More and more new medicines are being developed and approved – a record 59 last year – prolonging and improving lives. Many of these are complex, specialty drugs, treating difficult illnesses like cancer and autoimmune disease. Many Americans, however, are not benefiting from innovations. They neglect to fill their prescriptions because they don’t have the money.
This problem is typically portrayed as being one of runaway drug prices, but that is not the full picture. The “financial barrier to treatment,” as the Medicare Payment Advisory Commission (Medpac) calls it, is not the list price of the drug but the out-of-pocket cost to the patient who has to foot the bill for insurance deductibles, co-payments (that is, flat fees), and, especially, co-insurance (proportion of the price).
This problem is especially acute for some Americans most in need: seniors on Medicare. A new report by Juliette Cubanski, Tricia Neuman and Anthony Damico, published June 21 by the Kaiser Family Foundation, found that 3.6 million Medicare beneficiaries in 2017 spent enough on medicines to reach the catastrophic phase of their coverage, where there is no cap on what they spend out of pocket (the structure of Medicare reimbursement is explained below).
Some 2.6 million of these Medicare patients receive low-income subsidies (qualifications are complicated, but incomes generally have to be below $17,000 for individuals or $23,000 for couples) to relieve part of the burden. But 1,016,600 who reach the catastrophic phase do not get subsidies. That figure compares with just 407,200 ten years earlier.
Bipartisan support is growing to put a limit on the amount that Medicare beneficiaries have to spend out of pocket – and for good reason….
The Danger of High Out-of-Pocket Drug Costs to Health
Citing several prior studies, an article by Nina Joyce and colleagues in the American Journal of Managed Care concluded that high out-of-pocket (OOP) drug costs lead to “lower medication utilization and adherence, especially among patients with chronic conditions.” The researchers write, “Studies across a number of chronic diseases (e.g., rheumatoid arthritis, multiple sclerosis, hypertension, and hypercholesterolemia) report an association between higher OOP costs and lower drug utilization.”
The decision not to take prescribed medicines, write the researchers in their extensive study of epilepsy patients, “may be counterproductive, as patients reduce their use of preventive services and medications, which may translate into costlier care later on.” When sick people don’t take their medicine, they often land in the hospital or a nursing home.
One example is Parkinson’s Disease. A study by Y.J. Wei and six colleagues at the University of Maryland, published in the journal Value Health, found that one-fourth of patients with the disease had low adherence to drugs to fight its effects. Wrote the researchers:
Increasing adherence to APD [anti-parkinson drug] therapy was associated with decreased health care utilization and expenditures,” write the researchers. “For example, compared with patients with low adherence, those with high adherence…had significantly lower rates of hospitalization…, emergency room visits…, skilled nursing facility episodes…, home health agency episodes…, physician visits…, as well as lower total health care expenditures (-$2242), measured over 19 months. Similarly, lower total expenditure (-$6308) was observed in patients with a long DOT [duration of drug therapy] versus those with a short DOT.
No wonder a Best Practices Guide, published in 2017 by the Centers for Disease Control and Prevention, concluded that reducing OOP costs is “an effective strategy for increasing medication adherence and lowering blood pressure and cholesterol levels among diverse populations and in various settings.”
OOP Costs For Medicines in U.S., on Average, Are Surprisingly in Line With Europe, Canada, Japan
For most Americans, however, the OOP cost burden is modest – less than $10 a month on average and lower now than it was a decade ago. Our OOP drug spending, in fact, is in line with that of the rest of the developed world. The average for nine rich countries in 2016 was $118 annually, according to an analysis by Axios, using Peterson-Kaiser Health System Tracker data.
The U.S. average OOP expense was $139, ranking third behind Switzerland and Canada (yes, Canada, the country from which so many politicians want us to import medicines). The average Japanese citizen pays $8.58 a month out-of-pocket for prescriptions; the average American, $9.83. In fact, the difference between our OOP and that of the rest of the world is entirely explained by ourhigher per-capita income.
