Strong Words in Report by Ex-FBI Chief Freeh
In a world awash in counterfeit and contaminated medicines, the U.S. is an island of safety. But there are threats. One is the repeated recommendation – even from Donald Trump during the presidential campaign – that the United States import prescription drugs from abroad. A report issued June 6 by a team led by former FBI Director Louis Freeh provides overwhelming evidence that such an idea be rejected immediately.
The report – by the law firm of Freeh, Sporkin & Sullivan and the Freeh Group International Solutions -- finds that drug importation is a particularly bad idea for three reasons:
First, importation “would increase the threat of illegitimate products entering the United States, fueling criminal organizations’ activities and profits.”
Second, it would “worsen the opioid crisis – a crisis that has already grown substantially worse due to the powerful opioid fentanyl and fentanyl analogue-laced counterfeit pills being produced by illegal drug trafficking organizations, including in China.”
And, third, “Already overburdened law enforcement and regulatory capacity would be unable to ensure a safe prescription drug supply under importation.”
This third reason is powerful, especially coming from Freeh. The report states:
Allowing wholesalers, doctors, and patients to import direct from sources in Canada and Europe will increase the enforcement and investigative scope for US law enforcement and regulators when they are already stretched to the limit dealing with these agile and creative criminal organizations.
The report reminds us that the "U.S. prescription drug supply is the safest and most controlled system in the world. It has been referred to as the ‘Gold Standard.’… U.S. consumers take for granted that when they fill a prescription at a pharmacy in the United States they will receive the medicine prescribed by their doctor in the requisite form, quality, potency, and dosage.” But importation, even from Canada, puts that safe system in jeopardy.
Dangers of Tarnishing the ‘Pedigree’
The law is clear. As the FDA website explains:
The United States Federal Food, Drug, and Cosmetic Act (Act) (21 U.S.C. section 331) prohibits the interstate shipment (which includes importation) of unapproved new drugs. Thus, the importation of drugs that lack FDA approval, whether for personal use or otherwise, violates the Act. Unapproved new drugs are any drugs, including foreign-made versions of U.S. approved drugs, that have not been manufactured in accordance with and pursuant to an FDA approval.
[M]any drugs sold in foreign countries/areas as "foreign versions" of approved prescription drugs sold in the United States are often of unknown quality with inadequate directions for use and may pose a risk to the patient's health…. The manufacturing facilities and procedures for approved products are also carefully regulated by FDA to ensure product integrity…. FDA cannot assure the consumer that the drug purchased in the foreign country/area would be the same product his or her physician's prescription is written for.
The Freeh Report notes that the 1987 Prescription Drug Marketing Act established a “pedigree” requirement for prescription drugs. The Act says, “A drug pedigree is a statement of origin that identifies each prior sales, purchase, or trade of a drug, including the date of those transactions and the names of all the parties to them.” It took over a century to develop this closed system, and it works well – despite constant challenges.
Operation Pangea Seizes 20.7 Million Pills
The volume of the illegal and counterfeit drug trade is staggering. The World Customs Organization pegs the global market for counterfeits at $200 billion says the Freeh Report. Interpol’s Operation Pangea seized 2.4 million pills in 2011, and by 2015, the number had swelled to 20.7 million.
The consequences can be dire. In 2013, an estimated 122,350 children died in Africa because of a “poor-quality anti-malaria medication.” The American Journal of Tropical Medicine and Hygiene in 2015 published a supplement entitled “The pandemic of falsified medicines.” According to one of the academic papers: “Poor-quality medicines are a real and urgent threat to decades of success in global public health…. Although previously thought to be limited to low-income countries with weak pharmaceutical regulatory systems…, increasing reports of a large variety of poor-quality medicines…in high- and middle-income economies are illustrative of the pandemic nature of this problem.”
In a previous newsletter, we pointed out that a common practice is manufacturing counterfeit drugs unsupervised in a country like China and then shipping them to a more respectable source like Denmark or Canada, from which they are sent to the United States – a transaction that could become legal if drug importation rules change. An FDA official testified in 2007, “Of the drugs being promoted as ‘Canadian,’ 85 percent appeared to come from 27 countries around the globe.”
