Who regulates pharmaceuticals in the United States? If you answered, “The federal government, of course,” then think again. In the past two years, according to the National Conference of State Legislatures, 46 states have enacted prescription-drug laws, and 2,200 bills have been filed and are awaiting action. The range is broad and includes such areas as regulation of local compounding pharmacies, but some legislation relates to pricing.
This glut really has no public-policy justification. Congress gave the federal government jurisdiction over practically all aspects of pharmaceutical research and development, safety, approval, manufacture, marketing, and distribution. It is these activities that, in the end, influence competition, the key determinant in pricing.
The rationale for state jurisdiction in setting the prices of pharmaceuticals – or almost anything else, for that matter – is flimsy. Federal courts have ruled against previous attempts. In addition, price controls at any level of government have consistently failed, creating unintended consequences like gas lines. U.S. Rep. Tom McClintock (R-Calif), put it well, “Price controls always sound good in theory – but in practice they always create shortages of whatever commodity is being controlled.”
But that has not stopped state legislators.
While Maryland is currently trying to set drug prices directly by giving its attorney general authority to decide which increases are “unconscionable,” most states are more subtle. Particularly popular are “price transparency laws,” which require manufacturers to file reports on the cost factors – many of them proprietary – that are believed to determine pricing.
The idea is not to give patients information they need. Instead, according toAmeet Sarpatwari, a professor at Harvard Medical School, the aim is to arm lawmakers with proprietary details so they can enact more sweeping policy changes aimed at trying to set prices either directly or indirectly by, for example, keeping certain drugs out of Medicaid formularies.
Consider New York state. The Partnership for New York City, a network of business leaders, opposes a drug-price-transparency proposal in the state’s 2017-18 budget because it would require companies to give up “trade-secret information on pricing, sales, marketing, research, development and clinical trials.” The New York Department of Health would then “be authorized to use this information to set benchmark prices on drugs and to mandate surcharges and rebates on drugs sold at higher prices.”
The goal of Gov. Andrew Cuomo’s proposal, according to the New York Daily News, is quite simply “to control the price of prescription drugs.”
The Partnership calls the proposal an “industry-killing legislation,” adding in a Feb. 7 memorandum, “New York can’t have it both ways. We can either enact politics that attract and support the life sciences industry or impose restrictions that make it difficult to build companies and create jobs here.”
Or consider Pennsylvania, where Tony DeLuca, a Pennsylvania legislator. Quoted in the Wall Street Journal on a bill he proposed for his state, he said, “We need to have some transparency. I’m hoping it achieves lower health care costs.”
But such laws, which originated in Vermont, may have the opposite effect. The detail that some legislators are seeking is an expensive distraction for the manufacturers to gather and counter-productive for patients, who may get stuck with the extra administrative costs. In addition, they do nothing to improve the access of consumers to prescription drugs.
Patients Need the Right Information,
Not the Proprietary Business Data That Legislators Are After
Patients do, in fact, need more information – facts that can help them make informed decisions about their health care. If the goals are better care and lower costs, then legislators should focus on getting information to achieve that purpose. How about enhancing the collection and integration of claims and clinical data across all the payers in a state? That way, we can all identify the underlying drivers of costs and assess the comparative value of each treatment.
The questions that patients really need answered are ones like this: How much clinical value does a medicine (or more broadly, a medical treatment) provide? Will the treatment relieve my symptoms? Save my life? The question for policy makers is: Will this treatment help patients and lower costs for society as a whole? A focus on the price of manufacturing a pill or buying an ad is a diversion, and a costly one besides.
DeLuca, a Democrat who chairs the Pennsylvania House Insurance Committee, may have inadvertently revealed the true beneficiaries of the law in an interview in February with Healthcare Finance. “We’re not talking about price controls,” he said. “We are asking to make sure the insurance companies are not being ripped off.”
Insurance companies have their own business relationships with drug manufacturers. Getting legislators to tip the scales in their favor, may benefit insurers’ shareholders, but it does nothing for patients.
Anyone who recognizes the basics of economics knows that prices are not mainly determined by cost inputs but by value to consumers and the power of supply and demand in a competitive environment. Lady Gaga after all, does not price her concert tickets based on her bills for singing lessons.
