President Trump on Sept. 13 issued a new executive order that would set strict price controls on Medicare drugs. Pharmaceutical companies would be limited to charging here at home the lowest price that other wealthy countries pay. The White House has proposed variations on this theme before, but the new order is more expansive and, if it goes into effect, will push price controls to their most egregious.
Medicare covers about 40 million older Americans, but the program’s policies often spread to commercial plans as well. If enacted, the change would be profound, and studies show it would hamper the ability of pharmaceutical manufacturers to conduct research at today’s levels.
The order follows ambivalence within the Administration about imposing price controls, which have in the past been advocated by Democrats rather than Republicans. In its May 2018 blueprint, “American Patients First,” a comprehensive strategic document on reducing drug costs, the Department of Health and Human Services (HHS) expressed skepticism about the kind of index, or reference, pricing that is at the heart of the Sept. 13 order:
In 2013, the World Health Organization published a paper describing the growing use of external reference pricing, or the practice of using the price of a medicine in one or several countries to derive a benchmark or reference price for the purposes of setting or negotiating the price of the product in a given country. Every time one country demands a lower price, it leads to a lower reference price used by other countries.
Such price controls, combined with the threat of market lockout or intellectual property infringement, prevent drug companies from charging market rates for their products, while delaying the availability of new cures to patients living in countries implementing these policies.
The crux of the matter, as the WHO paper states, is that price controls come at a cost, as we will see.
Details of a Reference-Pricing Model
The Sept. 13 order follows a promise the President made on July 24, when he unveiled four orders to lower drug costs. The other three – including rebate reform and drug importation – previously advanced to a lengthy rulemaking process by HHS. For the fourth order, which Trump called “the granddaddy of them all,” the President, stated, “We’re going to hold that until August 24, hoping that the pharmaceutical companies will come up with something that will substantially reduce drug prices. The clock starts right now.” Ultimately, negotiations between the Administration and the industry failed to yield an agreement – though both sides say one was close – and the order was issued.
The order is based on what’s usually termed an external reference pricing, or ERP, model – that is, one country’s prices are determined by the prices in other countries. The executive order, however, uses different terminology, referring to the system as a “payment model on the most-favored-nation price.”
The order states, “It is the policy of the United States that the Medicare program should not pay more for costly Part B or Part D prescription drugs than the most-favored nation price.” The July 24 order applied only to Medicare Part B drugs, administered in doctors’ offices; the new order extends the policy to Part D drugs purchased from pharmacies. Also, the term “costly” is unclear; it does not seem to cover all Medicare drugs, but which?
The most-favored-nation (MFN) price is defined as “the lowest price” for a drug that a “manufacturer sells in a member country of the Organization for Economic Cooperation and Development (OECD) that has a comparable per-capita gross domestic product.” The price is also adjusted for “volume and differences in national gross domestic product” – a vague formulation.
An OECD database lists U.S. GDP per capita in 2019 as $61,000. The only truly “comparable” countries (that is, with rates that are within plus or minus $5,000) are Switzerland, at $62,000, and Norway, at $66,000. Other candidates for comparison, but at rates in the low-$50,000s, are Austria, Denmark, Germany, the Netherlands, and Iceland. All of these countries have nationalized health care systems with government agencies determining prices.
Criticism of the Plan From Conservatives
Reliable Trump supporters have criticized ERP plans as imposing on Americans the health policies of socialist or social democratic countries. For example, Grace-Marie Turner, president of the conservative Galen Institute, wrote in Forbes that the President’s order threatens to “import price controls from countries with government-run health systems.” The piece was headlined, “Say No to Importing Foreign Price Controls for Drugs.” According to a FiercePharma article Sept. 14, “Republicans in Congress…say they think adopting drug prices from countries where prices are set by the government is effectively importing socialism.”
President Trump himself threatened to veto H.R. 3, the Democrats’ drug-pricing bill, which contains an international reference-pricing provision. The bill passed the House in December but won’t come up for a vote in the Republican-controlled Senate.
In an editorial two years ago, when a less expansive plan than the current one was proposed, a Wall Street Journal editorial stated, “The reason European countries pay less for drugs is because they run single-payer health systems and dictate the prices they’re willing to pay. Don’t like it? They’ll then vitiate your patents and make a copycat.”
Origins of the Sept. 13 Proposal
The plan that was the target of the Journal’s scorn followed President Trump’s January 2018 State of the Union Address, when he said was “very, very unfair” that people who live in other rich countries pay less for medicines than Americans do. The May HHS blueprint made the same point, listing as one of “four major challenges” that “foreign governments [are] free-riding off of American investment in innovation.” In a Senate hearing the next month later, HHS Secretary Alex Azar said that he looked at the idea of ERP but said, “I don’t think it would be effective” because companies could simply raise prices abroad to gain leeway in setting prices here.
But in a few more months, the model was back on the table. On Oct. 25, 2018, the White House solution proposed a plan to set drug prices in this country based on 126% of an average price derived from an index of what 14 other countries, 12 in Europe plus Canada and Japan, are paying. The plan was entered in the Federal Register as a proposed rulemaking of the Centers for Medicare and Medicaid Services five days later and then languished.
Those earlier price controls would have applied only to single-source drugs and biologicals in Medicare Part B, such as infusions of cancer medicines. The system “would be phased in over a five-year period [and] would apply to 50 percent of the country.” It would, in effect, be a limited and long-lasting pilot program.
Prices under the new order would almost certainly be set lower than under the 2018 model. Rather than about one-fourth more than an average of several countries, a price would be identical to the lowest of the low. How low? In a September 2019 comparison of the prices of about 60 pharmaceuticals by the House Ways & Means Committee staff, the U.S. drugs sampled had an average list price of $466, but the average list price in Switzerland was $116; in the Netherlands, $153; in Denmark, $182. Because of rebates, “list prices” are not the prices Americans, or even their insurance plans, actually pay. Still, a most-favored-nation model could easily mean reductions of one-third to one-half.
The Order and the Election
The Sept. 13 executive order does not put the new pricing system for Medicare into effect immediately. Instead, it directs Azar to “develop and implement a rulemaking plan” for a model that will “test whether, for patients who require pharmaceutical treatment, paying no more than the most-favored-nation price would mitigate poor clinical outcomes and increased expenditures associated with high costs.” It is unclear how long the plan and the test would take, but an article in the New York Times said “the process could take months, if not longer, and it would almost certainly be challenged in court.”
Also unclear is whether HHS will examine the effect of MFN on future “clinical outcomes.” If reduced revenues lead to reduced R&D, which seems inevitable, then fewer new drugs will be available – with a devastating effect on outcomes.
The new MFN order itself “does not by itself do anything,” as Kaiser Family Foundation executive vice president of health policy Larry Levitt wrote on Twitter. “It has to be followed up by regulations, which will take time.”
The Times article also noted that the President has already “made the executive order – the war that has broken out with the pharmaceutical industry – a centerpiece of his campaign for re-election.” The original July 24 order ignited an explosive reaction from drug companies and their supporters, which, in turn, was followed by a tough TV spot from the Trump for President campaign committee. It begins, “Greedy drug companies seeking even bigger profits are lying about President Trump. Here’s what President Trump’s plan really does: Reduces Medicare and prescription drug prices.”
The Effect of Price Controls on U.S. Drug Innovation
If pharmaceutical revenues are sharply reduced by price controls, drug companies argue that their investment in research and development will fall as well. The result will be a falloff in new treatments – and in overall health – for Americans as well as the foreigners who depend on U.S. innovation.
In Newsletter No. 63, we used the example of Regeneron’s popular Eylea, an injectable Medicare Part B treatment for macular degeneration, a disease that leads to blindness. An MFN rule would cut Eylea revenues by at least one-third. Regeneron is currently spending large sums to develop a double antibody cocktail for the treatment and prevention of COVID-19. That drug entered late-stage clinical trials on July 6, and the company last month announced that results will be coming soon. Regeneron also announced that its research and development costs rose 36% to $580 million, or 36%, mainly as a result of its COVID-19 work. R&D costs represented 30% of revenues in the quarter and 65% of net income.
Would potentially life-saving medicines – not just for COVID but for many other diseases – even be developed if an MFN rule slashes future revenues?
A study of the original, milder October 2018 plan by the consulting firm Vital Transformation concluded that reference pricing “penalizes innovation, targets companies with the most advanced, newest products in the market for what are often the most challenging diseases.”
The study notes that many of the most innovative drugs are developed not by pharmaceutical giants but by smaller biotechs, which are often purchased by the larger companies. Reference pricing, the study found, “will radically reduce the amount of liquidity available for investments into new products/mergers/partnerships etc., negatively impacting market entry of new medicines .”
The study also casts doubt on the notion that, in response to an ERP model, drug companies will raise prices in Europe so that reference prices will rise. The study calls this scenario “highly unlikely and could lead to compulsory licenses against U.S. products” – that is, outright confiscation of American intellectual property by foreign governments. The study also concludes that if ERP applies only to the most advanced drugs, then R&D will skew away from those medicines.
A earlier study by Thomas Abbott and John Vernon, published as a working paper by the National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.” The 2018 plan would have reduced prices by 30%, and interpolating from the Abbott and Vernon calculations, we figure that R&D projects would drop between 20% and 40% – a disaster for global health. The new Sept. 13 MFN plan would cause an even deeper price cut.
Already in 2020, the Food & Drug Administration has approved 40 new drugs, fighting such diseases as lung cancer, HIV/AIDS, multiple myeloma, muscular dystrophy, migraine, malaria, thyroid eye disease and more. At this rate, by year end, more than 50 new drugs will be approved. Imagine that 10 or 20 of those were never developed.
The U.S. has taken the lead in pharmaceutical innovation because of our relatively free market. As Europe and Japan have moved to monopsony (single-buyer) price controls, their drug industries have suffered. We can expect the same if the U.S. adopts reference pricing.
How to Tackle Free-Riding?
What is to be done, then, to address the unfairness of free-riding?
More than 200 U.S. economists, including several Nobel Prize winners, tackled the price-disparity issue in a public 2004 letter. They wrote: “The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. 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.”
But how to get those “other wealthy nations” to do the right thing? The best answer is for the Trump Administration to play to its professed strength in trade negotiations. Through tough bargaining, the U.S. can pressure other rich countries to relax, or end, their price controls. Those countries could still provide tax credits or direct subsidies to their citizens for drugs and other health services if their aim is to ease the burden of health-care costs, but they should not be allowed to set prices for American medicines – any more than the U.S. government should be able to set prices for German cars.
Price controls badly distort trade and may be impermissible under current trade agreements – and can certainly be changed in future ones. The U.S. could begin the process by appointing a special USTR negotiator with jurisdiction over complicated issues of pharmaceutical trade, sanctions for countries that cheat on current agreements, and tough negotiations for future agreements.
Unfairness or Out-of-Pocket Costs?
The real problem, however, is not so much unfairness as high out-of-pocket costs for Americans. That is a subject we addressed at length in our last newsletter, which offered five ways for the Administration to reduce the amount that people pay themselves, especially the sickest patients: easing co-pay assistance so that manufacturers can assist Medicare beneficiaries in the same way they assist the commercially insured, enforcing insurance caps on monthly spending (here, states are out in front of the White House), placing a ceiling on Part D Medicare expenditures by beneficiaries (easy to do), changing regulations to speed biosimilars to market (thus increasing competition to drive down prices of the most advanced drugs), and reforming the opaque and corrupt rebate system (the object of one of the Administration’s orders).
Meanwhile, the first rule in health care is to do no harm. It’s critical that the U.S. avoid steps that would harm pharmaceutical innovation – and the nation’s health at the same time.
The executive orders that President Trump issued last month had as their goal to “deliver lower prescription drug prices to American patients.” But for nearly all patients, the price of a drug is practically meaningless. After all, 92% of Americans have health insurance, and what they pay for a medicine is determined by the conditions of their policies. The important question is how deeply consumers have to dig into their own pockets to pay for medicines at the pharmacy counter.
In our last newsletter, we discussed the drawbacks of several of the changes the White House proposed, especially drug importation, which imperils safety and won’t cut prices anyway, and a “most-favored nation” policy that imports foreign price controls to the U.S., harming domestic innovation and access to the best medicines.
There are, however, productive alternatives that could reduce out-of-pocket costs immediately, in most cases without Congressional action. One of those is rebate reform, discussed extensively in the last newsletter as well as in No. 58 and No. 45. Rebate reform was resurrected in the July 27 executive orders after being proposed first by the Department of Health and Human Services (HHS) two years ago, placed in the Federal Register, and then rescinded.
We will get to rebate reform at the end of this newsletter, but, first, it’s important to understand the nature of out-of-pocket (OOP) spending on drugs.
Twelve Dollars a Month
When we look at how much Americans pay from their own wallets on drugs, there’s a seeming contradiction. Average OOP spending by Americans is remarkably low, which is why a survey last year by the KFF Health Tracking Poll found that 46% of those filling prescriptions said they found it “very easy” to afford their medicines and another 29% said it was “somewhat easy.” Only 9% said paying for drugs was “very difficult.”
National Health Expenditures (NHE) data, reported in December by the Centers for Medicare and Medicaid (CMS), show that overall health spending (the amount paid by insurers, governments, employers and individuals combined) per capita in 2018 was $10,638. Of that, the bulk ($3,649 a person) was for hospital care and another large chunk ($2,221) was for physician and clinical services. Spending on prescription pharmaceuticals was just $1,026.
Out of the $1,026 for drugs, the actual yearly cost to the patient was $144 per American (see Table 16 of the NHE data). That comes to $12 per month. Out-of-pocket (OOP) spending on drugs is lower now than it was in 2005, when it peaked at $174. More recently, CVS Caremark, the giant PBM with 30% of the U.S. market, reported that “more than two out of three members spent less than $100 out of pocket in 2019.” That’s less than $9 a month.
OOP spending on drugs in the U.S. is in line with the rest of the developed world. As a study last year by Michael Mandel of the Progressive Policy Institute pointed out, “OECD data shows that average out-of-pocket spending ($143 in 2017) is actually lower than countries such as Canada ($144), Korea ($156), Norway ($178), and Switzerland ($215).”
Mandel notes that average OOP spending for persons with at least one prescribed medication dropped 27% from 2009 to 2016, according to a report by the Agency for Healthcare Research and Quality. Plus, “data from the Bureau of Labor Statistics Consumer Expenditure Survey shows that average household spending on prescription drugs fell by 11% between 2013 and 2018.”
The Paradox: OOP Spending Low, Anxiety and Outrage High
These OOP spending averages are low, but consumer anxiety and political outrage are high. Why? Because some people face very high OOP costs for their medicines, and nearly all people worry they may have the same dire situation in the future. For example, Mandel points out that for Americans who perceive their own health as “excellent,” drugs represent just 13% of their total health care OOP spending, but for Americans who says their health is “poor,” drugs represent 43%. (See Figure 2, here.)
The person in excellent health spends $45 a year out-of-pocket on drugs while the person in poor health spends more than $600. “As people become less healthy,” writes Mandel, “they see their out-of-pocket drug spending soar faster than other medical expenses or overall incomes. No wonder they are angry with drug companies!”
The purpose of insurance is to protect against loss – especially the kind of major loss that people have a hard time coping with themselves. So it would make sense for health insurance to provide the most cushioning for those who are most sick and in need of advanced medicines. Instead, those people are often hit the hardest with OOP requirements while the least sick can purchase their medicines for, literally, pennies per week.
Another anomaly is that health insurers design their policies so that Americans pay a far higher proportion out of pocket for prescription drugs than for other health services: 14% compared with only 2.9% for hospital care and 8.4% for physician and clinical services. (See the NHE data at Tables 16, 7, and 8.) This is counterproductive. You would think the insurers would want to encourage the use of medicines. After all, pharmaceuticals lower other costs by keeping people out of hospitals and doctors’ offices. In Newsletter No. 56, we reported extensively on how effectively drugs to combat heart disease and Hepatitis C (HCV) reduce costs in the health care system overall.
We noted, for example, that Hepatitis C “drugs are a comparative bargain – and comparisons, measuring one alternative against another, are what public policy is all about. HCV infection, which afflicts more than 3 million Americans, is responsible for 40% of all chronic liver disease in the United States, and one consequence is a liver transplant. The average estimated cost of such a procedure in 2017, according to a study by the research firm Milliman, was $813,000, or nearly ten times the original cost” of the original HCV drug Solvaldi. Today, through competition, the cost of HCV drugs has dropped considerably.
We can achieve substantially more adherence to prescriptions if OOP costs fall. For example, a study in the journal Arthritis Care & Research found that Medicare beneficiaries not qualifying for low-income subsidies 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, leading to more sick people for expensive physician and hospital care.
Back in 2015, before he served Commissioner of the Food & Drug Administration (FDA), Scott Gottlieb, a scholar at the American Enterprise Institute, told CNBC’s “Squawk Box” that America did not really have a drug cost problem. “What we have,” he said, “is an under-insurance problem. People are now under-insured, especially if they get a disease like cancer.”
In some cases, people are making their own decisions to under-insure, but in most cases, people cannot possibly get the coverage they need. Insurers demand too much co-insurance for specialty drugs.