We also noted that earlier this year the four most recently serving FDA commissioners – two appointed by President Obama and two by President George W. Bush -- last month came out against legalizing drug importation. The four wrote that importation would ‘‘harm patients and consumers and compromise the carefully constructed system that guards the safety of our nation’s medical products.’’
Commissioner Gottlieb’s Skeptical View of Importation
Scott Gottlieb, the new FDA commissioner, also has a negative view of drug importation. In a March 2016 column in Forbes, he wrote that importation does not address any of the “core challenges” of pricing: the structure of health insurance and the lack of competition because of regulatory barriers.
In his article, Gottlieb pointed out:
Given the rapid growth in the prevalence of sophisticated counterfeit drugs, no politician will approve a drug importation scheme without implementing a reasonable measure of regulatory oversight. There are simply too many channels for fake drugs to enter any importation scheme to forgo some meaningful controls.
Yet when importation of foreign drugs is done under a regulated scheme, it really wouldn't save money. I know. I worked on sketching an importation scheme for the FDA regulation of imported drugs when it looked like similar legislation would pass in 2004. That scheme would have added so much cost to the imported drugs; they wouldn’t be much cheaper than drugs sold inside our closed American system.
And, by the Way, Canadian Drugs Aren’t Cheaper
In fact, a strong argument against drug importation is that, even now, without the new regulatory apparatus that would be required, drugs from Canada and Europe are not necessarily cheaper than in the United States anyway.
A study by the non-partisan Congressional Budget Office in 2004 concluded that “permitting the importation of foreign-distributed drugs would produce at most a modest reduction in prescription drug spending.” Even if imports were allowed from “a broad set of industrialized countries,” the reduction would be about “$40 billion over 10 years, or about 1 percent. Permitting importation only from Canada would produce a negligible reduction in drug spending.”
One reason is that 85% of prescriptions in the U.S. are for generic drugs (up from 50% in 2005), and our generics are cheaper than those sold in Canada.The FDA in 2004 looked the prices of the seven “biggest-selling generic prescription drugs for chronic conditions that became available as generics in the United States since 1993” and found that “for six of the seven drugs, the U.S. generics were priced lower than the brand-name versions in Canada.” These results have been confirmed in subsequent studies: here and here.
Better Ways to Reduce the Cost of Medicines
The perennially bad idea of drug importation has surfaced because of legitimate concerns about the cost of medicines. There are much better approaches. “Enhancing competition and eliminating unnecessary regulation” were two more constructive suggestions urged by Jane Norris, a spokeswoman for the Centers for Medicare and Medicaid Services recently quoted in the Wall Street Journal. That’s the direction that Gottlieb wants to take.
Regulations, for example, currently, deter what is called “value-based pricing.” As an April article in Health Affairs explained;
Value-based pricing is an umbrella term, encompassing a number of different possible payment arrangements. At its administratively simplest, a company could link the single price it charges for a given drug to an assessment of how well it works. More sophisticated versions of value-based pricing in the marketplace would allow insurers and patients to receive rebates from drug manufacturers if a drug failed to work, an arrangement known as “outcome-based pricing.” Another variant would involve “indication-based pricing,” in which drug companies charge different prices for the same drug when it is used to treat different conditions.
In his Forbes piece last year, Gottlieb cited an article in BioCentury that showed that, “if a drug maker wanted to offer discounts based on a drug’s ability to shorten or reduce hospital stays, it can’t--not unless FDA explicitly says that the drug is approved to reduce or prevent hospital stays.”
There were reports late last week that President Trump was moving toward issuing an executive order that would promote value-based pricing in federal programs, such as Medicare Part D. Legislation would be required to use the approach more broadly. The President, like many other policy makers, is learning that tired “solutions” like importation won’t lower costs but will create serious side effects, like the ones Freeh enumerates. Market-based solutions and regulatory reforms will be far more effective.
On a morning in late June, Chris Cuomo was hectoring Sen. Dick Durbin (D-Ill) on CNN’s “New Day” for not doing enough to rein in drug costs. “Senator,” said the TV host, “drug prices are statistically the biggest reason that prices go up.”
