even figured it out – they’re rich. They won’t be so rich anymore.”
A more detailed 44-page blueprint, issued by the Department of Health and Human Services (HHS) and titled “American Patients First,” took a more subdued tone. Clearly, PBMs are not going to be eliminated, but the administration, including not just the President but HHS Secretary Alex Azar and Food & Drug Administration Commissioner Scott Gottlieb, want reform.
A study by the Berkeley Research Group last year does a good job explaining the role of PBMs. “Within the U.S. healthcare system,” it said, “the flow of dollars in the pharmaceutical marketplace is a complex process involving a variety of stakeholders and myriad rebates, discounts, and fees—some of which are paid after a prescription drug is dispensed to the patient.”
Key players in that complex process are PBMs. Working for health insurance plans, they never take physical possession of drugs. Instead, “they aggregate the buying power” of their clients “by negotiating discounted purchase prices with retail pharmacies, purchasing drugs at discounted prices for delivery by mail, and separately securing rebates on brand pharmaceuticals from manufacturers.”
Rebates are the source of much of the Trump Administration’s animosity toward PBMs.
The PBMs negotiate with drug companies, offering members of insurance plans access to their medicines in return for rebates, which are payments made after patients receive their medicines. Who gets the rebates? Not patients themselves, but employers and their insurance plans (and the PBMs often take some of the rebate for themselves).
These rebates are substantial – an average of 34% of the net price of brand medicines offered by commercial and Part D Medicare plans in 2017, according to the IQVIA Institute for Human Data Science. Rebates for some classes of drugs – whose manufacturers compete to become plan offerings – are even higher. Rebates for some diabetes medicines are more than 70%.
Rebates present several problems. First, they are not transparent. Second, they provide an incentive by PBMs to prefer the medicine with higher list price. And, third, rebates raise the price on which a consumer’s own proportional share of a drug’s cost is calculated. For example, if a drug costs $50 and a consumer’s coinsurance is 20%, then her out-of-pocket cost is $10. But a rebate of, say, $15 may be made to the insurance plan and employer after the purchase, so the real cost should be $35, in which case the consumer’s coinsurance payment should be $7, not $10.
The PBM paradigm does not apply in other parts of the health care system. For example, if you visit your dentist you pay coinsurance based on a percentage of the cost of the service that the insurer has negotiated on your behalf with the dentist. A typical dental policy states: “Because your dentist is part of the Preferred Dentist Program, all in-network covered services are billed at a negotiated rate. This means covered services usually cost less than your dentist’s non-negotiated rates for these services.” But for prescription medicines, the coinsurance is based on the full retail price of the medicine at the pharmacy counter – no matter what discounts and rebates the PBM or the insurer has negotiated with the manufacturer.
The Way the HHS Secretary Sees the Problem
Azar’s blueprint starts with some emphatic language from President Trump’sState of the Union Address: “One of my greatest priorities is to reduce the price of prescription drugs.” Much of the document reflects that tone, with passages about “costs spiraling out of control.” The blueprint lists “High list prices for drugs” as the first of four “challenges in the U.S. drug market.”
So reforming the PBM rebate system is not the only objective of the blueprint, but, as Sam Baker writes in the Axios Vitals newsletter, “Azar very much sounds like a man who’s seriously gunning for pharmacy benefit managers’ rebates – the current system for negotiating bulk discounts on drugs.”
Specifically, the HHS blueprint states:
Consumers who have not met their deductible or are subject to coinsurance, pay based on the pharmacy list price, which is not reduced by the substantial drug manufacturer rebates paid to PBMs and health plans. As a result, the growth in list prices, and the widening gap between list and net prices, markedly increases consumer out-of-pocket spending, particularly for high-cost drugs not subject to negotiation. This is not only a financial challenge, but a health issue as well.
The blueprint then cites a study by W.H. Shrank and colleagues at Brigham and Women’s Hospital and the Harvard Medical School that “found that consumers asked to pay $50 or more at the pharmacy counter are four times more likely to abandon the prescription than a consumer charged $10.”
A report by HIS Markit, released May 14, began with just this proposition – that “high beneficiary out-of-pocket (OOP) costs are a common barrier to proper adherence.” In the first research of its kind, the study looked at the effects of passing through a portion of the PBM rebates on diabetes medicines topatients at the point of sale, or POS (typically, the pharmacy) rather than having all those rebates go to insurance plans, employers, and PBMs themselves. The study concluded:
We estimate that for each beneficiary using brand diabetes medicines in the Part D coverage gap or catastrophic phase, passing through a portion of rebates at the POS would reduce overall per beneficiary healthcare spending by $1,352 and lower patient OOP spending by $367in one year. Over the next 10 years, we project that passing through rebates at the POS for diabetes medicines could reduce total medical spending by approximately $20 billion.
The HHS blueprint offers this judgment on the rebate system: “What had been a hidden negotiation and wealth transfer between drug manufacturers and PBMs is now a direct increase on consumer out-of-pocket spending that likely decreases drug adherence and health outcomes.”
So What’s the Remedy?
But the blueprint is also vague about how to remedy the problem. Instead, starting on page 35 of the document, it asks a series of questions – 18, by our count – to elicit public comment on actions that may follow.
One line of inquiry that seems to appeal to Azar is redefining the fiduciary responsibility of PBMs. Instead of working just for insurance plans, perhaps the PBMs should also be working for consumers. Here is a series of questions:
Should PBMs be obligated to act solely in the interest of the entity for whom they are managing pharmaceutical benefits?
Too often, negotiations do not result in the lowest out-of-pocket costs for consumers. Should PBMs be forbidden from receiving any payment or remuneration from manufacturers, and should PBM contracts be forbidden from including rebates or fees calculated as a percentage of list prices?
What effect would imposing this fiduciary duty on PBMs on behalf of the ultimate payer (i.e., consumers) have on PBMs’ ability to negotiate drug prices?