Structural change is what is needed – and this is where the right information can play an important role. The U.S. requires models that can help us shift from fee-for-service medicine (where payments are based on inputs) to value-based arrangements (where payments are based on outputs). That’s for all services – not just prescription drugs but hospitals, nursing homes, and doctors’ services. All health-care stakeholders have a role to play in developing a high-quality, cost-efficient system.
The Maryland price-gouging bill takes a more direct approach, though it’s doubtful many states will follow. If the legislation passes, Maryland would be the first state in the nation to give its AG the power to take pharmaceutical companies to court for price gouging,” according to the Baltimore Sun.
Such legislation betrays an ignorance of how prices are actually determined in the sector. Insurers and PBMs, both with enormous clout, negotiate with manufacturers of medicines. Introduction of generics after patents expire and competition among branded drugs themselves serve to lower drug costs over time. It is a process wholly different from what happens in other parts of the health-care system, where, for example, rising labor and facility costs increase prices year after year.
As we noted in our last newsletter, Express Scripts, a giant PBM, reported recently that the unit cost of traditional drugs for its members actually fell in 2016 compared with 2015 and that, overall, unit costs rose just 2.5%. By contrast, Cleveland Clinic, a respected hospital chain, recently reported that salary and benefit costs rose 9.3% over the year-earlier period, even though hospital admissions fell.
Undoubtedly, there are problems with specific parts of the market – particularly, with specialized generics, which, because of regulatory deficiencies, have little or no competition. Scott Gottlieb, Trump Administration’s nominee as FDA Commissioner, understands that problem and, if approved, will certainly address it. The FDA is the right level to tackle drug pricing – through smoothing and speeding the approval process.
Prop 61: Another Try at Price Controls
Concerns about prices are completely legitimate but the remedies that states are proposing are ineffective at best and counter-productive at worst. Imagine what will happen to research and development and other pharmaceutical investments in states like New York and Maryland, if their punitive measures take effect.
Unintended consequences were a major reason that voters in California last November rejected Proposition 61, which “Prohibits state agencies from buying any prescription drug from a drug manufacturer at any price over the lowest price paid for the same drug by the United States Department of Veterans Affairs.” Californians apparently realized that, if the proposition succeeded, prices for VA drugs might rise, and veterans themselves would be hurt the most. Other possible consequences: drug formularies would become more restricted, limiting Californians’ access to medicines, and drug companies might move their facilities elsewhere.
This is not to say that all state measures are bad ideas. If disclosure focuses on information that truly helps patients and their providers make good health-care decisions, then the facts can save lives. Ultimately, solutions require the cooperation of all health-care stakeholders, not just politicians fixated on drug prices, to create a truly high-quality, cost-efficient system.
Dreier Urges Common-Sense Economics to Constrain Health Costs
Meanwhile, a former congressman, David Dreier, a Republican who chaired of the House Rules Committee for eight years, provides a welcome antidote to more hysterical discussions of rising health-care costs in an opinion piece last week in The Hill. It is a plea to deploy economic common sense.
Dreier has been deeply involved in health policy for decades. He introduced the first bill advocating Health Savings Accounts 30 years ago. He starts his piece by making a simple point that is lost on many policy makers – or perhaps simply unknown to them: pharmaceuticals represent only about one-tenth of total health spending. By contrast, hospitals account for one-third and outpatient services (mainly physicians and other professionals) account for one-fifth.
“Why is it, then,” he writes, “that so many politicians focus on drug costs and not on hospital costs? The average one-day stay in a U.S. hospital now costs $5,000. That’s seven times as much as in Australia. Heart-bypass surgery averages $78,000, compared with $24,000 in the U.K.”
One reason for the obsession about drug costs may be political; every member of Congress has a hospital in the district but only a few have drug manufacturers. Another is the way health insurance works. Americans pay out of pocket just three percent of hospital costs, but, because of high deductibles and co-pays, 15 percent of pharmaceutical costs.
This insurance system is counter-productive. It discourages the use of lower-cost medicines that can keep patients out of higher-cost hospitals. Every additional dollar spent on diabetes medications, for example, saves seven dollars in other medical costs. And if a drug were invented to prolong the onset of Alzheimer’s by just five years, the estimated savings to the health care system would be $367 billion.
Hospital, physician and clinical spending rose $87 billion last year; drug spending, $13 billion. If you were the CEO of any business, where would you put your efforts to control costs?
Dreier finds his solution in the eternal verities of economics. The way to lower prices is to raise supply and lower demand. On the supply side, the U.S. can speed up drug approvals and “have more well trained professionals provide care now administered only by physicians.”