With that background, let’s look at five ways to lower OOP costs immediately: 1) allowing co-pay assistance for Medicare Part D, 2) limiting monthly OOP spending for state residents, 3) capping OOP payments for Part D, and 4) easing the path for bringing biosimilars to market, and 5) rebate reform.
Five Areas for OOP Reductions….
1. Co-Pay Assistance
In recent years, co-pay assistance – typically, through the use of cards or coupons – has become critical for many families with commercial insurance as high deductibles, co-pays (flat fees), co-insurance (proportional payments), and rising annual spending limits have become regular features of health insurance policies.
When high OOP costs deter people from filling their prescriptions, they get sicker and often have to seek hospital care, raising overall costs in the health care system, as dozens of studies have shown. Here are just two pieces of research….
For the sickest Americans, however, OOP costs are rising, and, as the situation worsens, co-pay coupons, which now cover hundreds of drugs for millions of Americans insured through commercial plans, have been filling the gap. Issued by drug manufacturers and distributed by physicians or pharmacists, coupons can save patients around $6 for every $10 they have to pay out of pocket.
A statewide study of coupons released in July by the Massachusetts Health Policy Commission found:
Coupon programs and their uptake have expanded in Massachusetts. The number of branded drugs that offered coupons rose from 278 in 2012 to 701 in 2018. Among commercial prescription fills where a coupon could have been used, the percent of claims in which a coupon was used increased from 2.1% in 2012 to 15.1% in 2018. The average coupon value per claim was $229 in 2018, more than double the average in 2012.
But these coupons apply only to commercially insured Americans. The Office of the Inspector General (OIG) for the Department of Health and Human Services (HHS) has ruled that “pharmaceutical manufacturers may be liable” under the federal Anti-Kickback statute if they offer coupons for “drugs paid for by Medicare Part D.” The statute prohibits the “solicitation, receipt, offer, or payment of remuneration to induce the purchase of any item or service” under a federal health program.
The OIG’s ruling, however, is an interpretation that can change – especially during this period of high unemployment and widespread anxiety over family finances because of COVID-19. It seems hardly fair that seniors on Medicare are deprived of co-pay relief that is widely offered to younger Americans with commercial policies.
As an alternative to a revised ruling by the OIG of HHS, President Trump could direct the federal Center for Medicare and Medicaid Innovation (CMMI), which is charged with “developing new payment and delivery service models,” to test a model allowing drug manufacturers to provide co-pay assistance to Part D beneficiaries.
The policy would be a temporary one, tied to the COVID-19 pandemic, which has put extra pressure on family finances.
Insurers argue that, by footing all or part of the bill, pharmaceutical companies are encouraging patients to use more expensive brand-name drugs, rather than cheaper generics. But, in fact, the whole idea of co-pay relief is to help people who can’t pay for costly medicines.
A study by IQVIA examined prescription data from 2013 to 2017 and found that co-pay coupons used by commercially insured patients on branded drugs that have lost patent exclusivity represent only “0.4% of the total commercial market volume.” The Massachusetts study found that “the percentage of all drug claims that used a coupon in 2018 was quite low (3%) because most prescription fills are for generic drugs (which do not offer coupons).” Remember as well that patients attempting to use coupons for branded drugs have already been approved by their insurer for that medicine.
Still, if they really think generics are being avoided because of coupons, the OIG and CMMI could simply order that coupons can be applied only to branded drugs for which a generic does not exist.
2. State Caps on Monthly Spending
A New England Journal of Medicine study found that at least 21 states to limit OOP costs for prescription drugs (see Table S1 here). In most of those states, legislation still awaits passage, but on Jan. 21, the Governor of New Jersey signed into law a bill that requires that at least one-fourth of the plans that each health insurer offers in the state must include a cap on monthly OOP payments for a single prescription. For silver, gold and platinum plans, that limit is $150; for bronze plans, $250. The cap applies to deductibles, co-pays, and co-insurance.
Other states have variations on the theme. Vermont imposes annual, rather than monthly caps. California’s law is much the same as New Jersey’s but with higher ($250 and $500) caps. Washington state requires capped co-pays (that is, flat fees) rather than co-insurance (a proportion of the cost of the drug) for its silver and gold plans. Four out of five insurance plans have specialty tiers for advanced medicines, with co-insurance typically ranging from 20% to 50%. Delaware, Louisiana, Connecticut and Maryland apply caps only to drugs in specialty tiers. New York bans such tiers altogether.
States are not waiting for the federal government to tackle the OOP problem. They are moving on their own to new standardized plan designs. A feasibility study in Washington state, for example, found that residents wanted lower deductibles and “more transparent and predictable cost sharing (co-payments rather than co-insurance)” and that these aims can be achieved with only modest increases – or even decreases – in premiums.
Research published in the New England Journal of Medicine on Aug. 6 concluded that OOP savings can be achieved “without detectable increases in health plan spending, a proxy for future insurance premiums.” The article by Kai Yeung of the Kaiser Permanente Washington Health Research Institute and colleagues examined the effects of requirements in Delaware, Louisiana and Maryland that capped monthly OOP outlays at $150 per 30-day supply of specialty medicines only.
The researchers worked with a sample of 27,161 commercial-plan members who had rheumatoid arthritis, multiple sclerosis, hepatitis C, psoriasis, psoriatic arthritis, Crohn’s disease, or ulcerative colitis – diseases that call for specialty drugs. Yeung and colleagues found that the patients in the 95th percentile of spending saved an average of $351 a month each. But patients with lower spending needs (even in the 75th percentile) were largely unaffected. The researchers wrote:
Our results suggest that the [monthly cap] policies may be well aligned with health economic principles for insurance coverage. Insurance functions best when it provides coverage for treatments that are high-cost, that are for rare conditions, and that patients value…. Aside from being used to treat relatively rare conditions, specialty drugs may be good candidates for generous coverage because they tend to be clinically important medicines.
Society should want to encourage the development of such medicines – not deter innovation, which would be the consequence of the “most-favored nation” proposal that we discussed in the last newsletter. That reference-pricing measure was aimed directly at specialty drugs.
Importantly, the researchers conclude, “Since a primary function of insurance is to spread the financial risk of catastrophically high spending for a small population, we interpret the caps as strengthening this risk-spreading function without detectably increasing spending for the broader population.” In other words, premiums would be unlikely to rise.
Not only is it economically baffling to place such a heavy burden on the sickest Americans, it appears highly unfair. A study published by the Centers for Disease Control and Prevention (CDC) last year looked at spending among cancer survivors aged 18 to 64. The CDC report stated:
Financial hardship was common; 25.3% of cancer survivors reported material hardship (e.g., problems paying medical bills), and 34.3% reported psychological hardship (e.g., worry about medical bills). These findings add to accumulating evidence documenting the financial difficulties of many cancer survivors.
Insurance companies and PBMs, however, oppose redesigning their policies to limit monthly OOP costs (the PBMs argue that caps will encourage physicians and patients to choose more expensive branded drugs over generics), and not just state but Congressional legislators are stepping in. Sens. Elizabeth Warren (D-Mass) and Ron Wyden (D-Ore) in 2018 introduced the Capping Prescription Costs Act, which set a limit of $250 per month in OOP costs for individuals and $500 for families. The bill died in committee.
The Trump Administration could boost the chances for monthly caps by publicly supporting legislation in the states and in Congress.
3. A Ceiling for Part D
Incredibly enough, Medicare Part D -- the pharmaceutical benefit, mainly for seniors, that was introduced in 2006 -- does not provide any cap on annual OOP spending on prescription drugs. In addition to paying monthly premiums, beneficiaries pay some level of cost-sharing for each prescription (either a flat co-pay or a percentage of the cost of the drug, depending on the tier the drug is on) until they have spent several thousand dollars. Then they enter what is called the “catastrophic phase” of coverage, where they have to pay co-insurance of 5% on the price of their drugs. The official Medicare website says that after you hit this phase, the system “assures you only pay a small coinsurance amount or copayment for covered drugs for the rest of year.”
Small? Not really. For the people who have drug costs high enough to get into the catastrophic phase, their expenses are significant. A research piece last year by Juliette Cubanski, Tricia Neuman, and Anthony Damico of the Kaiser Family Foundation examined the effects of the lack of a Part D OOP cap on Medicare enrollees. Among their findings:
Under authorities associated with the CMMI, HHS Secretary Alex Azar can develop and implement reimbursement reforms to Medicare. When it comes to bringing relief at the pharmacy counter to seniors, there’s a simple one waiting for him: expand on an existing pilot model called the Part D Senior Savings Model (which helps patients with diabetes by capping costs for insulin at $35 per month) and broaden the focus to high-cost drugs and reduced cost-sharing in the catastrophic phase of the benefit.
Essentially, this would create a cap on the amounts that seniors have to pay out-of-pocket each year for high-cost specialty drugs by eliminating their 5% obligation in the catastrophic phase of Part D. Manufacturers who want to participate in the pilot would have to put more skin in the game by negotiating rebates with plans that cover the 5% cost sharing and the additional costs plans may expect.
Congress has been considering an OOP cap for Part D for many months now, but the legislation is stalled. In the meantime, the Administration can take action.
4. Easing the Route to Market for Biosimilars
In the past few years, pharmaceutical price increases have moderated significantly and, by some measurements, have actually declined. Express Scripts, a large PBM with a 23% market share, stated in its latest Trend Report that the average prescription filled by its members cost 0.9% less in 2019 than the year before. A big reason is that early in the Trump Administration, the FDA initiated regulatory changes that have led to more generic drug approvals – a record 1,171 last year. Competition from generics, which account for nine out of ten prescriptions, drives down the prices of branded drugs.
Generics are copies of small-molecule drugs, the vast majority of medicines. But some of the most dramatic innovations are coming from what are called biological products (or biologics), which are complex, large-molecule treatments “produced through biotechnology in a living system, such as a microorganism, plant cell, or animal cell,” according to the FDA. A biosimilar’s relationship to a biologic is nearly the same as the relationship of a generic is to a small-molecule drug. Or, as the FDA states, a biologic is “highly similar to and has no clinically meaningful differences from an existing FDA-approved” biological product.
Biological products are among the most costly medicines. For example, the biologic Humira, a monoclonal antibody which treats various types of arthritis, Crohn’s Disease, and other conditions, was the top-selling drug in the world last year, with $20 billion in sales. Other biologics among the 10 best-selling drugs are Herceptin and Avastin for cancer and Rituxan, which treats lymphoma, leukemia and rheumatoid arthritis.
Unfortunately, U.S. approvals of biosimilars have lagged. The FDA has approved only two so far in 2020 and 28 in all. Even then, biosimilars are delayed or prevented from reaching the market because of expensive battles to surmount patent thickets or because of pressure applied by incumbent branded drugs to PBMs. Several companies, for instance, engaged in settlements to delay until 2023 the launch of biosimilars with Humira as reference product – even though some of those biosimilars were approved by the FDA as early as 2016 and 2017.
By contrast, Europe has approved more than 60 biosimilars, and they face fewer barriers in getting to market. The U.K. alone is expecting to save about $400 million from Humira biosimilars by next year, and just one U.S. firm, Biogen, estimates that it saved patients in 20 European countries a total of more than $2 billion from its biosimilars in 2019.
An IQVIA study found that total net spending on all biologics rose from $84 billion to $126 billion between 2014 and 2018 while spending on biosimilars increased from $200 million to a mere $1.9 billion. There is no doubt that biosimilars can have an impact. For instance, the market share of the insulin biologic Lantus fell 30% in a little over two years after the introduction of a biosimilar. But biosimilars clearly are not fulfilling their promise.
In an early study, the CBO estimated that biosimilars would reduce prices by 40%. Research by the Pacific Research
Issue No. 63: With Fanfare, White House Issues Four Orders on Drug Prices, But What Would They Actually Mean?
President Trump on July 24 signed four executive orders intended to “deliver lower prescription drug prices to American patients.” Some of the orders resurrect ideas that have been discussed for years. Some could have beneficial effects on Americans’ out-of-pocket costs and on their health. Others are likely to be harmful or impossible to implement. STAT News called the orders “a last-ditch effort by the White House to cut drug costs before the November election.” And, according to Reuters, “experts say they are unlikely to take effect in the near term and in some cases lack specifics.”
Regulatory orders can take months, even years, to implement. For example, the White House first announced a rebate reform order two years ago, placed it in the Federal Register eight months later, then rescinded it five months after that and is now bringing it back.
Still, the newly announced orders are worth examining in detail. Even if they do not affect policies this year, some may be brought back in the future, perhaps by a Biden Administration. Democrats could find it easier to pass legislation similar to Speaker Nancy Pelosi’s H.R. 3, the Lower Drug Costs Now Act, by pointing to the Trump Administration’s own price-control proposals.
President Trump has already achieved a major (but rarely recognized) success in constraining drug prices by removing regulatory barriers that harmed competition. The Administration could continue on that path by adopting a variety of policies that would quickly reduce out-of-pocket expenses, especially for seniors. We will mention some at the end of this newsletter.
For now, let’s turn to the July 24 orders. The three most important concern requirements that: 1) prices for certain Medicare Part B drugs not exceed what any other wealthy country pays, 2) pharmacy benefit managers (PBMs) pass on to consumers the rebates that the PBMs demand from drug manufacturers, and 3) the Department of Health and Human Services (HHS) ease the way for states to import drugs from Canada, where they are generally cheaper. All three, in slightly different forms, have long histories. Let’s take them in turn:
Price Controls Based on What Other Countries Pay
This rule would require Medicare to cap what it pays for a drug at the lowest price paid by in countries that have roughly the same income levels as the United States. The rule would apply only to a limited number of the most expensive Part B medicines (administered in doctors’ offices and hospitals), but it would provide a model for broader price controls.
When he announced the order, however, President Trump said, “We’re going to hold that until August 24, hoping that the pharmaceutical companies will come up with something that will substantially reduce drug prices. The clock starts right now.” So far, such alternatives have not been made public. Indeed, as Politico headlined on July 28: “Drugmakers refuse to attend White House meeting after Trump issues executive orders on costs.”
The change closely tracks a previous proposed rule that was placed in the Federal Register on Oct. 30, 2018. In that case, the price of an affected Part B drug would be capped based on a formula derived from an average of prices charged by a group of foreign countries, called an International Pricing Index (IPI).
In a speech five days earlier, President Trump criticized pharmaceutical companies for having “rigged the system” by charging higher prices in the U.S. than abroad. In fact, those companies would be thrilled to be able to charge as much in Paris as in New York. The system-riggers are not drug firms but foreign countries, nearly all of which operate nationalized health care systems, where prices are set -- and access to medicines determined -- by government agencies.
The IPI was widely mocked for including such countries as Greece in a basket of foreign prices from which the Centers for Medicare and Medicaid would derive a mandatory U.S price ceiling. Left out of the basket were 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 new proposal is even harsher. Rather than 126% of the mean price of the basket, the U.S. price would be reduced to the lowest price among other wealthy countries. This new reference, or index, price would be termed the “most-favored nation” (MFN) price.
The Costs of International Reference Pricing
The original 2018 proposal was eventually dropped, perhaps because of research showing that price controls of this nature would have a devastating effect on pharmaceutical innovation. It is still unclear which drugs would be affected, but Part B payments for some critical drugs are substantial. For example, reimbursements for Regneron’s Eylea, for example, which treats macular degeneration, a disease that leads to blindness, totaled $2.5 billion in 2017, without subtracting rebates. An MFN rule could cut revenues by 30%.
Regeneron is currently spending large sums to develop a “double antibody cocktail for the treatment and prevention of COVID-19.” The drug entered late-stage clinical trials on July 6. Would potentially life-saving medicines like these even be developed if an MFN rule slashes future revenues?
As we wrote in our Newsletter No. 47:
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 to adopt an IPI or MFN scheme is to import 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.
When the IPI was first proposed by the White House, one reaction was to urge the President to exert pressure on the Europeans, Canadians, and others, mainly through trade agreements, to end their own price controls and stop their free-riding. Instead, the White House has returned to what’s called “reference pricing” – letting others determine what Americans pay.
In its press release on the orders, the Department of Health and Human Services (HHS) listed rebates first – and with strong language. The order, said HHS, would…
End a shadowy system of kickbacks by middlemen that lurks behind the high out-of-pocket costs many Americans face at the pharmacy counter. Under this action, American seniors will directly receive these kickbacks as discounts in Medicare Part D. In 2018, these Part D discounts totaled more than $30 billion, representing an average discount of 26 to 30 percent.
Like international indexing, rebate reform has a bumpy history. On May 11, 2018, President Trump declared that it would be a significant part of the Administration’s strategy for constraining drug prices. In a Rose Garden speech, he said, “Our plan will end the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
After a long delay, HHS on Feb. 6, 2019, placed a highly detailed proposal for a rebate-reform rule in the Federal Register. In a speech on June 13, HHS Secretary Alex Azar took dead aim at a rebate system that, he said, “pushes prices perpetually higher.” PBMs require rebates of drug manufacturers to secure a favored place in their formularies. Favored drugs are placed in lower tiers, with lower cost-sharing required, so patients and physicians have an incentive to choose them. The proposed rule, said Azar, would replace “this rebate system with upfront discounts for seniors at the pharmacy counter.”