These figures help us understand the results of a new Kaiser Family Foundation (KFF) poll, which asked which health-care issues respondents wanted to hear Democratic candidates talk about in the upcoming presidential debates. “Lowering prescription drug costs” finished fifth at just 8%, tied with “access to reproductive health services” and far below lowering health costs in general, protecting the Affordable Care Act, and “increasing access to health care.”
In a separate study, Kaiser found that, among Americans who take any prescription medicine, 46% said it was “easy” to pay the cost and another 29% said it was “somewhat easy.” Just 9% said it was “very difficult” and 15% said “somewhat difficult.”
After all, at last count, 91.2% of Americans had health insurance coverage: private, Medicaid, Medicare, or military. That insurance is supposed to protect people from the full brunt of all kinds of health expenses, including drugs.
But Insurance Policies Are Upside Down
But some health insurance plans aren’t working the way they should when it comes to medicines. Many plans pay nearly the entire cost of inexpensive generics, but they force patients to pay large sums for specialty medicines to address serious illnesses. Those unexpected, catastrophic costs are why insurance was invented. The structure of these policies is upside down.
For example, Americans who take multiple sclerosis medications every month paid an average $3,708 annually out-of-pocket. “Patients in high-deductible plans,” which are becoming more and more prevalent, “paid even more, with average annual costs of nearly $8,000,” according to a recent Los Angeles Times article that cited research by Brian Callaghan of the University of Michigan, published in May in the peer-reviewed journal Neurology.
The burden on patients is especially heavy under the government-run plan for seniors: Medicare. In another study published by KFF, in February, researchers looked at OOP payments by Medicare beneficiaries for 28 specialty drugs, based on 2019 prices under 25 health plans. The median annual outlay was about $8,000.
As a result, a dangerously high proportion of Medicare patients do not fill prescriptions or skip doses because of OOP costs. In a thorough study published in the Journal of Clinical Oncology last year, Jalpa A. Doshi, a professor of medicine at the University of Pennsylvania, and her colleagues examined abandonment rates (defined as not filling a prescription within 90 days of its being written) for oral oncology drugs among a sample of 24,000 Medicare beneficiaries. The researchers found that when out-of-pocket costs for a prescription were $100 to $500, the abandonment rate for Medicare patients was 33%, which was higher than for patients with private insurance, at 29%.
A separate study in the journal Arthritis Care & Research found that, on average, Medicare beneficiaries not qualifying for a low-income subsidy paid an OOP average of $484 for a one-month prescription of a Part D biologic agent to combat the disease. Only 61.2% of the 886 beneficiaries studied filled their prescription.
While most U.S. patients have little trouble coping with drug costs, some – including many seniors – are finding their family finances destroyed by OOP pharmaceutical expenses, preventing them from filling prescriptions, making them sicker, and plunging them into bankruptcy. It is the plight of these Americans that policy makers are now addressing. The target is Medicare, the government-run health insurance program that enrolls 17% of Americans.
The Strange Structure of Part D
President Lyndon Johnson signed Medicare into law in 1965, but the program, which provides government-directed health insurance for seniors, did not cover prescription drugs until 2006. The drug benefit, termed Part D, is voluntary, administered by private companies with strict federal guidelines. Some 44.6 million of the 60 million Medicare beneficiaries are currently enrolled in a Part D plan.
The standard Part D benefit design for 2019 starts with a deductible of $415, then requires 25% co-insurance for the first $3,820 in total drug costs. In the next stage – often called the “donut hole” – beneficiaries continue to pay 25% of the cost out of pocket for branded drugs and 37% for generics. When total OOP spending reaches $5,100 (a level of drug costs equaling about $8,100), catastrophic coverage kicks in, and beneficiaries pay 5% of costs, with no limit.
In January, the Trump Administration proposed a step to mitigate some of the burden by ending rebates that pharmacy benefit managers (PBMs) require from drug manufacturers and replacing them with discounts that directly help the patient. If that measure goes into effect, list prices -- artificially inflated by the rebate system -- will fall, and that will mean that co-insurance percentages will be applied to lower dollar amounts.