Cuomo added, “Look, it's sticking out there as this big, ugly number. It's like 70%. You'll see estimates, that that's how much drug prices are going to go up. [You’re] fighting on all of these other fronts but ignoring the biggest number.” Cuomo concluded, plaintively, “It’s hard to get the people behind you when you don't go after the biggest, you know, the biggest factor in the room.”
Chris Cuomo’s ignorance of the facts about health-care spending is appalling, and he’s hardly alone. Politicians and media figures have been criticizing drug costs for years without showing evidence that they understand the data. The mythology is that powerful.
Just for starters, the “biggest factor in the room” is not prescription drugs but hospital care, which, according to the Centers for Disease Control accounts for three times as much spending. In fact, drugs don’t even rank second. That honor goes to a category termed “physician and clinical services,” with spending double that of drugs.
As for rising costs: pharmaceuticals rank far down the list. For the year 2016, according to the Center for Sustainable Health Spending of the Altarum Institute, here are the increases:
In other words, spending on drugs rose just five-tenths of a percentage point faster than GDP while hospital spending rose nearly two points faster.
“Pharmaceuticals accounted for only 11% of the rise in health care costs in 2016,” according to Michael Mandel, chief economic strategist at the Progressive Policy Institute and former chief economist at Business Week.
And Cuomo says that drugs are “the biggest reason that prices go up”? Hardly.
Not only are drug costs a minor part of the overall health-cost picture, but also the growth of spending on prescription medicines has been slowing.
A recent report from the QintilesIMS Institute projects that “moderating price increases for branded products, and the larger impact of patent expires, will drive net growth in total U.S. [drug] spending of 2-5 percent through 2021.” That 2% to 5% is a far cry from Chris Cuomo’s 70%.
How to Explain the Paradox
So how do we explain the paradox? Drug costs aren’t out of control, yet so many people seem to think they are.
For the answer, we have to distinguish among types of drugs and gain a better understanding of how health insurance works….
For the vast majority of prescriptions that Americans fill, prices are not rising. In fact, they are falling. Look at the 2016 Drug Trend Report, issued by Express Scripts, the largest of the pharmaceutical benefit managers with 83 million members.
Express Scripts divides prescription medicines into two categories – traditional and specialty. For traditional drugs – for instance, statins for lowering cholesterol, amphetamines for attention disorders, diabetes medicines like Lantus and Januvia – average unit costs actually declined, down 2.3% from 2015 to 2016. For specialty drugs – anti-inflammatory medicines like Humira and Enbrel, cancer drugs, and new medicines like Harvoni, that cure Hepatitis C – average unit costs rose at a much faster rate: 6.2% These specialty drugs are also being used more by patients, and total spending on them increased 13.3%, compared with a spending decline of 1% for traditional drugs, including increased use. (The fact that more people are using these drugs is, by the way, a good thing: It means that lives are being saved and lengthened. Before Harvoni, for instance, there was no effective cure for Hepatitis C, a disease that often led to liver cancer or a transplant or death.)
The spending experience of Express Scripts is reflected in the data of the other large PBMs.
As for patients themselves, the QuintilesIMS study found that only 2.3% of all prescriptions required payments by patients of more than $50, and the average amount paid for any prescription in 2016 was just $8.47, down from $9.66 in 2013.
As Carolyn Johnson wrote May 5 in the Washington Post:
There’s widespread outrage about soaring drug prices, but a new report shows that people are, on average, actually paying less for their medications than they did a few years ago.
Johnson also pointed to a Peterson-Kaiser Health System Tracker report last year, which “found a slight decline in personal spending on prescriptions” between 2013 and 2014 (the latest year in the study). In fact, overall out-of-pocket payments by enrollees in health plans rose only from $142 to $144 over a decade.
Out-of-Pocket: 15% for Drugs, But Just 3% for Hospitals
But these numbers must be read in context. On average, out-of-pocket spending as a proportion of total drug costs is very high compared to other parts of the health-care system: 15%, compared with just 3% for hospital costs, according to the Centers for Disease Control.
