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.
Six percentage points. That is the gap between the proportion of GDP the U.S. spends on health care and what other rich countries spend, according to a thorough study published last year in JAMA by three researchers affiliated with the Harvard T.H. Chan School of Public Health. What’s the source of the disparity?
Based on what you hear from media and politicians, a reasonable conclusion would be prescription pharmaceuticals. Even the Trump Administration, despite its professed preference for free-market competition over to nationalized medicine, wants to limit U.S. drug prices to an index of the pricesthat foreign governments set.
In fact, however, the Six Percent Gap has almost nothing to do with medicines. According to statistics from the OECD, the organization of developed nations, the U.S. spends 2.1% of GDP on pharmaceuticals; the average of the 10 other countries studied by the Harvard researchers is 1.5%. So that’s just six-tenths of a percentage point. A big chunk of the rest of the gap can be found in hospitals. The U.S. spends 5.8% of GDP on hospital care; the average of the 10 rich countries is 4%. That’s 1.8 percentage points. The rest of gap is filled with outpatient, physician, long-term care, and other costs.
Three Studies on Unhinged Hospital Costs
Not only are hospitals the main source of the disparity between health care spending in the U.S. and everywhere else, but also hospital costs, unlike pharmaceutical costs, appear to be coming unhinged. Consider:
These recent revelations once again raise a question that politicians and the media would rather ignore: Why is the spotlight on the cost of medicines when the cost of hospital care is far greater and, by some measures, out of control?
Some Facts About Hospital Spending
For the year 2017, the latest available statistics from the Centers for Medicare and Medicaid (CMS), hospital expenditures in the United States totaled $1.143 trillion. That’s about $3,500 per American. By comparison, prescription drug spending in 2017 was $333 billion, or about $1,000 per person. More facts about the scale of hospital costs:
Hospitals Change, But Efficiency Lags
The nature of hospitals is changing, and, while you would think that the change will lead to more efficiencies and lower costs, the opposite is happening. More and more, hospitals are becoming centers of out-patient, short-term care. For example, the total number of hospital admissions in the U.S. dropped from 38.9 million in 1980 to 35.1 million in 2015 (the latest statistics from theCenters for Disease Control) even though the U.S. population rose over this period by more than 100 million. The average length of a hospital stay during these 45 years fell from 10 days to six days, and the number of beds has dropped by half since 1975. Between 2000 and 2015 alone, the rate of hospital stays for those over age 65 dropped by 25%. Roughly half of appendectomy patients are going home the day of the operation; in the 1960s, the surgery required a stay of nearly a week.
Americans do not need intense, longer-term hospital services as much as they did in the past, and a major reason is that medicines are keeping them healthy enough to avoid surgeries and long stays. Just one examples: From 2001 to 2014, the rate of atherosclerotic cardiovascular disease (ASCVD) inpatient stays among adults decreased 41.5%. (ASCVD is defined here as coronary artery disease, acute myocardial infarction, or ischemic stroke.) This period coincides with the development of important medicines to reduce cholesterol and high blood pressure and to combat other precursors of ASCVD.
Hospitals, however, remain inefficient places for administering health care. Astudy by CMS found that over the period 1990-2013, the average annual growth rate of multi-factor productivity was only 0.1% to 0.6% (depending on methodology). “Multi-factor productivity” (MFP) is the change in outputs that results from a change in labor and capital inputs. Along with population increases, it is the main factor in GDP growth. For private non-farm businesses in the U.S., the rate was 1.1%.
Even as hospital beds and stays have fallen, hospital employment has risen – from 4,662,000 in April 2009 to 5,229,000 ten years later – an increase of 12%, according to the Bureau of Labor Statistics. As The Economist magazine reported Aug. 12 issue: “America spends vastly more on administration [than Europe]: 8% of health spending versus 2.5% in Britain. As of 2013, Duke University hospital had 400 more billing clerks (1,300) than hospital beds (900).”