In a fact sheet, the Department of Health and Human Services explained the current system it wants to change:
If the patient is spending out-of-pocket up to their deductible, they typically pay a drug’s list price. If a patient is paying co-insurance, as is common for expensive specialty drugs, they typically pay it as a percentage of a drug’s list price, even if the plan received a rebate. Patients with high out-of-pocket costs don’t see the benefit of rebates when they pay for their prescriptions. In some cases, a patient’s co-pay can actually be higher than the net price paid by the health plan after rebates.
For Lack of a Cap….
All well and good, but the glaring deficiency in Medicare is limitless Part D obligations for patients. The lack of a cap, that is, a limit on what beneficiaries have to pay out of their own pockets, hits Americans with serious diseases hard.
The catastrophic coverage zone, with its lack of a limit on OOP expenditures, hits Americans with serious diseases hard. The February KFF study, which looked at 28 specialty-tier Part D medicines, showed clearly that the largest contributor to OOP costs was not the deductible or next phase of co-insurance or the donut hole but this catastrophic phase. The researchers wrote:
More than half (61 percent) of expected annual out-of-pocket costs for these 28 drugs in 2019 would occur in the catastrophic phase, on average, which translates to $5,444 in out-of-pocket costs in the catastrophic phase alone.
And the new study by Cubanski and her colleagues found that between 2013 and 2017, OOP spending by the average non-subsidized Part D beneficiary rose by a stunning 71%.
The obvious answer is to eliminate co-insurance for beneficiaries beyond the limits of the donut hole. It is a change that 76% of Americans – including 75% of Republicans – favor, according to a survey earlier this year.
An alternative to a simple annual cap on Part D spending is adding a monthly co-payment limit per drug to go along with the annual cap. Many Medicare beneficiaries who take specialty medicines face large OOP outlays in the first few months of the year as they proceed through deductible, to initial co-insurance period to donut hole to catastrophic phase. To ameliorate the problem, the state of Colorado instituted a plan of “Consumer Cost Share for Prescription Drug Benefits” that required insurers in the state to offer the option of capped monthly co-payments for individual policies under the Affordable Care Act (this change did not apply to Medicare).
“For example,” says a Colorado regulatory bulletin, “if the plan design includes an individual annual out-of-pocket maximum of $6,000 per calendar year, the plan design cannot contain a maximum monthly copayment greater than $500 for each drug on the highest cost tier.”
A subsequent study by the research firm Milliman found that the Colorado program was working as planned, with no noticeable difference in premium increases for plans with fixed-dollar limited co-pays compared with standard co-insurance benefit designs. Insurance “markets did not appear to experience disruption following the implementation,” said the study.
A law in New Jersey to limit monthly co-pays to $250 per monthly prescription for Bronze ACA plans cleared the New Jersey Assembly by a wide margin in March and was reported out of a Senate committee on June 17. While the Colorado and New Jersey designs apply only to private insurance, they could easily be adapted to a capped Medicare Part D design.
The lack of a cap on Medicare is only the most obvious manifestation of the effects of the counterproductive nature of prescription pharmaceutical insurance. No wonder Americans, who pay an average of little more than $10 a month out of their own pockets for medicines, are anxious about drug prices. They know that if they get really sick, they could be paying many thousands of dollars a year – not once but, if they have chronic conditions, perhaps for the rest of their lives.
These sorts of personal disasters are precisely what insurance is supposed to defend against. We have automobile insurance, not to fill up the tank or replace the windshield wipers, but to repair serious damage in an accident or to protect us from hundreds of thousands of dollars of liability if we injure someone. Prescription drug insurance under Part D, by contrast, gets beneficiaries generic statin drugs at almost no charge but requires them to make OOP payments of $16,555 a year for Idhifa, a leukemia drug.
Insurance has it backwards, and Americans who have lower incomes or major health problems, or both, are suffering. Capping OOP expenditures for Part D, which has support in Congress from leading Democrats and Republicans and is part of a House reform bill, will help even more. Tara O’Neill Hayes of theAmerican Action Forum proposed a particularly well-designed plan for a Part D cap in a paper issued last August. She notes, “These changes are likely to lead stakeholders to alter their behavior in ways that reduce overall Part D expenditures for all stakeholders and ensure the program’s continued success."
