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.
In recent months, an idea called “march-in rights” has gathered momentum among prominent politicians and some journalists as a panacea to what they see as high pharmaceutical prices. As an article in The Hill described it last month, “Democratic presidential candidates are threatening to take a drastic step that even the Obama Administration rejected to lower drug prices without congressional approval.”
The Hill piece cited support for march-in rights from Sens. Elizabeth Warren (D-Mass), Bernie Sanders (I-Vt), and Kamala Harris (D-Calif), and from South Bend, Ind., Mayor Pete Buttigieg. Rep. Lloyd Doggett (D-Texas), the chairman of the Ways and Means subcommittee on health, has long been a fan, and in 2017, he led 50 House members in writing a letter to President Trump, urging him to make march-in rights easier to implement. And Washington Post business reporter Christopher Rowland began his article on the resurgent interest in march-in rights this way: “As drug prices have soared, lawmakers and patient advocates have pushed the federal government to deploy for the first time a powerful deterrent.”
Drug prices actually haven’t soared, but we’ll get to that later. For now, understand that the interest in march-in rights isn’t new. It began in 2002 but soon fizzled. Now, it’s being resurrected – though the idea faces the same obstacles. First, the right to march-in because of the price of a drug does not appear to exist in the law, and, second, if the law were changed, marching-in because of price would, according to a report in March by the Information Technology & Innovation Foundation (ITIF), “negatively impact U.S. life-sciences innovation and result in fewer new drugs.”
What Are March-in Rights?
Some 39 years ago, President Carter signed The Patent and Trademark Law Amendments Act, called colloquially “Bayh-Dole” for its two most prominent sponsors, Sen. Bob Dole (R-Kan) and the late Sen. Birch Bayh (D-Ind). The law addressed what both Democrats and Republicans saw as a major problem: The federal government was spending billions of dollars on research, but the fruits of that investment were not reaching the public because the researchers that did the work were obligated to assign rights to the government. Very few federally funded research projects were being commercialized.
Bayh-Dole clarified that, even if the government provided funding, universities and other institutions could own their inventions and assign them to others, including pharmaceutical manufacturers, which would then invest the hundreds of millions or billions of dollars necessary to develop an actual drug and bring it to market.
A report in April by the National Institute of Standards and Technology (NIST), a U.S. Commerce Department agency, explained that the “foundation” of Bayh-Dole is…
…the principle that inventions resulting from federally funded research should benefit the American people by the development of the inventions into commercially available products and services by achieving practical application of the invention that benefits the public.
Bayh-Dole recognized that federally funded research could create a virtuous cycle of innovation, which was described last year in an article in the Proceedings of the National Academy of Sciences by Ekaterina Galkina Cleary and colleagues:
Basic research provides a scientific foundation for drug discovery by elucidating mechanisms of disease and strategies for therapy, validating drug targets, and, sometimes, identifying prototype compounds. This research is funded largely by the public sector, primarily by government and is performed principally in academic institutions or government laboratories. The insights and intellectual property arising from this basic research are then transferred to the private sector for development.
Biopharmaceutical companies are responsible for conducting applied preclinical research and clinical research, obtaining regulatory approval, and establishing the manufacturing, control, distribution, and marketing required to commercialize a new molecular entity (NME). This development is funded primarily from the profits generated by earlier products as well as by capital investments.
The problem, before Bayh-Dole, was that there was a disruption in the cycle between government-funded basic research and the application of that research into commercialize products. The legislation was meant to patch the cycle.
The authors of Bayh-Dole wanted to be sure that they achieved their commercialization aims, so the law gave the federal government, as the NIST report states, “the right to ensure that a contractor, an assignee, or exclusive licensee of intellectual property developed with Federal funding is taking effective steps to further develop the invention so that it is available to the public.” The government, in limited circumstances, was allowed to “march in” and require contractors and assignees to, in the words of the law, “grant a nonexclusive, partially, or exclusive license in any field of use to a responsible applicant or applicant.” Or the government could grant such a license itself.
The justification for marching in was that steps were not taken by the licensee to achieve a “practical application” (that is, commercialize) of the invention.
As Bayh himself explained in 2004, he wanted to assuage the fear of some members of Congress that “companies might want to license university technologies to suppress them because they could threaten existing products…. The clear intent of these provisions is to insure that every effort is made to bring a product to market.”
The provisions were meant for extreme occasions, and none, apparently, has arisen. Since the law was signed in 1980, there has been no case of march-in rights being exercised.
The Specter of ‘Reasonable’ Prices
In 2001, Peter Arno, then a health economist at the Albert Einstein School of Medicine, and Michael Davis, a law professor at Cleveland State University, wrote an article in the Tulane Law Review claiming to have found a way to “enforce existing price controls.” They wrote, “The solution to high drug prices does not involve new legislation but already exists in the unused, unenforced march-in provision of the Bayh-Dole Act,” which was then 21 years old.
In an op-ed for the Washington Post the next year, Arno and Davis wrote that Bayh-Dole…
…states that practically any new drug invented wholly or in part with federal funds will be made available to the public at a reasonable price. If it is not, then the government can insist that the drug be licensed to more reasonable manufacturers, and, if refused, license it to third parties that will make the drug available at a reasonable cost.
In fact, Bayh-Dole makes no explicit reference at all to any “reasonable price.” The word “price” – reasonable or not -- never appears in the law, and the word “cost” is only used in reference to patent fees. Undaunted, Arno, Davis and other advocates of march-in rights point to the term “practical application,” which is defined in the law this way:
The term ‘practical application’ means to manufacture…under such conditions to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.
The phrase, “reasonable terms,” has been interpreted by advocates of march-in rights to be a reference to consumer prices. The government, however, has interpreted the phrase to mean “reasonable licensing terms,” says the NIST report.
In a piece for IP Watchdog, Joseph Allen, who worked for Bayh as a professional staffer on the Senate Judiciary Committee during the debate over Bayh-Dole, explained that the clause with the phrase “reasonable terms”…
…is limited to the patent owner, which will normally be an academic institution. As academic institutions are not commercializing their discoveries, the language applies to the terms of the patent license, not to how a product is priced in the market. That distinction is ignored by the critics.
For further elucidation, we can turn to the authors of the law itself. A few weeks after the Arno-Davis piece, Bayh (who had left office the year before) and Dole (the Senate Republican Leader) wrote in a letter to the Washington Post that their law…
…did not intend that government set prices on resulting products. The law makes no reference to a reasonable price that should be dictated by the government….
The ability of the government to revoke a license granted under the Act is not contingent on the pricing of the resulting product or tied to the profitability of a company that has commercialized a product that results in part from [federally] funded research. The law instructs the government to revoke such licenses only when the private industry collaborator has not successfully commercialized the invention as a product.
The NIST report points out that since 1980, the National Institutes of Health has received 12 requests to initiate march-in proceedings, and, “in each case, NIH determined that the criteria to exercise march-in rights were not met.” Ten of the 12 cases involved what the petitioners believed were high drug prices. “Ultimately, for each of these requests,” said the NIST report, “NIH determined that the use of march-in to control drug prices was not within the scope and intent of its authority.”
The NIST report acknowledged that there was “market uncertainty” created by the controversy over march-in rights, but the way to resolve any confusion about the “exceptional circumstances” under which such rights apply was sticking to the statute rather than creating a “regulatory mechanism for the Federal Government to control the market price of goods and services.” In other words, NIST, as the government’s top innovation agency, is not buying the argument of the marchers-in.
The Federal Government’s Share
In 2004, Bayh was asked to address NIH on the subject. He began with a reminder of why his legislation of a quarter-century earlier has been necessary:
By the late '70s, America had lost its technological advantage…. The number of patents issued each year had declined steadily since 1971. Investment in research and development over the previous 10 years was static. American productivity was growing at a much slower rate than that of our free world competitors. The number of patentable inventions made under federally supported research had been in a steady decline.
What had happened to American innovation, which had sparked generation after generation of international economic success? Our investigation at the Patent and Trademark Office [PTO] disclosed that the U.S. government owned 28,000 patents, only 4 percent of which had been developed as a product for use by the consumer.
Bayh admitted that there were critics of his bill, who argued, “If the taxpayer funds the research, the taxpayer should own the ideas produced.” But the vast majority of “patents procured as a result of government research grants, particularly those developed in university laboratories, resulted from basic research,” said Bayh to NIH. He added:
The ideas patented were in the embryonic stages of development. Often millions of dollars were required to produce the sophisticated products necessary for marketability. Since the government refused to permit ownership of the patents, private industry and business refused to invest the resources necessary to bring the products to consumers.
Bayh then quoted Thomas Edison as saying that “invention is 1% inspiration and 99% perspiration." And, said Bayh, “With regard to publicly funded research, government typically funds the inspiration and industry the perspiration.” The result of a policy of government ownership was that “billions of taxpayer dollars spent on thousands of ideas and patents which were collecting dust at the PTO. The taxpayers were getting no benefit whatsoever.”
The general argument that the government should reap the dollar benefits of its research is often repeated – lately by Rep. Alexandra Ocasio-Cortez (D-NY). But nearly all NIH funds go to basic research, which, because of the nature of markets, carries positive economic externalities that make it, throughout the world, an essential government-supported, rather than private-sector, function.
The study by Cleary, et al., in the Proceedings of the National Academy of Sciences found that federally funded studies contributed to the science underlying every one of the 210 new drugs approved between 2010 and 2016. But, as an article in STAT pointed out, “More than 90 percent of the [research] publications [deriving from the government-funded research] were related to the biological targets of the drugs, not the drugs themselves.” The authors of the research “say that the NIH funding for basic science complements industry research and drug development, which is mainly focused on applied science.”
The entire NIH budget for all activities – not just drug research -- in fiscal 2017 was $33 billion while R&D spending by U.S. drug companies was $71 billion. “Measured by R&D expenditure per employee, the U.S. biopharmaceutical sector leads all other U.S. manufacturing sectors, investing more than 10 times the amount of R&D per employee than the average U.S. manufacturing sector,” said the ITIF study.
Eyes on the Prize
It’s important to remember why Bayh-Dole was enacted in the first place. The goal of what is now called “the lab-to-market cross-agency priority,” the NIST report points out, is to “improve the transfer of technology from federally funded R&D to the private sector to promote U.S. economic growth and national security.” The idea is to “enable the United States to adapt to a rapidly changing global innovation landscape.” It’s not to try to extract extra rents from drug companies and other manufacturers.
Bayh-Dole has been a huge success. The Economist magazine called it “possibly the most inspired piece of legislation to be enacted in America over the past half-century.” It is no accident, as the ITIF report points out, that the U.S. now leads the world in the introduction of new drugs, with a 60% market share, compared with 10% in the 1980s – an acceleration that coincides with the enactment of the law.
“Over the last decade, biopharmaceutical companies have invested over half a trillion dollars in R&D,” says the report, “while more than 350 new medicines, many firsts of their kind, have been approved by the U.S. Food and Drug Administration.”
But like most legislation, Bayh-Dole is a delicate instrument. Changing the interpretation of march-in rights from what the authors of the law intended, says the ITIF report, would…
… jeopardize America’s successful life-sciences innovation system, as companies would be highly reticent to license IP [intellectual property] that could be connected to federal research and subsequently invest the additional billions required to develop a drug if they knew the government could come in as long as two decades later and seize or compulsorily license companies’ IP whenever it deemed a drug’s price too high.
How to Constrain Drug Prices
When he was asked about march-in rights at a hearing in August, NIH Director Francis S. Collins responded, “I’m not sure you want to mess with that. I don’t think, for the most part, the solution to drug prices is going to fall upon changes of a dramatic sort and how patenting is done for our funded efforts.”
Fifteen years ago, Bayh told NIH, “One is entitled to second-guess us and say that we should have allowed the government to have a say in the prices of products arising from federal R&D. However, if changes are believed warranted, we have a process to do so. That is to amend the law. You simply cannot invent new interpretations a quarter of a century later.”
Amending the law, however, would put at risk a system that is improving America’s economy and America’s health. As the NIST study put it:
U.S. economic competitiveness is strengthened by the ability of private sector companies to advance the new technologies resulting from basic R&D, and to deliver the products and services that drive the Nation’s economy forward. This ecosystem has allowed the U.S. to enjoy the economic benefits of advancing science and technology and has kept the Nation prosperous and strong. The partnership between Federal R&D and the private sector has proven to be an effective model.
The Trump Administration is already holding down drug prices through market mechanisms – mainly easing the path for generic medicines to compete when brand patents expire. In 2018, pharmaceuticals were one of only eight categories that saw an annual price declined among the 31 categories tracked by the Bureau of Labor Statistics.
While consumer drug prices dropped 0.6%, medical care prices rose 2% and hospital services rose 3.7% – the number-two categories for increases. The decline in drug prices has continued through 2019, falling in the last four consecutive months and in nine of the last twelve.
Currently, specialty drugs, many of them biological products (biologics) are the main driver of higher drug prices, accounting for 93% of spending growth since 2014. That’s no surprise. Biologics are exceedingly complicated to develop and produce. But their prices, too, can be constrained through competition, as we discussed in our last newsletter. A far better way to tackle the pricing issue is to focus on safe ways to speed biosimilars, which have no clinically meaningful differences from reference biologics, to market after patents expire.
This would seem to be a far more productive strategy than messing – as Collins put it – with the enormously effective technology-transfer law called Bayh-Dole.
Complex, powerful drugs called biological products, or biologics, now account for about two-fifths of all pharmaceutical spending and 93% of spending growth since 2014. The rise of biologics, which are harvested from biology rather than being synthesized chemically, has been a boon to patients suffering from cancer and other diseases, but the costs of these medicines are an increasing concern to policy makers. Biosimilars, which have no meaningful clinical differences from biologics, are supposed to tame biologic prices when patents expire, but so far they have had minimal effect, saving a mere $240 million a year, according to a new study by the Pacific Research Institute.