How could this affect manufacturer pricing behavior, insurance, and benefit design?
What unintended consequences for beneficiary out-of-pocket spending and federal health program spending could result from these changes?
The FDA Commissioner’s Concerns
The concerns of FDA Commissioner Gottlieb about PBM rebates predate his confirmation as FDA Commissioner a year ago. We noted in Issue No. 13 of this newsletter that Gottlieb wrote an article in Forbes in September 2016: “The need to rebate money to the PBMs, in order to drive formulary access, is…a principal reason that drug makers raise the list price on their drugs.” The current opaque system, he wrote, stemmed in large part from a 1996 court decision and may require legislation to fix. Gottlieb on May 3 suggested another approach: reinterpreting current federal law to block the practice. In a speech to the Food and Drug Law Institute, he said, “What if we took on this system directly, by having the federal government reexamine the current safe harbor for drug rebates under the Anti-Kickback Statute?”
Earlier, in a speech to the Pharmaceutical Care Management Association, the trade group for PBMs, he criticized “some PBMs” for being “complacent participants” in schemes to “hamstring biosimilar competition” – an issue we discussed in our Newsletter No. 23. But his main message in that address onApril 19 was to praise “the actions recently announced by some insurers that they would pass manufacturer’s drug rebates, often negotiated with PBMs, directly to their fully insured members with employer-based insurance – about 10 million covered lives.”
He was referring to a decision in March by UnitedHealthcare, one of the nation’s largest insurers and the owner of a PBM, OptumRX. “This is a bold action that will help create a fairer, more transparent market.,” said Gottlieb. “I hope that other insurers, employers, and manufacturers follow their lead. I also hope that your industry will continue to innovate to make it more transparent to pass along these rebates.”
Baby and Bathwater
As Gottlieb noted in his speech, PBMs play a critical role in “greater health care efficiency.” Some 260 million Americans have their drug benefits managed by PBMs. “That’s more covered lives than the health care systems in Germany and France combined.” He praised PBMs for their “success in generic substitution,” which is saving a quarter-trillion dollars a year.
Certainly, PBMs perform an important service in negotiating prices and “eliminating” them, as President Trump seemed to want, would create more problems than it would solve – especially if elimination meant substitution by government.
For example, in 2017, Express Scripts, a giant PBM with about 80 million members, used its market clout to hold overall per-person drug spending increases to 1.5% and unit-cost increases to just 0.8%. Because of the market power of PBMs, calls by politicians for the federal government to negotiate Medicare drug prices are senseless. Some 43 million Americans receive Part D drug benefits under Medicare, but Express Scripts alone has nearly twice as many members.
Targeting the ‘Gag Rule’
The President in his May 11 speech also said that his plan “bans the Pharmacist Gag Rules, which punishes pharmacists for telling patients how to save money. This is a total rip-off, and we are ending it.”
Trump was referring to contracts with PBMs and health plans that prevent pharmacists from telling consumers they could pay less out-of-pocket by not using their insurance. For instance, a month’s supply of blood-pressure drugs might be purchased by a consumer without insurance at a pharmacy for $10 in cash. But, with insurance, a consumer might have a co-pay of $15. Under some health-plan contracts, the pharmacist is not allowed to tell the consumer that she is better off not using her insurance.
Again, the federal government is not issuing a “ban” on such practices; instead, according to the Azar blueprint “HHS may [our emphasis] prohibit” gag-rule contracts. Once more, the document asks a series of questions, such as, “Should pharmacists be required to ask patients in federal programs if they’d like information about lower-cost alternatives? What other strategies might be most effective in providing price information to consumers at the point of sale?”
On May 17, Seema Verma, administrator of the Centers for Medicare & Medicaid Services (CMS), which is part of HHS, issued a sternly worded statement headlined, “Unacceptable Pharmacy Gag Clauses.” It said, in part, “We want to make it clear that CMS finds any form of ‘gag clauses’ unacceptable and contrary to our efforts to promote drug price transparency and lower drug prices.” Verma’s warning has no effect on commercial plans.
Courts and state governments are also taking up the issue.
A woman named Megan Schultz in Marin County, California, filed a lawsuit last year after she paid a $165 co-pay for a generic drug under her health plan that she could have bought from the same store for $92 if she had paid cash. “But her pharmacy didn’t clue her in,” said the Los Angeles Times. The article noted that “some 59% of independent pharmacists answering a survey by the National Community Pharmacists Assn. [NCPA] said they were subject to ‘gag clauses’ prohibiting them from volunteering” that the price would be lower if consumers paid cash themselves.
"PBM corporations are inserting costs into the system on virtually everyone in order to fuel their profits and reward shareholders," the newspaper quoted B. Douglas Hoey, head of the NCPA, as saying.
“In North Carolina,” the New York Times reported in February, “a new law says that pharmacists “shall have the right” to provide insured customers with information about their insurance co-payments and less costly alternatives. A new Georgia law says that a pharmacist may not be penalized for disclosing such information to a customer. Maine has adopted a similar law.”
In our last newsletter, we focused on the 340B drug-discount program, established 26 years ago and now under increased scrutiny. The program was meant to help poor hospital patients. Under the law, if drug manufacturers want to be eligible to participate in Medicaid, they have to provide outpatient medicines at prices discounted by 20% to 50% to hospitals that serve a disproportionate share of low-income Americans. The hospitals were then supposed to use those savings for charitable care. But the requirements were vague, and the program’s purpose has been distorted.
The HHS blueprint, issued after President Trump’s May 11 speech, includes a long section on 340B’s history and deficiencies and points out that the 2019 budget proposes reforms to 340B to “ensure that the benefits derived from participation in the program are used to benefit patients, especially low-income and uninsured populations.”