The demand side may be even more important. One point Dreier makes: “Americans are a lot sicker” than citizens of other countries – often because of unhealthy living. If we could get healthier, we would reduce the demand for health-care services.”
Dreier, as usual, takes a fresh approach. He’s on to something important.
At a press conference announcing the Administration’s plan to replace Obamacare, the new Secretary of Health and Human Services, Tom Price, referred to the “incredible increase in drug prices.”
Really? In its recently released Drug Trend Report, a thorough 116-page tome, Express Scripts, a large pharmaceutical benefit manager (PBM), found that per-person spending on prescription drugs rose 3.8% in 2016 – a decline of more than one-fourth compared with the growth rate in 2015. And, more directly addressing Dr. Price’s comment, the report found that “prescription utilization increased by 1.3%, while unit cost increased by 2.5%.”
That figure – 2.5% – is exactly equal to the year-over-year increase in the Consumer Price Index, that is, the inflation rate.
This 2.5% increase is confirmed in statistics reported recently by a smaller PBM, Prime Therapeutics, with 20 million members.
Specialty Prices Rise More
Some drug prices increased more than others, of course. New pharmaceuticals, many of them attacking terrible diseases like cancer, involve enormous investment. “Specialty medicines,” a phrase describing drugs of high complexity and cost, increased in unit cost by 6.2% in 2016 while their use rose 7.1% for a total spending increase of 13.3%. But spending on traditional drugs, according to the Express Scripts study, actually declined by 1% as unit costs fell by 2.3%.
Those traditional drugs are the ones most of use; they accounted for two-thirds of all drug costs in 2016.
Express Scripts also reported that “nearly one-third of our clients saw per-person spending on prescription drugs decrease in 2016 [our emphasis].” And the average out-of-pocket cost for a prescription rose a mere 9 cents, or less than 1%.
Still, Americans insured by Express Scripts paid out-of-pocket 15% of the total costs of their medicines. That is the same proportion that all Americans paid, according to the latest figures from the Centers for Disease Control. And 15% is a significant number, compared with the tiny portion of their hospital expenses Americans pay out-of-pocket: just 3%.
There are awfully few sectors of the economy where prices actually fall. But take a look at what’s happening with medicines, according to the Drug Trend Report…
Blood-Pressure and Heart Disease: Unit Cost Down 9%
Spending on drugs to treat high blood pressure and heart disease fell by 9.1% in 2016 as utilization increased 1.5% and unit costs dropped an incredible 10.6%. Generics account for 98% of all spending on these drugs, which are great examples of how drug prices fall over time after the initial breakthroughs. In addition, these heart-disease drugs preventspending in other parts of the health-care system. Patients who take their medicines stay out of doctors’ offices, clinics and hospitals. By the way, Express Scripts sees blood-pressure and heart-disease drug costs falling even more in 2017 and declining by a total of 29% over the next three years.
The unit-cost of cholesterol drugs dropped 6.5%, and the cost of asthma drugs fell 2.6%. Traditional drugs for pain and inflammation, which are used widely, increased only 0.9% in unit cost.
The number-one traditional medicine (based on spending), according to Express Scripts, is the diabetes drug Lantus. Its unit cost fell last year even though utilization rose 2.3%. Two other drugs in the top 10 – for heartburn/ulcer and for attention-deficit disorder – also fell in price.
Drugs for Hepatitis C -- a disease that afflicts the liver and can lead to cancer, a liver transplant, or death – have been the object of intense political interest ever since the introduction of Sovaldi in late 2013 at a list price of $1,000 per pill, or $84,000 for a full 12-week regimen. That list price bore little relationship to the amount insurers actually paid. For example, a CMS data release last year showed that in 2014, the average cost of a full Hep C treatment was about $27,000. The pent-up demand for these drugs – which actually cure the disease – played a significant role in increasing overall U.S. drug costs.
Big Decline for Hep C as Competition Increases
Lately, more anti-Hep-C drugs have been approved, and competition has driven down prices further. The unit cost of Harvoni, the most popular medicine in the class, dropped 4.3% last year, and, according to Express Scripts, the average cost of a Hep C drug fell 6.7%. Utilization dropped 27.3% for a total spending decline of about one-third. The forecast for the next three years is for spending to fall 65% below 2016 levels.