The situation is so frustrating that a group of researchers published a two-part article this spring in Health Affairs that argued for abandoning the biosimilars regime altogether, declaring biologics a “natural monopoly,” and having the government set prices according to a formula. (More details on that proposal – and the response – below.) Another article, by an intellectual-property scholar, termed biosimilars “a distraction.” Perhaps we’re asking biosimilars to do too much, too soon. On the other hand, biosimilars are already having a significant impact in Europe. Why haven’t they lived up to their promise here?
Can the Virtuous Cycle Apply to Biologics?
In recent years, the average price of a prescription in the U.S. has leveled off and even fallen. September was the fourth month in a row that the Bureau of Labor Statistics reported a decline in its pharmaceutical price index. A major reason is that regulatory changes have made it easier to bring generic drugs to market to compete with branded drugs whose patents have expired. Generics now account for 90% of all prescriptions, up from 75% in 2009, according to a May study by IQVIA. From 2014 to the end of 2017, generic drug prices fell by one-third. And when additional generics hit the market, the prices of their branded competitors fall as well.
This virtuous cycle, however, does not apply to the vast majority of biologics, which are becoming more and more important, especially in treating cancers and autoimmune diseases such as rheumatoid arthritis and ulcerative colitis. Because biologics are made from living organisms, they are large and complex molecules. For example, a Congressional Research Service (CRS) report in June pointed out that aspirin “contains nine carbon atoms, eight hydrogen atoms, and four oxygen atoms while the large biologic drug Remicade contains over 6,000 carbon atoms, almost 10,000 hydrogen atoms, and about 2,000 oxygen atoms.”
Biologics are expensive to develop, and, frequently administered in doctors’ offices and hospitals, they are also priced higher than other drugs. Last year, 11 of the 15 top-selling drugs in the U.S. were biologics, with total sales of about $85 billion.
An analogue – but not a precise one – to the relationship between a brand-name chemical drug and a generic is the relationship between a biologic and a biosimilar. While generics are exact copies of branded chemical drugs, biosimilars are almost. CRS provides this definition:
A biological product may be demonstrated to be “biosimilar” to the reference product if data show that the product is “highly similar” to the reference product, notwithstanding minor differences in clinically inactive components, and there are no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency.
Even developing a product that is “highly similar” to a biologic is daunting. “The investment needed to develop and market a biosimilar is considerably higher than the $1 million to $4 million that is required in the generic market,” wrote Erwin Blackstone and P. Fuhr Joseph Jr. in 2013 in a paper for the journal American Heath & Drug Benefits. “It takes 7 to 8 years to develop a biosimilar, at a cost of between $100 million and $250 million.”
Until recently, biosimilars faced daunting regulatory hurdles as well. Then, in 2010, Congress passed the Biologics Price Competition and Innovation Act (BPCIA) as part of the Affordable Care Act. The BPCIA created an abbreviated pathway for biosimilar approval by the Food & Drug Administration. Still, the number of biologics actually approved has been meager and the number actually reaching the market is minuscule.
Savings of $50 Billion to $250 Billion Over 10 Years
The potential for savings, however, is immense. In an earlier study, CBO estimated that biosimilars would reduce prices by 40%. Research published in July by the Pacific Research Institute found that if currently approved biosimilars became reasonably competitive -- gaining a 50% market share against branded biologics – savings would increase to $4.8 billion a year (or about 20 times current levels). With more approvals in more therapeutic classes, biosimilar savings could become much greater. A separate study by the Rand Corporation two years ago estimated total savings of $54 billion from 2017 to 2026, and a study by the pharmacy benefit manager (PBM) Express Scripts in 2013 forecast savings of $250 billion over the next 10 years.
So far, however, the FDA has approved 23 biosimilars, with only nine of those currently being marketed in the United States. Approvals are accelerating, with six in 2018 and seven so far in 2019, including two anti-cancer drugs. By contrast, Europe developed a regulatory framework five years earlier than the United States and has approved about two and a half times as many biosimilars, including 16 in 2018 alone.
Unlike in the U.S., in Europe, approved biosimilars are reaching patients and saving money. For example, the CRS study points out that the three FDA-approved biosimilar competitors to the top-selling drug in the U.S., Humira, will not reach the market until 2023. In Europe, however, four Humira biosimilars were launched at the start of 2019 with two more to come. Sanford C. Bernstein & Co. analyst Ronny Gal predicts that, by year-end, biosimilars will account for half the market in countries where they are being sold.
“The Impact of Biosimilar Competition in Europe,” an IQVIA study last year, looked in depth at the effect on prices and concluded:
The seven established therapy areas with biosimilar competition show a consistent picture of reduced average list prices in European countries. The increased competition resulting from biosimilars entering the market affects not just the price of the respective biosimilars referenced product, but also the price of the whole product class. It can have almost as large an impact on the total market price as it has on the biosimilar/referenced product price. In the case of EPO’s in Portugal, the price decease of the total market was -66%.
EPO stands for Epoetin, a drug that stimulates the production of red blood cells and fights anemia. Overall in Europe, biosimilars to Epoetin have driven prices down 27%, according to IQVIA. A separate FDA study found that the entry of a single biosimilar in a non-U.S. OECD market lowered prices by 30% compared with the previous price of the biologic. With three or four biosimilars in a therapeutic class, prices dropped 35% to 43%.
The IQVIA study also found that lower prices led to more demand and, thus, improved patient access. In other words, for the United States, more competitive biosimilars mean, not just lower spending, but a healthier nation.
Obstacles Biosimilars Face
The United States is usually in the vanguard of both medical innovation and the policy that encourages it. Why does Europe seem to be so far ahead? Besides development costs, biosimilars face a host of obstacles to getting to market here. One problem that seems fairly simple to address is lack of good information. Among the remedies discussed in the Biosimilars Action Plan, released by he FDA in July 2018, is better communication. Many pharmacists and physicians – not to mention members of the general public -- are still unclear on what biosimilars are and how they perform. There are worries that they are unworthy substitutes for branded biologics.
The FDA has initiated an outreach and education campaign, but, as a June article in STAT claimed, “misinformation about these products” is abundant. Wrote Hillel Cohen and Dorothy McCabe, two pharmaceutical executives who are members of the Biosimilars Forum Education Committee:
Some biologics manufacturers and groups have issued misleading, incomplete, and inaccurate information about the safety and effectiveness of biosimilars in an attempt to slow acceptance of and access to biosimilars. This mischaracterization is pervasive and threatens to stall system-wide health care cost savings and the advancement of biosimilars in the U.S. with untoward fear mongering.
In speech at Brookings last year, Scott Gottlieb, then the FDA Commissioner, pinpointed another obstacle. He called competition in the biologics space “anemic because consolidation across the supply chain has made it more attractive for manufacturers, Pharmacy Benefit Managers [PBMs], Group Purchasing Organizations and distributors to split monopoly profits through lucrative volume-based rebates on reference biologics—or on bundles of biologics and other products—rather than embrace biosimilar competition and lower prices.”
Is Competition Being Thwarted by PBMs and Biologics Makers?
In other words, the high rebates paid to PBMs and others by makers of biologic products – companies that make other popular medicines as well -- are a disincentive for plans to offer biosimilars to members. “The branded drug makers,” said Gottlieb, “thwart competition by dangling big rebates to lock up payors in multi-year contracts right on the eve of biosimilar entry.”
He added that the FDA was “concerned that volume-based rebates may encourage dysfunctional clinical treatment pathways. We’ve heard from multiple sources that some payors are requiring step-therapy or prior authorization on the reference biologic before patients can access a biosimilar. We see no clinical rationale for these practices.”
Joshua Cohen, a pharmaceutical analyst, elaborated on this theme in an article in Forbes:
In some ways, the U.S. biosimilars market behaves more like a branded than a generics market, where, in each therapeutic class consisting of originator biologics, biobetters (follow-on originator biologics), and biosimilars, different brands compete on price or rebates.
Originator biologics manufacturers increase rebates to retain market share, and in some cases negotiate formulary exclusivity with payers to preempt biosimilar competition. If available to them, they also introduce biobetters to the market, which compete on the grounds of improved quality, dosing, or convenience. In turn, biosimilar makers must offer payers substantial rebates to gain market share through favored formulary tier placement. Additionally, it’s vital that they invest heavily in marketing their product to obtain buy-in from payers, physicians, and patients.
The courts may step in to address this problem, or Congress and the Administration might follow through on earlier plans to rein in PBMs, whose opaque rebates enjoy an exemption from anti-kickback laws. But, clearly, a bottleneck exists in the United States but not in Europe.
Another obstacle is patent litigation. Stealing intellectual property is wrong, and patents spur innovation. But critics say that patient access is suffering when biologics makers, especially, game the system. The CRS study stated, “The launch of several biosimilar products has been delayed due to ongoing patent litigation and settlements between brand biologic and biosimilar companies.
For example, AbbVie has been the subject of Congressional inquiry for its use of a so-called ‘patent thicket’ to protect” its biologic Humira. The FDA approved three biosimilars to Humira in 2016, 2017, and 2018, but, under settlements between the manufacturer and AbbVie, none will be launched before Jan. 31, 2023. No doubt, a major reason that European biosimilars reach market more quickly is a difference in patent regimes.
Other obstacles include a confusing system for naming biosimilars that adds four random letters as the suffix to the non-proprietary name, the difficulty that companies developing biosimilars have in obtaining samples from branded biologics makers, and the thorny issue of interchangeability.
While pharmacists can substitute a generic for a branded drug on their own, they cannot substitute a biosimilar for a biologic unless the biosimilar is deemed “interchangeable” – a designation that, so far, no biosimilar has achieved. Speaking at a conference earlier this year, Gal argued that the FDA should “collapse the requirements” for interchangeable and biosimilar products into a single designation. Achieving approval as a biosimilar is already a high bar.
Are Biologics a ‘Natural Monopoly’?
Some analysts are maintaining that policy and educational obstacles are not at the root of the problem. In an article in Health Affairs in April, Preston Atteberry, Peter Bach, and Jennifer Ohn of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, and Mark Trusheim of MIT argued that biologics, unlike small-molecule chemical drugs, should be seen as “natural monopolies.” They write, “The biologic and chemical differences between small-molecule and biologic drugs, not policy decisions” explain why generics have increased competition but biosimilars have not.
Biosimilars, they write, are too expensive and time-consuming to produce, and because they are not exact copies, they will always elicit questions about clinical adoption. “Addressing these challenges consumes development time and money, increases the risk of regulatory failure, increases sales and marketing costs, and raises the expected profit threshold a prospective biosimilar manufacturer requires before considering entering the market,” they add. “Analysts have concluded that biosimilars are unviable for any reference product with annual revenues less than $897 million—a threshold that many biologics fail to meet.”
In a second article, the authors revealed their solution, which, they say, could generate $250 billion to $300 billion in savings over five years. A biologic could retain their exclusivity as intellectual property, as currently, but when that period expires, the government would order the price drastically cut, along the lines of reductions that ensue when generics enter the market of a chemical compound. “The lowered price,” write the authors, “should equal the costs of production (including facility repair and replacement) and market distribution, plus an appropriate profit.”
The article has brought strong responses. Alex Brill and Dominic Ippolito of the American Enterprise Institute, also writing in Health Affairs, argue that biologics are not “natural monopolies” – like, for example, an electric power company – and that the limited evidence shows that biosimilars do, in fact, “appear to generate the kind of competitive forces that most experts had predicted.”
An anonymous response to the first of the Atteberry pieces, points out that the National Health Service in the U.K. “recently secured biosimilar adalimumab at >80% discount, saving >£300 Million GBP/$400 Million in one tender. [Here is a link to an article on the subject.] This was the single most expensive specialty drug on our hospitals’ formularies. The 2018/19 financial year looks to deliver half a billion pounds of savings to reinvest back into healthcare.”
Proposed Policy Changes to Ease the Biosimilar Pathway
While consumers have an incentive to choose a generic that, under a pharmaceutical insurance plan, might cost $10 out-of-pocket over a branded drug that costs $200, no similar consumer incentive exists for a biosimilar over a biologic. That must change.
Prescribers, as well, lack strong incentives. Currently, their reimbursement under Medicare is the same, no matter whether they choose a biologic or a biosimilar. But the bill approved in July by the Senate Finance Committee proposes increasing the add-on payment percentage of the biosimilar from 6% of the manufacturer’s average sales price to 8%. creating greater incentive for physicians to choose the biosimilar product.
There are other potential legislative correctives to encourage biosimilar uptake as well. For example, Medicare plans currently receive stars for achieving certain quality and performance targets. The stars make the plans more enticing to consumers. On Oct. 6, Reps. Paul D. Tonko (D-NY) and Bob Gibbs (R-Ohio) introduced the Star Rating for Biosimilars Act (H.R. 4629), directing HHS to add availability of cost-saving biosimilars as a new condition for achieving stars. That’s an added incentive for plans to encourage biosimilar use.
Employers, however, need to become more active in pushing insurers and PBMs to clarify why biosimilars are not more available to plan members. If a branded biologic has a biosimilar competitor, why isn’t the plan promoting the use of the less expensive biosimilar? The answer may lie in the rebates that the biologic manufacturer is paying to the PBM.
The truth is that the virtuous cycle exists. It took decades for public policy to change so that generics would become more available and competitive. Let’s hope that the process for biosimilars moves faster. Clearly, however, this is not the time to give up on the promise of biosimilars to constrain drug prices.
Frequent comparisons are made between health care costs in the United States and in other wealthy countries. The focus of these comparisons is nearly always pharmaceutical prices. The latest example is a report, issued by the House Ways and Means Committee staff, titled, “A Painful Pill to Swallow.” The report compared drug prices in the United States with those in Canada, Australia, Japan, and a group of Europeans countries. It concluded, “The analysis presented in this report clearly illustrates that, across the board, the U.S. spends more on drugs than other comparable developed countries.”