Shortly after our newsletter on 340B went out, Adam Fein of Pembroke Consulting, publisher of the Drug Channels blog, released new data, showing that it was growing at a rate of 28.8% a year since 2014. In a presentation at the National Leadership Summit on 340B at Washington’s Newseum, he reported that discounted drug purchases under 340B, which is supposed to help hospitals care for lower-income patients, rose to $19.3 billion, up from $16.2 billion the year before. And, as Fein notes, as discounted purchases have risen, charity care by hospitals has declined, from 6.1% of total expenses in 2012 to 4.3% in 2016.
In his blog detailing the new data on the program, Fein wrote:
Let’s hope that our fractured political climate does not stop changes that would refocus the booming 340B program on genuine safety-net providers and needy patients. Frankly, I'm tired of hearing covered entities tell everyone "It's our money, we can do what we want."
It sounded like a good idea at the time, but now, 26 years after Congress established it, the 340B Drug Pricing Program has become the object of critical reports, derisive comments by government officials, and the first small steps at reform.
The program was meant to help poor hospital patients through a somewhat convoluted process. Under the law, if drug manufacturers want to be eligible to participate in Medicaid, they have to provide outpatient medicines at prices discounted by 20% to 50% to hospitals that serve a disproportionate share of low-income Americans.
Such hospitals, as well as affiliated clinics, “can realize substantial savings through 340B price discounts and generate 340B revenue by selling eligible outpatient drugs at a higher price than the discounted price at which the covered entity [i.e., the hospital] obtained the drug,” according to a review earlier this year by the House Energy and Commerce Committee.
The intent of 340B, whose name refers to the section of the Public Health Service Act that authorizes it, was that hospitals would use the extra revenue (the difference between the price at which they sell the drug and the discounted amount they pay for it) to help indigent and uninsured patients.
Gains From 340B Profits Aren’t Going to Low-Income Patients
But that isn’t happening. In a study published in the New England Journal of Medicine in February, Sunita Desai of the New York University School of Medicine and Michael McWilliams of the Harvard Medical School concluded, “Financial gains for hospitals have not been associated with clear evidence of expanded care or lower mortality among low-income patients.”
Another study in 2016, by Avalere Health for the Alliance for Integrity and Reform of 340B, found that in fiscal 2014 charity care represented less than the national average (2.2% of costs) at 64% of 340B hospitals.
Hospitals are ignoring the intent of the 1992 because… well, they can.
As Rena Conti of the University of Chicago and Peter Bach of Memorial Sloan Kettering wrote in Health Affairs:
340 B hospitals are not required to pass along their discounts to patients or insurers or to demonstrate their investments in outpatient programs for the poor. Consequently, these providers can generate 340B profits by pocketing the difference between the discounted price that they paid for the drugs and the higher reimbursement paid by insurers and patients.
Sen. Charles Grassley (R-IA) made this point in a 2013 letter to the administrator of the U.S. Health Resources and Services Administration:
Hospitals can elect to sell all of their 340B drugs to only fully insured patients while not passing any of the deeply discounted prices to the most vulnerable, the uninsured. This is contrary to the purpose of the 340B program since much of the benefit of the discounted drugs flows to the covered entity rather than to the vulnerable patients that the program was designed to help.
Program Quadruples in a Decade
Meanwhile, the 340B program has ballooned in size. Some 40% of all hospitals in the United States now participate as well as thousands of affiliated clinics, for a total of 38,396 covered entity sites, up from 8,605 in 2001.
“It is estimated that discounted drug purchases made by covered entities under the 340B program totaled more than $16 billion in 2016—a more than 30 percent increase in 340B program purchases in just one year,” states the E&C Committee report. Total drug purchases under the program quadrupled from 2007 to 2016 and now represent 5% of all the money spent on medicines in the country and more than half of all U.S. hospital drug purchases, up from 20% in 2009.
The growth of 340B has made the program unmanageable. The network now includes thousands of “contract pharmacies.” As Wayne Weingarten wrote in a December report by the Pacific Research Institute:
As identified in a 2014 report from the Inspector General of the Department of Health and Human Services, contract pharmacies add “complications” to the 340B program. These complications include diversion of 340B discounted medicines to non 340B-eligible patients, receiving duplicate discounts from both Medicaid and the 340B program when such duplication is prohibited, and not offering the 340B discounted price to uninsured patients, the raison d’etre of the program.
Originally, the law allowed only safety-net clinics without an in-house pharmacy to contract out pharmacy services to a retail pharmacy. Then, writes Weingarten, “the 2010 guidance allowed any covered entity, including large hospitals, to establish unlimited relationships with contract pharmacies…. Some hospitals have responded by building networks of hundreds of contract pharmacies that includes Walgreens, Rite Aid, CVS, and Wal-Mart – private, for-profit companies that clearly do not require government support.”
In addition, 340B-qualified hospitals buying up physicians’ practices in neighborhoods that are far from poor. The Desai-McWilliams study found, for example, that facilities owned by hospitals eligible for 340B had “230% more hematologist-oncologists than expected in the absence of the program” and that “program eligibility was associated with lower proportions of low-income patients in hematology-oncology.” In other words, buying up practices of physicians specializing in blood disorders and cancer – specialties associated with more expensive medicines -- gave the 340B hospitals a broader footprint in higher-income areas.
The Conti-Bach study, which looked carefully at the expansion patterns of 340B hospitals concluded:
The primary purpose of the 340B program was to give assistance to low-income and uninsured patients. Since its inception, the program has experienced expansions. However, we observed significant growth in the number of newly registered 340B DSH [facilities with a “Disproportionate Share” of indigent patients] hospitals and exponential growth in the number of outpatient clinics affiliated with them since 2004.