Part of this decline is the result of a backlog of patients being cured of the disease. Hepatitis C drugs are practically unique in that way. Unlike, say, drugs for chronic diseases like HIV/AIDS or diabetes, they are not taken forever. Still, some patients with Hepatitis C – and other diseases – may be denied the care they need as PBMs get between doctor and patient.
Yes, the price of specialty drugs has been rising. Six of the 10 most popular drugs in this class increased in unit cost by double-digits in 2016 – but none by more than 17.9%. That was Humira, an anti-inflammatory, whose utilization increased 10.5%.
Not All Drug Spending Goes to Companies That Make Drugs
PBMs like Express Scripts work for health insurers, and their job is to keep drug spending down. It is an important function, and the PBMs are rewarded for their efforts, but the opaque system of rebates and discounts they promote obscures the amount actually realized by manufacturers of medicines.
A study published in January by the Berkeley Research Group found that, on average, “brand manufacturers realize less than half of total drug expenditures” and that “over time, the share of gross drug expenditures realized by stakeholders declined for manufacturers and increased for non-manufacturers.”
In other words, branded-drug companies, often painted as the villains of the health-care system, make less off the sale of their product than non-manufacturers. The Berkeley study found that 42% of initial gross drug expenditures go to pharmacies, wholesalers, patients, governments, insurance companies, and PBMs, often in the form of rebates and fees. The rest is split between brand manufacturers (39%) and generic makers (19%).
Drug Prices Rises Are Not ‘Incredible’
No one is saying that the price of some drugs isn’t increasing, but the overall increase in drug prices is not “incredible.” It is equal to inflation. And drug costs overall – including utilization – are rising at a lower rate than costs in the hospital and physicians-and-professional-services sectors of health care, as the recent Altarum study showed. And those sectors are both far larger than pharmaceuticals.
The key is that the web of health-care costs is complicated, and it needs to be addressed in a serious and sophisticated manner. The Berkeley study strikes just the right tone:
Within the highly complex U.S. pharmaceutical market, myriad entities play a role in the process of making, shipping, filling, and paying for a prescription drug, and the dollars spent on prescription drugs are not realized by any one stakeholder.
As competition in the pharmaceutical marketplace has increased in recent years, brand manufacturers have been making larger payments for market access to their medicines. Government-mandated discounts and fees have also increased over the last five years. Many of these discounts are not plainly visible, leading to misperceptions about the relative share of gross and net drug expenditures realized by brand manufacturers.
An informed discussion about pharmaceutical spending and affordability must be supported by an understanding of the role played by all entities involved in the distribution and purchase of medicines and a recognition of the discounts that lead to far lower net spending than is commonly reported based on invoice price figures.
All true. And also true are two much simpler notions: 1) Drug prices are not rising astronomically, and 2) drugs comprise only about one-eighth of total health-care costs. Policy makers can’t make good policy unless they understand those facts
A disturbing new study, published Feb. 21 in The Lancet, points to a paradox. We spend more of our national output than any other country on health care. A Commonwealth Fund study in 2014 rated us third among 11 rich countries for “effectiveness of care.” The U.S. is probably the best place to live if you face acancer diagnosis, and our access to the best medicines is unmatched. Yet – and here’s the mystery – on average our health outcomes are mediocre, even poor – and apparently getting worse.
The Lancet study looked at life expectancy in 35 large, upper- or middle-income countries in 2010 and then, using sophisticated, Bayesian modeling, made forecasts for 2030. The U.S. ranked 25th out of the 35 for women’s life expectancy in 2010, a rank that is expected to fall to 27th by 2030, just ahead of Mexico and Croatia and behind Poland and Greece. For men, the ranking is 23rd now, falling to a projected 26th.
The Lancet’s researchers conclude that “the poor recent and projected US performance is at least partly due to high and inequitable mortality from chronic diseases and violence, and insufficient and inequitable health care.” But there is a simpler explanation that may be more powerful: We are less healthy to start with – because of our behaviors. The health care system has to work much harder and invest more money to get Americans well.
Is the Health-Care System at Fault
for Low Life Expectancy?
Samuel H. Preston, a sociologist at the University of Pennsylvania, and Jessica Y. Ho, a research scientist at Stanford, wrote a paper, first published by the prestigious National Bureau of Economic Research, with the intriguing title, “Low Life Expectancy in the United States: Is the Health System at Fault?” Their answer was, “No.” And their summary is worth publishing at length:
We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where behavioral factors do not play a dominant role. We show that the US has had significantly faster declines in mortality from these two diseases than comparison countries.