That’s hardly a surprise. The U.S. health care system is utterly different from that of other countries, where the government is in charge and, as a monopsony buyer, can demand the prices it wants from drug manufacturers. These nationalized health systems may have the benefit of lower prices, but they create significant drawbacks.
What About Innovation?
The Ways and Means report sheds little new light – while casting considerable shade – on a complex subject. The researchers, for example, give short shrift to what is probably the most important issue that faces serious policy makers tackling drug-cost question: the impact of prices on innovation. The U.S. set a new record last year for drug approvals, and the number of new sophisticated biological products jumped from 10 in 2014 to 24 in 2018. Many of these approved medicines target the worst diseases, especially cancer.
The Ways and Means report is clearly meant to provide ammunition for those in Congress (and even in the Administration) who want to force foreign price controls onto the U.S. system. But if that happens, how will innovation be funded? Who will provide the capital to develop the pill that cures Alzheimer’s or AIDS or that extends the life of cancer patients?
As we pointed out in Newsletter No. 52, after examining health spending in the U.S. and other rich countries last year, three Harvard researchers, including Ashish Jha, the dean for Global Strategy at the Harvard T.H. Chan School of Public Health, concluded: “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.”
The effect of price controls is predictable. They will deprive drug manufacturers of the revenues needed to fund research and development and harm the U.S. pharmaceutical industry in the same way they have depleted its European counterpart. As recently as 1990, Europe was spending more than the U.S. on R&D. Today, it’s no contest. Henry Grabowski and Y. Richard Yang wrote in Health Affairs that “U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.”
In a report titled, “The Opportunity Costs of Socialism,” the U.S. President’s Council of Economic Advisers looked at the effects of adopting European-style price controls:
Take the case of pharmaceutical innovation to improve patient health. Empirical research in this industry and others has shown that R&D investments are positively related to market size. For the case of medical innovation, evidence suggests that a 1 percent reduction in market size reduces innovation—defined as the number of new drugs launched—by as much as 4 percent (Acemoglu and Linn 2004).
Given that future profitability drives investment in this way, Lakdawalla and others (2009) examined the impact on medical innovation of the U.S. adopting European-style price controls. The study examined patients over the age of 55 and considered the reduction in R&D and new drugs approved that these price controls would cause. The paper examined increases in mortality for the heart disease, hypertension, diabetes, cancer, lung disease, stroke, and mental illness.
The study’s major finding is summarized in a chart on page 48 of the CEA report. Life expectancy for Americans aged 50-55 would quickly fall by a half-year in the U.S. and keep falling to seven-tenths of a year by 2060. And, because the U.S. develops so many new drugs, life expectancy would drop in Europe as well, by four-tenths of a year by 2040 and seven-tenths by 2060. The conclusion: “Given that innovations are financed by world returns mostly earned in the U.S., the mortality effects on health were substantial both in the U.S. and in Europe.”
R&D Projects Estimated to Fall 30% to 60%
Many U.S. companies now plough one-fifth of their revenues or more into R&D; indeed, R&D spending often exceeds net earnings. A study by Thomas Abbott and John Vernon, published as a working paper by the prestigious 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.” David R. Francis revisited the Abbott-Vernon paper on Oct. in the NBER Digest and wrote:
Numerous economic studies indicate that price controls, by cutting the return that pharmaceutical companies receive on the sale of their drugs, also would reduce the number of new drugs being brought to the market. So, a short-run benefit for consumers could lead to a long-run negative impact on social welfare. And, this damage wouldn't be fully felt for several decades because it takes so long to develop new drugs.
Against considerable research, the Ways and Means paper quotes the February congressional testimony of Rachel Sachs, an associate law professor at Washington University of St. Louis, who claims that pharmaceutical companies have “other opportunities to obtain savings” within their current business models. In other words, revenues may fall, but the drug companies can cut expenses to make up for the losses and still maintain R&D levels. Any economist would find this an odd claim. If businesses can save money and thus boost earnings, they would already be doing it. They have a huge incentive: their stock prices.
The Matter of Rebates
Rebates are a way of life in complicated pricing schemes for pharmaceuticals. As HHS explains in a Fact Sheet:
Drug companies pay rebates and other payments to PBMs [pharmacy benefit managers, who work for insurance plans], but these payments are not reflected in patient out-of-pocket drug costs. The average difference between the list price of a drug and the net price after a rebate is 26 to 30 percent. These rebates, negotiated in Medicare Part D and private plans, are typically not used to reduce patients’ cost sharing for a particular drug.
Unfortunately, it is difficult to calculate rebates. According to a study by the research firm Milliman:
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.
What we do know is that rebates are huge, and rising. The IQVIA Institute for Human Data Science found that the difference between invoice spending (that is, the amount paid by drug distributors, or roughly the list price) and net spending (accounting for all price concessions) increased from $74 billion in 2013 to $130 billion in 2017 for retail drugs. HHS found a similar trend of growing differences between list and net prices. Manufacturer rebates were only 10% of gross prescription drug costs in 2008. Today, according to HHS, they represent between 26% and 30% of list prices and in many cases far more.
The Ways and Means study uses 22% -- a figure for the year 2015, as reported this year by the Congressional Budget Office. Why such an old number when the Centers for Medicare and Medicaid Services has more up-to-date figures?
In a table, the Ways and Means report lists average drug prices for different countries and then states what the U.S. rebate would have to be in order to match it. On average, 61 drugs were examined per country -- with a range from 37 drugs from Portugal to 78 for the U.K., so, obviously we are not talking about direct comparisons here. Again, on average, the U.S. rebate to match foreign prices would have to be 73% -- with a range from 61% for Denmark to 82% for Japan.
The actual average rebate, as we noted, is probably around 28% -- but we can’t tell what the figure would be for the 37-78 drugs examined in the Ways and Means report. That report, to the committee staff’s credit, also looked at GDP per capita in the comparison countries. Clearly, richer countries, with more demand for medicines, should naturally have higher prices. Much of the price disparity can be explained by adjusting for GDP per-capita differences and subtracting rebates. For example, Canada’s GDP per capita is 27% lower than that of the U.S., and we can assume a 28% percent rebate.
Putting Drug Prices in Perspective
While prescription drug prices seem to be the obsession of the day, they represent only 10% of total health care costs, according to official National Health Expenditures data. An additional 4% of health care costs are attributed to drugs that are administered in hospitals and doctors’ offices. By contrast, hospitals account for 33% of U.S health costs, and physician and clinical services for 20%.
The truth is that the prices of nearly all health care services are higher in the United States. According to the Peterson-Kaiser Health System Tracker, an overnight hospital stay in the U.S. costs $5,220 versus $765 in Australia. The average price of an angioplasty in a U.S. hospital is $31,620, compared with $7,264 in the U.K., and a Caesarean delivery is $16,106 in the U.S. versus $9,965 in Switzerland. An MRI in the U.S. costs an average of $1,119; in Australia, $215. And an appendectomy costs twice as much in the U.S. as in the U.K.
Physician compensation in the United States is higher as well: an average $313,000 a year, according to an international compensation survey published this year in Medscape. That compares with $163,000 in Germany; $138,000 in the U.K., and $108,000 in France. Part of that difference is owed, as mentioned above, to disparity in GDP per capita, which is roughly 50% higher in the U.S. than, for instance, in France.
In addition, U.S. doctors have a heavier burden of medical malpractice insurance in a litigious society plus higher administrative costs that they must absorb themselves. A 2014 study published in BMC Health Services Research by Aliya Jiwani and colleagues found that billing and insurance-related activities added an additional $70 billion to physician-practice expenses, or about $80,000 per doctor in 2012, which would be about $100,000 today.
Remember, as well, that Americans have won or shared the Nobel Prize in Physiology or Medicine in 29 of the past 40 years. Not only our pharmaceuticals but our physicians are the best in the world.
Lack of Access in Other Countries
But health care is useless without access. The CEA report provides a comparison that shows, for different nations, the proportion of seniors who waited “at least four weeks to see a specialist in the past two years.” Of the 12 countries studied, the U.S. did best, with only 21% of seniors waiting that long. A sampling of the others: France, 42%; U.K., 51%; Canada (worst of the 12), at 59%.
Lung cancer is the number-one killer of cancers world-wide. While treatment for non-small-cell lung cancer (NSCLC) has improved considerably because of new drugs, in many rich countries access is limited. A study by HIS Markit for PhRMA found that, for five countries studied (Canada, South Korea, France, the U.K., and Australia), the average delay between regulatory approval of a drug to treat the disease and the first actual reimbursement of a patient was 589 days, or more than a year and a half. In the U.S., the delay is just 30 days.
The long delays in the other countries mean that many patients don’t survive to benefit from the effects of the drugs. By contrast, says the study, “American patients who were diagnosed with locally advanced and metastatic NSCLC between 2006-2017 are estimated to have gained 201,700 life years in total due to innovative medicines.”
An analysis by the U.S. Department of Health and Human Services found that only 11 of the 27 advanced medicines available under Medicare Part B in the United States were available in all 16 of the rich countries examined by HHS.
Rather than the U.S. importing European-style price controls, other wealthy countries should relax the tight grip of government, pay market prices, and give their citizens access to the best medicines. A study published last year by Dana Goldman and Darius Lakdawalla of the USC Schaeffer Center study notes:
We estimate that if European prices were 20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years. Encouraging other wealthy countries to shoulder more of the burden of drug discovery — including higher prices for innovative treatments — would ultimately benefit patients in the United States and the rest of the world.
We have entered a Golden Age for new medicines. Shouldn’t it benefit us all?
Policy makers are recognizing that smarter trade deals – rather than European-style price controls – could be the key to narrowing the gap between what Americans pay for pharmaceuticals and what others in rich countries pay for the same medicines. Trade agreements are also seen as an efficient route to ensuring governments protect patents, which in turn are the spur to innovation.
Lately, the U.S. Mexico Canada Agreement (USMCA), the successor to NAFTA, has brought new visibility to the importance of pharmaceutical commitments in trade negotiations. We will examine the USMCA later in this newsletter, but first consider how trade can be a solution to one of the most vexing problems in drug pricing.
Securing Fair Value for Innovative Medicines Through Trade Deals
The disparity between pharmaceutical prices in the U.S. and other developed nations has become a torrid political issue. President Trump commented in October: “I’ve seen it for years, and I never understood. Same company, same box, same pill, made in the exact same location. And you’ll go to some countries, and it would be 20 percent the cost of what we pay, and in some cases much less than that.”
In an attempt to narrow the difference, the Administration last October proposed using an index of other countries’ prices to set U.S. prices of some for the most advanced U.S. drugs: a policy called “reference pricing.” Butcritics point out that this approach would almost certainly lead to a significant decline in pharmaceutical research and development, fewer new medicines, reduced health and shorter lives – both in the U.S. and abroad.
A study by the research firm Vital Transformation found that the IPI “penalizes innovation, targets companies with the most advanced, newest products in the market for what are often the most challenging diseases.”
Said an article in JAMA last year by three Harvard researchers, “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.” The Vital Transformation study concluded, “Reducing revenue…via IPI impacts investment and radically impacts the probability of successful market entry” of new medicines.
Price controls severely weakened the European pharmaceutical industry, which as recently as 1990 was spending more than the U.S. on research and development. Henry Grabowski and Y. Richard Yang wrote in Health Affairsthat “U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.” As a result, Americans have faster, broader access, for instance, to the most advanced cancer medicines. Some 95% of the cancer drugs approved from 2011 to 2018 are available in the U.S., but only 74% are available in the U.K. and just 8% in Greece.
U.S. companies plough their revenues, mainly domestic, into research and development that helps patients everywhere. In typical examples, Merck’s 2018 financial report showed the company’s R&D spending represented 23% of total revenues; for Eli Lily, the proportion was 22%. In fact, for many large drug manufacturers, R&D spending annually exceeds profits. It is understandable that the President and others are distressed. Other rich countries are “free-riding, or taking unfair advantage of the United States’ progress in this area,” as a February study by the President’s Council of Economic Advisors (CEA), titled “Reforming Biopharmaceutical Pricing at Home and Abroad,” explained.
In a public letter 15 years ago, more than 200 U.S. economists tackled the price-disparity issue. 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."
Exactly. But how to address those overly restrictive foreign price controls?
One answer heard more and more frequently is improved trade rules. After all,President Trump frequently refers to his ability to negotiate better trade deals. The use of trade deals to narrow the price gap should be right in his wheelhouse.
The current unfairness seems evident. When a Lexus is shipped to the United States from Japan, our government does not require that it be sold for only $20,000 so that more consumers can afford it. But that is exactly what is happening with U.S. drugs. Europe is saying, “Send us your medicines to save the lives of our citizens but only charge what we tell you to charge.” That kind of policy appears to flout the concept of free and fair trade.
President Trump has torn up some trade deals and renegotiated others. He has recognized the impact of unfair trade practices on the U.S. economy and, specifically, on American workers. Now, his Administration is beginning to require trading partners to change their ways when it comes to pharmaceuticals.
The U.S.-Japan Bilateral
Proof that the Administration is making headway could come in the U.S.-Japan bilateral agreement scheduled to be signed during his month’s United Nations General Assembly meeting in New York. The Office of the U.S. Trade Representative (USTR) set as one of its negotiating objectives: “Seek standards to ensure that government regulatory reimbursement regimes are transparent, provide procedural fairness, are nondiscriminatory, and provide full market access for U.S. products, particularly under relevant Japanese measures.”
As an example of the obstacles American firms face, consider the discrimination wrought by recent revisions to Japan’s Price Maintenance Premium (PMP) system. A London-based online journal last year described PMP as a program…
…that adds price premiums to innovative new drugs and protects this price for the duration of the period of exclusivity or patent period. This had made it more attractive for pharma companies to develop new drugs for Japan early as there was a mechanism in place to get a reimbursed price that would reduce towering research and development costs.