Rebates are notoriously opaque, but it is clear that they have grown rapidly. A 2018 study by the research firm Altarum placed the total in 2016 at $89 billion, more than doubling in four years. Nearly the entire amount goes to insurers. By turning rebates, which are particularly high for Medicare Part D, into discounts for patients, not only would medicines be less expensive but the price on which co-insurance payments are calculated would be reduced.
The HHS proposal in 2019 would have ended the safe harbor from liability afforded rebates to PBMs under the federal Anti-Kickback statute, which is part of the Social Security Act. Instead, it would protect “point-of-sale reductions in price on prescription pharmaceutical products.”
But less than a month after Azar’s June 2019 speech, the White House announced a sudden change of mind: “Based on careful analysis and thorough consideration, the president has decided to withdraw the rebate rule.” Now, a year has passed, and rebate reform is back.
Why did the White House balk? One objection raised by presidential aides was that insurers, forced to pass rebates on to consumers, would make up the lost revenue by raising premiums. In addition, a Congressional Budget Office study estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029 as a result of losing rebates. That figure may sound high, but it is only 1% of total Medicare and Medicaid spending projected over the period.
Lower Out-of-Pocket Costs Improve Health
Even those estimates were questioned at the time by critics who argued that lower out-of-pocket costs would encourage patients to fill prescriptions they were neglecting because of the expense. Higher adherence would improve health, which in turn would lower overall care costs for federal programs.
A Milliman study in January 2019 for the Assistant Secretary of HHS for Planning and Evaluation looked at six scenarios, including decreases in branded drug prices by drug manufacturers and increased formulary controls by PBMs. For four of the scenarios, net government spending actually fell – in one case by $100 billion over 10 years and in another by $79 billion. All six cases projected that, for beneficiaries, premiums would rise and cost sharing would fall. On net, in five of the six scenarios, spending by beneficiaries would decline.
Then, there is the matter of premiums. “At the end of the day, while we support the concept of getting rid of rebates and I am passionate about the problems and the distortions in system caused by this opaque rebate system, we are not going to put seniors at risk of their premiums going up,” Azar was quoted by The New York Times as saying after the July 10 , 2019, to decision to pull the plug.
In fact, premium increases would almost certainly be a small percentage of a small number. For 2020, the Part D base beneficiary monthly premium is $32.74, a decline from the previous year. A study by the California Department of Managed Healthcare estimates the average increase as a result of rebate reform at 0.4%. A separate study found that the majority of Medicare Part D beneficiaries would see no increase at all. In that research, Erin Trish and Dana Goldman of the Schaeffer Center for Health Policy and Economics at the University of Southern California, began by estimating that “eliminating rebates would increase beneficiary-paid monthly premiums by an average of $4.31.” They wrote, “Our estimate is in line with those reported by HHS.” This tiny rise in Part D premiums would be overwhelmed by the out-of-pocket savings for seniors at the drug counter.
Besides modeling data, we also have real-world evidence of the extent to which patients may benefit. Last year, Optum, a PBM and part of the United Health Group, released data regarding its own program that follows the outline of rebate reform. Optum concluded that, when negotiated prescription plan discounts are passed on at the point of sale patients saved an average of $130 per eligible prescription. In addition, prescription drug adherence improved by 4% to 16%. In other words, patients paid less out of pocket and were more compliant with the medications that they were prescribed.
The new executive order, however, contains what sounds like a poison pill: premiums can’t rise. That appears to be an effort to kill rebate reform, which would have the most beneficial effect of any of proposed changes. Still, it can be saved if the proposal is improved as the precise terms are written.
The third major proposed change affects the importation of drugs from other countries – another contentious issue that is revived every few years. According to a July 24 HHS press release, the executive order actually takes three separate steps. It would “create a pathway for safe personal importation through the use of individual waivers to purchase drugs at lower cost from pre-authorized U.S. pharmacies” and “authorize the re-importation of insulin products made in the United States” if the HHS Secretary finds that it’s necessary for “emergency medical care.” The third step is the most important. It instructs the Secretary to “finalize a rule allowing states to develop safe importation plans for certain prescription drugs.”
Under a provision in a 2003 law, HHS has the power to approve state programs to import medications from Canada. But to gain that approval, the HHS Secretary has to certify the practice would pose “no additional risk” to the public’s safety and “result in a significant reduction” in cost for the “American consumer.” As a Wall Street Journal editorial on April 16, 2019, commented, “These are high bars,” and “No secretary has ever made such a judgment, and it’s hard to see why Florida deserves such a special federal blessing.” The editorial referred to Florida because the state passed legislation permitting importation.
Eight months later, the Food & Drug Administration, an HHS agency, issued a draft rule that “would allow states, wholesalers and pharmacies to import certain medicines from Canada.” But again, while there was fanfare, there has been action. Now, the President is ordering HHS to set a final rule.
The FDA has a long record of opposition to importation, in both Democratic and Republican administrations. Scott Gottlieb, Trump’s first FDA Commissioner, was a staunch foe. Three years ago, just before Gottlieb took office, his four predecessors – two appointed by President Obama and two by President George W. Bush – came out against legalizing drug importation, writing that it would ‘‘harm patients and consumers and compromise the carefully constructed system that guards the safety of our nation’s medical products.’’
Policing drug imports – even from Canada and even of medicines made in the United States initially – would be a nightmare for the FDA, which is responsible for the 3.8 billion prescriptions filled domestically.
The FDA explains on its website:
We appreciate that there is a significant cost differential between drugs available here and those in other countries/areas. However, many 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….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.
Former FBI Director Louis Freeh led a team on an extensive study in 2017 of the effects of importation on security. He concluded that importation “would increase the threat of illegitimate products entering the United States, fueling criminal organizations’ activities and profits “and that “already overburdened law enforcement and regulatory capacity would be unable to ensure a safe prescription drug supply.”
The Dangers of Counterfeit Drugs
But aren’t Canadian drugs safe? An FDA official testified in 2007, “Of the drugs being promoted as ‘Canadian,’ 85 percent appeared to come from 27 countries around the globe.” Gottlieb said last year, “When a consumer goes online to buy medicines purportedly from Canada, they may get a medicine sourced from elsewhere that could be counterfeit, expired or misbranded.”
Counterfeiting is an enormous problem globally. As Reuters reported in 2018 on a law-enforcement operation that led to 859 arrests:
Coordinated police raids in 116 countries have netted 500 tons of illicit pharmaceuticals available online, including fake cancer medications, counterfeit pain pills and illegal medical syringes, the Interpol police organization said.
Importation would be a bonanza for criminals. The Freeh report noted, “Counterfeiters certainly understand that the U.S. market is highly profitable and will readily exploit any deregulation of currently strict drug importation laws as a means to get their illegitimate products into the U.S.”
Another issue is that even if safety is assured, drugs imported from Canada won’t come close to meeting U.S. demand. Canada’s population of 39 million is less than one-eighth that of the United States. It is unlikely that drug manufacturers will send extra supplies of medicines to Canada, only to have them re-imported into the U.S. at lower cost.
As Azar, until recently a foe of importation, said in 2018:
[Canada is] a lovely neighbor to the north, but they’re a small one. Canada simply doesn’t have enough drugs to sell them to us for less money, and drug companies won’t sell Canada or Europe more just to have them imported here.
In fact, Canada itself would be likely to outlaw a flow of pharmaceuticals to the United States. But suppose it did not and suppose U.S. manufacturers did send extra drugs to Canada. In that case, we can expect that middlemen, including distributors and PBMs, would certainly take a cut. Simple economic theory would lead to the conclusion that the price of imported drugs would rise to meet the price of U.S. drugs.
In 2004, during a congressional session when a drug-import bill passed the House but died in the Senate, the Congressional Budget Office (CBO) issued what is probably the most definitive report on the prospective effects of importation.
The CBO 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.”
Azar may have had it right when, two years ago, he called re-importation “just a gimmick.”
Insulin and Epi-Pens
The final executive order is narrowly drawn. It would require federally qualified health centers (FQHCs) that “purchase insulins and epinephrine in the 340B program to pass the savings from discounted drug prices directly on to medically underserved patients.”
FQHCs are hospitals, clinics and other health care providers that provide primary care services in underserved areas. The 340B program, which has generated much of its own controversy because of how much it has expanded and how lightly it is enforced, requires drug manufacturers to provide outpatient medicines at significantly reduced prices. Responding to complaints that patients are not getting the benefits of price reductions and that the cost of insulin and injectable epinephrine has risen so much, the President wants Americans with little or no health insurance to get discounts for treatment of diabetes and severe allergies. Diabetes afflicts 34 million Americans, including 27% of those 65 years or older.
The US Can Do More to Constrain Prices
President Trump promised at the start of his Administration to reduce what Americans pay for drugs. He has, in fact, achieved – or is well on the way to achieving – that goal through American solutions. The most effective method has been to boost generic competition through regulatory changes. That market-based approach is far different from the direct intervention to set prices that the executive order on MFN requires.
The FDA approved a record 1,171 generics last year, including 107 first-time generics. Caremark, the largest pharmaceutical benefit manager (PBM) with 30% of the U.S. market, reported that the average prescription filled by its members cost 0.1% less in 2019 than in 2018. Express Scripts, with 23% of the market, reported an average price increase of just 0.9% last year. Out-of-pocket (OOP) drug costs for Caremark members declined $1.50 per month over the year, and two-thirds of members had annual OOP expenses of less than $100 in 2019. Another PBM, Prime Therapeutics, reported that prices for members of its Medicare plan declined by 0.4%.
The Trump Administration’s accomplishment, however, has been little understood by the public, in part because of a stream of media reports that focus on list prices, which are meaningless figures that ignore discounts and rebates. Typical is this Consumer Reports headline from last November: “The Shocking Rise of Prescription Drug Prices.” In fact, the Bureau of Labor Statistics reports that drug prices in 2019 rose less than prices of food, shelter, and medical care as whole.
It is ironic that a Republican White House that has already done more to constrain drug prices than another other administration would be proposing price controls and drug importation as solutions – multiple times.
There Are Alternative Routes to Reductions
Instead, the President could follow the path that has been so effective with generics by insisting on regulatory changes that would increase the use of biosimilars, which are, as the FDA puts it, “highly similar to and has no clinically meaningful differences from an existing FDA-approved” biological product, that is, a complex, large molecule “produced through biotechnology in a living system, such as a microorganism, plant cell, or animal cell.”
Biological products are among the most costly medicines, and biosimilars would provide competition that could reduce prices in a breathtaking way – as generics have done for small-molecule drugs. Only a handful of biosimilars have entered the market in the U.S., in glaring contrast to Europe, where they are already driving down prices. The Administration could make a major effort to ease not just FDA approval but market access to biosimilars.
In addition, the White House could immediately change rules that prohibit the use of co-pay assistance for Medicare. Co-pay cards and coupons, issued by pharmaceutical companies, have saved members of commercial health insurance plans billions of dollars, but such assistance is prohibited for Medicare. Why, especially now during the COVID crisis, should seniors be forced to pay large sums out of their own pockets when manufacturers are willing to defray the cost?
Finally, Medicare Part D could be revised, to place a cap on catastrophic expenditures by seniors. Incredibly, while such caps exist for commercial plans, they are absent for Part D. The Administration currently has the authority to provide this protection to the 22 million enrollees in Medicare Advantage plans, though legislation would be required to apply it throughout Part D.
Media reports on the new executive orders have stressed the upcoming election and the previous false starts, with the implication that the President is acting cynically and politically. Perhaps. While rebate reform is a simple change, long overdue, other proposals will certainly make it easier for politicians of both parties to enact changes that will bring the U.S. closer to a European-style nationalized health care system. Those changes could ultimately harm Americans’ health by making future pharmaceutical breakthroughs far less likely. Worse, they appear unnecessary at a time when alternatives to lowering out-of-pocket costs abound.
With COVID 19, Americans have learned just how dangerous the spread of pathogens can be. There is another health threat that needs addressing before it’s too late: antimicrobial resistance, or AMR. Over the years, bacteria, fungi and other microorganisms mutate and find ways to survive against medicines meant to attack them. “Unfortunately, resistance has been seen to nearly all antibiotics that have been developed,” writes C. Lee Ventola in a paper titled, “The Antibiotic Resistance Crisis,” in the journal Pharmacy and Therapeutics. “As a result, says the World Health Organization, “the medicines become ineffective and infections persist in the body, increasing the spread to others.”
Concludes a World Bank study: “If this trend continues unchecked, the world will confront a reality where many infectious diseases have ‘no cure and no vaccine.’”
Microorganisms that develop effective resistance are nicknamed “superbugs,” and they can be fatal. According to a report last year by the Centers for Disease Control (CDC), “More than 2.8 million antibiotic-resistant infections occur in the United States each year, and more than 35,000 people die as a result.” Deaths worldwide are estimated at 700,000, and if current trends continue, AMR will be the leading global cause of death by 2050, killing 10 million and reducing the world’s GDP by 2.2%, according to the Review on Antimicrobial Resistance, also called the O’Neill report.
The World Bank study, published in 2017, found that under a “pessimistic high-AMR scenario, global economic output would be 3.2 percent lower in 2030 and then fall further, so that in 2050, the world would lose 3.8 percent of its GDP, relative to the base case.”
Economic Costs of AMR May Be as Severe as During the Financial Crisis
Source: World Bank Group, “Drug-Resistant Infections: A Threat to Our Economic Future,” March 2017.
Currently, due to unique challenges facing new antibiotics that we will describe below, too few pharmaceutical researchers are working to develop new antibiotics to overcome AMR, but, with good policies, a dire situation can change, as we will see.
Antibiotic Resistant Bacteria and COVID 19
We expect that the COVID-19 crisis has exacerbated the AMR crisis. “It is of the utmost importance that the potential of the global pandemic to increase antimicrobial resistance (AMR) is taken seriously,” said an editorial in the journal Nature on May 20, adding….
A peek under the hood of studies reporting on patients hospitalized with coronavirus disease 2019 (COVID-19) reveals widespread use of antimicrobial therapies as part of the package of clinical care in some countries. For example, in a retrospective cohort analysis of 191 patients from two hospitals in Wuhan, Zhou et al. write that 95% of patients were treated with antibiotics and 21% were treated with antivirals.
Antibiotics work against bacteria, and they are useless against a virus like SARS-CoV-2, the cause of COVID-19. But a virus can unleash secondary bacterial infections. A Bloomberg article on March 8 explained one way in which COVID-19 kills:
The lungs are vulnerable to an invasive secondary bacterial infection. Potential culprits include the germs normally harbored in the nose and throat, and the antibiotic-resistant bacteria that thrive in hospitals, especially in the moist environments of mechanical ventilators. Secondary bacterial infections represent an especially pernicious threat because they can kill the critical respiratory tract stem cells that enable tissue to rejuvenate….
During the 1918 pandemic of Spanish flu, which killed an estimated 50 million people worldwide, including 675,000 in the United States, "the majority of deaths...likely resulted directly from secondary bacterial pneumonia caused by common upper respiratory-tract bacteria,” according to a study in the Journal of Infectious Diseases co-authored by scientists Tony Fauci, David Morens, and Jeffrey Taubenberger, of the National Institute of Allergy and Infectious Diseases. At the time, of course, there were no antibiotics to combat the bacteria.
It is now becoming clear, however, that fears of bacterial infections resulting from COVID have been overblown. SARS-CoV-2, the virus the world is now facing, is not the Spanish flu. Certainly, some patients do acquire bacterial coinfections (often from the hospital environment itself), and for them, antibiotic treatment is appropriate, says the Nature editorial.
“But these patients may be in a minority,” the editorial continued. “Writing in Clinical Microbiology and Infection, a group of European clinicians admit that it can be difficult to differentiate COVID-19 from bacterial pneumonia, which means that some patients without bacterial infections are receiving unnecessary antibiotics.”
A New York Times article by Andrew Jacobs on June 4 carried the headline, “Doctors Heavily Overprescribed Antibiotics Early in the Pandemic.” It quoted the director of epidemiology and antibiotic stewardship at the Detroit Medical Center as saying, “During the peak surge, our antibiotic use was off the charts.” Antibiotics were being administered to 80% of arriving patients. It became clear that this was a mistake, Dr. Chopra said.
“Nearly all severe COVID-19 patients” in the U.K. were being “treated with antibiotics, which may have limited efficacy,” wrote Jose Bengoechea and Connor Bamford of the Wellcome-Wolfson Institute for Experimental Medicine in the journal EMBO Molecular Medicine. They added….
Unfortunately, as the pandemic continues, we anticipate a significant increase in AMR through the heavy use of antibiotics in COVID‐19 patients. Even in a normal scenario, ICUs are epicentres for AMR development. This may have devastating consequences in those hospital settings with already a high prevalence of multidrug‐resistant strains. It is evident that as SARS‐CoV‐2 is transmitting in hospitals, also multidrug‐resistant bacteria are, leading to an increase in the mortality due to the limited arsenal of antibiotics to treat hospital‐acquired infections.