Those are average figures. Out-of-pocket costs, in real life, are far more of a burden for Americans who need specialty, as opposed to traditional, medicines. If that sounds crazy, blame the structure of insurance policies.
For Traditional Drugs, Competition Puts a Lid on Prices
A major reason overall costs have been held down is competition – especially because of greater use of generic drugs. A report by the U.S. Department of Health and Human Services last year noted that in 2014, prices fell for 65% of the generic drugs prescribed to Medicaid patients. Also last year, an IMS studyfound that the price of generic medicines dropped 79% on average within 12 months of entering the market for the period 2011-13 but only 44% for the period 2002-04.
Said Dr. Gottlieb on CNBC on June 28:
We don't play a role in drug pricing, but we do affect drug competition in terms of getting new drugs on to the market, and create competition to older drugs, particularly with generic drugs.
Specialty drugs, however, are another story. When patients are prescribed one of these innovative medicines, they often have to pay a great deal out of their own pockets.
A System of Tiers
Insurers, through their PBMs, apply different benefits to different tiers. For example, they might pick up the entire tab for drugs in the generic tier and provide more support for preferred brand-name drugs in a slightly higher tier. As the tiers rise, patients usually share more of the burden in coinsurance or copayments.
Specialty drugs are on high tiers, so patients have to pay more for them, and the spread between low and high tiers is widening. As Adam J. Fein explains inDrug Channels: “In 2016, copayments on the fourth tier [were] 9.3x more expensive than those on the first tier, compared with 5.9x in 2004.” The result is that even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.”
Yes, many of these policies limit out of pocket maximum-dollar payments, Fein points out, but, he writes, “one in five workers is in a plan with no out-of-pocket maximum for fourth-tier and specialty drugs.” And look at Medicare Part D, which, with its “doughnut hole,” has no limit on out-of-pocket spending after a patient reaches $8,017.
Writes Fein in his June 1 letter:
These benefit designs essentially discriminate against the very few patients undergoing intensive therapies for such chronic, complex illnesses as cancer, rheumatoid arthritis, multiple sclerosis, and HIV.
What kind of insurance is this, anyway? Insured patients pay zero for generic statin drugs that they have been taking for years but face out-of-pocket payments of tens of thousands of dollars a year for a cancer drug after getting a shocking diagnosis out of the blue.
Health Insurers Have It Exactly Backwards
No wonder politicians are hearing from constituents, and no wonder Chris Cuomo is confused. Health insurers have it exactly backwards, and average Americans are suffering as a result. Insurance is supposed to protect you from the unexpected, from crushing expenses that a household budget can’t manage. Instead, in the United States, health insurance is structured to pay a large proportion of small expenditures while often leaving patients to fend for themselves – or to get help from a charitable foundation – to pay for the big, devastating costs.
Despite these backward policies, some advocates want public policy to exacerbate the situation. Steven Brill, for example, wrote recently in the Washington Post that the Affordable Care Act should be changed to allow insurers to raise the ratio of rates between older and younger Americans from 3-1 to 5-1, to give older Americans greater government subsidies to pay for part of that increase, and to slap “controls on the price of prescription drugs” to pay for the subsidies. Price controls in the U.S. would have the same effect as in Europe and Canada: limiting the access of seniors to the most effective medicines.
Finding ways to reduce health-care costs is a great idea – but only if we look at the facts squarely and recognize where the problems really lie.
The Four Myths
Now, let’s review the myths:
Spending on medicines is out of control.
False. Spending is currently rising between 4% and 5% a year, a rate that is projected to moderate through 2021. Last year’s increase in drug expenditures was lower than the increase in hospital and physician costs..
Prescription drugs are “the biggest factor in the room.”
False. As of April, annual spending on prescription drugs was $355 billion, compared with $1,121 billion for hospitals and $706 billion for physicians and clinical expenses.
Drug prices are crushing most Americans.