In a letter to USTR, Jay Taylor of PhRMA, the U.S. industry trade association, wrote, “Under the new criteria, several U.S. global best-selling products have been deemed ‘non-innovative’ and stripped of their PMP eligibility. Further, the PMP company criteria appear to be inherently biased towards domestic companies and seriously call into question Japan’s commitment to fair and non-discriminatory policies consistent with its WTO obligations.”
Japan also provides weaker intellectual-property protection than the United States and suffers from deficiencies in transparency and enforcement. U.S. negotiators have the chance to bring Japan up to American standards, helping not just U.S. companies but Japanese consumers, who have access to fewer than half of newly developed cancer drugs.
The Potential U.S.-U.K. Trade Deal
Whenever the U.K. actually withdraws from the European Union – which could be as soon as next month -- the two countries will negotiate a new bilateral agreement. “We’re going to do a very big trade deal—bigger than we’ve ever had with the U.K.,” said President Trump recently. One element of that deal could be commitments to ensure fair value for U.S. medicines, ensuring transparency and due process in the pricing and reimbursement process.
“The United States, which sought to challenge a similar scheme in Australia during trade negotiations, argues that lower set prices are unfair on its pharmaceutical companies and leave U.S. consumers footing the bill,” said aReuters report earlier this year. But Boris Johnson, the British Prime Minister, said before meeting President Trump at the G-7 meeting in France that health care was not up for discussion.
“Americans have long wanted Britain to liberalize how the NHS [National Health Service] decides which drugs to offer British patients and at what prices,” said a Wall Street Journal editorial on Aug. 28. “Decisions on access are often driven more by cost than health benefit.” Because of reference pricing used in many other countries, “Britain’s price demands then become the basis for U.S. drug companies’ negotiations with buyers around the world.”
A Special Pharmaceutical Negotiator
In negotiations like these, Rep. Mark Meadows (R-NC), the chair of the House Freedom Caucus, believes the USTR needs help. So in April he introduced “The Fixing Global Freeloading Act” (H.R.2209). The bill, according to Meadows’s website, “would establish a Chief Pharmaceutical Negotiator” in the USTR’s Office. This new official would be “responsible for conducting trade negotiations and enforcing trade agreements to ensure that the United States’ pharmaceutical innovations are appropriately rewarded.”
In an op-ed in The Hill on May 7, Meadows elaborated:
For too long, we’ve let the world take advantage of the United States and nowhere is this problem worse than it is for medicines. In fact, many other American industries, such as agriculture and manufacturing, have negotiators advocating for, and protecting their innovation—it’s high time we assign a dedicated chief negotiator to the very industry most impacted by this freeloading from foreign interests who are supposed partners and allies.
In a Special 301 Report earlier this year, the USTR stated that it “has been engaging with trading partners, including Algeria, Argentina, Australia, Canada, China, Colombia, Ecuador, Egypt, India, Indonesia, Japan, Korea, Mexico, New Zealand, Saudi Arabia, Turkey, and the United Arab Emirates (UAE), to address concerns related to IP protection and enforcement and market access barriers with respect to pharmaceuticals and medical devices so that trading partners contribute their fair share to research and development of new treatments and cures.”
But other than USMCA, USTR has yet to score a major victory.
South Korea is our sixth-largest trading partner, and, in its revision of the U.S.-Korea bilateral trade agreement of 2012, the U.S. insisted that Korea end its policy of favoring its own pharmaceutical industry and restricting imported drugs to below-market prices. The USTR stated that as part of the renegotiation, “Korea will amend its Premium Pricing Policy for Global Innovative Drugs to…ensure non-discriminatory and fair treatment for U.S. pharmaceutical exports.” That treatment was supposed to have been ensured in the original KORUS bilateral deal seven years ago. Korea has agreed to comply in the new version, but it is still by no means clear that it will do so.
Biosimilars in the USMCA
One of the most contentious trade issues involving pharmaceuticals currently is a provision of the USMCA. The leaders of the three countries signed the deal November 30, but Democrats in the U.S. House are threatening to refuse to approve it. One major issue is enforcement of labor standards in Mexico, but another involves commitments designed to help manufacturers of biological products (“biologics”) – highly sophisticated large-molecule medicines – to protect their innovation. Biologics are the fastest-growing class of therapeutics.
Under Chapter 20 of the agreement, makers of biologics would be allowed 10 years of protection for the data they used to win approval. “After a decade has elapsed,” explains the New York Times, “competing drug companies are allowed to rely on the original company’s data to get product approvals for their own drugs, without repeating clinical trials, as long as they can show they have produced a similar drug.”
Currently, Canada provides eight years of data protection for biologics. Mexico provides five years – although some legal experts are skeptical of whether there is any real protection for biologics in Mexico. In the U.S., data are protected for 12 years, a duration that will not change with ratification of the agreement. The U.S. wants to set a minimum of 10 years in order, as President Trump put it, to “make North America a haven for medical innovation and development.” But the USMCA will also help advance a global standard for future trade agreements. Other developed countries, such as Australia, New Zealand, and Chile, have only five-year protections. (Japan has eight years, and the U.S. pharmaceutical industry has urged the USTR to extend the limit to twelve in a new bilateral.)
Democrats argued in a letter to the USTR, Robert Lighthizer, that “we believe it is critical that the United States remains the leader in health care innovation. However, we also believe that Americans are entitled to timely access to affordable health care and medicines.”
They worry that longer data protection means fewer biosimilars – that is, drugs that are, in the words of the FDA, “highly similar to” and with “no clinically meaningful differences from” existing FDA-approved reference biologics. Biosimilars hold enormous promise in the effort to constrain drug prices – in the same manner as generics for small-molecule medicines. But only 23 biosimilars have been approved in the U.S., and just nine of those are being marketed here.
A strong counter-argument, however, is that a short period of exclusivity will discourage innovation, so that there will be fewer biologics for biosimilars-makers to copy. Marc Bush, a professor of international business diplomacy at Georgetown University, wrote last month in the Detroit News:
It takes roughly $2.6 billion to create just one new medicine. Without a reasonable data exclusivity period, competing firms could simply copy a new biologic and sell it for a bottom-dollar price. It would be extremely difficult for investors to recoup their development costs. So innovators would have little incentive to invest in new biologic research in the first place.
If investment in biologics dries up, biosimilars will disappear too. That’s because scientists can’t reverse-engineer nothing, and without data exclusivity to seed research on new biologics, that’s exactly what there will be to copy: nothing.
U.S. Law Calls for Trade Deals to Bring Other Countries
Up to U.S. Standards
Opponents of the biosimilars provision of the USMCA have claimed that the pharmaceutical industry wants the 10-year restriction in the agreement in order to prevent future reductions in the U.S. standard by Congress. But a new paper by Miriam Sapiro, who was deputy U.S. Trade Representative in the Obama Administration, argues that “USMCA obligations would not constrain Congress’ authority or ability to revise U.S. law or policy.” Sapiro, who is a senior advisor to a group pushing to pass USMCA, writes:
If lawmakers have concerns with existing U.S. laws, they can work to change those laws at any time, regardless of whether there is a trade agreement in place with Canada, Mexico or any other trading partner…. The language of existing trade agreements – and their implementing statutes – preserves Congress’ ability to legislate at any point.
Sapiro also notes that Congress has clearly stated that trade deals should aim to bring other countries up to U.S. standards. She quotes Trade Promotion Authority (TPA) legislation:
[t]he principal negotiating objectives of the United States regarding trade related intellectual property are…ensuring that the provisions of any trade agreement governing intellectual property rights that is entered into by the United States reflect a standard of protection similar to that found in United States law.
According to a Congressional Research Service analysis that was updated this June, the TPA law, signed by President Obama in 2015, also specifically “seeks to eliminate government price controls and reference prices ‘which deny full market access for United States products.’”
It is these principles, approved on a bipartisan basis, that led USTR to negotiate commitments that could result in narrowing the gap between U.S. and foreign drug prices, while at the same time continuing to spur innovation and make people healthier – here and around the world.
The biggest health policy story of the year isn’t the proposal for Medicare for all. It is something that has actually happened: the prices of drugs are falling.
As a classic man-bites-dog tale, declining pharmaceutical prices would seem perfect for the media. Instead, the biggest story is also the most underreported story – or, more accurately, the most resisted story.
But the story is important. After all, both Republicans and Democrats are promoting policy changes based on the assumption that drug prices are rising out of control. As Eric Sagonowsky put it in Fierce Pharma: “Politicians have been hitting hard at pharma for months and years, using terms such as ‘skyrocketing,’ ‘astronomical’ or ‘soaring’ to describe drug costs.”
This assumption lies behind such policy proposals as allowing importation from Canada, ordering inflation caps for Medicare Part D, setting controls linked to an index of European drug prices, and so on. For example, Alex Azar, Secretary of Health and Human Services said on July 31, “For the first time in HHS’s history, we are open to importation.” Azar had previously shown disdain for importation, calling it a “gimmick.”
Going into an election, President Trump may be viewing drug prices through a political lens, perhaps attempting to take the issue out of Democratic hands. Still, it surprising that he has not taken more credit for his own Administration’s unprecedented achievement and that he is, from time to time, backing proposals that his political opponents have dreamed about for years.
CPI for Prescription Drugs Down 2% for Year Ending June 30
On July 11, the President’s Council of Economic Advisers Tweeted, “The Consumer Price Index (CPI) for prescription drugs decreased 2.0 percent in June from 12 months prior according to the CPI release from @BLS.gov [the U.S. Bureau of Labor Statistics] today. This is the lowest 12-month change since January 1968.” Take a look at this chart that accompanied the CEA Tweet:
The BLS reports the three-month percentage change in the Consumer Price Index (CPI) for prescription drugs at the end of each month. Out of the last 16 readings, prices have fallen nine times, risen seven, and were flat once.
Figures from the official National Health Expenditure Accounts for 2018 won’t be out until December, but the data for 2017 show that prescription drug spending rose only 0.4%. That compares with an increase of 4.6% for hospital spending and 4.2% for physician and clinical services. Those two categories represented 53% of all health spending in the United States in 2017; prescription drugs, 10%.
In his State of the Union speech on Feb. 5, President Trump cited the BLS data. The media pushback was immediate. Tami Luhby of CNN wrote that “some experts are concerned that the [CPI] index isn’t as adequate a measure as it was” in the past and that, anyway, the “CPI varies widely from month to month.”
Similarly, the Associated Press reported at the time, “Trump is selectively citing statistics to exaggerate what seems to be a slowdown in prices.” The AP quoted economist Paul Hughes-Cromwick as saying, “The annualized number gives you a better picture. It could be that something quirky happened in December.”
In fact, the CPI decline is confirmed by other data-gathering sources, and December was no quirk. In the six months since the State of the Union, the drug-price index has continued to fall.
The Evidence from PBMs
Perhaps the best resources for drug prices are giant pharmacy benefit managers (PBMs), the firms that negotiate those prices with manufacturers on behalf of health insurance plans – including Medicare and Medicaid – for millions of enrollees.
Consider the annual “Drug Trend Report” from Express Scripts, a PBM with more than 80 million members. For 2018, Express Scripts reported that the average unit cost (that is, price) of prescriptions written for those enrolled in the commercial plans it serves dropped 0.4% compared with a year earlier. Combined with an increase in utilization of 0.8%, lower prices resulted in an overall average drug cost increase per member of only 0.4% -- “the lowest commercial drug trend in 25 years.” Express Scripts also reported that prices for its Medicare clients declined even more: 1.4%.
CVS Caremark, another huge PBM, reported that drug prices for its members in 2018 rose only 1.2%, which is less than overall U.S. inflation of 1.9%.
PBMs typically divide their drugs into two categories: traditional (or non-specialty) and specialty. The AARP Institute explained in a report in June:
Specialty drugs treat conditions that often affect older populations, such as cancer, rheumatoid arthritis, and multiple sclerosis. While there is no set definition for specialty drugs, the term generally includes drugs that are used to treat complex and chronic conditions; that require special administration and handling; or that require patient care management. Another notable characteristic is that they are among the most expensive drugs on the market.
Blue Cross Blue Shield reports that specialty drugs represent only 3% of the insurer’s branded-drug volume, but 34% of branded-drug spending. However, “Concerns about specialty drugs ignore an important fact: prices decline considerably with the introduction of competition from other patented drugs or biosimilar drugs after patents expire,” wrote Tomas Philipson, now the chairman of the President’s Council of Economic Advisers, Dana Goldman of the University of Southern California, and Anupam Jena of Harvard, in an article for Forbes on the American Enterprise Institute website.
Sure enough, while specialty drugs are often cited as the source of soaring drug prices, the PBMs reported only small increases in their prices for 2018. Express Scripts said that specialty drug price prices rose 2.1% for its commercial plans; CVS Caremark reported an increase of 1.7%; and another PBM, Prime Therapeutics, reported a decline of 0.5%.
In the category of traditional or non-specialty drugs, all three PBMs reported that prices fell substantially in 2018: by 6.5% for Express Scripts; 4.2% for Caremark; and 2.1% for Prime.
The Key Difference: Gross Vs. Net
If the Bureau of Labor Statistics and the PBMs say that prices are flat or falling, then why are politicians and the media claiming the opposite? One reason is that market conditions have changed in recent years, but the narrative of skyrocketing drug prices endures. Another is that many people are either confused by the data or are willfully ignoring the numbers.
Calculating drug prices is not easy. Not only are about 4 billion prescriptionswritten each year but also there are different ways to define the “price” of a drug. Generally, politicians and media cite “list price” or “Wholesale Acquisition Cost” (WAC).
For example, Politico reported July 1, “Prescription drug prices jumped 10.5 percent over the past six months…[and] in the first six months of the year, prices for 3,443 medicines rose.”