As Tedros Adhanom, the director general of the World Health Organization, noted, “COVID-19 has led to an increased use of antibiotics, which ultimately will lead to higher bacterial resistance rates that will impact the burden of disease and deaths during the pandemic and beyond.”
Unless we seriously tackle the AMR threat, we could arrive soon at time when antibiotics – miracle drugs that have saved hundreds of millions of lives -- won’t work.
The Vanishing Promise of Antibiotics
Last year’s CDC report, “Antibiotic Resistance Threats in the United States,” begins with the story of a woman named Anne Miller of New Haven in 1942. She was very ill:
Infectious germs had made their way into her bloodstream. Desperate to save her, doctors administered an experimental drug: penicillin, which Alexander Fleming discovered 14 years earlier. In just hours, she recovered, becoming the first person in the world to be saved by an antibiotic. Rather than dying in her thirties, Ms. Miller lived to be 90 years old. Today, decades later, germs like the one that infected Mrs. Miller are becoming resistant to antibiotics.
An antibiotic is a drug to treat bacterial infections, which range from salmonella to syphilis to impetigo to meningitis to pneumonia. Penicillin, developed from a mold, and other early antibiotics were substances produced by one microorganism that inhibits the growth of another. Later, synthetic antibiotics were developed that had the same effects. Antibiotics, most of which are inexpensive generic drugs, save millions of lives around the world each year.
The problem is that germs fight back by altering their composition through mutations, blocking the entry of drugs or developing pumps to get rid of them, and can achieve the “ability to defeat the antibiotics designed to kill them,” says the CDC. Antibiotic resistance “does not mean your body is resistant to antibiotics” but that bacteria and fungus are.
AMR moves fast. Just a decade after penicillin became widespread, “more than half of common Staphylococcus bacteria in big hospitals were resistant to it,” according to an article in The Economist last year. “In response, drug firms churned out new antibiotics at a steady pace to replace ineffective ones. But as the 20th century drew to a close this arms race in antibiotics became harder because of their rampant use worldwide – on humans, livestock and crops.” The more an antibiotic is used, the faster bacteria develop mutations that confer resistance to it.
In its report late last year, the CDC identified five resistant bacteria as “urgent threats,” 11 as “serious threats,” and five more as “concerning” or earning a place on a “watch list.” Among the urgent threats are drug-resistant Candida auris, which causes severe blood-borne infections around the world, and Neisseria gonorrhoeae, which causes 1.1 million sexually transmitted infections a year, half of them drug-resistant. Such popular antibiotics as penicillin, tetracycline and ciprofloxacin are no longer recommended for gonorrhea, which can cause permanent health problems in both men and women.
The CDC calls another of those in the “urgent category,” drug-resistant Acinetobacter, which turned out to be one of the bacteria found in COVID 19 patients, “a challenging threat to hospitalized patients because it frequently contaminates healthcare facility surfaces and shared medical equipment.” The CDC first flagged Acinetobacter in 2013, and cases dropped from 10,300 that year to 8,500 in 2017, mainly because of better hospital practices. Some types of bacteria are resistant to carbapenem, which is usually a highly effective antibiotic class. Unfortunately, “treatment options for infections caused by carbapenem-resistant Acinetobacter baumannii are extremely limited. There are few new drugs in development.”
Where Are the New Drugs?
“Antimicrobial resistance continues to erode our therapeutic armamentarium,” said an editorial last year in the New England Journal of Medicine. So where are the reinforcements? Where are the new antibiotics to replace those that have become ineffective?
The Economist points out that in 1980, there were “25 large pharma companies working on new antibiotics; by 2020, there were just three.”
A paper accepted June 25 by the journal Clinical infectious Diseases by Nidhi Dheman and colleagues notes that the number of investigational new drug (IND) applications to fight bacteria dropped to an 11-year low in 2019, “and the number of antibacterial INDs initiated with the FDA from 2010-2019 was lower than any of the previous three decades.” The paper also points out that while antibacterial drug development programs in the 1980s and 1990s “had high success rates, with over 40% of INDs obtaining marketing approval, in a median time of about six years,” later programs had a success rate of just 23% with development time averaging 8.2 years.
The Pew Charitable Trusts in April found that 41 new antibiotics are currently in clinical development, many of them addressing resistant bacteria. But 41 antibiotics in Phase 1, 2, or 3 of clinical trials is a tiny number in the world of pharmaceutical R&D. Compare it to more than 300 drugs in development for skin diseases and 1,100 for cancer, according to PhRMA.
Why, in the midst of an AMR crisis, are here so few potential new medicines for antibiotics?
On March 18, STAT published an article by Isaac Stoner, a biomedical entrepreneur who in 2018 founded Octagon Therapeutics, focused on producing more effective antibiotics. “It turned out to be a disaster,” Stoner wrote. He and his colleagues had found a powerful new compound they wanted to bring to market. But “investor after investor turned us down. Antibiotics, they said, were practically guaranteed money losers. Sadly, it turns out they are right.” So his company dropped the antibiotic.
Another firm that found trouble was Achaogen, a startup biotech, which in June 2018 gained FDA approval for Zemdri, a treatment for urinary tract infections resistant to multiple antibiotics. Sales were minuscule – less than $1 million the first year. By April, as Wired recounted the story, Achaogen was bankrupt, with $120 million in debt. “Even a company that succeeds in bringing an innovative new antibiotic to market can’t necessarily survive,” said Allen Coukell of Pew, quoted in CIDRAP News.
“I’m worried the remaining small biotech companies won’t be here this time next,” said Greg Frank, director of Working to Fight AMR, an advocacy group. “The longer we wait,” said Frank, quoted by the New York Times, “the deeper in the hole we’re in and the more expensive it’s going to be to solve the problem.”
The economics killing innovation to battle AMR is not intuitive. Consider the usual model of drug development. If there are no drugs that effectively treat a disease, manufacturers have an incentive to develop a new medicine that can. The cost of bringing a single new, approved medicine to market is high – an average of nearly $3 billion – with very few therapies actually successfully making it through the R&D process and receiving FDA approval, but the investment can be justified by the potential prospect of future revenues, especially if a large number of patients needs the drug.
Pricing Divorced From Value
But the market for antibiotics is different. In his first-person story, Stoner explained:
Last-resort antibiotics, the ones that are effective against the most dangerous bacteria, are an option that doctors rarely turn to, prescribing them only in limited emergency scenarios. If such novel antibiotics are overused, bacteria will develop resistance to them. This caution is scientifically sound, but it creates a problem for companies developing new treatments: the number of patients receiving them will — hopefully — always be low.
Stoner also writes that “insurers are incredibly tight-fisted when reimbursing doctors and health systems for their use of antibiotics,” and Medicare pays hospitals the same to treat patients with infections “whether they use cheap generics or more effective — and more expensive — cutting-edge drugs.”
So pricing is divorced from value, and, Stoner concludes:
At current price points, and with responsible prescribing practices, companies developing new and effective antibiotics have no hope of recouping the massive development costs needed to bring them to market.
A 2016 study by Wayne Weingarden of the Pacific Research Institute pointed to two additional obstacles for new antibiotics. First, the drugs “are prescribed for a relatively short period of time – the prescription’s duration is measured in days or weeks, the time it takes to kill the infection, rather than in years as is the case with other potential innovations. The shorter prescription time…limits potential antibiotic sales and consequently potential revenues.” Also, he writes:
The development costs for new antibiotic and antiviral therapies will likely be higher because the clinical trials require a highly selective patient population (e.g. those patients who are afflicted with the resistant microorganisms). There are simply fewer of these patients available, therefore, this requirement makes the clinical trials more difficult to carry out.
Drugs to battle AMR, then, are victims of a kind of market failure. They are expensive to develop, but physicians use them sparingly and insurers deny them the kind of premium they deserve.
Patient groups, foundations, international organizations, and health care providers, and drug manufacturers have proposed solutions -- some behavioral and informational, some economic. The Davos Declaration, signed by more than 80 companies in 2016, called for, among other measures, stewardship strategies for “ensuring antibiotics are only used by patients who need them” and increased surveillance. A database called ATLAS (Antimicrobial Testing Leadership and Surveillance) was launched by Pfizer in 2017, providing physicians and public health workers with access to data on the efficacy of antibiotic treatments and emerging resistance patterns around the world. Pfizer, Wellcome, and the governments of Ghana, Kenya, Malawi and Uganda announced a partnership last month to provide increased surveillance for data-gathering.
The CDC is working to prevent the number of infections – and thus reduce the need for antibiotics in the first place – by encouraging vaccinations (the PCV13 vaccine, for example, protects against 13 forms of pneumococcus, including resistant ones) and safe-sex practices and by stopping the spread of germs in hospitals and non-hospital institutions, such as nursing homes.
“Greater focus on infection prevention and control, using antibiotics only when needed, as well as innovations in diagnostic testing, alternative treatments, and effective vaccines, will better prepare the United States for the resistance that will continue to emerge worldwide,” said the CDC report.
There’s evidence that those steps are working, but it is clear that something more is required: an economic fix. In a letter to Congress, Pew, the Infectious Diseases Society of America, the Trust for America’s Health and 23 other groups called for a “package of economic incentives to reinvigorate the stagnant pipeline of antibiotics.” The letter noted that of antibiotics in development today, only 11 have the potential to address the superbugs that the World Health Organization considers the most dangerous. That is just 11 of the total 7,000 drugs in development for all diseases.
The letter recognized that Congress previously had taken some steps to battle AMR, such as the Generating Antibiotics Incentives Now (GAIN) Act of 2012 “to extend the market exclusivity period for certain antimicrobials and, four years later, creating the Limited Population Antibacterial Drug regulatory approval pathway to facilitate the development of antibiotics and antifungals for patients who have few or no treatment options.”
But those steps, as well as increased funding for NIAID and BARDA to support antibiotic R&D, have not been enough. (Achaogen received help from BARA, the Biomedical Advanced Research and Development Authority, but the company still failed.)
Economic solutions need to address what Seth Seabury and Neeeraz Sood in the Health Affairs Blog call “pull incentives,” that is, “demand-based tools designed to make the market more attractive for a successfully developed product.” New antibiotics “are intended to have limited initial use,” so vast sales are unlikely. What are ideas that can create enough pull to inspire investment in antibiotics?
One popular idea is government payments to companies that successfully develop therapies targeted against the most threatening infections. A discussion guide for a January conference in Washington held by the Duke Margolis Center for Health Policy emphasized the particular value of “post-approval market entry rewards,” or MERs. Said the guide:
According to a thorough literature review and stakeholder analysis conducted by DRIVE-AB, an entry reward is the most commonly recommended potential pull incentive. Such a reward would likely take the form of multiple annual payments to a developer following the approval of a new antimicrobial…to ensure consistent revenue.
Awards, said the O’Neill Commission, “would ‘de-link’ the profitability of a drug from its volume of sales, supporting conservation goals by eliminating the commercial imperative for a drug company to sell new antibiotics in large quantities.”
Sen. Michael Bennet (D-Colo) is sponsoring the PASTEUR (Pioneering Antimicrobial Subscriptions to End Surging Resistance) Act, which sets up an expert committee on Critical Need Microbials to develop a list of microbes for which drugs are needed and to provide subscription contract awards, payable over up to three years, to developers of the drugs.
Another idea is awarding to an antimicrobial innovator a grant of an exclusivity extension that “could be applied to some other, existing drug on a one-time basis,” write Seabury and Sood. The extension would be tradeable, “so an innovator with no existing product could sell the extension to a manufacturer with a drug close to patent expiry.”
Developing Novel Reimbursement Models
Last year, Democratic Sen. Bob Casey of Pennsylvania and Republican Sen. Johnny Isakson of Georgia (who retired in December) introduced the Developing an Innovative Strategy for Antimicrobial Resistant Microorganisms (or DISARM) Act. DISARM would reimburse novel antibiotics targeted against resistance infections with additional payments to hospitals, helping to drive better access for patients that need these therapies. A separate bill was introduced by a bipartisan group in the House headed by Rep. Danny Davis (D-Ill).
The U.K.’s National Health Service last year launched a pilot program to encourage the use of new antibiotics, paying “pharmaceutical companies up front for access to effective antibiotics, rather than reimbursing them based on the quantity of antibiotics sold…. Under the new model, drug makers would still be reimbursed by the NHS even if the new drugs are kept in reserve.”
"Today we are sending a strong signal to the rest of the world that there are workable models to stimulate investment in these vital medicines and that together we can tackle" antimicrobial resistance, Health Minister Nicola Blackwood said.
The truth is that possible remedies to the AMR crisis abound. Matthew Renwick of the London School of Economics and two colleagues identified 47 different ones in a paper in the Journal of Infectious Diseases in 2016. What is undeniable is that action is required now to prevent million of deaths in the future. Waiting, as we have certainly learned with the current coronavirus pandemic, is not an option.
No simple formula determines the price of a drug, nor is there a single price for a drug in the U.S. multipayer system, but there is a consensus that the value of a medicine – its effectiveness for patients – should be the prime factor. Unfortunately, the leading organization that promotes value pricing has serious shortcomings, both in its overall approach and methodology.
‘Examined for Value by a Credible Body’
Currently, in a nation where 91% of Americans have health insurance, most prices are settled through negotiations between pharmacy benefit managers (PBMs), working for insurers and health plans, and pharmaceutical manufacturers, with such factors as competition, effectiveness and other market factors at play.
But isn’t there a way to gauge the effectiveness of drugs so that prices, reflecting true value, become easier to determine, almost formulaic?
In a July 16, 2018, comment letter responding to the Trump Administration’s “Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” the Pharmaceutical Care Management Association, a trade group for PBMs, stated:
To achieve a reasonable level of pricing, the drug could be examined for value by a credible body that would estimate a reasonable range of price for a given drug, based on the value it is expected to bring to patients. One such entity is the Institute for Clinical and Economic Review (ICER).
ICER, founded in 2006, describes itself as “an independent and non-partisan research organization that objectively evaluates the clinical and economic value of prescription drugs.” By analyzing “all clinical data” and convening “key stakeholders – including patients, doctors, life science companies, private insurers, and the government – ICER translates “the evidence into policy decisions that lead to a more effective, efficient, and just health care system.”
Sounds perfect, but there have been problems, big ones. Consistent criticism led ICER last year to ask for public comment on its “value assessment framework” for 2020 to 2023. ICER has asked patient representatives to review its draft drug reports, and in April the organization appointed its first-ever “Vice President for Patient Engagement.”
Despite these steps, the “800-pound gorilla of cost-effectiveness analyses,” as Shea McCarthy called ICER in STAT News, has provided no transparency into how stakeholders are affecting the “economically justified price” that ICER calculates for the drugs it examines.
First Issue: Suspicion of Bias
The organization has been under fire almost from its inception.
The first issue was suspicion of bias. The organization’s eight-person governance board is heavy with former and current insurance industry executives, including officials of Kaiser Permanente and UnitedHealth Group and the past executive vice president of America’s Health Insurance Plans trade association. Another member of the board is Ron Pollack, who headed the advocacy group Families USA for 33 years. Pollack is no friend of the companies that make the medicines that ICER judges. A typical quote: "Price gouging is becoming America's other drug crisis. The drug companies are using the top 20 drugs to squeeze consumers dry."
ICER’s primary funder is the Laura and John Arnold Foundation, which has donated $27.6 million to the organization since 2017, plus at least $20 million more to Memorial Sloan-Kettering, Johns Hopkins, and other institutions for work on pharmaceutical “affordability.” John Arnold was an Enron executive who, according to Wired magazine, “managed to walk away from Enron’s 2001 collapse with a seven-figure bonus and no accusations of wrongdoing attached to his name.” He then started a hedge fund, became a billionaire, and retired at 38 to concentrate on philanthropy. The Laura and John Arnold Foundation has taken an aggressive stance on drug pricing that, from the start, threw into question the objectivity of ICER’s research because of the views of its major funder.
Quantifying Quality of Life
Still, even if ICER were wholly objective, the task it set for itself – trying to quantify a drug’s effectiveness – was certain to invite criticism. The focus of ICER’s work is the acronym QALY, which stands for “quality-adjusted life year.” Introduced 44 years ago in an academic paper Richard Zeckhauser and Donald Shepard, the concept was to create a way to evaluate both the duration of life and the quality of that life in one single measure.
Here’s how it works: If a person lives for one year in perfect (100%) health, the person is assigned a QALY of 1, which is derived by multiplying one year of life by a “utility” value of 1. The utility number represents the relative quality of the life. A utility of 1 represents perfect health, a utility of 0 represents death, and everything between reflects different relative states of quality.
So if a person lives three years with only half the utility of perfect health, then the QALY would be 1.5, because the 3 years of life is multiplied by the 0.5 utility value. Similarly, if the person lives for six months at half utility, then the QALY is 0.25 (0.5 year x 0.5 utility value).
ICER compares a current treatment with a treatment using a new drug and calculates the new drug’s ability to increase QALY; that’s the drug’s effectiveness. Then, ICER suggests an amount of money that an additional QALY is worth – for example, $100,000. Multiply the QALY increase by the dollar amount and (voila!) you have what ICER calls the “value-based price benchmark.”
