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.
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