But such figures, based on list prices, are highly misleading because, in the pharmaceutical sector, unlike in other industries, the gatekeepers that stand between manufacturers and consumers – PBMs like Express Scripts – extract a large rebate off the list price after the transaction occurs. (The U.S. government also gets rebates for Medicare drugs, and both state governments and the U.S. get rebates for Medicaid.)
For private companies, the payment of such a rebate would violate federalanti-kickback laws if PBMs did not enjoy a special safe-harbor exemption (the Administration earlier proposed taking that exemption away but seems to have backtracked). In addition, PBMs insist on secrecy for rebates paid by manufacturers on specific drugs.
The focus of political and press criticism of drug prices is the manufacturer of the medicine. So what is significant is not the WAC or list price, but the “net” price, or the amount that actually flows to the pharmaceutical manufacturer.
The difference between list and net is huge:
The Bubble Keeps Inflating
Fein calculates that the bubble increased 10% in 2017 and 9% in 2018. These increases in rebates and other discounts explain why stories about drug prices are so far off the mark. The article in Politico, for example, never mentions rebates or net prices. STAT News, headlined in January that “Trump falsely claims ‘drug prices declined in 2018.’” The article was referring to a Tweet by the President that previewed his State of the Union. STAT noted, “At the start of last year, drug makers hiked prices on 1,800 medicines by a median of 9.1 percent, and many continued to increase prices throughout the year.”
No sensible person denies that many list prices have risen, but much of those increases are being captured by PBMs – and the plans that are their clients and owners -- in the form of rebates. Consider data for “protected brands” – that is, non-generic drugs that are still under patent. The IQVIA study found that the invoice, or list price, of protected brands rose an average of 5.5% in 2018 but net prices rose only 0.3%. For the period 2019 to 20123, IQVIA estimates that while list prices for these drugs will increase 4% to 7%, their net-price change will fall in a band from a decline of 1% to an increase of 2%.
These figures are confirmed by Express Scripts, which reported on page 5 of its 2018 “Trend Report” that average prices for its members declined 6.5% for "traditional brand drugs" despite a 7.3% rise in list prices, and member prices rose 2.1% for specialty drugs despite a 7.1% rise in list prices.
Similarly, CVS Caremark reported that list prices rose 8.1% for non-specialty branded drugs while the prices that the PBM actually paid fell 4.2%; for specialty drugs, the list price increase was 7.6% and the net increase just 1.7% (again, less than inflation).
These figures almost perfectly matched the 7% rise in 2017 retail prices reported by the AARP Public Policy Institute in a study of 97 widely used specialty prescription drugs. So a good assumption is that the net price increase for these drugs was also around 2%, matching U.S. inflation overall. (Note that rebates for specialty drugs are often less than for other drugs because specialty medicines have fewer – and sometimes no – competitors to play off against each other to determine which one will be in the formulary.)
The AARP study makes no attempt to discover net prices (in fact, the word “net” never appears in the report). This omission is not only misleading but curious because AARP has a partnership with United Healthcare to provide Medicare Part D coverage, and United owns Optum RX, one of the three largest PBMs. It would seem that the rebate data are accessible.
Out-of-Pocket Costs Also Flat or Falling
Real per capita net spending per year on drugs in the U.S. by all sources (government, insurers, individuals) grew only by $44, or 4.4%, in total -- or an average of only a few tenths of a point a year, from 2009 to 2018, according to the new IQVIA study. And the trend line has flattened: spending in 2018 was 0.1% higher than in 2015.
Even more remarkable has been the trend for out-of-pocket (OOP) payments for drugs by individual Americans. CVS Caremark reported that in 2018, two out of three of its members who filled any prescriptions at all, spent less than $100 on drugs throughout the year. The average spending for all Express Scripts members for a 30-day prescription last year was $11.55, or six cents more than in 2017. Exactly 50% of the PBM’s plans decreased their drug spending in 2018, compared with 44% in 2017.
A big reason is that generic drugs, according to IQVIA, account for 90% of all prescriptions, up from 75% in 2009. The AARP study found that from the end of 2014 to the end of 2017 (latest data), generic drug prices fell by one-third. But the IQVIA study found that even the OOP costs for branded drugs have risen just 2% from 2014 to 2018.
Still, there is no doubt that Americans feel the burden of OOP drug costs. Certainly, one explanation is that, as the NHE data show, OOP spending represents 14% of total drug costs and just 3% of hospital costs. Insurance is structured to pay a higher proportion for hospital and physician claims than drug claims. A second explanation also relates to insurance design: Patients with high drug costs have to pay high coinsurance rates. Medicare and private insurance both need to reconsider the way their reimbursements are crushing a small number of Americans who are unfortunate enough to be sicker than others.
Readers of this newsletter are probably familiar with the reasons that prices have leveled off and dropped. The main one is increased competition that has resulted from the Administration’s easing bureaucratic barriers to approving generic drugs. Those approvals set records in each of the past two years. Perhaps presidential jawboning also plays a part.
Prices could be further constrained if the Administration would move more quickly to bring biosimilars to market – that is, almost identical copies of patented biological products, which tend to be highly advanced and often expensive treatments. In 2018, only three novel biosimilars were launched. Net spending on biologics has increased from $84 billion in 2014 to $126 billion in 2018, but biosimilar spending is just $2 billion.
Competition appears to have had the most dramatic effect on prices, but politicians can’t seem to break the habit of trying to impose top-down government fixes. The truth is that no effective policy solutions can be devised without an understanding of the facts on the ground. The most salient of those facts today is that drug prices are not skyrocketing. To the contrary.
Issue No. 50: Senate Plan for Medicare Price Controls Raises Ire, But Benefit Redesign Is Broadly Attractive
The Goal: Lower Out-of-Pocket Costs and Intensify Price Bargainin
The Senate Finance Committee on Thursday plans to take up a drug pricing bill, put together by the panel’s chairman, Sen. Chuck Grassley (R-Iowa), and ranking member, Sen. Ron Wyden (R-Ore).
The legislation would make two major changes: It would place an inflation cap on pharmaceutical prices, and it would redesign the benefit – that is, change who pays for what and at which stage. Those changes are poles apart. One imports European-style price controls; the other fits Part D’s original philosophy of price constraint through competition.
Sudden Attention for Inflation Cap
An inflation cap gained sudden attention a week ago, when, eager to make a deal with Speaker Nancy Pelosi (D-Calif), Treasury Secretary Steve Mnuchinproposed the idea as a way to reduce federal spending. An inflation cap had already been discussed in the Finance Committee, where it was advanced by Wyden. The concept Is laid out in Subtitle B – Part D - Section 128 of the Chairman’s Mark of the
This provision would establish a mandatory rebate if a pharmaceutical manufacturer increases their list price for certain covered Part D drugs above inflation…. Rebatable drugs would be defined as Part D-covered products that are brand drugs (and not a generic drug) or that are licensed as a biologic (and not a biosimilar).
According to Inside Health Policy, “Senate Finance Republicans have been skeptical about incorporating those rebates in Medicare Part D.” The article on July 19 by Rachel Cohrs and John Wilkerson continued, “The Trump administration, however, reportedly is open to the rebates, and sources say those rebates account for the brunt of the $115 billion in drug savings that the administration is proposing as part of a budget deal.”
In the end, the inflation cap was absent from the budget agreement that White House and congressional negotiators reached on Monday. (That deal still requires formal House and Senate approval and the President’s signature.) But the cap is front and center in the bill the Finance Committee is considering, and late Tuesday, the White House said it was backing the legislation.
Reports last week that the White House was willing to agree to an inflation cap immediately touched off a firestorm of protest from conservatives. Sally Pipes, president of the free-market Pacific Research Institute, wrote on Forbes.com July 19 that “the proposal would hurt vulnerable seniors and stifle medical innovation.” And former House Speaker Newt Gingrich tweeted, “Pelosi’s #Medicare price control plan” grows government, won’t reduce what seniors pay for drugs out of their own pockets, and “would just encourage manufacturers to have higher initial prices.”
On Monday, Grover Norquist’s Americans for Tax Reform led 17 conservative groups in signing a letter to the Finance Committee, stating, “We are concerned that this proposal institutes a new price control on Part D that will do nothing to directly help seniors and will instead create distortions that will undermine the free market and the success of Medicare Part D.”
A Solution Is Out There
One reason conservatives – and others as well – are so exercised about an inflation cap is that it runs counter to the strategy behind Part D, and, if implemented, the policy will likely trigger a host of unintended consequences. An obvious one is that pharmaceutical companies will, as Gingrich notes, have a bigger incentive to bring out new drugs at especially high prices since those prices will become the base for sub-inflationary increases. Another is that U.S. pharmaceutical employment will be jeopardized at a time when China is moving in the opposite direction, changing laws to attract more drug research and development.
Part D has, in general, worked exceptionally well. For example, using federal data, the Kaiser Family Foundation (KFF) found that Part D costs have risen slowly – an annual average of just 2.2% annually from 2010 to 2017, or just one-half of one percentage point faster than inflation overall.
Still, there are two problems with Part D currently. The first is the one we highlighted in issue No. 48 of our newsletter: When people get very sick and need innovative, specialty medicines, the structure of Part D requires them to pay large amounts out of pocket. The second is that insurers and manufacturers need to negotiate harder. A fairly easy solution to both problems is out there, but it has nothing to do with government price controls.
In fact, price controls could threaten the entire structure and even existence of Part D, a program that was opposed in 2003 by nearly all the Democrats in Congress, including Pelosi herself. A market-based federal program that is succeeding may constitute a threat to some politicians. So one of the best arguments for opposing inflation caps may simply be to defend Part D, and Medicare as a whole, from more extensive attacks.
The good news is that, in addition to the scheme for federally imposed price controls, the Finance Committee is also proposing, in
A Brief History of Part D
It’s hard to believe, but for 41 years Medicare, the federal health care program for seniors (as well as those under 65 with certain disabilities), had no comprehensive prescription drug benefit.
In December 2003, President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act. The vote was close. At the time, Americans over 65 were spending $2,322 a year on average, for their medicines. That’s the equivalent of $3,232 today.
Part D, launched on Jan. 1, 2006, allowed beneficiaries to choose a Prescription Drug Plan (PDP) as their insurer. PDPs, following rules administered by the Centers for Medicare and Medicaid Services (CMS), work with Pharmacy Benefit Managers (PBMs) to establish a “formulary” of listed drugs, based on negotiations with drug manufacturers. CMS approves each plan. There are now more than 900 of them, a 15% increase since 2018.
The base Part D premium is $33 a month, a figure that has barely budged since 2011 and is far lower than estimated when the program began. But there is a wide range of premiums – from $10 to $156. In addition, higher earners pay a surcharge of up to $77.
Part D was structured to use competition as a discipline to hold costs to beneficiaries down, and it has largely worked. Overall spending over the first eight years was $349 billion less than expected. Here is a good video on YouTube, from the group Medicare Today, that explains. A report by the Government Accountability Office stated that plan sponsors have held prices down…
through their ability to negotiate prices with drug manufacturers and pharmacies. To generate these savings, sponsors often contract with pharmacy benefit managers (PBMs) to negotiate rebates with drug manufacturers, discounts with retail pharmacies, and other price concessions on behalf of the sponsor.
PBMs have enormous clout in negotiations because they are so large and can deploy the leverage of their entire medicine-using membership. There are 45 million Part D enrollees, but that figure is dwarfed by, for example, the PBMExpress Scripts, which alone has 83 million members who last year filled 1.4 billion prescriptions.
Private-Sector Negotiations Have Led to Price Declines
Express Scripts reported earlier this year that in 2018, the average price of a prescription for its members on Medicare plans fell by 1.4%; meanwhile utilization rose by 1.1%, so total costs fell by 0.3%.
The reason is competition. PBMs know how to play drug companies off against each other. According to a study released in June by Avalere, “less than 1% ($0.9 billion) of total Part D spending was for single-source brands that were the only product available in their therapeutic class.” Price reductions typically come in the form of rebates off the list price, and, according to the Altarum Institute, Part D plans score higher rebates on brand medicines than commercial plans.
PBMs and insurers already subject drug manufacturers to what are called “price protection penalties,” establishing a ceiling for increases by requiring rebates if prices rise beyond a certain amount. According to a study by Milliman, these rebates “have become more common and represent an increasingly large share of total rebates.”
The law that established Part D has a “non-interference clause,” which states that the government “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.” An inflation penalty instituted by the federal government would probably violate that clause unless new legislation is passed.
Medicare Part D was founded on the premise that competition and choice would manage costs and increase patient satisfaction – and that is what has happened. Premium growth has been low or non-existent, the plans are negotiating discounts of more than one-third for branded drugs (UnitedHealthcare, for example, paid $7.3 billion in prescription drug claims under Part D and received $4.1 billion in rebates), and seniors like the program (nine in ten say they are satisfied).
The Path to Real Reform for Part D
Part D, however, is not perfect. The current payment system is complicated and counter-productive. A Medicare beneficiary first pays the full costs of medicines up to a deductible, which in 2019 is a maximum of $415. Next comes the initial coverage phase, where the beneficiary is subject to coinsurance, paying 25% of the cost of the drug. That phase ends at $3,820 in total drug costs. In the next phase, the “donut hole” or “coverage gap,” the beneficiary pays 25% coinsurance for branded drugs and 37% for generics up to total costs of $8,100. Finally, the catastrophic phase begins, and beneficiaries face 5% coinsurance with no limit.
As a result, some Medicare beneficiaries have to pay huge out-of-pocket (OOP) costs. Nearly one in ten reached the catastrophic phase in 2017. Of those 3.6 million people, 2.6 million had costs buffered by low-income subsidies, but that left 1 million seniors exposed to unlimited drug costs. According to KFF, among those million seniors, average OOP spending for those with leukemia or lymphoma was $5,000; for those with multiple sclerosis, $4,900; with viral hepatitis, $4,300.