While hospital stays are decreasing, the cost of procedures done in the hospital is rising. Between 2005 and 2014, the average cost per hospital stay, adjusted for inflation rose a total of 12.7%, according to a 2017 H-CUP report. “The cost of a maternal (childbirth) hospital stay rose 12.8% (again, adjusted for inflation); neonatal stay, 19.2%; surgical, 16.4%; injury, 17.1%.”
Government More Problem Than Solution
What is the problem? An excellent report in December titled, “Reforming America’s Healthcare System Through Choice and Competition,” by the departments of HHS, Treasury and Labor, points to government itself as responsible for much of the problem, citing “misallocation of resources and widespread inefficiency in the healthcare system, particularly in public programs.” Says the report:
Since the government share of healthcare spending is so large, government rules impose inefficiencies on private firms dependent on public funding, even if they also serve privately funded patients. Simply put, government has played a large role in limiting the value Americans obtain for their healthcare spending. The United States is spending a large and increasing share of its national income on healthcare, and much of this spending does not lead to citizens living longer, healthier lives.
The HHS-Treasury-DoL report also pointed out that both hospitals and physician services have become more and more concentrated, with fewer players in big markets. The proportion of primary-care physicians working in a hospital or health care system rose between 2010 and 2016 from 28% to 44. Zack Cooper, a co-author of the study published in Health Affairs and an associate professor of health policy at Yale University, was quoted in Modern Healthcare as saying:
What is most worrying to me is that there has been fairly profound consolidation among hospitals and when they gain market power they have the ability to raise prices. They have the ability to gain more favorable contractual terms, which allows them to raise prices and resist the new, more sensible payment reforms.
A study published in Health Affairs in 2014 found “that an increase in the market share of hospitals with the tightest vertically integrated relationship with physicians--ownership of physician practices--was associated with higher hospital prices and spending.”
For the 10 years ending in February 2018, a study found, an average of 14 community oncology practices a month have been closed, acquired, or merged into hospitals. And a study last year found that between 2004 and 2014, the proportion of chemotherapy infusions conducted in hospitals for commercially insured patients rose from 6% to 43% -- and the cost of such treatment in a hospital as opposed to a doctor’s office for a day was more than twice as high on average.
Example of What’s Wrong: 340B
Government policy is encouraging concentration. Consider the 340B program, established more than a quarter-century ago as a way to help poor hospital patients. In order to participate in Medicaid, drug manufacturers have to provide outpatient medicines at prices discounted by 20% to 50% to hospitals that serve a disproportionate share of low-income Americans. The hospitals are then allowed to claim full reimbursement at undiscounted rates and are supposed to use this excess for charitable care.
But, as we pointed out in Issue No. 30 of this newsletter, the program is not working as promised. It has become just another subsidy to support inefficient hospitals, and it is encouraging these hospitals to swallow up other health practices, which then get to take advantage of 340B. Meanwhile, the vagueness of the law allows hospitals to ignore the obligation to help poor patients and for hospitals that serve non-poor patients to get benefits as well.
In a paper in 2014, Rena Conti of the University of Chicago and Peter Bach of Memorial Sloan-Kettering pointed out how 340B has set in motion factors that raise overall health costs:
The 340B program creates a widening disparity between noneligible and eligible hospitals and affiliated oncology practices in the profits they are able to obtain from the care of well-insured patients with cancer. This disparity is likely underlying trends toward consolidation and affiliations between community-based oncology practices and 340B-eligible hospitals.
This disparity may also lead to shifting of care out of community-based oncology practices and into hospital-based infusion suites. These trends will tend to increase total spending. Cancer care delivered in a hospital-based outpatient infusion suite is typically more expensive than that delivered in a physician’s community-based office.
Weak Attempts to Address Costs
So far, government attempts to address the hospital-cost issue have been weak. In an attempt to increase competition, HHS is now requiring hospitals to disclose their prices. But the information that hospitals are providing is largely indecipherable. Take a look at this “Chargemaster” Excel spreadsheet provided by a hospital chosen at random, Methodist LeBonheur Healthcare of Memphis. What do you suppose “FNA BX W/CT GDN 1ST LES” means? It costs $1,604. In addition, these prices are meaningless to the 91% of Americans with health insurance. They want to know what they have to pay.