Obviously, the QALY itself is a blunt instrument, often obscuring the true experience of real people. In Newsletter No. 34, we used this example:
Imagine that Patient A has been living for six years in a state severe debilitation, at a utility of 0.3. Now imagine Person B has lived in a state of near perfect heath for two years, at a utility of 0.9. The net experiences of both patients would each total 1.8 QALYs for the time periods considered. But can the experience of being severely disabled over a longer period of time be deemed similar to living in perfect health over a shorter period?
It clearly depends on the person, and the example shows how difficult it is to quantify personal experience. And there’s another question: How do researchers know whether a person’s “health-related quality of life” is at a 0.4, 0.7, or 0.9? Researchers use surveys that take into account such matters as mobility, ability to wash and dress oneself, pain, anxiety, and ability to perform usual activities at work and leisure. The survey data are translated unto utility values.
‘Our Concern Reflects Deep Flaws’
Many patient groups are appalled at this process.
In 2018, CVS Health, parent company of CVS Caremark, a large PBM, issued a white paper describing “a program that allows clients to exclude any drug launched at a price of greater than $100,000 per QALY” from their plan. More than 90 patient organizations, ranging from the American Association of People With Disabilities to the Bladder Cancer Advocacy Network, wrote a letter to the CEO of CVS Health, that said in part:
Our concern reflects deep flaws in ICER’s cost-effectiveness analysis. In particular, policy decisions based on cost-effectiveness ignore important differences among patients and instead rely on a single, one-size-fits-all assessment. Further, cost-effectiveness analysis discriminates against the chronically ill, the elderly and people with disabilities, using algorithms that calculate their lives as “worth less” than people who are younger or non-disabled.
From a clinical care perspective, QALY calculations ignore important differences in individual patient’s needs and preferences. From an ethical perspective, valuing individuals in “perfect health” more highly than those in “less than perfect” states of health is deeply troubling.
(The CVS-ICER plan is “off to a slow start,” Reuters reported in October.)
In an op-ed piece in the San Francisco Examiner last year, Randall Rutta, the chairman of the Partnership to Fight Chronic Disease, objected to the fact that ICER does not give an extra year of life for a person with a chronic condition the same value as an extra year for a healthy person. In effect, then, a drug that lengthens the life of a sick person is not as valuable – on a QALY basis – as a drug that lengthens the life of someone who is not sick.
“The discounted QALY,” writes Rutta, “is in effect a determination of discounted value assigned to a person, a value judgment that may be at odds with their personal opinion about their own life in its totality, in the context of family, workplace, and community.”
Limitations and Dangers of QALY
Last year, the National Council on Disability, a federal agency, issued a report highly critical of QALY analysis. In a letter of transmittal to President Trump, the council’s chairman, Neil Romano, a former Assistant Secretary of Labor for Disability Employment Policy under President George W. Bush, wrote:
[I]n an effort to lower their healthcare costs, public and private health insurance providers have utilized the Quality Adjusted Life Year (QALY) to determine the cost-effectiveness of medications and treatment. QALYs place a lower value on treatments which extend the lives of people with chronic illnesses and disabilities. In this report, NCD found sufficient evidence of the discriminatory effects of QALYs to warrant concern, including concerns raised by bioethicists, patient rights groups, and disability rights advocates about the limited access to lifesaving medications for chronic illnesses in countries where QALYs are frequently used. In addition, QALY-based programs have been found to violate the Americans with Disabilities Act.
And the Governor of Oklahoma recently signed into law a bill, HB 2587, that would bar the state from using QALY methodology. It says that state agencies…
shall be prohibited from developing or employing a dollars-per-quality adjusted life year, or similar measure that discounts the value of a life because of an individual’s disability, including age or chronic illness, as a threshold to establish what type of health care is cost effective or recommended.
In a review of the academic literature on QALY, published in 2016 in the Journal of Stem Cell Research and Therapy by D.A. Pettit of Oxford University and colleagues wrote:
The QALY has limitations in producing reliable and valid measurements across disease categories and does not consider a variety of contextual factors including program-specificity, palliative care, mental health and indeed the future of the medical landscape. As it is currently defined, QALYs do not cover the nuances needed within and across disease categories and patients.
The researchers concluded: “Three common themes emerged concerning the limitations of QALYs. These were ethical considerations, methodological issues and theoretical assumptions and context or disease specific considerations.”
Perhaps the biggest problem is the rigidity with which ICER employs the QALY – despite the methodology’s well-known limitations, only some of which we have noted here. HTAs (or health technology assessment bodies) in Europe and the U.K. have adopted a more flexible approach.
Some critics accept the notion that ICER’s calculations of QALY despite some misgivings, but they question why ICER includes price recommendations in its efficacy analyses. Those recommendations have lately strayed from the range of $100,000 to $150,000 ICER set in its own “Value Assessment Framework” for 2020 to 2023.
The organization would seem to be better off avoiding pricing recommendations entirely and sticking to calculations that reflect how much a drug extends and improves the life of patients – a tough enough job in itself.
There is no doubt that finding a quantifiable way to provide reasonable range of assumptions on the value makes eminent sense, but so far, ICER has not achieved what it set out to do. It still lacks the confidence of key stakeholders. Perhaps, in the end, an organization with ICER’s apparent ideological baggage is simply not equipped for a task that has proven extremely difficult.
When it comes to pharmaceuticals, the focus of policy makers, the media, academics, and advocacy groups tends to be on who’s paying how much. They often neglect what Americans are paying it for -- that is, the drugs themselves.
As a result, too many people risk missing the big picture, which is that Americans are gaining access to more and more innovative medicines that are granting them longer and better lives.
In 2019, U.S. Food & Drug Administration (FDA) approved 48 new medicines, bringing the total for the past three years to 153. That is 25% more than for any such period since 1938, when President Roosevelt signed the Food, Drug and Cosmetic Act, and the modern era of pharmaceutical regulation began. The record for approvals was set in 2018; last year’s total was the second-highest ever.
In regulatory jargon, these approved drugs are called “new molecular entities,” or NMEs. As the FDA says on its website: “Many of these products contain active moieties that have not been approved by FDA previously, either as a single ingredient drug or as part of a combination product; these products frequently provide important new therapies for patients.”
(A “moiety,” by the way, is part of a molecule that often gets its own name and is found within other molecules, too.”)
What the NME total does not include is also significant. The list of 48 “does not contain vaccines, allergenic products, blood and blood products, plasma derivatives and gene therapy products” or other biological products, which are often the most advanced medicines. (Last year’s 48, for example, does not include the approval in May of a revolutionary genetic treatment for a terrible disease afflicting young children – more on that below.)
The list also does not include approvals for new indications – or other applications for an already-approved drug. For example, the drug Keytruda, originally approved in 2014 for advanced melanoma (skin cancer), has since been granted FDA approval for more than 20 indications. Seven of those approvals came in 2019 (and one so far in 2020), including for certain kinds of cancers of the lungs and esophagus.
Nor does the total include generic drugs, or copies of patented medicines. For fiscal year 2019, the FDA approved an incredible 1,171 generics, breaking the previous year’s record by 21%. In all, more than 3,000 generics have been approved since Oct. 1, 2016. The flood of generics is, in large part, the result of a streamlining of the approval process under FDA Commissioner Scott Gottlieb, and it’s a key reason that the price of the average prescription has leveled off and even declined under the Trump Administration.
While the volume of FDA approvals has been encouraging, drug R&D has to earn enough of a return on investment to keep the innovations coming. Remember that Investments that began decades ago produced the drugs approved in 2019.
Today, there are threats from such proposals as pricing U.S. drugs – the source of most global innovation – according to an index of prices set by governments in foreign countries. We’ll explain some of the dangers of this International Pricing Index at the end of this newsletter.
Wide Variety of Approved NMEs
The variety of NMEs approved last year is striking. Let’s begin with cancer. In our last newsletter, we quoted Janet Woodcock, the director of the FDA’s Center for Drug Evaluation and Research, writing that “2019 was another strong year for making new cancer and blood therapies available to patients in need.”
The FDA approved two new drugs for breast cancer, two for bladder cancer, and others for multiple myeloma (a type of blood cancer), prostate cancer, and large B-cell lymphoma, the most common type of non-Hodgkin lymphoma. Other approved drugs treat mantle cell lymphoma, which causes strokes and heart attacks, and a type of leukemia that afflicts adults.
Also approved was Rozlytrek, the third oncology drug that, said the FDA in an August press release, “targets a key genetic driver of cancer, rather than a specific type of tumor.” The release stated that the treatment is…
based on a common biomarker across different types of tumors rather than the location in the body where the tumor originated. The approval marks a new paradigm in the development of cancer drugs that are “tissue agnostic.”
Here, drawing from the FDA’s excellent annual report on new therapy approvals, issued last month, are just some of the other drugs approved last year:
‘First in Class’ and ‘Breakthrough’ Drugs
Of the 48 drugs, 20 were considered “first in class,” that is, they have, in the FDA’s words, “potential for strong positive impact on the health of the American people. These drugs often have mechanisms of action different from those of existing therapies.” Among them were the depression drug Zulresso and Balversa for advanced bladder cancer.
Thirteen of the approved drugs were awarded “breakthrough” status, meaning that they treat “serious or life-threatening diseases for which there is unmet medical need and for which there is preliminary clinical evidence demonstrating that the drug may result in substantial improvement on a clinically significant endpoint (usually an endpoint that reflects how the patient feels, functions or survives) over other available therapies.” Among them: Adakveo for sickle cell and Rozlytrek for metastatic solid cancer tumors.
22 New Biological Products, Including 3 Vaccines
Biological products, or biologics, are highly complex compounds. They can also be living cells or tissues, “made from a variety of natural resources—human, animal, and microorganism—and may be produced by biotechnology methods,” according to the FDA, which last year approved 22 of them.
Several of the biologics were vaccines, including Ervebo, approved in December to prevent the disease caused Zaire Ebola virus, which kills about half the people it affects. The last Ebola outbreak, from 2014 to 2016, led to 11,324 deaths in Africa and one in the United States.
Other approved biologic vaccines were Exembify, which prevents Primary Humoral Immunodeficiency (PI), a term encompassing multiple disorders of the immune system that can sometimes lead to death if untreated, and Dengvaxia for dengue disease, a painful mosquito-borne illness that each year sickens 100 million people around the world and kills 22,000, according to the Centers for Disease Control and Prevention.
The FDA also approved a separate treatment for PI for adolescents, a biologic to control bleeding in hemophilia patients, and, as we mentioned above, a genetic treatment called Zolgensma for spinal muscular atrophy (SMA), the number-one genetic cause of death in infants.
Biosimilars Lag; What Can Be Done?
Unfortunately, only 26 biosimilars – whose relationship to biologics is roughly the same as that of generics to branded small-molecule pharmaceuticals – have been approved since the FDA began the process is 2015. Ten of those were approved in 2019, compared with seven in 2018 and five in 2017. The trend is up, but the pace is frustratingly slow.
Biosimilars are far more expensive to develop and produce than generics: a cost per drug of between $100 million and $250 million, compared with just $1 million to $4 million, according to Erwin Blackstone and P. Fuhr Joseph Jr., writing in the journal American Heath & Drug Benefits.
Pharmaceutical manufacturers worry that the investment may not be worth the cost if they can gain approval but are still not be able to bring their biosimilars to market. The concern is not clinical; it’s obstacles to acceptance by physicians and pharmacy benefit managers not to mention a barrage of patent lawsuits that lead to long delays. We examined the biosimilars issue in Newsletter No. 54, and we will revisit it soon as advocates push for reforms that will ease uptake.
A great deal is at stake. Biologics are the fastest-growing pharmaceutical expense. Since 2014, writes Avik Roy in Forbes, they are responsible for essentially all of the increase in drug spending. They represent just 2% of prescriptions but 37% of spending, so biosimilars offer significant cost savings opportunity.
Of the nine biosimilars approved last year, three have Herceptin as their reference branded drug and two have Humira.
Herceptin treats early-stage breast cancer that is Human Epidermal growth factor Receptor 2-positive (or HER2+). Two previously approved biosimilars also have Herceptin as their reference drug, and competitors to the branded drug, which was approved by the FDA back in 1998, went on the market last year. According to FiercePharma, Herceptin ranks number-17 among top-selling drugs, with $2.9 billion in revenues in the U.S. in 2018.
The number-one seller is Humira at $13.7 billion. Initially approved by the FDA in 2002, Humira treats several auto-immune diseases, including rheumatoid arthritis and Crohn’s. As with Herceptin, the FDA has approved a total of five biosimilars with Humira as the reference product. But, because of legal settlements, Humira will keep competition in the U.S. at bay until 2023.
By contrast, in Europe, where far more biosimilars have been approved and come to market, competitors to Humira began being sold last year. The effect of biosimilars was immediate, with revenues for branded Humira falling 34% in the first three quarters of the year outside the U.S. (compared with an increase of 10% domestically).
Other biosimilars approved by the FDA in 2019 had as their reference products: Avastin, the 18th top-selling drug in the U.S., for multiple cancers (now with a total of a total of two biosimilar competitors); Neulasta, ninth top-seller, for low white blood cell counts (with three biosimilars); Remicade, ranking 11th, for stroke (four biosimilars); Enbrel, third, for auto-immune diseases (two biosimilars); and Rituxan, fourth, for several diseases, from rheumatoid arthritis to leukemia (also two biosimilars).
There’s little doubt that if these biosimilars gain wide acceptance in the market – as many have done in Europe –the competition will lead to significant and sustainable savings in drug costs.
The Great American Drug-Developing Machine
The U.S. continues to lead the world in developing new drugs (about twice as many as all of Europe combined from 2014 to 2018), and the people who live here are the main beneficiaries. Of the 48 novel drugs, 33 were approved first in the United States. Americans not only develop most of the world’s drugs; we also have far greater access to them.
As we noted in our last newsletter, a PhRMA analysis last year, using data from the research firm IQVIA, as well as the FDA, the European Medicines Agency, and Japan’s Pharmaceuticals and Medical Devices Agency, compared how broadly and quickly new cancer medicines became available in 15 rich countries, many of which set prices artificially low.
The U.S. was, far and away, and the leader. Some 96% of the new drugs were available in the U.S.; Germany and the U.K. tied for second with 71%, with Canada at 57% and Japan at 50%; the median was just 62%. The average delay in the public’s access to the new cancer medicines was a mere three months in the U.S., again by far the best. French patients could not gain access to the average new drug for 19 months; Italy, 20 months; the U.K., 11 months. The median among the nations was 16 months.
The reason is no secret. While highly regulated, the U.S. health care system remains far more responsive to the market and the immediate wants and needs of the public and physicians, compared with government-controlled systems in other countries. U.S. policy has been developed with an eye toward encouraging scientific innovation.
In an important piece in the New England Journal of Medicine on Jan. 30, Dhruv Khullar and colleagues presented a model of “the structure of the pharmaceutical reward system and the way in which existing and proposed policies affect it.” They are worth quoting at length:
The evolution of a successful drug occurs in three sequential periods. During the innovation period, a drug is developed and tested but cannot be sold. Only a small minority of drug products are ultimately approved by the FDA, and for those that are, this approval constitutes the start of the monopoly period, during which no other corporation can manufacture and sell the drug. After the various patents and exclusivity periods of a drug expire, the competitive period commences. Other corporations can now produce and market identical copies (i.e., generic or biosimilar drugs) of the innovator product (i.e., the brand-name drug).
Each pharmaceutical policy can be understood in terms of how it affects the financial condition in one (or more) of these three periods. Financial losses generally occur during the innovation period. Positive and potentially sizable profits occur during the monopoly period and then decline during the competitive period.
The decision to develop a new drug is driven largely by a corporation’s expectation of the relative sizes of these three periods — that is, what it anticipates the investments and rewards to be before and while embarking on drug development. For a given corporation, realized net profits may ultimately prove to be larger or smaller than anticipated, but public policy creates an environment that defines what can be expected on average.
Policymakers can use four types of levers to alter the expected financial results in the reward box: market entry levers, monopoly protection levers, payer requirement levers, and tax policy and direct financial incentives.
Threats to a Delicate, Productive System
The system the authors describe is delicate. It currently produces remarkable results – far more medicines each year than any other country produces with far greater access for patients. In the debate over drug pricing, these results – incredibly enough – are often ignored when changes are advanced. For example, Vital Transformation, a consulting firm, looked at the consequences of the International Pricing Index (IPI) that is part of H.R. 3 legislation, which passed the House in December.
According to the analysis, 64 drugs came to market over the past 10 years under biotech partnerships that have been so productive lately. With the IPI in effect, there would have been “56 fewer approvals of medicines originating from these small biotech companies, a reduction of nearly 90 percent.”