Simply capping catastrophic OOP spending by eliminating 5% coinsurance in the catastrophic phase would end the problem, as we showed last month, but many analysts believe that a more sophisticated change that accelerates incentives to hold down costs would be better.
Under the current system, insurance plans (that is, the pricing police) pay only 5% of costs in the donut hole and 15% in the catastrophic phase. Manufacturers pay 70% in the donut hole and nothing at all in the catastrophic phase.
According to Tara O’Neill Hayes of the American Action Forum (AAF): “Because insurer liability is very limited in the catastrophic phase, insurers have little incentive to keep beneficiaries out of that final phase.” A new alignment of responsibilities is necessary.
In August 2018, Hayes issued a Part D reform plan that received a good deal of attention. The Medicare Payment Advisory Commission, or MedPAC, a congressionally mandated agency, began addressing a similar redesign in 2016 and in April weighed in again with new research and on June 14 with itsannual report to Congress. Two weeks later, Hayes issued her own revised proposal, which some are calling AAF-Plus. Her approach and MedPAC’s are similar, and MedPAC summed it up this way:
In general, we expect [a redesign] would provide stronger incentives for plan sponsors to manage enrollees’ spending and potentially restrain manufacturers’ incentives to increase drug prices or launch new products at high prices.
Such a redesign, as the Senate Finance Committee proposed in its legislation, has broad support -- though some analysts will disagree with the proportions.
Under the committee’s plan, beneficiaries would start with the same deductible as now. The initial coverage phase and coverage gap would be conflated so that beneficiaries pay the same coinsurance across the spectrum. The Senate bill proposes 25% -- though previous plans proposed 20%.
Across this unified phase, the committee proposes a constant liability for plans of 75% to go with the 25% for beneficiaries. (Currently, in the initial coverage phase, plans have a liability of 75%; manufacturers, zero. In the coverage gap, manufacturers have a liability of 70%; plans, 5%.)
The big change would come in the catastrophic phase, where, under the Senate committee bill, the government liability would be reduced from the current 80% to 20%, and the plans’ liability would rise from 15% today to 60%. Manufacturers would be responsible for the final 20%, where currently they face zero liability. Under this plan, beneficiaries would be out of the picture altogether, with no liability for catastrophic costs. As of 2022, beneficiaries would pay no more out-of-pocket than $3,100.
Restructuring Addresses Problems Better Than Price Controls
This restructuring – and it is a proposal that can be tweaked in many ways -- addresses both of the current problems.
First, the OOP cap for non-low-income-subsidiary Part D beneficiaries would fall from unlimited today to a much lower figure. Hayes presents a table in her paper showing that with $40,000 in total drug costs, a beneficiary today faces OOP expenditures of $11,861. Even if they are healthy, seniors endure tremendous anxiety about getting sick and not being able to afford their medicines. The reimbursement structure would be limit OOP to $3,100, in addition to low-cost premiums. (Even $3,1000, though a major improvement over the current situation, would be a hardship for many Americans; previous proposals had limited OOP to $2,500.)
Second, as Hayes concludes, “Reforming the benefit structure…realigns the financial incentives of both the insurers and drug manufacturers” in a way that will put additional pressure on prices.
Under the committee bill, the plans – that is, the insurers and PBMs (often one and the same with recent mergers) -- will have substantial skin in the game when it comes to reimbursements for innovative specialty drugs. The plans will be on the hook not for just 15% of the tab in the catastrophic phrase, but for 60% (a previous proposal put the level at 75% with the government paying 20% and manufacturers, 5%). Even at 60%, the plans will undoubtedly ratchet up pressure on drug manufacturers, which themselves will have to reimburse for catastrophic costs from which they were immune for 13 years.
Unlike under the current design, both plans and manufacturers will have a big incentive to keep beneficiaries from going over the $3,100 out-of-pocket cap and reaching the catastrophic phase. Almost certainly, a redesign would increase the liability of drug manufacturers, but it is a solution which -- unlike artificial, government-imposed price controls – fits the philosophy and strategy that has guided Part D Medicare to its successes.
This piece that is missing in this restructuring is a resurrection of the plan to end hidden rebates to pharmacy benefit managers, which would have the effect of lowering not just prices at the pharmacy but the list prices on which Medicare coinsurance is calculated, thus cutting out-of-pocket costs to seniors. On July 11, President Trump suddenly killed this plan, which he has once so passionately advocated. Bringing it back would be another boon to Medicare beneficiaries – and to everyone who values transparency in pricing.
Hospitals and Drugs
In closing, we find it hard to resist noting the irony of an April paper on drug prices issued by the American Hospital Association (AHA). It called on Washington to “require mandatory, inflation-based rebates for Medicare drugs.”
Hospitals in this country have benefited from political protection and from consolidation. As the Center for American Progress reported on June 26, “Many hospitals are able to sustain profits and high prices because of their market power, which has grown as competition has dwindled and providers have consolidated through mergers and acquisitions.”
But hospitals are receiving closer scrutiny. After all, in 2017, Medicare hospital spending was nearly triple Medicare drug spending. As an article in Modern Healthcare concluded, “Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward.”
Still, however policy makers decide to address hospital costs, they would do well to remember why Part D works as well as it does: private-sector competition and minimal government intervention. An inflation cap imposed by Washington is the opposite approach.
Maryland last month became the first state to establish a board to set maximum prices for drugs purchased by state and local governments; shortly thereafter, Maine became the second.
According to a survey by the National Academy for State Health Policy(NASHP), attempts to establish price-review boards in two states (Illinois and Connecticut) failed, but in five others (Massachusetts, Minnesota, New Jersey, Oregon, and Missouri) legislation has been referred to relevant committees.
The structure of the review boards is similar in all these states, so let’s take a close look at one of them. Legislation passed the Maryland House of Delegates, 96-37, and the Senate, 38-8. Maryland’s governor, Larry Hogan, a Republican, declined either to veto or to sign the bill, so after a prescribed waiting period, it became law.
Maryland, like five of the other seven states where review boards have been up for consideration, is staunchly Democratic. Only one of its eight members of the U.S. House is Republican, and Hillary Clinton beat Donald Trump in 2016 by 60% to 34%.
Still, a state price control board is significant for any state. As Health Care for All, an advocacy group, put it, “The Prescription Drug Affordability Board will be the first government entity in the United States created to lower the cost of drugs.”
‘Damaging, Unintended Consequences
But there are problems. Big ones. Christine Hodgdon, a Baltimore resident who was diagnosed with both breast and thyroid cancer at age 34, wrote in the Annapolis Capital Gazette that, while a review board “may sound like good news for patients, [it] would have damaging, unintended consequences to innovation in Maryland, dimming the hope for potential breakthrough treatments without reducing the cost patients pay.”
Martin Rosendale, the CEO of the Maryland Tech Council, believes that the board will “have a negative impact on our local businesses.” With 41,000 Marylanders employed in high-paying biotech jobs, the state is sending a signal that biopharmaceutical companies are unwelcome – especially at time when far more is spent on other segments of the health care system, such as hospitals, that are immune to this kind of scrutiny and when Medicaid drug spending is flat (issues we explore below).
As Rosendale notes, “Price controls limit access to needed medicines. Capping prices or profits within the drug supply chain would restrict patients’ access to medicines and result in fewer new treatments.”
What Maryland and the other states are trying to do is import the model of government-as-payer – prevalent in such countries as Canada -- to the United States. A major means for government agencies in these countries to hold down prices is denying their citizens access to drugs – especially the most innovative and effective. A Wall Street Journal editorial last year pointed out that of 74 cancer drugs launched between 2011 and 2018, some 95% are available in the United States. “Compare that to 74% in the U.K., 49% in Japan, and 8% in Greece.”
In a paper earlier this year, Avik Roy, president of the Foundation for Research on Equal Opportunity, pointed out that “not all foreign countries have access problems to new medicines.” He produced a chart, based on data from the WHO European Observatory on Health Systems and Prices, that show that such nations as Germany and Denmark…
enjoy rapid and frequent access to innovative medicines, comparable to that of the United States. In Denmark for example, after a drug is approved by the European Medicines Agency (the European equivalent of the FDA), it takes an average of five months for that drug to reach patients. This is, in large part, due to the use of free pricing in these high-access countries.
Denmark does not regulate drug prices at all, Roy notes, and Germany allows free pricing for the first year after launch, “which has encouraged manufacturers to rapidly enter its large market.” By contrast, in Belgium and Italy, where prices are tightly regulated access takes an average of 15 months. With its price-control board, Maryland is moving in the direction of Belgium and Italy, with predictable results.
Limiting access to the best medicines has life-and-death consequences. Compare, for instance, survival rates for cancer in the U.S. and the U.K., where the National Institute for Clinical Excellence (NICE) serves as the kind of board that Maryland is setting up. According to the U.S. Centers for Disease Control (CDC), five-year survival rates for four out of five different kinds of cancers studied were higher in the U.S. than the U.K.: breast, colon, lung, and prostate. The only exception was childhood leukemia, where the U.S. rate was 87.7% and the U.K. rate was 89.1% For lung cancer, nearly twice as many Americans survived than U.K. residents.
If you have cancer, this study and others have shown, the best place to be is the United States. Price-control boards like the one Maryland is implementing could change that situation.
Rosendale make a final point. The law, he said,…
could also create a “gray” market of companies that buy and resell medicines to each other before one of them finally sells the drugs to a hospital or other health care facility. As the medicines are sold from one secondary distributor to another, the possibility of counterfeit medicines entering the legitimate medicine supply increases, thereby threatening patient safety.
How the Review Board Works
According to the text of the legislation, the first assignment of the five-person board -- whose members are appointed individually by the governor, the two legislative branches, and the attorney general – will be a study, to be completed by the end of next year, of the drug distribution and payment system and of what other states and countries are doing “to lower the list price of pharmaceuticals.” (Why list price and not the actual cost to the state and consumers is not explained.)
After that, the board will target branded drugs, including biological products, that are launched at a Wholesale Acquisition Cost (WAC) – that is, list price before discounts and rebates -- of $30,000 or more a year or that, after launch, are registering price increases of more than $3,000 a year. Also targeted will be generics with a WAC of $100 or more a month or that have increased in price by more than 200% in a year.
Finally, under the law, the board has an open-ended mandate to pursue “other prescription drug products that may create affordability for the state health care system and patients.”
After identifying its targets, the board next conducts a “cost review” to determine whether a drug will lead to an “affordability challenge” for Marylanders. The review can look at 10 factors (such as the WAC itself, rebates, the price of “therapeutic alternatives,” and restrictions to access), as well as “any other factors as determined by the board.” In all these matters, the board works with a 26-person “stakeholder council” that includes physicians, nurses, representatives of drug companies, advocates for seniors, and the like.
The board can also look at a drug manufacturer’s research and development costs, its direct-to-consumer advertising costs, plus virtually anything else it wants to consider. Then, starting Jan. 1, 2022, the board can set “upper limits” on drugs that are purchased for state-run hospitals, colleges, and prisons, state employee health plans, and Medicaid (the Maryland Medical Assistance Program, whose threshold income requirement for a family of four is $34,000 a year).
What Is the Right Price for a Drug?
Exactly how the board will come up with the correct maximum price for a drug is left vague in the law. A big question is why a group of political appointees has more pricing wisdom than the market-based real-life transactions that determine the net price of Medicaid drugs (in the first place.
Once the price does get set, drug manufacturers can appeal and then take the state to court. The constitutionality of the law is still an open question because it could be interpreted as an attempt to regulate interstate commerce, a federal responsibility. The Baltimore Sun, a supporter of the price-control board, said in an editorial,
This bill treats manufacturers no differently whether they’re in Maryland or Virginia or California. The question of whether this measure would survive a legal challenge is certainly legitimate, given that a federal court recently struck down Maryland’s attempt to limit generic drug price spikes.
The law may be more important for what it signifies than for what it will ultimately do. Politicians at both the state and federal level seem to what to dosomething about drug prices – even if those measures deter innovation and ultimately harm the health of their constituents.
Attacking Spread Pricing
A survey by the NASHP for that, as of July 7, “47 states had filed 269 bills to help control prescription drug costs.” Nearly half those bills were directed at pharmacy benefit managers (PBMs) – especially at a practice called “spread pricing,” a practice that has also caught the attention of the federal Centers for Medicare and Medicaid (CMS), which issued guidance in May to fight abuses. According to CMS:
Spread pricing occurs when health plans contract with pharmacy benefit managers (PBMs) to manage their prescription drug benefits, and PBMs keep a portion of the amount paid to them by the health plans for prescription drugs instead of passing the full payments on to pharmacies. Thus, there is a spread between the amount that the health plan pays the PBM and the amount that the PBM reimburses the pharmacy for a beneficiary’s prescription.
If spread pricing is not appropriately monitored and accounted for, a PBM can profit from charging health plans an excess amount above the amount paid to the pharmacy dispensing a drug, which increases Medicaid costs for taxpayers.
Spread pricing is a real problem, and one that can be addressed effectively. In 2018, Ohio moved all state contracts with PBMs off the spread model and onto a simple pass-through model after the state determined that PBMs were raking off 9% of Medicaid prescription costs. Kentucky reported that PBMs earned $123 million from spread pricing last year.
Medicaid Net Drug Spending Flat
Medicaid spending is a serious concern of all states. Although the federal government pays about three-fifths of the cost, the state’s share is typically one of the two overall budget items, along with education. Total Medicaid costs arerising at about 4% annually, but, according to a Kaiser Family Foundationreport on May 1, net spending on Medicaid pharmaceuticals after federal and state rebates has been flat for the three most recent years of data (2015-17) and, in fact, declined between 2016 and 2017.
