Despite the uproar from politicians over pharmaceutical prices, the increase in spending on prescription drugs in the United States in 2016 was only 1.3% -- by far the smallest rise in any health-care category. The stunning figure was part of a mass of data presented in a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS).
National health expenditures (NHE) rose in 2016 by 4.3%, the lowest rate since 2013. According to the article, “the slowdown was broadly based,” but the decline in the growth rate of spending on medicines was particularly dramatic.
The statistics show that the sharp rise in drug spending in 2014 and 2015 – at rates of 12.4% and 8.9%, respectively – was an aberration. “In particular,” said the article, “strong growth in spending for drugs to treat hepatitis C contributed to higher overall spending growth in 2014 and 2015.” In addition, during this period, millions of uninsured Americans gained access to medicines under the Affordable Care Act.
The Health Affairs article continued:
The 2016 rate of prescription spending growth is more in line with the lower average annual growth during the period 2010-13 of 1.2 percent – a rate that was driven by the shift to more consumption of generic drugs…. Despite these large fluctuations in growth rates over the past several years, retail prescription drugs’ 10 percent share of national health expenditures in 2016 is similar to the share in 2009.
Prescription-drug spending rose at a considerably lower rate than GDP in five of the seven years reported in the article (again, the outliers were 2014 and 2015). By contrast, hospital spending increased considerably faster than GDP in five of the seven years and about the same in other two.
Here is a comparison of increases in 2016 by spending category:
The Health Affairs article also reveals that drug utilization – that is, the number of prescriptions dispensed – increased 1.9%. Since total spending increased at a lower rate, unit prices for medicines actually declined in 2016.
The article also reported that total spending on generic drugs (including brand-name generics) declined in 2016. Generics constitute 84% of all prescriptions.
So why do Americans feel drug costs – and health-care costs in general – are high? The data have a good answer. It turns out that out-of-pocket spending, which includes consumer co-payments, deductibles, co-insurance, and spending for services that are not covered, rose 3.9% in 2016 -- the “fastest rate of growth since 2007 and higher than the average annual growth of 2.0 percent in 2008-15.” One major reason is the rise in the proportion of covered workers who were enrolled in high-deductible plans from 20% in 2014 to 24% in 2015 to 29% in 2016. “At the same time,” says the article, “average private health insurance deductibles for single coverage plans increased 12% in 2016.”
You might think that higher out-of-pocket costs may give workers an incentive to be better shoppers of health services, but research shows that they cause them to cut back on services they truly need, such as preventive care and medications. Those services help reduce costs in the future.
The new statistics confirm what any sophisticated analyst already knew: prescription drugs are a small portion of total health expenditures and can deliver a big bang for the buck (the hepatitis C drugs being a good example: they obviate the need for a liver transplant that can cost more than a half-million dollars).
But critics of drug spending persist. Consider a new report from the National Academies of Sciences, Engineering and Medicine called “Making Medicines Affordable: A National Imperative.” The report goes wrong at the start by stating, “Spending on prescription drugs has been rising dramatically.” It has not. According to the CMS actuaries, from 2010 to 2016, drug costs rose from $253 billion to $339 billion, or 30%. Hospital costs over the same period rose from $822 billion to $1.1 trillion, or 32%. Overall NHE rose from $2.6 trillion to $3.3 trillion, or 28%. In other words, drug spending is rising about the same as health spending in general and a bit less than hospital spending.
A study released in May by the IQVIA Institute for Human Data Science concluded, “Real net per capita drug spend has been relatively unchanged over the past decade.” Adjusted for inflation, spending by all parties (insurers, government agencies, employers, and individuals) on drugs per American was $811 in 2007 and $895 in 2016. That’s a compound annual growth rate of 1.1%.
The National Academies report also makes the claim: “Drug costs are a significant part of the nation’s total spending on health care.” It depends on what you mean by “significant.” Is 10% of total spending significant? Today, drugs represent 10.1% of total HCE, according to the Centers for Disease Control. In 1960, they represented 9.8%. Overall, hospital spending is triple drug spending, and physician and clinical spending is twice drug spending.
Also, it is critical to understand the forces responsible for increases in drug spending. As a September report from the QuintilesIMS Institute stated, “Revenue growth has been driven by new products and volume growth from existing products; price has been a net negative driver.” Specifically, the report found that growth in the use of existing drugs averaged 2.6%, increases in revenues from new drugs averaged 3.8%, and prices of existing drugs declined an average of 2.5%.