False. Most Americans are not being crushed, but all Americans recognized that they could be if they get sick. Average out-of-pocket cost of a prescription is less than $10 – and dropping. Some 88% of prescriptions are for generics. But insurance policies force patients to pay a big chunk of the cost of specialty drugs for such diseases as cancer.
Drug companies are at fault for Americans going broke paying for specialty drugs.
False. The problem is not the price of these drugs, but the way insurance policies are structured. Insurers pay a higher proportion of the cost of old-line generics than they pay for complex specialty medicines. This is the opposite of how insurance is supposed to work.
This is not to say that policy makers should sit on their hands. The best ways to modulate prices are to increase competition among drug manufacturers – as Dr. Gottlieb wants to do – and to pressure insurers to act as real insurers rather than pre-paid plans for already low-priced drugs.
Finally, policy makers should focus on the big-ticket parts of the health-care system – in-patient and out-patient care – rather than on the part that has accounted for just 11% of the spending rise last year.
Better Drug Coverage Means More Adherence, Which Means Less Spending on Other Parts of the Health-Care System
It’s hard to believe, but for 41 years, Medicare, the government-run health insurance system for seniors, did not provide coverage for prescription drugs. In 2003, with support from both President George W. Bush and Sen. Ted Kennedy (D-Mass), slim bipartisan majorities in the House and Senate passed the Medicare Prescription Drug, Improvement, and Modernization Act. Three years later, Part D went into effect.
Today, not only is Part D working well but also the program is illustrating a powerful dynamic: Providing better coverage for drugs, increases adherence to doctors’ prescriptions, and taking medicines in turn reduces costs in other parts of the health-care system, especially expensive hospital stays.
Before Part D, seniors were spending an average of $2,322 a year on their medicines. The new program allowed them to choose among competing private plans, with the federal government providing subsidies. The Part D benefit structure can be complicated for Medicare beneficiaries. Under the “standard benefit design,” you pay a monthly premium and there is an annual deductible ($400 in 2017) before coverage kicks in. After that, you pay 25% until drug costs reach a total of $3,700. You then enter the coverage gap, or“doughnut hole,” and pay 40% of your plan’s price for branded drugs and 51% for generics. Beyond the doughnut hole, when you hit approximately $8,700 in total drug costs, you move to “catastrophic coverage” and pay no more than 5% while the plan itself pays 15% and federal government pays 80%. (There is extra help for patients with financial need.)
According to a Morning Consult survey last year, Americans love Part D. Roughly 90% of seniors say they are satisfied with their coverage, and 92% say the plan is “convenient to use.” Competition is working. Nearly every state has at least 20 plans from which to choose. As a result, the average monthly premium for 2017 is $34 (roughly stable since 2011), and total Part D costs for the first decade were 45% below the original estimates of the Congressional Budget Office (CBO).
Where Do Those Rebates Go?
Medicare Part D is one of the most successful government programs in history, but it has its critics. A recent article in the Wall Street Journal concluded that “expensive medicines are increasingly denting the pocketbooks of seniors…in Medicare’s prescription-drug program, known as Part D, despite federal legislation meant to reduce out-of-pocket costs and drugmakers’ increasing discounts.” The median out-of-pocket cost for a drug purchased under Part D rose 38% between 2011 and 2015, according to the Journal’s analysis.
One problem, of course, is that doughnut hole. The Affordable Care Act will help; it calls for reducing the patient’s share of a drug’s cost by about half between now and 2020. (That promise, however, could change if the ACA is repealed and replaced.) Another problem is the cost of specialty drugs, coupled with insurance benefit designs that place these drugs on coinsurance tiers that charge patients from 25% to 50% of the price of the drug. The article cites as an example the blood-cancer medicine Revlimid, with average annual out-of-pocket costs of about $4,210.
Pharmaceutical companies give substantial rebates on such drugs. But under Part D, the rebates go to insurers, not to patients. The Journal article says that spokesmen for two drug companies (including Celgene, maker of Revlimid) “said they would prefer that rebates were used to help lower patients’ out-of-pocket costs.” The article continued:
An Amgen spokeswoman said that despite the significant rebates it provides to insurers, “many intermediaries continue to shift costs to patients, resulting in out-of-pocket payments based on the list price rather than the discounted price of products."