If, however, you want to get an idea of the total cost – to insurers and individuals – of major procedures, there are resources. The average cost of a hospital stay for pneumonia, for example, is $10,000; for the fracture of a lower limb, $17,000; for a heart valve disorder, $42,000. A liver transplant averages $813,000; kidney transplant, $415,000. An MRI averages $1,119 in the U.S. and $503 in Switzerland; an appendix removal is $15,930 in the U.S. and $2,003 in Spain; and a C-Section is $16,106 in the U.S. and $7,901 in Australia.
Why aren’t these figures more daunting to individuals and politicians? A big reason is the structure of insurance policies, both government and private. While hospital spending is more than three times pharmaceutical spending overall in the United States, individual Americans pay out of their own pockets$47 billion a year for pharmaceuticals compared with $34 billion for hospital services – or 38% more.
Let’s put the issue as simply as possible. In one sector of health care – hospitals – costs are rising at more than 4% annually, mainly because prices are rising. In another sector of health care – pharmaceuticals – costs are flat, and prices are flat. Hospitals represent about one-third of total health care costs; prescription pharmaceuticals, about one-tenth. If the aim is to constrain costs, where would any sensible public policy effort concentrate?
Three months ago, Alex Azar, the HHS Secretary, explained, in his typically blunt fashion, why the Trump Administration wanted to end the “hidden system of kickbacks to middlemen.” Azar was referring to payments extracted from drug manufacturers by powerful pharmacy benefit managers (or PBMs), companies that determine the medicines that patients can access under their insurance plans.
Azar left little doubt why change was necessary. “Every day,” he said, “Americans, particularly our seniors, pay more than they need to for their prescription drugs.” By ending “this era of backdoor deals,” he continued, President Trump will “deliver savings directly to patients when they walk into the pharmacy.”
In short, the President wants to lift the burden of drug costs for patients. He is not out to cut federal spending or transfer wealth from one industry to another. He wants people who are sick to save some money and improve their health. That has been the Administration’s intention from the start, and it has achieved notable – though often unnoticed -- success.
The Food & Drug Administration took the first big step by easing approval of generic medicines to increase competition and drive down prices. The Bureau of Labor Statistics reports that the pharmaceutical price index is down 0.4% for the year ending March 31, compared with a 1.9% increase in U.S. prices overall. Converting drug rebates to consumer discounts is the Administration’s second big step. We explored the measure at length in No. 43 of this newsletter, but, the rebate proposal is so important that developments in the past two weeks prompted this update.
CBO Issues Report on Budget Impact
On Feb. 6, the Department of Health and Human Services published a proposed rule in the Federal Register that seeks to replace rebates to PBMs, insurers and health plans with discounts to patients at the point of purchase, perhaps as soon as next year. The rule, which would end a safe harbor for rebates that would otherwise have violated the 1972 federal Anti-Kickback Statute, applies only to Part D of Medicare and to managed care organizations (MCOs) that participate in Medicaid, but the anticipated change is alreadyaffecting some commercial insurance plans.
The Congressional Budget Office (CBO) last week issued a seven-page report on the possible effect of the rule on the federal budget. CBO estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029. That looks like a large number, but put it in perspective. Total Medicare and Medicaid spending over the 10-year period is projected at $17.1 trillion, so the increase would be about 1%, or about $50 per year for every American. More important, the CBO report was based on necessarily shaky assumptions. Change the assumptions, and you get much different results – including, as one respected research firm found, governmentsavings.
What is not disputed is that Medicare beneficiaries will be winners – which was, after all, the very purpose of the change. Not only will consumers pay less at the pharmacy but they will be more likely to fill their prescriptions and “better adhere to their prescribed drug regimens if their costs were lower, as they would be under the proposed rule.”
More Medicine Utilization Means More Savings
on Hospital and Physician Care
Greater utilization is a cost to the government that CBO estimates at about $10 billion. But, says the CBO, “the increase in the number of beneficiaries following their drug regimens would also reduce spending for services covered under Parts A and B of Medicare, such as hospital and physician care, by an estimated $20 billion over that period.”