We focused on whether these expansions have been associated with a shift away from the program’s core focus on low-income and uninsured populations. We found that 340B DSH hospitals serve communities that are poorer and have higher uninsurance rates than the average US community. However, beginning around 2004, newly registered 340B DSH hospitals have tended to be in higher-income communities, compared to hospitals that joined the 340B program earlier.
We also found that, compared to 340B DSH hospitals, their affiliated clinics tended to serve communities with socioeconomic characteristics that were more similar to the average US community…. These results suggest that the expansions among 340B DSH hospitals run counter to the program’s original intention.
Our findings are consistent with recent complaints by stakeholders and media reports suggesting that the 340B program is being converted from one that serves vulnerable communities to one that enriches participating hospitals and the clinics affiliated with them
Reforming the Program
The Trump Administration on Jan. 1 took the first step toward reforming the program. Drawing on a 664-page proposal it issued in July, the Centers for Medicare and Medicaid Services laid down new rules that it said would “lower out-of-pocket drug costs for people with Medicare and empower patients with more choices.”
The rules apply to only a small slice of the 340B program -- just to “certain Medicare Part B drugs.”
Instead of reimbursing hospitals at the Average Sales Price (ASP) of a drug plus 6%, CMS will reimburse at ASP minus 22.5%. A Sloan Kettering report in 2016 made it clear that eliminating the mark-up would not cause hardship to 340B hospitals. The 6% premium over ASP…
appears to understate the profit associated with the administration of “Part B” drugs, due to higher gross profits to doctors and hospitals from their commercial insurance contracts and steep discounts available to 340B hospitals. The collective gross profit across all patients and care settings is around 49% but is not evenly applied as the blended profit margin for doctors is around 16% while it is around 140% for hospitals. The subcategory of hospitals in the 340B program earn a blended profit margin of around 210% (other hospitals are at 98%).
CMS is not pocketing the $1.6 billion in savings from the reduction. Instead, it is increasing reimbursement rates for other services the hospitals provide. Also, Medicare patients will benefit because their copayments are based on the CMS reimbursement rate, which is being cut nearly 30%. Seema Verma, the administrator of CMS, noted that Medicare beneficiaries will benefit “from the discounts that hospitals receive under the program by saving an estimated $320 million on copayments for these drugs in 2018 alone.”
Peter Bach of Sloan Kettering told Kaiser Health News, “If Medicare reduces the reimbursement amount, that will directly reduce what patients pay. Patients will see lower prices.”
The Future of 340B
While the reforms leave the vast majority of the 340B program untouched, the changes may foreshadow a major shakeup. Joe Grogan, associate director for health programs at the White House Office of Management, called 340B “really screwed up” in remarks Nov. 14 before a cancer research conference in November, as reported by Politico.
The program, he said, is “incredibly flawed in how it’s operating” and has grown “far beyond its intent.” Grogan said that in many instances 340B isn’t operating to meet its stated purpose of helping hospitals serve low-income and uninsured patients.
The day before Grogan’s remarks, the American Hospital Association (AHA), the Association of American Medical Colleges, America’s Essential Hospitals filed a lawsuit against the Department of Health and Human Services, asking for an injunction to prevent CMS from implementing the 340B changes. Rick Pollack, the president of the AHA, said in a press release, “From its beginning, the 340B Drug Pricing Program has been critical in helping hospitals stretch scarce federal resources to enhance comprehensive patient services and access to care.”
AHA also launched an advertising campaign, which probably appears baffling to anyone unacquainted with government acronyms. Some 228 members of the House signed a letter to Administrator Verma, saying, “We are deeply concerned [about] this misguided policy.” And, as Sally Pipes of the Pacific Research Institute, a conservative think tank, wrote in Forbes, “A bipartisan group of senators – including supposed fiscal hawks like Sens. John Thune (R-SD) and Rob Portman (R-Ohio) – are trying to block the reform.” She added:
That’s disappointing. Hospitals are exploiting 340B to enrich themselves at the expense of poor patients. Their abuse of the program drives up the health tab borne by taxpayers and everyone with private health insurance. Lawmakers committed to limited government ought to overhaul 340B rather than defense the broken status quo.
On Dec. 29, the U.S. District Court dismissed the hospital associations’ suit on jurisdictional grounds. The plaintiffs appealed to the U.S. Court of Appeals for the District of Columbia, which granted an expedited schedule. Briefs are flying back and forth, and oral arguments are scheduled for May 4.
Even if the lawsuit is resolved soon, the fight over 340B is far from over. A program that was much admired when President George H.W. Bush signed it, has grown beyond recognition, with its intent distorted and obscured. The Trump Administration, which wants to make good on its promises to cut health costs and rationalize government programs, clearly has 340B in its sights.
“Like it or not,” wrote Adam Fein on his Drug Channels blog in July, “change may finally be coming to the out-of-control 340B program. Let’s hope Congress can get the program refocused on genuine safety-net providers and financially needy patients.”
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Americans spend more on drugs than people who live in other rich countries. In his State of the Union Address in January, President Trump described the disparity as “very, very unfair.”
The extent of the difference, however, is a complicated matter.
A CNN report in 2015 said that “Americans pay anywhere from two to six times more than the rest of the world for brand-name prescription drugs.” A study reported by Scientific American says that U.S. prices are triple those of the United Kingdom. But such comparisons pit U.S. list prices against final negotiated prices in Europe: apples vs. oranges. A more accurate comparison would take into account U.S. discounts and rebates and use actual average selling prices for U.S. medicines.
A study published March 13 in JAMA by Irene Papanicolas, Liana Woskie, and Ashish Jha of the Harvard Chan School of Public Health looked broadly at health-care costs in the U.S. and other high-income countries. It found that U.S. prescription-drug spending and total pharmaceutical spending (including drugs administered in doctors’ offices and hospitals) were each nearly double that of the average of the 11 countries (seven from Europe plus the U.S., Canada, Australia and Japan) studied.