Unfortunately, this is the same story throughout the health insurance system. Rebates aren’t used to reduce what patients pay out of their own pockets for their medicines. As we have noted many times, the average American pays15% of drug costs out-of-pocket, compared with just 3% of hospital costs.
The Bigger Issue: Health Costs Are Integrated
There is a bigger issue here as well – the importance of considering health costs in an integrated way. Spending in one category can reduce spending in another. Listen to two Senators during the debate over Part D in 2003:
[M]any of the sicknesses you used to go to the hospital for and stayed for 3 or 4 days can be taken care of by taking a pill. Yet Medicare says if you go to the hospital and run up a bill of however many tens of thousands of dollars to stay that many days, we will pay for it. But if you take the pill that makes the hospital visit unnecessary, we will not. That clearly doesn't make sense. There is the need for the benefit of prescription drugs, and the Medicare system needs to catch up to circumstance. – Sen. Robert Bennett (R-Utah)
There is a dramatic change in the pattern and practice of medicine. Perhaps no better example is what happens with stomach illness. Twenty years ago, there was not much one could do for somebody who suffered from ulcers other than to have surgery. But now with prescription drugs that address the underlying causes, stomach surgery has been reduced by two-thirds. Yet, in Medicare there is no coverage for those prescription drugs. You can't have a modern Medicare without a prescription drug component.” – Sen. Kent Conrad (R-ND)
In other words, spending on one part of the system reduces spending on other parts. “Taking an antibiotic,” says a Congressional Budget Office report, “may prevent a more severe infection, and adhering to a drug regimen for a chronic condition such as diabetes or high blood pressure may prevent complications. In either of these circumstances, taking the medication may also avert hospital admissions and thus reduce the use of medical services.”
The term for this phenomenon is “medical offset.” Incredibly enough, the “CBO did not include any offsetting effect on medical services in its estimates involving changes to prescription drug policies” – most notably, Part D. But in an important report in 2012, the CBO changed course.
CBO validated the view that not only are innovative medicines one of the most valuable and cost-effective segments of health-care spending, but also medicines lower overall costs in other health-care sectors. Specifically, CBO concluded that a 1% increase in the number of prescriptions filled by Medicare beneficiaries results in a 0.2% reduction in Medicare’s medical spending.
Given that Part D drug spending is approximately $140 billion a year and that Medicare’s medical spending is about $500 billion, the CBO estimate implies that increased drug use of $1.4 billion could reduce medical spending by $1.0 billion ($500 billion x 0.002). Therefore, the medical savings associated with the increase in drug utilization could offset approximately 70% of the cost.
Even more dramatic are individual diseases. For example, in a paper published in 2014 in the journal Value Health, Y.J. Wei and six colleagues at the University of Maryland looked at the effects of taking anti-Parkinson drugs (APDs) on the rest of the health system. They examined two groups of patients – those with low and with high adherence to taking APDs. The high-adherence group “had significantly lower rates of hospitalization…, emergency room visits…, physician visits,” and so on. Over 19 months, the high-adherence group had total health expenditures (including drug costs) that were $2,242 lower.
The CBO’s 2012 report cited as “particularly relevant” a study published in theAmerican Economic Review by Amitabh Chandra, Jonathan Gruber and Robin McKnight because it “examined a large group of Medicare beneficiaries, considered changes in cost sharing similar to those included in the original Part D legislation…and rigorously compared beneficiaries before and after changes in their cost sharing to an unaffected control group.”
What happened when patients had to pay more out of their own pockets for drugs and doctor visits? They ended up having to go to the hospital more because they used drugs less:
[W]e find significant “offset” effects in terms of increased hospital utilization in response to the combination of higher copayments for physicians and prescription drugs. These offset effects are concentrated in the most ill populations. While our dataset precedes the implementation of Medicare Part D for prescription coverage, this finding has implications for the design of Medicare Part D… for beneficiaries with relatively high levels of spending—who are likely to be similar to the chronically ill enrollees who experienced disproportionate offsets in our analysis.