The largest overall impact would be seen in the treatment of cancers, with the loss of 16 treatments ranging from chronic myeloid leukemia (CML), lymphoblastic leukemia, ovarian cancer, breast cancer, prostate cancer, and lymphoma. In addition, two treatments for non-insulin-dependent diabetes would not have reached the market, as well as 10 orphan drugs for rare conditions such as pulmonary fibrosis, glioblastoma (cancers of the brain), and pulmonary arterial hypertension. Also included in the 56 drugs at risk are treatments for migraine, narcolepsy, wound care, and hepatitis B.
Changing policy while overlooking the powerfully positive effects of the current system could be disastrous.
Issue No. 59: Cancer Death Rate Registers a Record Decline; Reminder That Drugs Have Massive Benefits as Well as Costs
With all the debate over drug costs, it’s important to remember that pharmaceuticals also have massive benefits. Lives are extended or saved, pain and disability are reduced, suffering patients become more happy and productive, and burdens are lifted from their families.
Consider cancer, which, after heart disease, is the number-two cause of mortality in the United States. Two in every five Americans will get cancer in their lifetimes, with 1.8 million new cases expected in 2020. One in nine men will get prostate cancer; one in eight women will get breast cancer; one in 16 Americans will get lung cancer. Overall, cancer kills about 600,000 Americans a year; it’s the cause of 21% of all deaths.
But over the past quarter-century, the cancer death rate (that is, mortality per 100,000 Americans) has fallen an incredible 29%. Among black males, the demographic group with the highest death rate, the decline has been close to 50%. The American Cancer Society (ACS) estimates that 2.9 million fewer deaths have occurred than if the peak rates of the late 1980s and early 1990s had persisted.
Most dramatically, the death rate from cancer registered the largest one-year drop ever recorded, 2.2%, between 2016 and 2017, according to an ACS report released on Jan. 8.
There are several reasons for the decline: the reduction in tobacco use, earlier detection through better imaging techniques, improved surgical procedures, and new medicines and vaccines. A study by Seth Seabury and colleagues, published in the Forum for Health Economics and Policy in 2016, estimated that 73% of the success in fighting cancer is attributable to drugs.
The Promise of Immunotherapy
One of the most dramatic advances recently has been the use of drug-based immunotherapy, which enlists patients’ own immune system to kill tumors. As of December, the Food & Drug Administration had approved immunotherapy to treat about 20 different kinds of cancer, including bladder, kidney, lung cancer, leukemia, and non-Hodgkin’s lymphoma.
Immunotherapy is not a panacea. Currently, only a minority of patients respond positively to individual immunotherapy drugs, and immunotherapy has not proven significantly effective for three of the most common types of cancer: breast, prostate, and colon. More research and innovation are needed.
Still, recent declines in mortality because of immunotherapy are particularly striking for metastatic melanoma, or skin cancer that had spread to other organs, according to a new ACS paper. Death rates fell from an average reduction of 1% a year between 2006 and 2010 for men and women aged 50 to 64 years to 7% between 2013 and 2017. In other words, mortality rates in metastatic melanoma fell by a total of one-fourth in just four years.
A breakthrough occurred when James Allison, who, since the late 1970s, had been exploring the theory that the immune system can be manipulated to recognize cancer and mobilize cells to fight it, developed the drug ipilimumab, patented in 2011 by Bristol-Myers Squibb under the brand name Yervoy. (In 2018, Allison, affiliated with the MD Anderson Cancer Center, won the Nobel Prize.)
Former President Jimmy Carter, at age 90, was diagnosed in August 2015 with Stage IV melanoma that had spread to his brain. He said he had only a “few weeks left,” but he was successfully treated with radiation and a new immunotherapy drug developed by Merck called pembrolizumab, or Keytruda, which had been approved by the FDA less than a year earlier. Carter, four and a half years later, is still alive, and Keytruda has been approved for many other cancers as well, including lung, renal cell, esophageal, and cervical.
William G. Cance, chief medical officer for ACS, cited the “accelerated drops” in melanoma mortality thanks to immunotherapy as “a profound reminder of how rapidly this area of research is expanding, and now leading to real hope for cancer patients.”
The Case of TKIs for CML
Immunotherapy is not alone as an effective drug treatment for cancer. In May 2001, the FDA approved imatinib, a tyrosine kinase inhibitor (TKI), marketed by Novartis as Gleevec. The drug fights chronic myelogenous leukemia (CML), a cancer in which too many white blood cells are being produced in bone marrow. Tyrosine kinases are enzymes that promote cell growth, and a TKI like imatinib can inhibit their activity. Several generic manufacturers started producing imatinib after Gleevec went off-patent in 2016, and Novartis has since developed another TKI called nilotinib.
In addition to generics, there are five different branded TKIs, including Pfizer’s Bosulif and Takeda’s Iclusig, to fight CML. While it is not yet proven that any of these drugs can cure the disease, CML is being tamed; some 80% of patients are surviving at least 10 years, compared with 20% before imatinib reached the market.
Medicines to battle CML are not inexpensive, but their benefits far outweigh their costs. According to a 2012 study by Wesley Yin and colleagues in the American Journal of Managed Care, “Cost analyses indicate that the TKI drug class in CML therapy has created more than $143 billion in social value. Approximately 90% of this value is retained by patients and society, while approximately 10% is recouped by drug companies.”
The Yin study appeared four years before the imatinib generics and the same year that the FDA approved Bosulif and Iclusig. Today, the value retained by patients and society is undoubtedly far higher.
Economic Value of Progress in Fighting Cancer
In an earlier study, Frank Lichtenberg of Columbia University took a broader view. Lichtenberg wrote:
Based on the average cancer drug expenditure per cancer patient from diagnosis until death over the past decade, my analysis shows that the cost of [an] added year of life—plus any further benefits to people’s quality of living—was about $6,500. Given that surveys have estimated that most Americans would be willing to pay between $100,000 to $300,000 to extend their lives by one year —$6,500 represents a true bargain….
It’s worth remembering that…expensive drugs remain outliers in the grand scheme of cancer therapies. What’s more, drug prices usually decline steeply after patents expire and the drugs become available as generics, yet the ability of companies to charge high prices for a brief window provides incentive for the pharmaceutical industry to keep the wheels of innovation turning. This system may do a pretty good job of balancing society’s need for innovation as well as access.
In a separate 2004 National Bureau of Economic Research paper, Lichtenberg wrote that “since the lifetime risk of being diagnosed with cancer is about 40%, the estimates imply that new cancer drugs accounted for 10.7% of the overall increase in U.S. life expectancy at birth.”
In 2010, Darius Lakdawalla of the University of Southern California, along with five colleagues, including Tomas Philipson, who was then an economics professor at the University of Chicago and now heads the President’s Council of Economic Advisers, wrote a detailed study in the Journal of Health Economics of the economic effects of the war on cancer, declared in 1971 by President Nixon.
Lakdawalla and his colleagues determined that by 2000, the increased life expectancy was much greater, and like Lichtenberg and Yin, the vast majority of increased value flowed to patients and society:
Between 1988 and 2000, life expectancy for cancer patients increased by roughly four years, and the average willingness-to-pay for these survival gains was roughly $322,000. Improvements in cancer survival during this period created 23 million additional life-years and roughly $1.9 trillion of additional social value, implying that the average life-year was worth approximately $82,000 to its recipient.
Health care providers and pharmaceutical companies appropriated 5–19% of this total, with the rest accruing to patients. The share of value flowing to patients has been rising over time. In terms of economic rates of return, R&D investments against cancer have been a success, particularly from the patient’s point of view.
The researchers calculated that “drug companies, hospitals, doctors, and health professionals” earned at most $393 billion in profits over this time period,” compared with the net surplus to patients of nearly $2 trillion. This study is not new, but it is thorough and widely cited, and its conclusion holds up today.
In Three Years, 36 New Cancer Drugs
In the next edition of this newsletter, we will provide a complete rundown on new drugs approved in 2019, but for now, let’s continue to focus on cancer. It is worth quoting at length the section on cancer drugs in the annual report of the FDA’s Center for Drug Evaluation and Research (CDER), issued earlier this month:
2019 was another strong year for making new cancer and blood therapies available to patients in need. We approved new advances for certain patients with prostate cancer, bladder cancer, breast cancer, and lung cancer. We also approved two new bone marrow cancer therapies.
Additionally, CDER approved another new cancer therapy that can be used to treat any kind of tumor that has a specific genetic marker, as opposed to where in the body the tumor originated --- only the third cancer therapy approved by the FDA to target treatment based on a specific characteristic of a tumor instead of its site of origin.
Also to help advance cancer therapies, CDER approved a new drug to treat certain adult patients with diffuse large B-cell lymphoma, the most common type of non-Hodgkin lymphoma, a type of blood cancer. CDER also approved a new therapy for patients with mantle cell lymphoma, also a form of blood cancer that causes blood clots that can cut off oxygen and blood supply to the major organs and cause strokes and heart attacks that may lead to brain damage and death…. We also approved a new therapy for adult patients with chronic lymphocytic leukemia or small lymphocytic lymphoma, similar blood cancers that occur in different parts of the body.
In all, the FDA has approved 36 novel cancer drugs in the last three years. In addition, drugs that were first approved for one particular indication, like the immunotherapy Keytruda, have been approved for many more.
Developing these drugs is expensive and time-consuming. A study published in 2015 in the journal Cell concluded that ipilimumab, the treatment for metastatic melanoma “resulted from research conducted by 7,000 scientists at 5,700 institutions” over a period of a century. Remember that the average cost of bringing a single drug, of any sort, to market is about $3 billion, as this Scientific American article explains.
In addition to medicines that directly treat cancer, vaccines can prevent it from ever developing. For example, the human papillomavirus (HPV) has been linked, according to ACS, “to cervical, anal, throat, vulvar, and penile cancers. In fact, most cervical cancers are caused by infection with HPV.” A vaccine can stop the virus from developing. Similarly, a vaccine combats the hepatitis B virus, which puts people at higher risk of liver cancer. And eight new, competitive drug treatments developed in the past six years can completely eliminate the hepatitis C virus, which also can lead to liver cancer.
‘Where You Want to Get Cancer’
Since 1975, the proportion of people diagnosed with specific cancers who have survived at least five years has risen by 54% for lung cancer, 36% for colon, 50% for prostate, and 21% for breast.
For breast cancer, five-year survival rates vary widely, based on the stage at which detection occurs. The rate is 99% for localized disease, 85% for regional disease, and 27% for distant-stage disease, according to a 2017 ACS report. Overall for breast cancer, the rate is 90%; for prostate cancer, 98%; for melanoma, 92%.
The National Cancer Institute now lists 71 drugs to treat breast cancer, and new treatments are being developed all the time. For example, last month, the FDA granted “Breakthrough Therapy Designation” to the “addition of tucatinib to trastuzumab (Herceptin) and capecitabine for the treatment of patients with locally advanced unresectable or metastatic HER2-positive breast cancer,” including cancer that has spread to the brain.
Progress against all cancers will depend on advances in detection and on new medicines, and the source of most of those medicines will undoubtedly be the United States. According to PhRMA, the trade association, some “1,100 medicines and vaccines for cancer…are in clinical trials or awaiting review by the U.S. Food and Drug Administration.”
As a Wall Street Journal editorial headline put it earlier this month, the U.S. is “where you want to get cancer.” The piece cited a study in The Lancet last year that found that someone diagnosed with pancreatic cancer between 2010 and 2014 had nearly twice the likelihood of surviving five years in the U.S. than in the U.K. The five-year survival rate for brain cancer was 36.5% in the U.S., 27.2% in France, and 26.3% in the U.K. For stomach cancer: 33.1% in the U.S., 26.7% in France, and 20.7% in the U.K.
An earlier study that looked at survival results for five common cancers in seven rich countries, as related by the U.S. Centers for Disease Control, found the U.S. performing best by far. That study looked at proportion of patients with different kinds of cancers surviving at least five years. The United States was number-one out of the seven countries for three of the five cancers (breast, colon, and prostate), second in lung cancer, and sixth in childhood leukemia. No other country came close to that record.
A PhRMA analysis last year, using data from the research firm IQVIA, as well as the FDA, the European Medicines Agency, and Japan’s Pharmaceuticals and Medical Devices Agency, compared how broadly and quickly new cancer medicines became available in 15 rich countries, many of which set prices artificially low.
The U.S. was, far and away, and the leader. Some 96% of the new drugs were available in the U.S.; Germany and the U.K. tied for second with 71%, with Canada at 57% and Japan at 50%; the median was just 62%. The average delay in the public’s access to the new cancer medicines was a mere three months in the U.S., again by far the best. French patients could not gain access to the average new drug for 19 months; Italy, 20 months; the U.K., 11 months. The median among the nations was 16 months.
A survey in 2018 identified 65 new cancer drugs launched between 2011 and 2017 and found that “nearly all were available in the United States (62 medicines or 95 percent) compared to 75 percent in the United Kingdom and 51 percent in Japan.”
The country that develops drugs first gives the fastest and the most comprehensive access to those drugs. And it is an advantage that is becoming glaringly obvious as the development of cancer drugs accelerates. That system, as it pertains to pharmaceuticals, is currently under severe attack, and opponents might want to remind themselves that research has shown clearly that the benefits of cancer drugs far outweigh their costs.
Issue No. 58: Rebate Reform, Suddenly Dropped by the White House, May Be Convincing Enough for a Comeback
On May 11, 2018, President Trump declared that rebate reform would be a significant part of the Administration’s strategy for constraining drug prices. In a Rose Garden speech, he said, “Our plan will end the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
Then, last summer, five months after the Department of Health and Human Services placed a proposed rebate-reform rule in the Federal Register, the Administration backtracked. What happened? And is rebate reform truly dead, or is there a convincing case for a comeback?
Why the White House Originally Wanted
to Reform the Rebate System
The prescription drug supply chain “middlemen” mentioned above include wholesalers, distributors and most notably, pharmacy benefit managers, or PBMs. PBMs determine the composition of formularies, the medicine chest that patients can access under their insurance plans. They extract rebates from drug manufacturers and then pocket the money themselves or pass a percentage of it on to insurers (some of which, like Cigna and UnitedHealth, own PBMs), to federal and state governments, or to private health plans.
Rebates are payments from sellers to buyers, and, in the health-care sector, they would be illegal under the 1972 federal Anti-Kickback Statute if it were not for a special safe-harbor exemption applying to PBMs That exemption would be eliminated under HHS’s proposed rule, which Secretary Alex Azar said would end the “hidden system of kickbacks to middlemen.” He added, “Every day, Americans, particularly our seniors, pay more than they need to for their prescription drugs.” By ending “this era of backdoor deals,” he continued, President Trump will “deliver savings directly to patients when they walk into the pharmacy.”
The Administration’s objective with the proposed rule was to replace rebates with discounts to patients at the point of purchase, perhaps as soon as 2020. The rule applied only to drugs under Part D of Medicare and to managed care organizations (MCOs) that participate in Medicaid. Congress would have to pass laws to reform the rebates for the commercial plans that cover most Americans, but, frequently, changes to Medicare and Medicaid flow to the rest of the reimbursement system.
‘Finally Ease the Burden of Sticker Shock’
Azar was not exaggerating when he said that rebate reform “has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of sticker shock.”
According to a report last year by the consulting firm Milliman, “Rebates are mostly used for high-cost brand-name prescription drugs in competitive therapeutic classes where there are interchangeable products (rarely for generics).” The aim of the PBMs is to get pharmaceutical manufacturers to pay to have their drugs admitted to formularies and to secure preferred “tier” placements.
Says an April 2018 report by the Altarum Institute:
The concern is that PBMs, in their role as intermediaries, have diverted much of the potential savings to their own bottom lines, a concern intensified by the lack of transparency around the proprietary rebate amounts.
Examples include PBMs retaining more than their agreed upon share of rebates through re-labeling rebates as fees and PBMs pressuring manufacturers to increase their list prices with a commensurate increase in rebates. This benefits PBMs doubly since they are often paid fees based on a percentage of list price and also retain a share of rebates.
The role of rebates has increased in recent years, and they now average 26% to 30% of the list price of a drug-- and much higher (over 60%) in some cases. According to Altarum (see Exhibit 4 in the report), rebates for branded drugs under Medicare in 2016 averaged 31%; for Medicaid, 61%. Rebates’ proportion of total Part D doubled from 2006, according to a report by the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
“There is general agreement,” said a white paper last March by Amanda Cole and colleagues for the Institute for Clinical and Economic Review (ICER), “that the gap between list price and net price is widening as a cumulative sum: over the five years between 2012 and 2016 the total value of pharmaceutical manufacturers’ off-invoice rebates and other price concessions more than doubled from $59 billion to $127 billion.”
In 2017, Adam Fein reported in the blog Drug Channels, new data from the research firm IQVIA revealed that “manufacturers of brand-name drugs in 2017 reduced list price revenues by an astonishing $153 billion. Those reductions came primarily from rebates, discounts, and other payments to the drug channel. That figure has grown by 10% from the 2016 figure, even though net prices for brand-name drugs grew by only 1.9%.”
The Rebate Dynamic
Critics argue that to satisfy the demands of powerful PBMs, pharmaceutical manufacturers raise their list prices so that PBMs can capture more money from the proportion of that price they charge. The higher list price also means that patients face higher out-of-pocket costs for their medicines. Thus, as Fein noted, the gap between list and net price grows – and consumers are harmed.