We hardly want to discourage the development of new drugs, and we certainly want people to use more medicines that make them healthy and keep them out of the hospital. So rising revenues in those areas are beneficial. Because of competition, especially from generics as branded drugs lose patent protection, drug costs – unlike costs in other parts of the health-care system fall over time.
The QuintilesIMS study concludes, “Net revenue growth for prescription medicines will average 2–5% through 2021; growth will be driven by new and existing products and offset by patent expiries.” That’s similar to the revenue growth range of practically every industry in America.
Proposals That Will Harm Health
If you get the problem wrong, it is hard to get the remedy right. In the “National Imperative” report, the proposals to lower costs– which we have heard many times before – would, in many cases, make matters worse. As the dissenting view accompanying the report states, “The committee’s recommendations, if actually implemented, will lead to unintended consequences that will damage the health of people in the United States and damage the health of an industry whose innovations are essential to addressing unmet medical needs in the future.”
Among the remedies proposed is to have Medicare, all 50 Medicaid state programs, the Veterans Administration and other government programs negotiate drug prices as a single block, giving them more market power as purchasers. But the top three pharmaceutical benefit managers (PBMs) already have tremendous market power, and and recent results show they use that power to keep costs down even as utilization rises. Unfortunately, some of the mechanisms that the PBMs use operate on a foundation of perverse incentives (such as rebates) that can come at the expense of the health of patients. Importantly, recent data reveal that patients aren’t directly benefiting from the savings incurred by some of the schemes utilized the PBMs. Still, more government involvement in medicine-buying will inevitably lead to more limited choices and access to care for Medicare and Medicaid beneficiaries. That has been the experience in Europe and Canada.
There is no doubt that some drugs are indeed costly, but that’s why insurance was invented – to mitigate the pain of unexpected, big expenses. Unfortunately, the structure of health insurance policies is changing, with patients responsible for a larger proportion of the costs of advanced medicines. As we have pointed out before, the trend in insurance-policy design is to cover the cost of inexpensive generics almost entirely and to force patients to pay hundreds or thousands of dollars for specialty drugs. This is backwards.
As Adam Fein wrote last summer Drug Channels:
These benefit designs essentially discriminate against the very few patients undergoing intensive therapies for such chronic, complex illnesses as cancer, rheumatoid arthritis, multiple sclerosis, and HIV.
According to the Kaiser Family Foundation’s Annual Survey of Employer Health Benefits for 2016, more and more insurers are adding a fourth tier to their coverage plans. Last year, 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. And copayments (that is, what insured people pay out of their own pockets) are, on average, more than nine times higher for fourth-tier specialty drugs than they are for first-tier generics. That multiple has nearly doubled since 2004.
As a result, writes Fein, even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.” About one-fifth of plans with a specialty-drug tier have no limit at all on what a patient pays in coinsurance.
The Year Ends, the Myths Persist
This edition ends our newsletter’s first year, and, just as at the start of 2017, politicians and media are still purveying pernicious myths about health-care costs. But a flood of data shows otherwise. There is probably no better example of the prevailing misunderstanding than the conclusion of the prestigious National Academics that “spending on prescription drugs has been rising dramatically.”Our impression, however is that, slowly but surely, minds are changing.
No one denies that reasonable steps need to be taken to constrain spending – and the smartest step is to increase competition. We have a tried-and-true mechanism in generics and their analogue for sophisticated biologic products called biosimilars.
Our mission continues in 2018: to inject sanity and facts into the debate over health-care costs, so that decision-makers in the public and private sector can make wiser choices.
Issue No. 23: Biosimilars Hold Hope for Lowering Drug Costs and Improving Patient Access, But Challenges Surface
Over the past decade, generic drugs have kept a lid on the cost of health care and increased the access of Americans to effective pharmaceuticals. The big question now is whether medicines based on more complex, previously patented biological products can have a similar – or even greater -- impact. Despite recent legislative changes, barriers remain to the kind of competition that is already having a beneficial effect on costs and increasing access in Europe.