States are not required to offer pharmaceutical coverage under Medicaid, but all of them do. (After all, medicines keep people out of hospitals and physicians’ offices, where total spending is five times that of drugs.) Medicaid provides reimbursement to pharmacies for what amounts to the national average price of the drug. To cover some of the cost, according to a KFF primer,
federal law requires manufacturers who want their drugs covered under Medicaid to rebate a portion of drug payments to the government, and in return, Medicaid must cover almost all FDA-approved drugs produced by those manufacturers.
Most states also negotiate for rebates. In 2017, federal and state rebates totaled 55% of total drug spending, up from 46% in 2014. Overall, net Medicaid spending on prescription drugs after rebates totaled $29 billion in the most recent year for data; that about 5% of total costs for Medicaid, a program that spends $119 billion on fee-for-service long-term care alone.
Drugs a Small Portion of Medicaid Costs Compared to
Long-Term Care, Hospitals
So the mystery is not merely how state boards are going to determine whether a drug costs too much but why the politicians who create the boards are so fixated on medicines rather than on much larger budget items, such as hospitals and long-term care.
One answer may be that ideological interest groups are also fixed on drugs. For example, a national group called Patients for Affordable Drugs Now played a key advocacy role in securing the Maryland price-setting board, including running television ads encouraging Governor Hogan to sign the bill. The group received $950,000 last year from the Action Now Initiative, which is funded by Laura and John Arnold, Houston-based philanthropists who made drug-price reduction a cause.
Another answer is simply that practically every elected official has at least one hospital providing employment in his or her district while pharmaceutical manufacturers are national and global companies. It may make political sense to overlook the sharply rising cost of hospital care – and even lavish benefits on hospitals. In an article earlier this year in National Affairs, Chris Pope wrote about what he called “hospital protectionism” by state and federal governments:
America's hospital industry is already one of the most politicized sectors of the nation's economy, and its shape and structure are the product of decades of deliberate legislative and regulatory actions.
Price-Setting Boards Can Damage Health
The real danger in creating state price-setting boards, however, is the damage they can do to America’s health. Pharmaceutical innovation has entered a kind of golden age, with more and more innovative drugs being developed for diseases that, in the past, ruined lives or put an early end to them.
The death rate from cardiovascular disease has dropped by two-thirds since the 1970s, in large measure because of cholesterol and blood-pressure medicines. HIV/AIDS was a death sentence before antiretroviral drugs were developed. In 2013, the Food & Drug Administration approved an actual cure for Hepatitis C, which kills more Americans than any other infectious disease. Last year, the FDA approved 59 new drugs, a record. These medicines treat such conditions as smallpox, melanoma, rheumatoid arthritis, cystic fibrosis, breast cancer, acute influenza, and many more. Cancer breakthroughs are multiplying.
Putting political limits on the cost of medicines – especially when these costs have been flat in recent years – could have significant negative consequences. Drug companies need to spend vast sums on research and development to bring drugs to market (the total cost per approved medicine is close to $3 billion); if the revenues fall, so will R&D, and so will the opportunities for Americans to benefit from innovation.
Frustration at the costs of medicines may be understandable, but the best way to limit pharmaceutical expenses is not top-down controls from governments but competition in the marketplace. The Trump Administration has already shown what can be achieved by easing the pathway for approval of generic drugs: an overall decline in the average price of medicines.
The Bureau of Labor Statistics (BLS) reports that prescription drug prices have fallen in eight of the past 14 months. Express Scripts, the pharmacy benefit manager (PBM) for 83 million Americans, reports that during 2018 the average cost per prescription for members of its commercial plans fell by 0.4%. For Medicare plans, the decline was 1.4%. CVS Caremark, another giant pharmacy benefit manager, says that last year, the prices of specialty drugs for its members rose just 1.7% and those non-specialty drugs fell 4.2%.
Much more can be done to intensify competition and to reduce the out-of-pocket costs of patients – for example, regulatory changes to improve the chances of getting biosimilar drugs to the marketplace. Political price controls are a blunt instrument, bound to do a lot of damage, intended or not.
More and more new medicines are being developed and approved – a record 59 last year – prolonging and improving lives. Many of these are complex, specialty drugs, treating difficult illnesses like cancer and autoimmune disease. Many Americans, however, are not benefiting from innovations. They neglect to fill their prescriptions because they don’t have the money.
This problem is typically portrayed as being one of runaway drug prices, but that is not the full picture. The “financial barrier to treatment,” as the Medicare Payment Advisory Commission (Medpac) calls it, is not the list price of the drug but the out-of-pocket cost to the patient who has to foot the bill for insurance deductibles, co-payments (that is, flat fees), and, especially, co-insurance (proportion of the price).
This problem is especially acute for some Americans most in need: seniors on Medicare. A new report by Juliette Cubanski, Tricia Neuman and Anthony Damico, published June 21 by the Kaiser Family Foundation, found that 3.6 million Medicare beneficiaries in 2017 spent enough on medicines to reach the catastrophic phase of their coverage, where there is no cap on what they spend out of pocket (the structure of Medicare reimbursement is explained below).
Some 2.6 million of these Medicare patients receive low-income subsidies (qualifications are complicated, but incomes generally have to be below $17,000 for individuals or $23,000 for couples) to relieve part of the burden. But 1,016,600 who reach the catastrophic phase do not get subsidies. That figure compares with just 407,200 ten years earlier.
Bipartisan support is growing to put a limit on the amount that Medicare beneficiaries have to spend out of pocket – and for good reason….
The Danger of High Out-of-Pocket Drug Costs to Health
Citing several prior studies, an article by Nina Joyce and colleagues in the American Journal of Managed Care concluded that high out-of-pocket (OOP) drug costs lead to “lower medication utilization and adherence, especially among patients with chronic conditions.” The researchers write, “Studies across a number of chronic diseases (e.g., rheumatoid arthritis, multiple sclerosis, hypertension, and hypercholesterolemia) report an association between higher OOP costs and lower drug utilization.”
The decision not to take prescribed medicines, write the researchers in their extensive study of epilepsy patients, “may be counterproductive, as patients reduce their use of preventive services and medications, which may translate into costlier care later on.” When sick people don’t take their medicine, they often land in the hospital or a nursing home.
One example is Parkinson’s Disease. A study by Y.J. Wei and six colleagues at the University of Maryland, published in the journal Value Health, found that one-fourth of patients with the disease had low adherence to drugs to fight its effects. Wrote the researchers:
Increasing adherence to APD [anti-parkinson drug] therapy was associated with decreased health care utilization and expenditures,” write the researchers. “For example, compared with patients with low adherence, those with high adherence…had significantly lower rates of hospitalization…, emergency room visits…, skilled nursing facility episodes…, home health agency episodes…, physician visits…, as well as lower total health care expenditures (-$2242), measured over 19 months. Similarly, lower total expenditure (-$6308) was observed in patients with a long DOT [duration of drug therapy] versus those with a short DOT.
No wonder a Best Practices Guide, published in 2017 by the Centers for Disease Control and Prevention, concluded that reducing OOP costs is “an effective strategy for increasing medication adherence and lowering blood pressure and cholesterol levels among diverse populations and in various settings.”
OOP Costs For Medicines in U.S., on Average, Are Surprisingly in Line With Europe, Canada, Japan
For most Americans, however, the OOP cost burden is modest – less than $10 a month on average and lower now than it was a decade ago. Our OOP drug spending, in fact, is in line with that of the rest of the developed world. The average for nine rich countries in 2016 was $118 annually, according to an analysis by Axios, using Peterson-Kaiser Health System Tracker data.
The U.S. average OOP expense was $139, ranking third behind Switzerland and Canada (yes, Canada, the country from which so many politicians want us to import medicines). The average Japanese citizen pays $8.58 a month out-of-pocket for prescriptions; the average American, $9.83. In fact, the difference between our OOP and that of the rest of the world is entirely explained by ourhigher per-capita income.
These figures help us understand the results of a new Kaiser Family Foundation (KFF) poll, which asked which health-care issues respondents wanted to hear Democratic candidates talk about in the upcoming presidential debates. “Lowering prescription drug costs” finished fifth at just 8%, tied with “access to reproductive health services” and far below lowering health costs in general, protecting the Affordable Care Act, and “increasing access to health care.”
In a separate study, Kaiser found that, among Americans who take any prescription medicine, 46% said it was “easy” to pay the cost and another 29% said it was “somewhat easy.” Just 9% said it was “very difficult” and 15% said “somewhat difficult.”
After all, at last count, 91.2% of Americans had health insurance coverage: private, Medicaid, Medicare, or military. That insurance is supposed to protect people from the full brunt of all kinds of health expenses, including drugs.
But Insurance Policies Are Upside Down
But some health insurance plans aren’t working the way they should when it comes to medicines. Many plans pay nearly the entire cost of inexpensive generics, but they force patients to pay large sums for specialty medicines to address serious illnesses. Those unexpected, catastrophic costs are why insurance was invented. The structure of these policies is upside down.
For example, Americans who take multiple sclerosis medications every month paid an average $3,708 annually out-of-pocket. “Patients in high-deductible plans,” which are becoming more and more prevalent, “paid even more, with average annual costs of nearly $8,000,” according to a recent Los Angeles Times article that cited research by Brian Callaghan of the University of Michigan, published in May in the peer-reviewed journal Neurology.
The burden on patients is especially heavy under the government-run plan for seniors: Medicare. In another study published by KFF, in February, researchers looked at OOP payments by Medicare beneficiaries for 28 specialty drugs, based on 2019 prices under 25 health plans. The median annual outlay was about $8,000.
As a result, a dangerously high proportion of Medicare patients do not fill prescriptions or skip doses because of OOP costs. In a thorough study published in the Journal of Clinical Oncology last year, Jalpa A. Doshi, a professor of medicine at the University of Pennsylvania, and her colleagues examined abandonment rates (defined as not filling a prescription within 90 days of its being written) for oral oncology drugs among a sample of 24,000 Medicare beneficiaries. The researchers found that when out-of-pocket costs for a prescription were $100 to $500, the abandonment rate for Medicare patients was 33%, which was higher than for patients with private insurance, at 29%.
A separate study in the journal Arthritis Care & Research found that, on average, Medicare beneficiaries not qualifying for a low-income subsidy paid an OOP average of $484 for a one-month prescription of a Part D biologic agent to combat the disease. Only 61.2% of the 886 beneficiaries studied filled their prescription.
While most U.S. patients have little trouble coping with drug costs, some – including many seniors – are finding their family finances destroyed by OOP pharmaceutical expenses, preventing them from filling prescriptions, making them sicker, and plunging them into bankruptcy. It is the plight of these Americans that policy makers are now addressing. The target is Medicare, the government-run health insurance program that enrolls 17% of Americans.
The Strange Structure of Part D
President Lyndon Johnson signed Medicare into law in 1965, but the program, which provides government-directed health insurance for seniors, did not cover prescription drugs until 2006. The drug benefit, termed Part D, is voluntary, administered by private companies with strict federal guidelines. Some 44.6 million of the 60 million Medicare beneficiaries are currently enrolled in a Part D plan.
The standard Part D benefit design for 2019 starts with a deductible of $415, then requires 25% co-insurance for the first $3,820 in total drug costs. In the next stage – often called the “donut hole” – beneficiaries continue to pay 25% of the cost out of pocket for branded drugs and 37% for generics. When total OOP spending reaches $5,100 (a level of drug costs equaling about $8,100), catastrophic coverage kicks in, and beneficiaries pay 5% of costs, with no limit.
In January, the Trump Administration proposed a step to mitigate some of the burden by ending rebates that pharmacy benefit managers (PBMs) require from drug manufacturers and replacing them with discounts that directly help the patient. If that measure goes into effect, list prices -- artificially inflated by the rebate system -- will fall, and that will mean that co-insurance percentages will be applied to lower dollar amounts.
In a fact sheet, the Department of Health and Human Services explained the current system it wants to change:
If the patient is spending out-of-pocket up to their deductible, they typically pay a drug’s list price. If a patient is paying co-insurance, as is common for expensive specialty drugs, they typically pay it as a percentage of a drug’s list price, even if the plan received a rebate. Patients with high out-of-pocket costs don’t see the benefit of rebates when they pay for their prescriptions. In some cases, a patient’s co-pay can actually be higher than the net price paid by the health plan after rebates.
For Lack of a Cap….
All well and good, but the glaring deficiency in Medicare is limitless Part D obligations for patients. The lack of a cap, that is, a limit on what beneficiaries have to pay out of their own pockets, hits Americans with serious diseases hard.
The catastrophic coverage zone, with its lack of a limit on OOP expenditures, hits Americans with serious diseases hard. The February KFF study, which looked at 28 specialty-tier Part D medicines, showed clearly that the largest contributor to OOP costs was not the deductible or next phase of co-insurance or the donut hole but this catastrophic phase. The researchers wrote:
More than half (61 percent) of expected annual out-of-pocket costs for these 28 drugs in 2019 would occur in the catastrophic phase, on average, which translates to $5,444 in out-of-pocket costs in the catastrophic phase alone.
And the new study by Cubanski and her colleagues found that between 2013 and 2017, OOP spending by the average non-subsidized Part D beneficiary rose by a stunning 71%.
The obvious answer is to eliminate co-insurance for beneficiaries beyond the limits of the donut hole. It is a change that 76% of Americans – including 75% of Republicans – favor, according to a survey earlier this year.
An alternative to a simple annual cap on Part D spending is adding a monthly co-payment limit per drug to go along with the annual cap. Many Medicare beneficiaries who take specialty medicines face large OOP outlays in the first few months of the year as they proceed through deductible, to initial co-insurance period to donut hole to catastrophic phase. To ameliorate the problem, the state of Colorado instituted a plan of “Consumer Cost Share for Prescription Drug Benefits” that required insurers in the state to offer the option of capped monthly co-payments for individual policies under the Affordable Care Act (this change did not apply to Medicare).