The paper did not state whether the U.S. data included discounts and rebates, but the dollar figures are much higher than those in a September study by the Quintiles IMS Institute, which removed discounts and rebates and calculated “net manufacturer revenue” for all drugs (including those administered in doctors’ offices and hospitals).
Some drugs are actually cheaper at home than abroad. In 2004, a report from the FDA began, “If you think all drugs from Canada are cheaper than U.S. drugs, think again.” Generics now account for 89% of all U.S. prescriptions, and the FDA looked at the seven top-selling generics in the U.S. in 2004: “For six of the seven drugs, the U.S. generics were priced lower than the brand-name versions in Canada. Five of the seven U.S. generic drugs were also cheaper than the Canadian generics.”
More recently, Canada’s Globe and Mail reported in 2014 that a study by the University of Ottawa and the Bruyere Research Institute found that Canadians are “spending much more than people in the…United States” for six drugs studied, including popular medications for cholesterol and high blood pressure.
It’s also important to look beyond medicines. U.S. health-care costs overall are far higher than in other high-income countries. Look at compensation for professionals. The March JAMA study found that the average general practitioner in the U.S. earns $218,000 a year, or 63% more than the average for the high-income countries in the survey. Canada pays its GPs an average of just $146; France, $112,000; Australia, $87,000. U.S. specialist physicians earn $316,000, or 73% more than average. U.S. nurses make an average of $74,000, or 42% above average.
An MRI in the U.S. costs an average of $1,119, according to another study. ; in Australia, $215. Appendix removal is $15,930 on average in the U.S. and $6,040 in Switzerland. In the U.S., heart bypass surgery is $78,318; in the U.K., $24,059. These differences are more significant than drug-price differences because hospitals represent about one-third of U.S. health spending while prescription drugs represent about one-tenth.
Innovative Medicines Do Cost More Here
Still, there is no doubt that individual branded innovative medicines cost more – to consumers and government and private insurers -- in the United States than in other rich countries. For example, the JAMA study found that Advair, an asthma medicine cost $155 per month (after discounts) while the same drug in Canada was $74; in Japan, $51; and in Germany, $38.
Humira, the highest-grossing drug in the United States, treating such diseases as rheumatoid arthritis, costs $2,505 in the U.S. but an average of $1,436 in the seven high-income countries that supplied data. A 2015 study by Bloomberg, using data from IHS and SSR Health, found that, accounting for discounts, the breast-cancer treatment Herceptin cost $4,754 per month in the U.S. and $3,186 in Germany.
Why Other Rich Countries Have Lower Drug Prices
The reason other wealthy countries have lower drug prices is no secret: Those countries have nationalized, single-payer health-care systems. The government is the monopsony – that is, sole – purchaser of medicines and the decision-maker on which patients (if any at all) will have access to medicines. Even when governments aren’t direct purchasers, they impose price controls – in Canada, through a “Patented Medicine Prices Review Board.” For new drugs, Canadian prices cannot exceed the median price in other comparator countries, which themselves have price controls.
The result is that U.S. consumers fund pharmaceutical innovation, and the rest of the world benefits at low cost. As the JAMA study says, “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.” The authors cite 2006 research by Henry Grabowski and Y. Richard Yang that concluded, “Country-level analyses for 1993–2003 indicate that U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.”
The reason for the dominance is that U.S. companies plough their profits, mainly earned domestically, into research and development that helps patients everywhere.
Thus, other rich countries are “free-riding,” as a February study by the President’s Council of Economic Advisors (CEA), titled “Reforming Biopharmaceutical Pricing at Home and Abroad,” explained:
The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.
Price Controls at Home Would Harm Everyone’s Health
The U.S. has consistently rejected a single-payer, European-style system – for example, “Hilarycare” in 1993 and Democratic proposals that preceded the final Affordable Care Act in more recent years. But if the U.S. did adopt price controls at home, the losers would be Americans themselves, who would see drug innovation decline and with it their own health. Cutting prices in the U.S. would lead to fewer new medicines being developed and thus shorter, unhealthier lives than would otherwise be the case.
The U.S. accounts for nearly half of all branded pharmaceutical revenues in the world while other developed countries represent only about one-fourth. The CEA estimates that 70% of OECD patented pharmaceutical profits come from sales to U.S. patients. “Thus, innovators across the world rely heavily on Americans paying market prices to underwrite returns on investments into products that improve their health.”
After all, as a January study by Dana Goldman and Darius Lakdawalla of theUSC Schaeffer Center for Health Policy and Economics notes, “The most recent evidence suggests that it takes $2.5 billion in additional drug revenue to spur one new drug approval, based on data from 1997 to 2007.”
So the U.S. faces an “innovation-access” tradeoff. If revenues and profits are reduced, then investment in research and development will fall as well. The result would be a sharp decline in new treatments – and in overall health – for Americans as well as foreigners.
A study by Thomas Abbott and John Vernon, published as a working paper by the National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.”
Conversely, what would happen if other OECD countries lifted or significantly relaxed price controls? The USC Schaeffer study notes:
Using a previously published economic-demographic microsimulation, we estimate that if European prices were 20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years. Encouraging other wealthy countries to shoulder more of the burden of drug discovery — including higher prices for innovative treatments — would ultimately benefit patients in the United States and the rest of the world.
What Can Be Done?
Despite all these arguments based on health, economics, and the law, there remains the political issue. Americans don’t like the fact that Canadians, Japanese, Australians and Europeans can buy drugs at a lower price. It is, as President Trump said, “very, very unfair.” Can anything be done?
The CEA report has a section headed, “Limiting Under-Pricing of Drugs in Foreign Countries,” but, curiously, the Council does not offer a recommendation on how to limit that under-pricing.
Through tough bargaining, of the sort that the Trump Administration favors, the United States can pressure other rich countries to relax, or end, their price controls. The countries could still provide tax credits or direct subsidies to their citizens for drugs and other health services if their aim is to ease the burden of health-care costs.