The Generic Success Story
Today, about 90% of all U.S. drug prescriptions are filled with generics, compared with just 57% in 2004. The average out-of-pocket cost for a generic prescription is just $8, and many generics cost insured patients nothing at all. Express Scripts, the largest pharmaceutical benefit manager (PBM), reports that “prices for the most commonly used generic medications [are] down 8.7% this year  and 73.7% lower than the 2008 base price. As a result, the unit cost of the average commonly used medicines (as opposed to what are termed “specialty” drugs) fell last year by 2.3%.
A generic is a medicine that “works in the same way and provides the same clinical benefit as its brand-name version,” according to the Food & Drug Administration (FDA). It is the “same as the brand-name medicine in dosage, safety, effectiveness, strength, stability, and quality.” On average, generics come to market 13 years after a patented, branded drug, and that branded drug quickly declines in both price and revenues.
Cost Savings From Biosimilars?
Now, enter biologics. These are complex medicines, which, according to the FDA, “are manufactured through biotechnology, derived from natural sources or, in some cases produced synthetically.” Biologics treat a wide range of conditions, including rheumatoid arthritis, inflammatory bowel disease, and several types of cancer. Seven of the 10 best-selling drugs in the U.S. in 2015 were biologics, including such well-known names as Humira and Avastin, and global sales of all biologics are estimated to reach $390 billion in 2020, or more than one-third of today’s total pharmaceutical revenues.
It would seem logical that, just as generics have reduced the overall costs of branded, conventional, small-molecule medicines, the process would be repeated for biologics and biosimilars. A biosimilar is a medicine that has no clinically meaningful difference with its branded biologic and, as a March article in Scientific American put it:
People in medicine and policymaking have counted on what they sometimes call a “biosimilar revolution” to push prices down, much as generics have frequently replaced high-priced brand-name drugs in the past. Some have predicted cost savings from biosimilars in the U.S. and Europe to be as high as $110 billion by 2020.
But the analogy is not exact. Identical generic versions of small-molecule drugs can be chemically synthesized, but that is not the case for complex biologics. Manufacturing a biologic is a far more complicated, expensive task than making a small-molecule drug, and there are regulatory differences as well.
‘No Clinically Meaningful Differences in Safety and Effectiveness’
Still, as patents expire for biologics, biosimilar medicines are being developed to compete with their branded counterparts. A biosimilar is not completely identical structurally to the branded product, but it is “highly similar,” in the words of FDA Commissioner Scott Gottlieb and Leah Christi, associate director for therapeutic biologics in the FDA’s Office of New Drugs. An approved biosimilar, they wrote in October has “no clinically meaningful differences in terms of safety, purity and potency (safety and effectiveness) from — an already FDA-approved biological product, called the “reference product.”
Making a biosimilar requires an investment that dwarfs what’s needed for a generic small molecule drug. A biosimilar typically takes five to seven years to develop at a cost reported to be more than $100 million in some cases, not including regulatory fees. By comparison, a generic version of a small-molecule drug takes about two years at a cost of $1 million to $2 million. As a report by the Congressional Research Service (CRS) points out: “The biologic drug Remicade contains over 6,000 carbon atoms, almost 10,000 hydrogen atoms, and about 2,000 oxygen atoms.”
Some drug companies, nevertheless, are hard at work producing biosimilars that work the same as patented biologics currently on the market. Just asthe Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxman Act, cleared a regulatory path for generics, the Biologics Price Competition and Innovation Act of 2009, part of the Affordable Care Act, or Obamacare, has facilitated the development of biosimilars.
So far, seven have been approved by the FDA. The first, in March 2015, was Sandoz’s Zarxio, a biosimilar to Amgen’s Neupogen; the drug stimulates the production of white blood cells to fight infection for cancer patients. The latest approval is for Mvasi, developed by Amgen and Allergan and authorized on Sept. 14. A biosimilar to Genentech’s Avastin, Mvasi treats types of lung, brain, kidney, colorectal, and cervical cancers.
At the time of the approval of Mvasi, FDA Commissioner Scott Gottlieb said:
Bringing new biosimilars to patients, especially for diseases where the cost of existing treatments can be high, is an important way to help spur competition that can lower healthcare costs and increase access to important therapies. We’ll continue to work hard to ensure that biosimilar medications are brought to the market quickly, through a process that makes certain that these new medicines meet the FDA’s rigorous gold standard for safety and effectiveness.
Gottlieb’s focus on biosimilars is encouraging, but the U.S. is late to the biosimilars game and there are challenges.