Change appears warranted not just for government programs but for private ones as well.
The future of medical innovation is clear. It lies with specialty medicines for diseases that, in the past, killed patients or left them severely disabled and required expensive surgery and long hospital stays. These drugs are expensive – not only do they cost billions of dollars to develop, but a combination of factors come into play, including the number of patients affected (more patients pay a lower incremental cost while a smaller number of patients pay a higher incremental cost). In 2010, the U.S. spent $11.5 billion on the top 25 specialty drugs. By 2017, net spending reached $151 billion, or nearly half of all spending on medicines. Insurance companies have coped with innovation in the wrong way, by raising OOP costs for beneficiaries who suffer with the worst diseases.
Because of the structure of insurance policies, Americans in 2017 had to cover14% of prescription drug costs out of pocket but only 3% of hospital costs, according to the Centers for Medicare and Medicaid Services. Put it another way: U.S. hospital expenditures overall are 3.4 times greater than prescription drug expenditures, yet Americans spend 26% more out of their own pockets for drugs than for hospitals.
This makes no sense. Drugs, after all, are what keep people out of doctors’ offices and hospitals. Restructuring health plans of all sorts – beginning now with Medicare -- will go a long way toward removing a major source of anxiety and making Americans healthier and more productive.
In a speech on Oct. 25, President Trump criticized pharmaceutical companies for having “rigged the system” by charging higher prices in the U.S. than abroad. In fact, the system-riggers are not drug firms but foreign countries. Nearly all of them operate nationalized health care systems, where prices are set -- and access to medicines determined -- by government agencies.
This is the system that Americans have consistently rejected and one that, according to a new study, would wreak havoc on pharmaceutical innovation, yet a Republican Administration wants to import a key portion of it to the United States.
There is another approach, however, to closing the disparity – one that would seem better suited to President Trump’s own style and political philosophy. It is for the White House to exert pressure on the Europeans, Canadians, and others, mainly through trade agreements, to end their own price controls and stop their free-riding.
Importing Price Controls
Drug companies would like nothing better than to insert some equity into what American and patients in other countries are paying for drugs, but they can’t without the help of their own government. Most foreign nations run monopsony drug purchasing operations; in other words, government agencies are the only purchaser of pharmaceuticals. The result, as the President said, is that “American consumers…subsidize lower prices in foreign countries through higher prices in our country.”
The gap is real, but is the best way to narrow it what the Administration is advocating?
A few days after the President gave his speech, the Centers for Medicare and Medicaid Services (CMS), an agency of the U.S. Department of Health and Human Services (HHS), proposed a rulemaking that would create an International Pricing Index (IPI) Model. If it goes into effect, the IPI would establish drug price controls based on an index of what other countries pay. The index would apply to single-source drugs and biologicals in Medicare Part B, which reimburses for physician-administered treatments, such as infusions of cancer medicines.
In other words, for some of the most innovative and sophisticated treatments, the U.S. will be adopting a critical component of foreign nationalized health care systems. While that component is limited, it is a classic foot in the door, and according to new research, it will have immediate and detrimental consequences.
Price controls have had a devastating effect on the pharmaceutical industry outside the United States. Not only will fewer drugs be developed, but, if the U.S. adopts the European system, restrictions on access will surely follow. Of the 74 cancer drugs launched between 2011 and 2018, some 95% are available in the United States. “Compare that to 74% in the U.K., 49% in Japan, and 8% in Greece,” said the Wall Street Journal in an editorial last October.
Opposition From Conservatives, Economists
What makes the IPI so strange is that it is being advanced by a President who has generally taken a free-market approach to constraining drug prices – and has been more successful than his predecessors in achieving that goal. Data from the Bureau of Labor Statistics show that pharmaceutical prices have fallen during the 12 months ending in March. Why? Mainly because of increased competition from generics, whose approvals have been eased bynew Food & Drug Administration policies. HHS is also getting ready to end opaque rebates and require discounts to go to patients at the pharmacy counter.