The Administration, for example, recently got South Korea to ensure equal treatment for U.S. drug manufacturers in a renegotiated bilateral agreement; in the past, only Korean companies received the advantage of premium pricing.
Price controls badly distort trade and may be impermissible under current trade agreements – and can certainly be changed in future ones. The U.S. exported$47 billion in pharmaceuticals in 2015, and that figure could be far higher without foreign price controls.
More than 200 U.S. economists tackled the price-disparity issue in a public2004 letter. They wrote: “The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives.”
Among the signers were the late Nobel Prize winner Milton Friedman and President Trump’s top economist, Kevin Hassett, who was then at the American Enterprise Institute.
One current proposal calls for appointing a special USTR negotiator with jurisdiction over complicated issues of pharmaceutical trade, sanctions for countries that cheat on current agreements, and tough negotiations for future agreements.
At the same time, regulatory reforms in the U.S. such as easing the path for generic and biosimilar drugs to provide competition, could lower spending here while maintaining high levels of investment in innovation.
Meanwhile, the first rule in health care is to do no harm, and it’s critical that the U.S. avoid steps that would harm pharmaceutical innovation – and the nation’s health at the same time.
When people talk about high drug costs, they are really talking about high out-of-pocket costs to them under their insurance plan – especially huge open-ended obligations if they become sick with cancer or a debilitating auto-immune or infectious disease. It is this understandable anxiety that feeds the political reaction to drug expenses. That reaction, in turn, leads to misdirected proposals that would further block patient access to medicines and deter investment in developing new medicines that save lives.
But there is another approach – reforming the design of insurance plans by limiting what insured individuals and families have to pay out of their own pockets. In the case of Medicare, a simple legislative change, already recommended by a government commission, would have a major effect; in the case of commercial plans, a sensible readjustment will do the trick. These changes could be shaped in a way that has minimal effect on premiums.
But before we get to details, let’s review what we are really talking about when discuss high drug spending….
So what is the problem?
Too Many People Reaching Too Deeply Into Their Pockets
It is that some Americans have to reach deeply into their own pockets to pay for certain medicines when they get sick. A big reason is that health insurance is different from other forms of insurance.
Insurance is meant to pay for the consequences of an adverse event you might not be able to afford yourself. For example, your auto insurance reimburses, not for a new set of windshield wipers after the old ones have worn out, but for expensive bodywork after your car is in a bad accident. Health insurance doesn’t work that way. Many generic drugs cost an insured patient nothing at all under a typical health plan, but certain cancer medicines, for example, can cost thousands or tens of thousands of dollars out-of-pocket.
Specialty drugs – treatments, for example, that miraculously harness patients’ own immune systems to battle cancer – are costly to develop and to provide. More and more of these specialty drugs, which treat a range of complex diseases, will be coming to market in the years ahead. There were 240 immuno-oncology drugs in development at the end of 2017.
Only a tiny slice of the population needs such drugs, and the aim of insurance is to protect such patients against the catastrophe of having to pay for expensive medicines on their own. Just three out of 1,000 Express Scripts members had annual medication costs greater than $50,000 in 2016.
A Cap for Medicare Part D
Even insurance under Medicare Part D has this flaw. Medicare insurance for prescription drugs is, overall, an excellent program. As Kenneth Thorpe, a professor of health policy, wrote recently:
Part D is a rare public-policy success story celebrated by Republicans and Democrats alike. It has a unique structure in which the government, instead of providing health coverage directly, manages a market of private options. Patients have the freedom to choose among dozens of competing plans.
Yes, but the federal government mandates a complicated payment structure for Part D. First, enrollees pay a $405 deductible; beyond that, their insurers pay 75% of retail drug costs up to $3,750 in a year. Then enrollees enter the “doughnut hole, which requires a payment of 44% of the cost of brand drugs and 35% of the cost of generics. In 2018, enrollees exit the doughnut hole when the prescribed drugs reach a total of about $8,400 in retail cost; next comes the catastrophic part of the plan, where the insurer and the government cover 95% of drug costs.
The doughnut hole is set to end next year, but, if you have high drug costs, your liability in the catastrophic zone of coverage is open-ended. There is no out-of-pocket cap. You pay 5%, and that obligation can be devastating for many families.
Express Scripts, for example, 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. This means that, after you have emerged into the catastrophic portion of Part D insurance, you will owe about $1,600 out of pocket. Oncology drugs are even more expensive, and, of course, many Americans have more than a single condition.
In 2016, the Medicare Payment Advisory Commission proposed that the government should “eliminate enrollee cost-sharing the out-of-pocket threshold.” The report pointed out that for the population of patients with high out-of-pocket costs, those costs persisted out into the future. That sounds like a sensible solution.
High Annual Limits in Commercial Plans
Most private health plans have annual out-of-pocket limits for total spending on covered services, but even with that limit, out-of-pocket spending can be high. This is especially true as plans continue to increase deductibles and shift more costs to enrollees. The Affordable Care Act, despite its title, has annual out-of-pocket limits that are astronomical for some Americans: $7,350 for an individual plan and $14,700 for families (and these figures do not count premium payments). The median household income in the U.S. is about $60,000, so, under ACA health plans, families can be spending one-fourth of their before-tax pay on health care.
Even a few thousand dollars can be a burden. Between 2005 and 2015, the proportion of enrollees in employer-sponsored health insurance plans with out-of-pocket expenses (again, not including premiums) that exceed $1,000 a year rose from 17% to 24%. Some 12% in 2015 had expenses exceeding $2,000 and 2% paid more than $5,000, according to an analysis by Peterson-Kaiser Health System Tracker.