Europeans Are Ahead on Biosimilars
The European Medicines Agency authorized its first biosimilars in August 2007 and so far has approved a total of 37 such products. A study by QuintilesIMS, published in May, found that European biosimilars have not only lowered health-care costs but also have increased patient access:
For most classes, there is a significant increase in consumption since biosimilar entry in countries which had low starting volumes. There are also some countries which already had high usage of classes before biosimilar entry, such as Sweden with Anti-TNF’s [drugs such as Humira and Remicade, which treat inflammation], which show a significant increase in consumption.
For a class of drugs termed G-CSF, which stimulate the bone marrow to produce white blood cells (an example is Neupogen), increased access in some European countries has been especially significant, with consumption rising 500% in Slovakia and 164% in Norway. The study adds:
The increased competition of biosimilars entering the market has an impact on not just the volume of the directly comparable referenced product, but also the volume of the whole product class…. All products in these therapy areas, including biosimilars, are contributing to this increased patient access.
What Is Hindering U.S. Progress on Biosimilars?
But it’s not merely the late start that is preventing the United States from gaining the full benefits of biosimilars.
Amgen’s biosimilar Amjevita was approved a year ago, with hopes it would compete with Abbvie’s Humira, America’s top-selling medicine. But the market launch was tied up in lawsuits, and last month Amgen agreed to a settlement that will delay Amjevita’s appearance on the market until 2023.
Meanwhile, Johnson & Johnson has focused on its relationship with insurance companies to limit competition for its biologic Remicade, which combats such illnesses as rheumatoid arthritis and Crohn’s disease, against Pfizer’s Inflectraand Merck’s Renflexis, both biosimilars approved by the FDA and on market in the United States. Inflectra and Renflexis seem to be fostering just the sort of competition Gottlieb and other policy makers want, lowering costs with the goal to increase access.
J&J’s efforts to defend the drug triggered a lawsuit in September by Pfizer. Originally, claimed Pfizer, health insurance companies had classified Inflectra at parity with Remicade (whose technical name is infliximab), meaning there was no reason to favor one drug over the other. “However,” said a Pfizer statement, “insurers reversed course after J&J threatened to withhold significant rebates unless insurers agreed to ‘biosimilar-exclusion’ contracts that effectively block coverage for Inflectra and other infliximab biosimilars.”
In other words, according to Pfizer, J&J was using its contractual relationships with insurance companies to block the use of a competitor’s product. “These anticompetitive practices are preventing physicians from trying and patients from accessing the biosmiliar,” said the Pfizer statement.
Wrote reporter Lydia Ramsey in Business Insider last month: “While there has been a lot of hope that biosimilars will help save the US healthcare system billions on costly, biologic drugs, it's taking longer than expected to get to that point.”
It is not hard to see why.
In addition to the obstacles that are the source of the Pfizer-J&J suit, biosimilars have to contend with misunderstandings by physicians and patients about the nature of biosimilars. The FDA’s website has made a good effort to show that, when it approves a biosimilar, it will work like a biologic and it does not differ in any meaningful manner in safety or effectiveness. But the FDA still has more work to do in providing education beyond a placement of materials on their website. While the FDA is one source for information, physicians also have to contend with information about biosimilars from a variety of stakeholders. Some of that information is misleading on the safety and efficacy of biosimilars.
Adding to the complexity of the situation, biologics are generally administered by physicians, who have to contend with a complicated system of insurance reimbursement that may not support biosimilar uptake. Just last month, the Center for Medicare and Medicaid Services reversed its biosimilar coding and reimbursement policy under Medicare Part B to support the uptake of biosimilars. It will be important that other insurers support similar policies in the setting of physicians’ offices.
Biologics are life-changing drugs that require hefty R&D costs, long development times, and complex manufacturing. They are expensive. The best way to control the cost of these medicines and provide greater access is through legitimate competition following a period of patent exclusivity. We have seen the process work for generics, and it can work for bioimilars as well.
Still, if physicians don’t recognize that FDA-approved biosimilars work the same as biologics, they won’t prescribe them. Insurers, too, need to realize that in the long run, biosimilars offer cost savings and access that will help their clients. Policy makers should focus on ensuring that a competitive system can operate freely, and the FDA and other institutions must make it a priority to enhance education about these medicines. Biosimilars offer great hope, but they need active support from multiple stakeholders to help realize their potential.
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