The IPI, both because it relies on direct price-setting and on the policies of Europeans, would seem to contradict the Administration’s strategy – not to mention a worldview that is highly skeptical of the outsized role other governments play in their economies.
Whatever the Trump Administration’s motivations, it was no surprise that, within a month of the proposal, 57 conservative groups, from Grover Norquist’s Americans for Tax Reform to the Tea Party Patriots Citizens Fund, vigorously opposed it. In a letter to HHS Secretary Alex Azar, they wrote:
Conservatives have long opposed price controls because they utilize government power to forcefully lower costs in a way that distorts the economically-efficient behavior and natural incentives created by the free market.
When imposed on medicines, price controls suppress innovation and access to new medicines. This deters the development and supply of new life saving and life improving medicines to the detriment of consumers, patients, and doctors.
In 2004, during another period of interest in mitigating the European-U.S. price disparity, more than 200 American economists made the same point, signing a public letter that said in part:
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; the late Paul McCracken, chairman of the Council of Economic Advisers under President Nixon; and President Trump’s own first CEA chair, Kevin Hassett, who was then at the American Enterprise Institute.
But what the economists warned against – “imposing price controls here” in the U.S. – is precisely what the Trump Administration wants to do. The President tried to repeal the Affordable Care Act, or Obamacare, because of concerns about increasing the role of the U.S. government in health care, but the IPI Model goes much farther and would actually bring government-run health care from Europe, Japan, and Canada to the United States.
Economists recognize that price controls have consequences. Limiting prices means limiting revenues and earnings, which in turn means limiting the funds available for the research and development that produces medicines that have been so effective in recent years in fighting cancer, heart disease, auto-immune disease, HIV/AIDS, Hepatitis C and many more.
A study released at the BIO International Convention in Philadelphia last week by the consulting firm Vital Transformation found that the IPI…
The study also refuted the claim by HHS that R&D would be reduced by only 1% with the implementation of the IPI.
What Is the IPI, Exactly?
The new price controls would apply only to certain Medicare Part B drugs. According to a press release from HHS, the new system “would be phased in over a five-year period [and] would apply to 50 percent of the country.”
We still don’t know all the details, but, according to a policy brief from HHS titled, “What You Need to Know About President Trump Cutting Down on Foreign Freeloading,” the U.S. government will survey prices from a group of countries and then set a target price of “126% of the average price other countries pay” for physician-administered drugs. Studies differ widely on the precise difference between U.S. and foreign prices, but recent HHS research pegs the U.S. figure at 180% of average prices in a set of 15 European countries plus Japan. The price controls would be applied under Section 1115a of the Social Security Act and would not require Congressional approval.
Because income is a major factor in the pricing of all goods and services, including drugs, the choice of some of the countries used by HHS in its price survey is highly suspect. Greeks, for example, have a per-capita income that is 53% lower than that of Americans, according to the World Bank; Croatians, 58% lower; Czechs, 42%. None of the 16 nations has a higher per-capita income than the United States.
In its filing in the Federal Register on constructing an International Price Index, CMS said it was going to jettison Croatia, but “we are considering using pricing data from the following countries: Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, and the United Kingdom.” Left off is Switzerland, which ranks second to the U.S. in per-capita drug spending, as well as seven of the nine countries with the highest per-capita global GDP.
The list has come in for some deserved ridicule, and sources say that it may be adjusted to include more rich countries and fewer poor ones. But such changes do not address the bigger problem – which is that, by importing foreign price controls, the U.S. will do significant damage to pharmaceutical innovation, harming the health of Americans.
The Effect of Price Controls
The IPI proposal in itself will have an impact on non-Medicare as well as Medicare prices, according to the Vital Transformation study. It will have little or no effect on the out-of-pocket costs of Americans but will reduce the revenues – and, thus, the R&D investments, of companies responsible for the world’s most effective medicines. As a precursor of broader policy changes, its potential dangers are evident.