A Bias Against Drugs
High out-of-pocket costs are symptomatic of the bias insurers have against drugs and in favor of other parts of the health-care system. For example, 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 in silver ACA Exchange plans with combined medical and pharmacy deductibles. A rational health insurance plan would weight drugs at least equally and probably more heavily than hospitals and doctors given that they can lower costs for other services.
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!
In Issue No. 20, we reported on the Kaiser Family Foundation’s detailed annual survey of health benefits. One finding was that more and more insurers were adding a fourth, fifth, or even sixth tier to their policies for higher-priced, or specialty drugs. In 2016, some 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. Specialty tiers usually require a higher out-of-pocket payment from patients, and insurers are now more likely to require onerous coinsurance (that is, a percentage of the cost of the drug after the deductible) rather than copayment (a flat fee for a prescription drug that is predetermined by their health insurance plan).
Kaiser found that coinsurance for drugs on a specialty tier can exceed 25% in employer plans. According to the BCBS Network of Michigan website, their Medicare Advantage enrollees pay 45% of the retail cost of Tier 4 non-preferred brand-name and generic drugs and between 25% and 33% of the cost of Tier 5 specialty drugs.
Facing high out-of-pocket costs even when using their insurance, many Americans simply decline to fill their prescriptions.
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.
In other words, high insurance out-of-pocket costs make Americans sicker – and that, in turn, causes total health-care spending to rise.
A Meaningful Out-of-Pocket Spending Limit
One way to address the problem is a flat out-of-pocket spending limit on drugs. A study last year by the consulting firm Milliman, commissioned by the Leukemia and Lymphoma Society, modeled the impact of a cap of $150 per prescription on popular Silver-tier individual exchange plans under the ACA. The cap would take effect regardless of whether or not a member had met their deductible. The analysis concluded: “Assuming no other changes to benefit design, a $150 prescription drug cost sharing cap per script for a typical Silver plan in the individual market would increase monthly premiums by about 0.7%, or less than $3 per month” in 2016 and an estimated 0.8% in 2017 or 2018.
The Milliman researchers noted that “only small copay increases in other benefits are necessary to approximately offset premium increases resulting from the $150 cap, such as increasing copays to PCP [primary-care physician] visits and generic medicines by $1 to $5.”
States like Colorado and Montana now require a subset of insurance plans sold within their states to offer this kind of real insurance – that is, plans with fixed copays and no deductibles for medicines. The action taken in these states helps enhance the choice of benefit designs available to patients – and provides patients with options with lower up-front costs and smooths out expenses over the plan year.
The federal government can help address high-drug-cost anxiety by ending catastrophic exposure on Part D Medicare policies, as the Medicare Payment Advisory Commission has recommended. This step of providing a “real cap” on out-of-pocket spending for Medicare drugs, plus state action and some public and official pressure, could encourage commercial insurers to offer sensible insurance too.
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The health-care spending data being released lately can make your head swim. Let’s try to make some sense of it – and then turn to a refreshing new report from the President’s Council of Economic Advisers.
In Newsletter No. 24, we reported on National Health Expenditure [NHE] figures for 2016, according to actuaries of the Centers for Medicare and Medicaid Services. Overall health costs rose 4.3%, the smallest increase since 2013, and pharmaceutical costs rose only 1.3%.
Then, in Newsletter No. 26, we reported on data gleaned by Express Scripts, the largest pharmaceutical benefit manager (PBM), which found that in 2017, drug spending for its private clients rose only 1.5% -- the smallest increase since the company became gathering records in 1993. The rise was consistent with data previously reported by another large PBM, Prime Therapeutics, which found that in the first half of 2017, spending increased at 0.8% compared with the same period the year before.
We also noted in that newsletter that the Health Care Cost Institute (HCCI) reported an increase in total health expenditures for 2016 of 4.6%, about the same as the CMS report. But HCCI found that pharmaceutical spending was up 5.1%, compared with 1.3%, according to CMS. The difference could mainly be explained by the fact that CMS was looking at costs net of discounts and rebates while HCCI looked at gross costs.
A New Report Projects Spending Through 2026
With us so far?
Now, we have a new report on National Health Expenditures (NHE) from CMS, issued on Feb. 14, and summarized in a Health Affairs article by Gigi Cuckler and seven other officials of CMS.
This report consists not of hard data but of forecasts through 2026. For 2017, CMS believes that the increase in NHE was 4.6%, just a few ticks above the 4.3% in 2016. Also for 2017, CMS estimates that pharmaceutical expenditures (net of rebates, etc) will increase by 2.9% -- higher than what the PBMs indicated but still a small increase and well below overall NHE.
But in 2018 and the years after, CMS expects major increases in pharmaceutical spending – 6.6% in 2018 and about the same annually through 2026. These are only guesses, but they are disturbing on their face and require some explanation.
First, prescription-drug expenses are forecast to rise 6.3% annually, on average, from 2017 to 2026; overall, NHE is projected to rise 5.4% -- less than a percentage point difference. Second, forecasting drug costs is a difficult proposition. CMS proved that a year ago when it predicted that drug spending in 2016 (which had ended a month before) would rise 5%. Spending actually rose just 1.3%.
Consider the factors that boost drug spending. Begin with prices of the vast majority of medicines, both generics and branded drugs. The trend for these medicines is flat to down, as the PBM data show clearly. Next, look at utilization. Americans are using more medicines every year. That’s a good thing since taking prescription drugs prevents patients from getting sicker and moving into the more costly parts of the health-care system: physician visits and hospitals. Next, examine which branded drugs are losing their patent protection. Medicines are unique in health care because their prices go down over time as more competitors enter the market and benefits continue in perpetuity, but, as it happens, the dollar-value of branded drugs whose patents expire in 2018 will be lower than in years past; hence, that estimated 6.6% increase in costs.