We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system.
It’s not the health care system. It’s the “high prevalence of disease in the US [that] adds considerably to health expenditure,” write Preston and Ho. In other words, Americans spend more not because of health care but because of health. Or, rather, lack of health.
Here is more evidence….
Heart Failure on the Rise
The American Heart Association recently released its annual update on heart disease and stroke and predicted that the “number of people diagnosed with heart failure is increasing and projected to rise by 46 percent by 2030, resulting in more than 8 million people with heart failure.” But we have substantial tools to fight heart disease. For example, cholesterol-lowering statin drugs and high-blood-pressure medicines have been available as generics for years and, for most Americans, are inexpensive. Emergency interventions mean that a heart attack is no longer a death sentence. Yet the threat of heart failure keeps growing, and the culprit isn’t so much poor health care as poor behaviors.
The American Heart Association developed what it calls the Simple 7: “avoiding smoking and tobacco products, engaging in daily PA [physical activity], eating a healthy diet, maintaining a healthy weight, and keeping cholesterol, BP [blood pressure], and glucose at healthy levels.” For almost everyone, meeting these goals does not require expensive medical intervention. Unfortunately, few are measuring up. Only 16.9% of adults met five or more of the Simple 7 goals in 2007-08; even worse, only 14.6% met five or more goals in the most recent period studied, 2011-12.
Poor Diets, Low Physical Activity,
High Health Costs
The AHA found that 17% of men and 14% of women still smoke cigarettes. Only 22% of adults meet federal physical activity guidelines. The prevalence of obesity among adults has increased from 31% in 1999-2000 to 38% in 2013-14. (We have the highest obesity rate in the OECD, the organization of developed nations.) About 80% of men and 70% of women have unhealthy diets. Nearly 40% of adults have total cholesterol of 200 milligrams per deciliter or higher (above 200 is considered “borderline high” or “high,” according to theNational Institutes of Health ); that’s hard to understand with the prevalence of generic statins. One-third of adults have high blood pressure.
The AHA reports that a meta-analysis of nine cohort studies, representing 12,2417 patients, found that as little as 15 minutes of daily moderate to vigorous physical activity reduced death rates for adults 60 and older. Exercise reduces mortality not just from heart disease but from cancer, respiratory diseases, and diabetes, among others. In a separate study, the Centers for Disease Control found that 38 million adults (one in six) “consume alcohol excessively,” costing the economy $224 billion a year (that’s about two-thirds of what the U.S. spends annually on prescription drugs.).
As we noted in the last newsletter , the three conditions responsible for the most health-care spending in the U.S. are diabetes, ischemic heart disease (heart attack and stroke), and low back and neck pain, according to ancomprehensive study in December by JAMA. In most cases, the three can be prevented or mitigated through exercise, good diet, and smoking cessation.
The U.S. spends nearly 19% of GDP on health care while no other industrialized country spends more than 12%. But those numbers don’t tell the whole story. Unhealthy behaviors cause illnesses, and illnesses can require expensive interventions.
How to Save $60 Billion a Year
If behaviors improved, the cost savings would be enormous. Blue Cross-Blue Shield, the health insurer, found that annual medical spending for an obese person is up to $1,429 higher than for a person of normal weight. About 80 million adults are obese. Cutting that figure in half would save around $60 billion a year.
Chronic diseases account for 86 cents of every dollar spent, says the Blue Cross-Blue Shield report. “Chronic diseases and conditions, including heart disease, stroke, cancer, diabetes, obesity, and arthritis are among the most common, costly – and preventable – of all health problems.”
A 2015 study looked at 13 rich OECD countries and found that Americans had by far the highest proportion of seniors with two or more chronic diseases: 68%, compared with 33% for the U.K. and 49% for Germany. When it comes topremature death (before age 50), U.S. rates for cardiovascular and disease are roughly twice those of an average of 17 rich countries.
Policy makers and the general public are up in arms about high health-care costs. And they should be. But many of the critics are looking in the wrong places. Lower costs begin at home. The most productive route to cutting national health-care expenses is improving health through better personal behaviors.
Online newsletter dedicated to helping you understand the costs and benefits that sometimes lie obscured in our complicated health care system