A study by Thomas Abbott and John Vernon, published by the prestigiousNational Bureau of Economic Research, modeled "how future price controls in the U.S. will impact early-stage product development decisions in the pharmaceutical industry." The researchers estimated "that cutting prices by 40 to 50 percent in the U.S. will lead to between 30 to 60 percent fewer R&D projects being undertaken (in early-stage development)."
A 2004 study by the U.S. Department of Commerce found that government price controls across just nine OECD countries were associated with an annual decrease in pharmaceutical revenues of $18 billion to $27 billion and reduced R&D expenditures of $5 billion to $8 billion. According to DoC, that would mean that three or four new drugs would not enter the market each year. A 2015 study, using the 2004 DoC results and published in the RAND Journal of Economics, found that seven to 11 new drugs would be lost.
But the irony is that, if implemented, the IPI Model’s meager or non-existent benefits will almost certain disappoint the people it is supposed to help. A study by the research firm Avalere in December found that the…
vast majority of seniors in Medicare would not see a reduction in their out-of-pocket (OOP) costs from the proposed IPI model because more than 87% of Part B beneficiaries have supplemental coverage (e.g., Medigap, employer sponsored, Medicare Advantage, Medicaid) that covers their cost sharing for Part B drugs.
Avalere estimates that less than 1% of seniors in Medicare would see reduced OOP costs (in a given year) if the demo were to include the 27 drugs listed in the Office of the Assistant Secretary of Planning and Evaluation (ASPE) Report that was released in conjunction with the [proposal]. This figure is a result of the small number of beneficiaries taking 1 of the 27 included drugs (about 4% of all Part B FFS enrollees), and the low number (10–13%) of beneficiaries without any supplemental insurance.
If Not Price Controls, What?
A little over a year ago, the President’s Council of Economic Advisers (CEA), which has been producing some of the most sensible work in recent years about health care costs, issued a report titled, “Reforming Biopharmaceutical Pricing at Home and Abroad.” It 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…. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.
It’s significant that the CEA did not cite any version of a foreign pricing index as a solution – but the Council did not offer anything else either. We assume that the economists at the CEA understand that by importing price controls, Americans themselves would end up the biggest losers. Forcing price cuts in the U.S. would lead to fewer new medicines being developed, particularly the kind of high-value medicines for very sick patients covered by Medicare Part B.
But there is another approach that could prove effective. Rather than the U.S. adopting the European system, the Europeans should adopt the U.S. system.
The benefits, both to Americans and Europeans, would be significant. An article by Dana Goldman and Darius Lakdawalla of the Schaeffer Center at the University of Southern California estimated that ending price controls in Europe would result in $10 trillion in welfare gains over the next 50 years for Americans and $7.5 trillion for Europeans.
President Trump could deploy carrots and sticks in trade negotiations to get other wealthy countries to relax or end their price controls. Currently, drugs seem to be immune to the rules that apply to everything else. For example, imagine if U.S. automakers were told by the French government that any car they export to France could cost only $15,000. No U.S. Administration would tolerate such a violation of basic trade fairness, yet this is precisely the situation that prevails with medicines.
The Steps to Take
There are precedents. Last year’s bilateral trade agreement with the U.S. required South Korea to “amend its Premium Pricing Policy for Global Innovative Drugs to…ensure non-discriminatory and fair treatment for U.S. pharmaceutical exports.” And the new U.S. Mexico Canada Agreement, the successor to NAFTA, requires all three countries to provide 10 years of protection for patented biological products. Much more could be done.
A good first step would be for the U.S. to appoint a dedicated official in the Office of the U.S. Trade Representative to handle pharmaceutical matters, with the aim of ending pricing disparities and increasing the volume of U.S. exports.
Second, just as the FDA under Scott Gottlieb eased approval of generics and created more competition with branded small-molecule medicines, it should also clear the path for the approval and marketing of biosimilars to enhance competition with many of the Part B biologics that HHS wants to target through price controls.
In 2017 and 2018, Europe approved 31 new biosimilars; the United States, just 12. This is one area where we can import something from Europe – not a price-control index but a smart regulatory policy that encourages competition and lower prices.
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