The ICER white paper explained a key part of the dynamic:
All would agree that higher list prices hurt many patients who need ongoing drug treatment, since the increase in the use of co-insurance and of high-deductible plans has meant that rising numbers of patients are required to pay their out-of-pocket share for drug coverage in relation to the list price, not the negotiated rebate price.
A fact sheet from HHS points out that if patients are “spending out-of-pocket up to their deductible, they typically pay a drug’s list price” – that is, the price before the rebate. And if patients are 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.”
The fact sheet uses this example. Assume that a drug’s list price is $300 for a monthly prescription. A 30% rebate to a health plan would reduce the cost to that plan to $210. Assume also that a patient’s health plan requires co-insurance of 20%, paid out of the patient’s own pocket. But that 20% applies to the list price of $300 (thus, $60), not to $210 (where it would be $42). So, the net cost to the insurer is now $150 ($210 minus $60). HHS wants to end this practice, noting, “In some cases, a patient’s co-pay can actually be higher than the net price paid by the health plan after rebates.”
Under Part D, Medicare beneficiaries are currently responsible paying out of pocket 5% of the cost of their drugs once they reach the catastrophic part of their coverage (after about $8,100 of total spending in 2019: see Figure 4 here). That 5% is applied, again, to the list price of the drug, not to its price after rebates. Part of the rebate goes to the insurer and part to the federal government.
The 2018 report by Milliman pointed out the perverse incentives that rebates can cause with Part D, adding expenses for both patients and the government. Says the report, “A very high rebate can mean that the Medicare Part D plan’s retained portion of the rebate exceeds its liability. In this case, the Medicare Part D plan would have a financial incentive to prefer a high-cost prescription drug over a lower-priced alternative, which would increase costs to patients and the federal government.”
The Problem of Rebate Secrecy
A further problem with the rebate system is that it is so opaque. As the Milliman report explained:
Rebate contract terms are trade secrets and vary widely among brands, pharmaceutical manufacturers, and health insurers, but tend to be highest for brands in therapeutic classes with competing products. This secrecy makes cost comparisons of competing brands on the basis of price alone very difficult (if not impossible) to estimate.
Rebates therefore create a “black box” in the prescription drug distribution chain—the patient (and often the commercial health insurer) does not know how much the pharmaceutical manufacturers are paying in rebates, and how much of the rebates PBMs are keeping before passing the remainder to the health insurer.
It is no wonder, then, that in its comprehensive blueprint of May 2018, “American Patients First,” HHS listed among its potential action items: “Measures to restrict the use of rebates, including revisiting the safe harbor under the AntiKickback statute for drug rebates.” The document criticized “a business model built on opaque rebates and discounts that favor high list prices.”
The Administration thus made a strong case for reforming rebates and used tough language to criticize a secretive system that was raising out-of-pocket costs for seniors and increasing government expenses.
July 10 Meeting Leads to a Reversal
In a speech on June 13 in Washington, Azar argued that the “prescription drug market is so characterized by opacity, backdoor dealing and market concentration that it’s really not a market at all—and we need active steps to restore competition.” He added:
For instance, the current shadowy system of drug rebates pushes prices perpetually higher, allowing all actors in the system to make more money every year, while patients keep paying more out-of-pocket. Does that sound like any market you’ve heard of?
That’s why we’ve proposed replacing this rebate system with upfront discounts for seniors at the pharmacy counter.
But then, just 28 days later, the White House announced a sudden change of mind: “Based on careful analysis and thorough consideration, the president has decided to withdraw the rebate rule.”
But why? The decision came July 10 at a meeting that included Trump; Azar; Larry Kudlow, the director of the National Economic Council in the White House; Tomas Philipson, a University of Chicago health economist who a few days later would be named Acting Chairman of the Council of Economic Advisers; Kellyanne Conway, Counsellor to the President; and Seema Verma, Administrator of the Centers for Medicare and Medicaid Services.
According to a Bloomberg Law report, “Trump decided to kill the rule because of the high cost to the government and because of a concern that the rule could benefit drug companies, according to two sources briefed on the meeting.”
The Bloomberg article pointed to the Administration’s “recent loss in a lawsuit that challenged a rule requiring drugmakers to put their list prices in direct-to-consumer advertising.” It is hard to see how the disclosure lawsuit was germane to rebate policy, but it may have stirred animosity in some quarters. In addition, the insurers and PBMs, with considerable political clout, mounted strong opposition.
Two months before the White House decision, the Congressional Budget Office (CBO) issued a report on the possible effect of the rule on the federal budget. CBO estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029. "Why be for something that CBO says has a tremendous cost and there aren’t ways to pay for it?" Axios quoted a Senate aide as saying. Certainly, $177 billion looks like a large number, but it is actually only 1% of projected Medicare and Medicaid spending over the 10-year period.
The CBO report was based on assumptions that were highly speculative. Change assumptions about behavior, and you get much different results. A PhRMA blog makes the point that the CBO report “fails to account for the stronger incentives that the proposed rule could create to negotiate the best value for patients.”
Study Finds Government Costs Fall in Four of Six Scenarios
A Milliman study in January 2019 for the Assistant Secretary of HHS for Planning and Evaluation looked at six scenarios, such as decreases in branded drug prices by drug manufacturers and increased formulary controls by PBMs. For four of the scenarios, net government spending actually fell – in one case by $100 billion over 10 years and in another by $79 billion. All six cases projected that, for beneficiaries, premiums would rise and cost sharing would fall. On net, in five of the six scenarios, spending by beneficiaries would decline.
Two months before the White House meeting, an article in Health Affairs by Joe Antos and James Capretta of the American Enterprise Institute argued:
It is tempting to blame high prices on unnecessary middlemen, but those middlemen have been hired by employers and health plans with the expectation that they will be effective at holding down overall costs. Undercutting the ability of PBMs to secure rebates would shift power and leverage to drug manufacturers. It is hard to see how taking that step would lead to lower overall costs for consumers.
But the truth is that rebate contracting is only one tactic to constrain prices. There are many other means at the disposal of PBMs without the negative consequences of the rebate system. For example, some insurers use a net-price contracting and pass all the savings on to the members.
By contrast, a study published in the Journal of the American Medical Association last month, funded by the Laura and John Arnold Foundation, looked at the placement of branded drugs in Medicare Prescription Drug Plan formularies when a generic equivalent was available. Researchers found that “72% of Part D formularies had a lower cost-sharing tier and 30% of Part D formularies had fewer utilization controls on branded drugs for at least one multisource drug.” In other words, PBMs and Insurers preferred costlier alternatives due to higher rebates than lower-priced generic medicines; leaving patients and the healthcare system to absorb the cost.
In addition, the argument that, as Bloomberg put it, the Administration balked because the proposed rule benefit pharmaceutical manufacturers would appear to be irrelevant. Does it make sense to render policy decisions on the basis of whether they harm one industry group or another? Or on the basis of whether the decisions achieve the kind of goals laid out in the 2018 HHS blueprint: better health and lower costs for consumers?
Yes, both better health and lower costs. This paragraph from the CBO report is instructive:
Lower prices on prescription drugs reduce beneficiaries’ out-of-pocket costs. Beneficiaries who do not fill some of their prescriptions because their current out-of-pocket expenses are high would be more likely to fill them and to better adhere to their prescribed drug regimens if their costs were lower, as they would be under the proposed rule.
In CBO’s estimate, the additional Part D utilization stemming from implementing the proposed rule would increase federal spending for beneficiaries who are not enrolled in the low-income subsidy program over the 2020–2029 period by a total of about 2 percent, or $10 billion.
However, the increase in the number of beneficiaries following their drug regimens would also reduce spending for services covered under Parts A and B of Medicare, such as hospital and physician care, by an estimated $20 billion over that period. On net, those effects are projected to reduce Medicare spending by $10 billion over the 2020–2029 period.
Political Fears Over a Minuscule Premium Increase
One simple explanation for the rejection of rebate reform at the July 10 White House meeting was the prospect that health plans would compensate for lost rebate revenues by boosting Medicare Part D premiums. And who wants to be responsible for a hike on seniors with an election approaching?
“At the end of the day, while we support the concept of getting rid of rebates and I am passionate about the problems and the distortions in system caused by this opaque rebate system, we are not going to put seniors at risk of their premiums going up,” Azar was quoted by The New York Times as saying after the July 10 decision.
But objections to premium increases may have been disingenuous while the real reasons were more political – a response to intense advocacy by the insurers, unhappiness with the successful legal opposition to disclosure regulations and fear of being seen as helping pharmaceutical companies in any way.
After all, premium increases would almost certainly be tiny. A study by the California Department of Managed Healthcare estimates the figure at 0.4%.
A separate study found that the majority of Medicare Part D members would see no increase at all. In that research, Erin Trish and Dana Goldman of the Schaeffer Center for Health Policy and Economics at the University of Southern California, began by estimating that “eliminating rebates would increase beneficiary-paid monthly premiums by an average of $4.31.” They wrote, “Our estimate is in line with those reported by HHS.”
The minuscule premium increases, as the Milliman report found, would easily be overwhelmed by out-of-pocket savings on co-pays and co-insurance. The biggest beneficiaries of this change, by far, will be sickest seniors, whose out-of-pocket spending will fall and whose health will improve.
Trish and Goldman also found that “only about 13 million of the 43 million Part D beneficiaries would see their premiums increase.” Many of the others either get their coverage through Medicare Advantage plans that use federal dollars to offset premium or qualify for low-income subsidies.
One large PBM, OptumRx, owned by UnitedHealthcare, has experimented, with excellent results, on “consumer point-of-sale prescription drug discount programs,” accompanied by “modest increases” in premiums, in the low single digits.
According to an Optum press release early in 2019:
Just two months into the year, the existing program has already lowered prescription drug costs for consumers by an average of $130 per eligible prescription. UnitedHealthcare data analytics demonstrate that when consumers do not have a deductible or large out-of-pocket cost, medication adherence improves by between 4 and 16 percent depending on plan design, contributing to better health and reducing total health care costs for clients and the health system overall.
An Irresistible Policy Change?
It is also far from clear that a political calculus that eschews rebate reform for fear of tiny increases in premiums is a winning one. Without rebate reform and without point-of-sale advertising disclosures (struck down by a federal court two days before the White House meeting on rebates), President Trump could be “vulnerable to Democrats’ attacks that he isn’t following through on his promises to lower drug prices,” wrote Stephanie Armour in the Wall Street Journal.
As a result, the Administration may soon take another look at rebate reform. The Administration record on constraining drug prices – mainly by easing approvals of generic drugs – is confirmed by Bureau of Labor Statistics data, which show declines for pharmaceuticals in 10 of the last 16 months and by reports from research firms and PBMs like Express Scripts. But the White House has done a surprisingly inadequate job of publicizing the achievement.
Rebate reform would be a solid policy accomplishment, relatively easy to explain. The Administration would almost certainly benefit from a reform that addresses what Americans care about most in health care: reducing the amount of money comes out of their own pockets and gaining access to drugs that address the worst illnesses. After the White House implements the reform, Congress will be under pressure to follow by making similar changes for commercial policies.
As an election nears, rebate reform may be turn out to be irresistible policy.
Hospital spending increased to $1.2 trillion in 2018, according to National Health Expenditures (NHE) data, released earlier this month by the Centers for Medicare and Medicaid Services (CMS). The total now represents 33% of all U.S. health spending. By comparison, spending on retail drugs in 2018 was $335 billion, or 9% of all health spending, according to NHE.
In an analysis in Health Affairs on Dec. 5, Micah Hartman and his colleagues at CMS present a table that shows that from 2015 to 2018, hospital spending rose $157 billion while prescription drug spending rose $18 billion.
So, over the past four years, hospital spending jumped 15.2% while retail prescription drug spending increased a total of just 5.7%, which is less than the overall Consumer Price Index. And that is spending, which is boosted by increased utilization of drugs. As a CMS document put it: “In 2018, faster growth in non-price factors helped to drive the increase in total retail prescription drug spending growth, while retail prescription drug prices declined by 1.0 percent.” Drug prices have continued to fall. According to the Bureau of Labor Statistics, they have dropped in 10 of the past 16 months.
Using a different set of definitions, the Centers for Disease Control reported that hospital spending represented 38.6% of all U.S. health spending in 2017, up from 36.1% in 2007, and that pharmaceutical spending was 11.3%, down from 12.3% ten years earlier. Among the five major categories of health spending, hospitals were the only one where the proportion rose.
With these facts, where do you think policy makers, journalists, and non-profit advocates are focusing nearly all their attention when it comes to America’s health costs? The answer, of course, is prescription drugs.
Why? One explanation is the design of health insurance policies, which require patients to pay a far higher proportion of total costs out of their own pockets for medicines than for hospital care. Another is that hospitals, which are major employers in congressional districts, tend to enjoy the support of elected officials.
But lately, things are changing. The Trump Administration is now insisting that hospitals disclose price information which, as Kaiser Health News put it, “they have long kept obscured,” such as the rates they negotiate with insurers. In another proposal, the White House wants to require that insurers tell patients beforehand how much they owe out of pocket for hospital services.
Meanwhile, Congress is considering a deal on what is often termed “surprise billing.” The phrase, explains Peterson-KFF Health System Tracker…
…describes charges arising when an insured person inadvertently receives care from an out-of-network provider. Surprise medical bills can arise in an emergency when the patient has no ability to select the emergency room, treating physicians, or ambulance providers. Surprise bills can also arise when a patient receives planned care.
For example, a patient could go to an in-network facility (e.g., a hospital or ambulatory surgery center), but later find out that a provider treating her (e.g., an anesthesiologist or radiologist) does not participate in her health plan’s network. In either situation, the patient is not in a position to choose the provider or to determine that provider’s insurance network status.
Median rates for these surprise bills for anesthesiologists are 5.5 times that of patients treated under Medicare and for emergency medicine, 4.7 times, according to a study in August by the USC-Brookings Schaffer Initiative for Health Policy.
New rules would apply, according to Bloomberg, “where patients can’t afford bills from physicians who don’t accept their insurance. In those situations, patients would have to pay only what they would owe to an in-network provider of the same service.”
Disclosing Prices at Hospitals
On Dec. 4, the Federation of American Hospitals, along with three other hospital associations and three hospitals, filed a suit in U.S. District Court to prevent the Trump Administration from requiring them to disclose prices they privately negotiate with insurance companies. As an article on CNN.com explained:
The rule, which stems from an executive order Trump issued this summer, requires hospitals to make public by 2021 the rates they negotiate with insurers and the amounts they are willing to accept in cash for an item or service. In addition, they must provide this information in an online, searchable way for 300 common services, such as X-rays, outpatient visits, Cesarean deliveries and lab tests.
Meanwhile, the Administration has asked for comment on further rules that would require health plans to allow their members to get access to pricing and out-of-pocket (OOP) costs through a standardized Internet tool.
Seema Verma, the CMS Administrator, wrote in an op-ed in the Chicago Tribune:
For too long, insurers and hospitals have dubiously claimed that negotiated prices are a strange variation of proprietary business secrets that they’ll share with you — just after you receive the service. Remarkably, prices are even hidden from people with high deductible plans who must pay for a substantial amount of services out of their own pocket before their insurance kicks in.
The idea is not just to inform consumers but to push down prices. “The price transparency delivered by these rules,” Verma wrote, “will put downward pressure on prices and restore patients to their rightful place at the center of health care.”
Or, as Caitlin Oakley, an HHS spokeswoman, said bluntly, “Hospitals should be ashamed that they aren’t willing to provide American patients the cost of a service before they purchase it.”
Judging from the lawsuit, however, one would have to conclude that hospitals are not. They argue that the Administration has exceeded its authority and that the rules violate the free-speech clause of the First Amendment.
It is also unclear just how much interest patients will take in hospital costs, when they pay such a small proportion of the total bill out of their own pockets. A Kaiser Family Foundation analysis in November found that Medicare beneficiaries – a good proxy for all Americans -- spent an average of 2% of the cost of in-patient hospital services out of their own pockets, compared with an average of 21% of the cost of prescription drugs.
In addition, it is uncertain whether the rule will stand up to legal scrutiny. In July, a federal court struck down a rule issued by the Department of Health and Human Services requiring that drug companies disclose the price of drugs in direct-to-consumer advertising. The court said HHS overstepped its statutory and regulatory authority. The judge didn’t rule on First Amendment claims made by the plaintiffs.
An Inefficient Hospital System
What is important about proposals to rein in surprise billing and to increase transparency may not be so much the substance of the measures but that they are being attempted at all. Hospitals have enjoyed a special relationship with policy makers, as chronicled by Chris Pope, a Manhattan Institute fellow, in the Winter 2019 article in National Affairs.
Pope wrote that our health care system is distinguished “by the protectionist nature of government intervention in the marketplace. And this above all means protectionism on behalf of hospitals.” He continued: “Over decades, the structure of state regulations and federal subsidies has encouraged hospitals to inflate their costs by protecting them from competition. This has yielded enormous overcapacity and inefficiency.