As obvious as this statement may be, it is a remarkable one for a government budget agency to make: Spending more on drugs means spending less on health care overall because drugs make people well, so they don’t have to use hospitals and doctors as much. The CBO even published a monograph on this subject in 2012 titled, “Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services.”
For example, Hepatitis C (HPC) kills more Americans than any other infectious disease. Before the advent in 2014 of the first drug that cures HPC, a significant proportion of patients with the disease ended up saving their lives only through a liver transplant, at an average cost of $813,000. That expense – not to mention pain and suffering caused by the disease itself – can be avoided now with a three-month course of a medicine at a total cost to all payers of less than one-tenth the price of a transplant.
Very simply, lower out-of-pocket drug costs (as the new rebate rule will produce) will lead to more people taking the medicines they need, in turn making them healthier.
Milliman Finds Very Different Result
Still, despite this saving, the CBO finds that net $177 billion loss to the Treasury over five years. But CBO also admits in its report that other organizations have come up with different results.
The consulting firm Milliman engaged in a thorough study for HHS earlier this year that looked at seven possible scenarios, each distinguished by different behavioral changes. Milliman found that in four of the scenarios, the government actually saved money – as much as $100 billion in one case. In three scenarios, the net increase in government spending ranged from $18 billion to $139 billion. In another study, the Office of the Actuary of the Centers for Medicare and Medicaid Services (CMS) estimated that cost to the government will total $196 billion.
The CMS study, which was released in August 2018, projected that the out-of-pocket savings to consumers would total $93 billion and be offset by premium increases of $50 billion.
Those anticipated premium increases, as Wayne Weingarten of the Pacific Research Institute wrote in Forbes, are evidence “that the patients who require expensive medicines have been subsidizing the premiums for all other patients. Such a financial arrangement violates the fundamental premise of health insurance.” It does, but the arrangement, unfortunately, is at the heart of our upside-down system of reimbursement for medicine costs. Ending the current rebate system will help patients who are carrying the heaviest burden today because list prices for drugs, on which co-payments are based, will decline.
And put those potential Part D increases in context. For 2019, the average Part D premium is $32.50 a month, down from $33.59 in 2018. HHS forecasts that, after rebate reform, premiums will rise between $2.70 and $5.64 a month – well below the average out-of-pocket savings and a special boon to seniors who rely on more advanced medicines.
How Will Behavior Change?
More dubious was CMS’s forecast that pharmaceutical manufacturers would not turn all of the current rebate money into discounts. Instead, the manufacturers “would withhold about 15 percent…and would negotiate discounts approximately equal to the remaining 85 percent.” CBO concluded that this estimate was “reasonable and adopted it.”
But why is it reasonable? Using economic common sense, we would expect that the future net price (where rebates are replaced by discounts) should be approximately the same as the current net price (that is, under the rebate regime). The current net price is the result of hard bargaining between drug manufacturers and PBMs; it’s doubtful that the bargaining would be much different under an all-discount regime.
In fact, in one of its scenarios, Milliman makes the assumption that PBMs will respond to being deprived of rebates by tightening their formulary controls and even forcing manufacturers to make additional price concessions, “which could be even greater than the equivalent rebate arrangements today.”
CBO neglects to point out that this trend – the increased administrative burden and restricted access for patients and the increased cost-sharing – has been growing in recent years and can be expected to continue. The Milliman scenario that reflects this narrative, which the researchers call “Increased Formulary Controls and Increased Price Concessions” and which produces the $100 million in savings for the U.S. Treasury, may be the most plausible of all.
And let’s not forget one of the major aims of the reform: increasing transparency. Today, rebates are a closely secret, but imagine what will happen with reform. The largest concessions a manufacturer makes to a plan will suddenly become known to all the other plans, putting downward pressure on prices. This is another reason that post-rebate reform price concessions could be greater than they are today.
Making projections on the effect of ending rebates on government spending means guessing the behavior of some huge players: consumers, PBMs, insurers, pharmacies, and drug manufacturers. CBO and CMS do not have a great track record in this regard. When Medicare Part D was enacted, CBO projected that the average premium in 2013 would be about $60. In fact, it was $31.17.