“For example,” says a Colorado regulatory bulletin, “if the plan design includes an individual annual out-of-pocket maximum of $6,000 per calendar year, the plan design cannot contain a maximum monthly copayment greater than $500 for each drug on the highest cost tier.”
A subsequent study by the research firm Milliman found that the Colorado program was working as planned, with no noticeable difference in premium increases for plans with fixed-dollar limited co-pays compared with standard co-insurance benefit designs. Insurance “markets did not appear to experience disruption following the implementation,” said the study.
A law in New Jersey to limit monthly co-pays to $250 per monthly prescription for Bronze ACA plans cleared the New Jersey Assembly by a wide margin in March and was reported out of a Senate committee on June 17. While the Colorado and New Jersey designs apply only to private insurance, they could easily be adapted to a capped Medicare Part D design.
The lack of a cap on Medicare is only the most obvious manifestation of the effects of the counterproductive nature of prescription pharmaceutical insurance. No wonder Americans, who pay an average of little more than $10 a month out of their own pockets for medicines, are anxious about drug prices. They know that if they get really sick, they could be paying many thousands of dollars a year – not once but, if they have chronic conditions, perhaps for the rest of their lives.
These sorts of personal disasters are precisely what insurance is supposed to defend against. We have automobile insurance, not to fill up the tank or replace the windshield wipers, but to repair serious damage in an accident or to protect us from hundreds of thousands of dollars of liability if we injure someone. Prescription drug insurance under Part D, by contrast, gets beneficiaries generic statin drugs at almost no charge but requires them to make OOP payments of $16,555 a year for Idhifa, a leukemia drug.
Insurance has it backwards, and Americans who have lower incomes or major health problems, or both, are suffering. Capping OOP expenditures for Part D, which has support in Congress from leading Democrats and Republicans and is part of a House reform bill, will help even more. Tara O’Neill Hayes of theAmerican Action Forum proposed a particularly well-designed plan for a Part D cap in a paper issued last August. She notes, “These changes are likely to lead stakeholders to alter their behavior in ways that reduce overall Part D expenditures for all stakeholders and ensure the program’s continued success."
Change appears warranted not just for government programs but for private ones as well.
The future of medical innovation is clear. It lies with specialty medicines for diseases that, in the past, killed patients or left them severely disabled and required expensive surgery and long hospital stays. These drugs are expensive – not only do they cost billions of dollars to develop, but a combination of factors come into play, including the number of patients affected (more patients pay a lower incremental cost while a smaller number of patients pay a higher incremental cost). In 2010, the U.S. spent $11.5 billion on the top 25 specialty drugs. By 2017, net spending reached $151 billion, or nearly half of all spending on medicines. Insurance companies have coped with innovation in the wrong way, by raising OOP costs for beneficiaries who suffer with the worst diseases.
Because of the structure of insurance policies, Americans in 2017 had to cover14% of prescription drug costs out of pocket but only 3% of hospital costs, according to the Centers for Medicare and Medicaid Services. Put it another way: U.S. hospital expenditures overall are 3.4 times greater than prescription drug expenditures, yet Americans spend 26% more out of their own pockets for drugs than for hospitals.
This makes no sense. Drugs, after all, are what keep people out of doctors’ offices and hospitals. Restructuring health plans of all sorts – beginning now with Medicare -- will go a long way toward removing a major source of anxiety and making Americans healthier and more productive.
In a speech on Oct. 25, President Trump criticized pharmaceutical companies for having “rigged the system” by charging higher prices in the U.S. than abroad. In fact, the system-riggers are not drug firms but foreign countries. Nearly all of them operate nationalized health care systems, where prices are set -- and access to medicines determined -- by government agencies.
This is the system that Americans have consistently rejected and one that, according to a new study, would wreak havoc on pharmaceutical innovation, yet a Republican Administration wants to import a key portion of it to the United States.
There is another approach, however, to closing the disparity – one that would seem better suited to President Trump’s own style and political philosophy. It is for the White House to exert pressure on the Europeans, Canadians, and others, mainly through trade agreements, to end their own price controls and stop their free-riding.
Importing Price Controls
Drug companies would like nothing better than to insert some equity into what American and patients in other countries are paying for drugs, but they can’t without the help of their own government. Most foreign nations run monopsony drug purchasing operations; in other words, government agencies are the only purchaser of pharmaceuticals. The result, as the President said, is that “American consumers…subsidize lower prices in foreign countries through higher prices in our country.”
The gap is real, but is the best way to narrow it what the Administration is advocating?
A few days after the President gave his speech, the Centers for Medicare and Medicaid Services (CMS), an agency of the U.S. Department of Health and Human Services (HHS), proposed a rulemaking that would create an International Pricing Index (IPI) Model. If it goes into effect, the IPI would establish drug price controls based on an index of what other countries pay. The index would apply to single-source drugs and biologicals in Medicare Part B, which reimburses for physician-administered treatments, such as infusions of cancer medicines.
In other words, for some of the most innovative and sophisticated treatments, the U.S. will be adopting a critical component of foreign nationalized health care systems. While that component is limited, it is a classic foot in the door, and according to new research, it will have immediate and detrimental consequences.
Price controls have had a devastating effect on the pharmaceutical industry outside the United States. Not only will fewer drugs be developed, but, if the U.S. adopts the European system, restrictions on access will surely follow. Of the 74 cancer drugs launched between 2011 and 2018, some 95% are available in the United States. “Compare that to 74% in the U.K., 49% in Japan, and 8% in Greece,” said the Wall Street Journal in an editorial last October.
Opposition From Conservatives, Economists
What makes the IPI so strange is that it is being advanced by a President who has generally taken a free-market approach to constraining drug prices – and has been more successful than his predecessors in achieving that goal. Data from the Bureau of Labor Statistics show that pharmaceutical prices have fallen during the 12 months ending in March. Why? Mainly because of increased competition from generics, whose approvals have been eased bynew Food & Drug Administration policies. HHS is also getting ready to end opaque rebates and require discounts to go to patients at the pharmacy counter.
The IPI, both because it relies on direct price-setting and on the policies of Europeans, would seem to contradict the Administration’s strategy – not to mention a worldview that is highly skeptical of the outsized role other governments play in their economies.
Whatever the Trump Administration’s motivations, it was no surprise that, within a month of the proposal, 57 conservative groups, from Grover Norquist’s Americans for Tax Reform to the Tea Party Patriots Citizens Fund, vigorously opposed it. In a letter to HHS Secretary Alex Azar, they wrote:
Conservatives have long opposed price controls because they utilize government power to forcefully lower costs in a way that distorts the economically-efficient behavior and natural incentives created by the free market.
When imposed on medicines, price controls suppress innovation and access to new medicines. This deters the development and supply of new life saving and life improving medicines to the detriment of consumers, patients, and doctors.
In 2004, during another period of interest in mitigating the European-U.S. price disparity, more than 200 American economists made the same point, signing a public letter that said in part:
Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives.
Among the signers were the late Nobel Prize winner Milton Friedman; the late Paul McCracken, chairman of the Council of Economic Advisers under President Nixon; and President Trump’s own first CEA chair, Kevin Hassett, who was then at the American Enterprise Institute.
But what the economists warned against – “imposing price controls here” in the U.S. – is precisely what the Trump Administration wants to do. The President tried to repeal the Affordable Care Act, or Obamacare, because of concerns about increasing the role of the U.S. government in health care, but the IPI Model goes much farther and would actually bring government-run health care from Europe, Japan, and Canada to the United States.
Economists recognize that price controls have consequences. Limiting prices means limiting revenues and earnings, which in turn means limiting the funds available for the research and development that produces medicines that have been so effective in recent years in fighting cancer, heart disease, auto-immune disease, HIV/AIDS, Hepatitis C and many more.
A study released at the BIO International Convention in Philadelphia last week by the consulting firm Vital Transformation found that the IPI…
The study also refuted the claim by HHS that R&D would be reduced by only 1% with the implementation of the IPI.
What Is the IPI, Exactly?
The new price controls would apply only to certain Medicare Part B drugs. According to a press release from HHS, the new system “would be phased in over a five-year period [and] would apply to 50 percent of the country.”
We still don’t know all the details, but, according to a policy brief from HHS titled, “What You Need to Know About President Trump Cutting Down on Foreign Freeloading,” the U.S. government will survey prices from a group of countries and then set a target price of “126% of the average price other countries pay” for physician-administered drugs. Studies differ widely on the precise difference between U.S. and foreign prices, but recent HHS research pegs the U.S. figure at 180% of average prices in a set of 15 European countries plus Japan. The price controls would be applied under Section 1115a of the Social Security Act and would not require Congressional approval.
Because income is a major factor in the pricing of all goods and services, including drugs, the choice of some of the countries used by HHS in its price survey is highly suspect. Greeks, for example, have a per-capita income that is 53% lower than that of Americans, according to the World Bank; Croatians, 58% lower; Czechs, 42%. None of the 16 nations has a higher per-capita income than the United States.
In its filing in the Federal Register on constructing an International Price Index, CMS said it was going to jettison Croatia, but “we are considering using pricing data from the following countries: Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, and the United Kingdom.” Left off is Switzerland, which ranks second to the U.S. in per-capita drug spending, as well as seven of the nine countries with the highest per-capita global GDP.
The list has come in for some deserved ridicule, and sources say that it may be adjusted to include more rich countries and fewer poor ones. But such changes do not address the bigger problem – which is that, by importing foreign price controls, the U.S. will do significant damage to pharmaceutical innovation, harming the health of Americans.
The Effect of Price Controls
The IPI proposal in itself will have an impact on non-Medicare as well as Medicare prices, according to the Vital Transformation study. It will have little or no effect on the out-of-pocket costs of Americans but will reduce the revenues – and, thus, the R&D investments, of companies responsible for the world’s most effective medicines. As a precursor of broader policy changes, its potential dangers are evident.
A study by Thomas Abbott and John Vernon, published by the prestigiousNational Bureau of Economic Research, modeled "how future price controls in the U.S. will impact early-stage product development decisions in the pharmaceutical industry." The researchers estimated "that cutting prices by 40 to 50 percent in the U.S. will lead to between 30 to 60 percent fewer R&D projects being undertaken (in early-stage development)."
A 2004 study by the U.S. Department of Commerce found that government price controls across just nine OECD countries were associated with an annual decrease in pharmaceutical revenues of $18 billion to $27 billion and reduced R&D expenditures of $5 billion to $8 billion. According to DoC, that would mean that three or four new drugs would not enter the market each year. A 2015 study, using the 2004 DoC results and published in the RAND Journal of Economics, found that seven to 11 new drugs would be lost.
But the irony is that, if implemented, the IPI Model’s meager or non-existent benefits will almost certain disappoint the people it is supposed to help. A study by the research firm Avalere in December found that the…
vast majority of seniors in Medicare would not see a reduction in their out-of-pocket (OOP) costs from the proposed IPI model because more than 87% of Part B beneficiaries have supplemental coverage (e.g., Medigap, employer sponsored, Medicare Advantage, Medicaid) that covers their cost sharing for Part B drugs.
Avalere estimates that less than 1% of seniors in Medicare would see reduced OOP costs (in a given year) if the demo were to include the 27 drugs listed in the Office of the Assistant Secretary of Planning and Evaluation (ASPE) Report that was released in conjunction with the [proposal]. This figure is a result of the small number of beneficiaries taking 1 of the 27 included drugs (about 4% of all Part B FFS enrollees), and the low number (10–13%) of beneficiaries without any supplemental insurance.
If Not Price Controls, What?
A little over a year ago, the President’s Council of Economic Advisers (CEA), which has been producing some of the most sensible work in recent years about health care costs, issued a report titled, “Reforming Biopharmaceutical Pricing at Home and Abroad.” It explained:
The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations…. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.
It’s significant that the CEA did not cite any version of a foreign pricing index as a solution – but the Council did not offer anything else either. We assume that the economists at the CEA understand that by importing price controls, Americans themselves would end up the biggest losers. Forcing price cuts in the U.S. would lead to fewer new medicines being developed, particularly the kind of high-value medicines for very sick patients covered by Medicare Part B.
But there is another approach that could prove effective. Rather than the U.S. adopting the European system, the Europeans should adopt the U.S. system.
The benefits, both to Americans and Europeans, would be significant. An article by Dana Goldman and Darius Lakdawalla of the Schaeffer Center at the University of Southern California estimated that ending price controls in Europe would result in $10 trillion in welfare gains over the next 50 years for Americans and $7.5 trillion for Europeans.
President Trump could deploy carrots and sticks in trade negotiations to get other wealthy countries to relax or end their price controls. Currently, drugs seem to be immune to the rules that apply to everything else. For example, imagine if U.S. automakers were told by the French government that any car they export to France could cost only $15,000. No U.S. Administration would tolerate such a violation of basic trade fairness, yet this is precisely the situation that prevails with medicines.
The Steps to Take
There are precedents. Last year’s bilateral trade agreement with the U.S. required South Korea to “amend its Premium Pricing Policy for Global Innovative Drugs to…ensure non-discriminatory and fair treatment for U.S. pharmaceutical exports.” And the new U.S. Mexico Canada Agreement, the successor to NAFTA, requires all three countries to provide 10 years of protection for patented biological products. Much more could be done.
A good first step would be for the U.S. to appoint a dedicated official in the Office of the U.S. Trade Representative to handle pharmaceutical matters, with the aim of ending pricing disparities and increasing the volume of U.S. exports.
Second, just as the FDA under Scott Gottlieb eased approval of generics and created more competition with branded small-molecule medicines, it should also clear the path for the approval and marketing of biosimilars to enhance competition with many of the Part B biologics that HHS wants to target through price controls.
In 2017 and 2018, Europe approved 31 new biosimilars; the United States, just 12. This is one area where we can import something from Europe – not a price-control index but a smart regulatory policy that encourages competition and lower prices.
Online newsletter dedicated to helping you understand the costs and benefits that sometimes lie obscured in our complicated health care system