Another study, published as a National Bureau of Economic Research working paper in 2014, examined whether Part D produced offsets – that is lower costs elsewhere in the system. The answer was a resounding “Yes.” The authors – Robert Kaestner, Cuiping Long, and G. Caleb Alexander – wrote:
We find that obtaining prescription drug insurance through Medicare Part D significantly reduced hospital admissions and Medicare expenditures for those admissions. Overall, gaining prescription drug insurance through Medicare Part D was associated with an 8% decrease in the number of hospital admissions, a 7%, or $138, decrease in annual Medicare expenditures for hospitalization, and a 12%, or $728, annual decrease in total resource use (i.e., charges) associated with hospital admissions.
Among specific types of admissions, prescription drug insurance was associated with significant decreases in admissions for CHF [congestive heart failure] (18%), coronary atherosclerosis (13%), and COPD [lung disease] (32%).
Besides its benefits to seniors, Part D has demonstrated conclusively that when people use medicines more, they use other parts of the health-care system less. And those other parts can be very expensive. American Heart Association data show that bypass surgery averages $117,000 and valve replacement, $164,000, not including doctors’ fees.
The lesson here is that policy makers need to look at the system in an integrated way. When drugs that cured Hepatitis C came on the market a few years ago, politicians complained about high costs, but those drugs have prevented liver transplants that cost hundreds of thousands of dollars. More investment in medicines means not only better health and longer lives but also less time in the hospital.
Government Negotiation Not the Answer
The concerns raised in the Wall Street Journal article about rising out-of-pocket costs to seniors under Part D are real and need addressing, but the answer is not the one you hear from some politicians: have the government negotiate lower prices. We examined this issue in detail in this newsletter a few months ago, and the points we made are worth repeating:
First, the U.S. government has less clout as a price influencer than private pharmaceutical benefit managers (PBMs). Let’s assume that the government negotiates on behalf of all 40 million Medicare beneficiaries. That’s a lot, but private PBMs, since they also cover other Americans in business or individual plans, negotiate on behalf of many more. For example, Express Scripts, at last count, covered 83 million; CVS Health, the second-largest PBM, covers 65 million.
We can see the results in drug costs. Express Scripts managed to keep the average increase of spending on drugs used by its members down to 3.8%. (That includes increased use of medicines; for unit prices alone, the increase was just 2.5%.) The average spending increase for CVS Caremark was just 3.2%; for another large PBM, Prime Therapeutics, 2.5%; for Medimpact, 4.4%.
Second, the way a government tries to hold down drug prices is by restricting access to innovative medicines rather than by increasing market-based competition. Consider the Department of Veterans Affairs, which squeezes drug companies for discounts by using its authority to set its own formulary, or list of accepted medicines.
The one government program that squeezes drug companies for discounts by using its authority to set its own formulary is the Department of Veterans Affairs. VA health economist Austin Frakt calculated in 2011 that the program covers about 59% of the 200 most popular drugs, while Part D Medicare insurers covered an average of 85%, and some plans covered as much as 93%.
The VA is a big customer, and drug makers will offer significant discounts to stay on its list. The VA’s drug costs are lower than Medicare’s, but, as Frakt wrote, “If Medicare plans looked more like the VA, a lot fewer drugs would be covered.” Because of these “tightening formularies, beneficiaries would lose low-cost access to many drugs."
Governments in Europe use the same model as the VA. The result is that the best new drugs in the U.S. are often unavailable in European countries. Several studies indicate European patients face major delays in gaining access to new drugs, especially for cancer. That is one reason that cancer patients have better outcomes in the United States than in other developed countries. For example, five-year survival rates for breast cancer are 89% in the U.S. and 81% in the U.K.; for colorectal cancer, 65% in the U.S. and 54% in the U.K.
There are better ways to put downward pressure on prices than by government fiat. “Enhancing competition and eliminating unnecessary regulation” were two more constructive suggestions urged by Jane Norris, a spokeswoman for the Centers for Medicare and Medicaid Services quoted in the Wall Street Journal. That’s the direction the new FDA chief, Scott Gottlieb, wants to take.
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