Now the story grows more complicated. To a great extent, the CMS projections of higher drug-cost growth is the result of forecasts that new drugs – especially more costly and more powerful specialty drugs, such as cancer immunotherapy treatments – will enter the market. In other words, increased spending reflects not so much drug-price inflation as innovation, so apples are not being compared to other apples.
One way to reduce drug spending growth would be to pass a law banning pharmaceutical research. No new immunotherapy drugs to fight cancer would mean no increase in costs from innovative drugs entering the market.
In fact, we are living in a golden age of medicines. Already this year, the Food & Drug Administration has approved Erleada, to treat prostate cancer; Symdeko, for cystic fibrosis; Biktarvy, to treat HIV infections; and Lutathera, for cancerous tumors of the pancreas or the gastrointenstinal tract. When a new drug comes on the market to treat a disease that has been effectively treated before, then, by definition, drug costs will rise. But lives will be prolonged or saved. Without weighing the benefits, citing costs is meaningless.
Some Perspective on All Those Numbers
Despite the deficiencies of huge, aggregate numbers, the NHE projections do allow us to put health-care costs into perspective. For example….
Where the Money Is: Hospitals
Hospitals are where the money is. Hospital spending is more than three times drug spending, but unlike medicines – whose use increases every year, mainly through innovation – hospitals are on the decline. A special section in the Wall Street Journal on Feb. 26 points out, “Traditional hospital care is too costly and inefficient for many medical issues.” The number of community hospitals has fallen from nearly 6,000 in 1980 to fewer than 5,000 today despite an increase of 100 million in the U.S. population. Hospital stays have been dropping since 2007.
A provocative article in the New England Journal of Medicine’s Catalyst in December was headlined, “Do Hospitals Still Make Sense?” It notes that inefficiency is built into the system:
In the not-too-distant future, health delivery systems will, and should be, paid for keeping people healthy and out of the hospital rather than for procedures and admissions. The economic framework of health care will be turned upside down, with profit being directed toward maintaining the health of populations rather than toward just thwarting illness.
It is unlikely, however, that this glorious day will arrive through the leadership of existing mega-hospitals. As the authors – Jennifer Wiler, Nir Harish, and Richard Zane – write,
It is challenging, if not impossible, for most large hospitals, with their high fixed costs, to morph into nimble, low-cost businesses. The delivery models that will succeed are those that do not simply extend the reach of the hospital but begin to entirely replace the hospital as we know it.
This is the real cost challenge: disrupting the incumbent system that accounts for one-third of NHE. The impact will be far greater than playing around at the edges, focusing, as so many politicians do, on the category that accounts for one-tenth of NHE – which also happens to be the category where huge innovation is occurring.
The CEA’s Refreshing Report
The Council of Economic Advisers recently weighed in on the issue of drug pricing, with a 29-page report. One of the CEA’s three members is Tomas Philipson, a leading health economist from the University of Chicago, and, while the report is not perfect, it reveals Philipson’s depth of knowledge and free-market orientation.
This report is valuable not so much for its recommendations (though many are excellent) but for its approach to a complex issue. It is refreshing to read a sentence like this in a government report: “It is misleading…to consider only the prices of these new drugs without evaluating the well-being of patients before the drug became available.”
The report uses the example of a patient diagnosed with HIV in the early 1990s. “Before new breakthrough therapies for HIV emerged, the price of a longer life was prohibitively high because a longer life could not be bought at any price anywhere in the world.” In fact, the price could be called infinite. But once HIV drugs were developed and marketed in 1996, “the price of a longer and healthier life for HIV-positive individuals decreased dramatically: it reached the equivalent of the price of the new, patented drugs.”
Competition then drove down the price further. The report concludes, “The example of innovative HIV drugs makes the essential point that even though the price of the drug was considerable and drug spending rose, the effective price of better health declined.”
How to lower the effective price of health care further? By “preserving incentives to innovate.”
The report notes that “the fixed costs of developing and bringing a drug to market are typically large…[and] the incentive to innovate is driven by whether expected profits exceed those high fixed R&D costs,” which are about $2.6 billion per new prescription drug approval “inclusive of failures and capital costs,” according to the Tufts Center for the Study of Drug Development. And “government policies have a major influence on the size of these fixed costs.”
The report notes that the FDA has put in place programs to speed up the entry of therapeutic drugs, but “there is still room for improvement – the average time of development and entry of new drugs of more than a decade is too long.”
The report also zeroes in on “biosimilars,” which, according to the FDA, are “highly similar to and [have] no clinicially meaningful differences from” existing branded biological products. Those biological products are large-molecule drugs that treat difficult illnesses such as cancer and auto-immune disease. Says the CEA report:
Lack of competition for biologics, including those with expired patents and data exclusivity periods, is one potential reason prices remain high. Eighteen of the top 30 selling biologics were first licensed in 2004 or earlier, suggesting that prices have remained high despite relevant patent expirations.
CEA says that one problem is that the FDA has not finalized guidelines for demonstrating biosimilar interchangeability yet. “Speeding up the issuance of final guidelines could add certainty and attract additional biosimilar applicants.” In addition, economics incentives such as buy and bill will continue to promote use of more expensive originator biologics compared to biosimilars.
High Prices ‘Result From Government Policies’
The report concludes that “many artificially high prices result from government policies,” and the CEA recommends not just changes to drug approvals but changes to Medicaid and Medicare – for example, giving Part D beneficiaries access to negotiated discounts at the pharmacy counter.
The report also advocates reducing Part B reimbursement for hospitals under the 340B drug rebate program, which has been distorted beyond its original purposes. The CEA proposes that some savings go to the Treasury and other savings to hospitals based on their uncompensated care. (The report devotes extensive coverage to 340B, which cries out for reform, as we noted in ourNewsletter No. 14.)
We will have more on 340B in an upcoming letter.
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.
Online newsletter dedicated to helping you understand the costs and benefits that sometimes lie obscured in our complicated health care system