As an example, Pope writes:
Whereas the European Union had an average hospital-bed occupancy rate of 77% in 2015, the rate in America's community hospitals was only 63%. Occupancy rates were less than 30% for American hospitals with between six and 24 beds, and 42% for those with 25 to 49 beds.”
Hospital admissions inn he U.S. dropped from 39 million in 1980 to 35 million in 2015, and the average length of a hospital fell by 40%. But, meanwhile, hospital employment has been rising sharply – from 4.7 million in November 2014 to 5.3 million five years later – an increase of 10.5%, according to the Bureau of Labor Statistics. As The Economist magazine reported: “America spends vastly more on administration [than Europe]: 8% of health spending versus 2.5% in Britain. As of 2013, Duke University hospital had 400 more billing clerks (1,300) than hospital beds (900).”
The U.S. also over-invests in equipment, in part, as Pope argues, because political imperatives keep hospitals open that should be closed and, as a result, our system is far too decentralized.
As we noted in newsletter No. 46, a study by CMS found that over the period 1990-2013, the average annual growth rate of multi-factor productivity for hospitals was only 0.1% to 0.6% (depending on methodology). “Multi-factor productivity” (MFP) is the change in outputs that results from a change in labor and capital inputs. Along with population increases, it is the main factor in GDP growth. For private non-farm businesses in the U.S., the rate was 1.1%.
Hospitals don’t behave like other markets. Consolidation, which in most industries is a way to increase efficiency and bring down costs, has actually increased the prices of hospital services, according to a study by the National Council on Compensation Insurance (NCCI). The July 2018 report concluded:
Reductions in hospital operating costs do not translate into price decreases. Research to date shows that hospital mergers increase the average price of hospital services by 6%-18%. For Medicare, hospital concentration increases costs by increasing the quantity of care rather than the price of care.
A report to Congress in March by Medpac, the Medicare Payment Advisory Commission also took a dim view of the results of hospital consolidation in America. It found that horizontal consolidation (among hospitals) can lead to higher commercial prices and so a greater gap with Medicare, which “could put pressure on Medicare to increase physician prices.” Meanwhile, vertical consolidation (where hospitals buy out medical practices) “can also result in higher costs for Medicare and commercial insurers.”
Higher Prices Abound in Hospitals
A study in Health Affairs in February found between 2007 and 2014, “hospital prices grew 42 percent, while physician prices grew 18 percent. Similarly, for hospital-based outpatient care, hospital prices grew 25%, while physician prices grew 6 percent.” An article in Modern Healthcare that examined the study concluded: “Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward.”
The new NHE data show that hospital spending rose 4.5% during 2018, and prices were the main reason. “Faster growth in hospital prices,” said the CMS report, “was partly offset by slower growth in non-price factors, such as the use and intensity of services.”
Between 2005 and 2014, the average cost per hospital stay, adjusted for inflation, rose a total of 12.7%, according to a major study by the Healthcare Cost and Utilization Project (H-CUP). “The cost of a maternal childbirth hospital stay rose 12.8% (again, adjusted for inflation); neonatal stay, 19.2%; surgical, 16.4%; injury, 17.1%,” wrote the study’s authors.
The average cost of a hospital stay for pneumonia is now $10,000; for the fracture of a lower limb, $17,000; for a heart valve disorder, $42,000. A liver transplant averages $813,000; kidney transplant, $415,000. An MRI averages $1,119 in the U.S. and $503 in Switzerland; an appendix removal is $15,930 in the U.S. and $2,003 in Spain; and a C-Section is $16,106 in the U.S. and $7,901 in Australia.
It’s no wonder the New York Times in November ran an article headlined, “With Medical Bills Skyrocketing, More Hospitals Are Suing for Payment.” The reporter, Sarah Kliff, wrote:
When a judge hears civil cases at the courthouse in this southwest Virginia town two days a month, many of the lawsuits have a common plaintiff: the local hospital, Ballad Health, suing patients over unpaid medical bills. On a Thursday in August, 102 of the 160 cases on the docket were brought by Ballad.
Hospitals mark up the price of the medicines they use by an average of 479% of the cost they actually pay, according to a study by The Moran Company, a research firm that prepared the report for the Pharmaceutical Manufacturers of America. Insurers don’t reimburse hospitals for the entire amount that they bill. But, says Moran, “hospitals receive 252 percent of estimated hospital acquisition cost from commercial payers.”
Another way that hospitals offset inefficiencies is through government subsidies like the 340B program. This program was established more than a quarter-century ago to stretch scarce resources for government grantees providing health services and to help large mission driven-public hospitals such as New York Health and Hospitals Corporation. Under 340B, in order to participate in Medicaid, drug manufacturers have to provide outpatient medicines at prices discounted by 23% to 99.9% to certain non-profit hospitals. The hospitals are then allowed to claim full reimbursement at undiscounted rates for private payers. The difference was intended to help support the institutions and centers that provided care to low income patients.
But the program has changed drastically from the original concept, as we showed in Issue No. 30 of this newsletter. It has encouraged hospitals to swallow up other independent health practices, which then get to take advantage of 340B program. Meanwhile, the law allows hospitals to avoid passing on the discount to poor or financially stressed patients, and the number of eligible types of hospitals has been expanded regardless of whether they serve any Medicaid or uninsured patients.
Even ostensible attempts to constrain hospital costs turn into subsidies, as Pope demonstrated in a Manhattan Institute study, “When the Government Sets Hospital Prices: Maryland’s Experience,” released in June:
Rather than reducing health-care costs in any significant way, Maryland’s payment-regulation experiment has…been captured by the hospitals that it was intended to regulate. The regulation is loose and does little to distinguish the state from its peers in a variety of metrics—except for one crucial fact: the system allows the state to claim higher reimbursements from the federal government for Medicare patients.
Decades of regulations have induced unintended consequences, too, which have been patched with further regulations, inducing further unintended consequences. Nevertheless, Maryland’s payment system survives because it entitles the state’s hospitals to a unique $2 billion annual windfall from Medicare.
Despite the attempts to fix problems of surprise billing and lack of transparency, politicians remain more focused on drug costs rather than hospital costs – even though hospital spending is at least triple drug spending and rising at 4%-plus annually, more than twice the rate of drugs.
Besides the obvious issue of political favoritism, with hospitals being the largest employers in 16 states (the University of Pittsburgh Medical Center, for example, has 89,000 employees), there is the problem of insurance design. More and more insurance policies are requiring the sickest patients to pay high co-pays and co-insurance tabs. These patients face large OOP costs, sometimes $10,000 a year or more, and the bills frighten not just those who have to pay them but their friends and neighbors who hear their stories.
While hefty co-pays and co-insurance affect all kinds of health care spending by consumers, the highest OOP expenses often hit people who use the most innovation medicines. So, while hospital spending is more than three times pharmaceutical spending overall, individual Americans pay out of their own pockets $47 billion a year for pharmaceuticals compared with $34 billion for hospital services – or 38% more.
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.
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.
A rational health insurance system would reimburse drugs more heavily than hospitals and doctors in order to encourage medicine use – because drugs can lower costs for other services, as we showed in our last newsletter.
No wonder constituents are more scared of drug costs than hospital costs. Insurance redesign would be a huge help, but, in the meantime, policy makers should keep their eyes on cost-containment prize: the American hospital.
A new study confirms that medicines are often lower-cost alternatives to expensive and sometimes dangerous procedures. In addition, other research shows how medicines allow patients to avoid other treatments that involve further doctor visits, hospital stays, and much greater costs.
The new study, a seven-year clinical trial, called ISCHEMIA, drew significant attention globally. It found that people with severe but stable heart disease from clogged arteries cut their risk of having a heart attack over the next few years just as much by using medicines as by having surgery. “Stents and bypass surgery are no more effective than drugs for stable heart disease, highly anticipated trial results show,” said the Washington Post in a Nov. 16 headline.
According to the Associated Press:
The results challenge medical dogma and call into question some of the most common practices in heart care. They are the strongest evidence yet that tens of thousands of costly stent procedures and bypass operations each year are unnecessary for people with stable disease.
Percutaneous coronary angioplasty (PTCA) – which opens up blocked arteries in order to increase circulation to the heart – is the second-most-common operating-room procedure in America during a hospital stay (after knee surgery), with 534,000 operations, according to H-CUP, the federal Healthcare Cost and Utilization Project. Coronary bypass surgery is also common, ranking 14th with 203,000 operations. Heart procedures are expensive. H-CUP data show that in 2015, a PTCA cost an average of $92,000 – almost doubling in ten years.
A fairly simple coronary intervention with drug-eluding stents (propping open arteries and releasing medicine internally) cost an average of $26,000 for the initial hospitalization and a total of $57,000 including costs for outpatient visits and complications, according to the California Technology Assessment Forum. For bypass surgery, the costs are $34,000 and $61,000.
Unfortunately, getting reliable information on hospital costs can be difficult, and these figures are from 2013, but the price trajectory is up while that of heart-disease medicines is down.
Details of the Research
The trial involved 5,200 men and women with moderate to severe ischemia, or insufficient blood flow caused by clogged arteries. The participants in the study kept to their regular medical therapy, which, according to Gina Kolata, writing in the New York Times, included “statins and other cholesterol-lowering drugs, blood pressure medications, aspirin and, for those with heart damage, a drug to slow the heart rate.” Some patients got stents to open arteries, and the ones who did took anti-clotting drugs.
But for those who received only standard medical therapy, the drugs were generally inexpensive. Generic statins and drugs to reduce blood pressure cost only a few dollars a month, according to the GoodRx website.
Most dramatically, the study found that among those who had stents or bypasses, deaths totaled 145; for those who received medication alone, deaths were 144.
The trial also examined whether patients experienced a heart attack, heart failure, hospitalization for unstable chest pain, or resuscitation after cardiac arrest. Researchers found no difference, over a median of 3.3 years, in any of these disease-related events between the two groups. They did, however, find that those who underwent bypass or stent procedures experienced the events at a higher rate during the first six months of their treatment. In an interview, Judith Hochman of the New York University Grossman School of Medicine, the study’s chair, said that those results suggested that the procedures led to complications.
This study was not the first to show that medicine alone is often the best way to treat heart disease. An earlier report, by the American Medical Association and the Joint Commission, said that “roughly 1 in 10 elective angioplasty procedures performed nationwide may be ‘inappropriate,’ and another third questionable. The operation typically costs around $30,000, and in rare circumstances it can cause tears in blood vessel walls, major bleeding and other problems.”
Will this research change the way doctors treat heart disease? Perhaps not, said Vikas Saini, a cardiologist and president of the Lown Institute in Brookline, Mass., quoted by Axios, "Established practices die hard, especially when there is a substantial culture, mindset and financial structure reinforcing that behavior.”
The Axios article continued:
The prices of individual stents range anywhere from several hundred to several thousand dollars, and the surgeries tack on tens of thousands more for hospitals, which have been pretty dedicated to keeping their beds full whenever possible.
Statins and hypertension drugs have been a major factor in reducing age-adjusted deaths from heart disease from 412 per 100,000 Americans in 1980 to 165 in 2017. An H-CUP study, titled, “Trends in Hospital Inpatient Stays in the United States, 2005-2014,” found that over the nine years “the number of stays for coronary atherosclerosis and other heart disease decreased by 63 percent (from 1,076,100 to 397,000)… Stays for congestive heart failure decreased by 14.4 percent (from 1,053,100 to 901,400).”
Hepatitis C: Medicines vs. Transplants
Hepatitis C (HCV), which kills more Americans each year than any other infectious disease, provides another example of how medicines can reduce costs in the health system overall. In 2014, the FDA approved a remarkable drug called Sovaldi that cured HCV within 12 weeks for 91% of patients. Much of the commentary around Sovaldi focused on its list price: $84,000 for a course of treatment. Since then, the original manufacturer, Gilead, as well as competitors have brought out improved HCV drugs and prices have fallen by three-quarters.
But even at $84,000 or far more, HCV drugs are a comparative bargain – and comparisons, measuring one alternative against another, are what public policy is all about. HCV infection, which afflicts more than 3 million Americans, is responsible for 40% of all chronic liver disease in the United States, and one consequence is a liver transplant. The average estimated cost of such a procedure in 2017, according to a study by the research firm Milliman, was $813,000, or nearly ten times the original cost of Sovaldi.
Adherence and Reduced Medical Costs
If policy makers are serious about reducing health care costs, the best place to look is improving adherence. Many Americans end up in the hospital, where the cost of an average stay is more than $10,000, because they don’t take medicines they should.
In 2017, Jane Brody of the New York Times called non-adherence to doctors’ prescriptions an “out-of-control epidemic.” A review in the Annals of Internal Medicine noted that non-adherence leads to 125,000 deaths and 10% of all hospital admissions each year. The authors wrote:
Studies have consistently shown that 20 percent to 30 percent of medication prescriptions are never filled, and that approximately 50 percent of medications for chronic disease are not taken as prescribed.
And an article by Lisa Rosenbaum and William Shrank in the New England Journal of Medicine concluded that patients not adhering to medication regimens costs the U.S. $100 billion to $290 billion a year. That article was published in 2013, so we can assume the figure is much higher today.
This phenomenon of non-adherence has been extensively studied. For example, in an article in the journal Medical Care last year, M. Christopher Roebuck and colleagues found that full adherence to prescriptions by Medicaid beneficiaries would have reduced hospitalization due to congestive heart failure by 26%, to hypertension by 25%, and to diabetes by 12%.
Uncontrolled diabetes is an especially difficult problem. Research in 2016 found that more was spent on diabetes, at $101 billion in 2013, than on any other disease in the United States (ischemic heart disease was second). But much of the spending could avoided if diabetes were controlled by more Americans through medications.
Diabetes can lead to kidney failure, amputation, blindness and stroke – and high hospital bills. According to American Diabetes Association data, only 8 million of the 30 million Americans with diabetes actually control their disease. Better adherence would avoid 2.9 million hospital days and save $5,170 per diabetes patient per year, according to research published this year by J.T. Lloyd of the Center for Medicare and Medicaid Innovation.
Often, critics point to drug prices as the reason for non-adherence, but the issue is far more complicated. Non-adherence, for example, is high even for inexpensive medications like statin drugs, as research published last year showed clearly. Behavior counts.
In cases where costs do deter adherence, the obstacle is not the list price of a prescription but what patients, only 8.5% of whom did not have insurance at any point during the year, have to take out of their pockets to pay for it. That amount is determined by the design of insurance policies, which, more and more, require high rates of cost-sharing, especially for innovative drugs.
Research on Offsetting Costs
More generally, a study by the Congressional Budget Office (CBO) in 2012 reviewed the extensive literature on the offsetting effect of pharmaceutical use on other medical costs. The conclusion: “A 1 percent increase in the number of prescriptions filled by beneficiaries would cause Medicare’s spending on medical services to fall by roughly one-fifth of 1 percent.”
That is impressive in itself, but Roebuck, writing in the Journal of Managed Care & Specialty Pharmacy, points out that for some costly diseases, the savings are even greater. For hypertension, a 1% increase in prescription drug use led to a 1.17% decrease in other medical costs; for diabetes, it led to a 0.83% decrease; for congestive heart failure, 0.77%; for dyslipidemia (high cholesterol), 0.63%. Roebuck notes that these four conditions represent 40% of Medicare Part D (drug benefit) utilization. He writes that more than half of Medicare beneficiaries have both hypertension and high cholesterol, with average annual medical costs of $13,825 – despite the low costs of drugs to treat the diseases.
He writes, “The current findings suggest that a 5% increase in the use of antihypertensive medication by patients with these 2 conditions may prompt reductions in medical costs of more than $800 annually per beneficiary.”
In addition, the CBO recently analyzed a proposed rule to reform the system of rebates in way that would reduce the out-of-pocket (OOP) costs paid by beneficiaries as an alternative to pharmaceutical benefit managers requiring payments from drug manufacturers. “Beneficiaries who do not fill some of their prescriptions because their current out-of-pocket expenses are high would be more likely to fill them and to better adhere to their prescribed drug regimens if their costs were lower, as they would be under the proposed rule,” said the CBO analysis.
In its research, CBO estimated the proposed rule “would increase federal spending” on behalf of beneficiaries of the Medicare Part D drug insurance program “over the 2020–2029 period by a total of about 2 percent, or $10 billion.” But there would also be a huge offset in increased adherence as OOP outlays dropped. “The increase in the number of beneficiaries following their drug regimens,” said CBO, “would also reduce spending for services covered under Parts A and B of Medicare, such as hospital and physician care, by an estimated $20 billion over that period.”
The net result, then: “Those effects are projected to reduce Medicare spending by $10 billion over the 2020–2029 period.”
Dangers of Viewing Costs in a Vacuum
As this last example shows, policy makers, the media, and the public should never examine health care costs in a vacuum. The medical system is intricately interrelated. It is meaningless to say that a drug – or a surgical procedure – is costly. We need, first of all, to examine “compared to what” and then to understand how a small increase in spending in one area can lead to large decreases in others.
Online newsletter dedicated to helping you understand the costs and benefits that sometimes lie obscured in our complicated health care system