Eyes on the Prize
The precise dollar effect of the reform may be a mystery, but the value to senior Americans is not. A year ago, HHS issued a blueprint called, “American Patients First.” Its aim was clear: “bringing down the high price of drugs and reducing out-of-pocket costs for the American consumer.”
Under the current, almost absurdly complex system for pricing drugs and reimbursing their costs, rebates play an outsized and pernicious role. They are opaque, they provide a perverse incentive to increase list prices, and they harm patients by boosting what they have to pay out of their pockets. Ending rebates addresses all of those deficiencies at what is at worst a low cost to the Treasury – and what may be no cost at all, or even a small profit.
The CBO study, in fact, can be seen as a form of indirection. It’s critical to keep our eyes on the prize. The goal is constraining costs to consumers and improving their health. This, undoubtedly, rebate reform will do.
Every few years, the idea of importing medicines from other countries into the United States comes into vogue. In large part because drug prices are set by foreign governments, many medicines are cheaper in Europe and Canada. So why shouldn’t Americans benefit from lower prices abroad?
Two reasons: First, importation is unsafe. Second, importation doesn’t actually save much, if any, money.
Popularity Among Politicians, Even Republicans
Alex Azar, the Secretary of Health and Human Services (HHS), has called importation “a gimmick.” He might have added the adjective “dangerous.”
Still, there is no denying importation is popular with politicians. While left-leaning legislators like Sen. Bernie Sanders (I-Vt) and Rep. Elijah Cummings (D-Md) have been advocating importation for years, the notion is spreading in Congress among more centrist Democrats and with Republicans. For example, in January, Sens. Charles Grassley (R-Iowa), the chair of the Finance Committee, and Amy Klobuchar (D-Minn), a candidate for president, introduced the Safe and Affordable Drugs From Canada Act.
But much of the action this time around is in the states, and Canada is the favorite prospective source. Even the Governor of Florida, a conservative Republican named Ron DeSantis, is on board. “While our prices remain high,” said DeSantis in February, “our neighbors in Canada are spending significantly less for the same drugs. These price disparities are indefensible and inexcusable and I am ready to act.” DeSantis claimed in a press conference that President Trump “not only supports this, he is enthusiastic.”
Florida passed a limited importation bill in its House of Representatives on April 12 by a margin of 93-22. A key Senate committee passed a more restrictive version on April 10, and that bill is headed to the full Senate in Tallahassee.
“Legislation has been advanced this year in about a dozen states that would advance wholesale drug importation programs,” wrote Shefali Luthra and Phil Galewitz in Kaiser Health News. Among the states, according to the National Academy for State Health Policy, are traditionally Republican Missouri (SB 722), Oklahoma (SB 1381), Utah (HB 163), and West Virginia (HB 4294).
Those states, write Luthra and Galewitz, “are leaning on a provision in a 2003 law that empowers the [U.S.] Department of Health and Human Services to approve state programs to import medications from Canada.” But to gain that approval, the HHS Secretary has to certify the practice would pose “no additional risk” to the public’s safety and “result in a significant reduction” in cost for the “American consumer.” As a Wall Street Journal editorial on April 16 commented, “These are high bars,” and “No secretary has ever made such a judgment, and it’s hard to see why Florida deserves such a special federal blessing.”
Where the Administration Seems to Stand
Would HHS approve mass drug imports from Canada or any other country? Azar’s posture can be characterized as disdain. The word “importation” did not even appear in the HHS “Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” issued last May.
The Food & Drug Administration, which is the HHS agency charged with the safety of medicines, has a long record of opposition to importation, in both Democratic and Republican administrations. Scott Gottlieb, the departed FDA Commissioner was a staunch foe. Two years ago, just before Gottlieb took office, his four predecessors – two appointed by President Obama and two by President George W. Bush – came out against legalizing drug importation, writing that it would ‘‘harm patients and consumers and compromise the carefully constructed system that guards the safety of our nation’s medical products.’’
President Trump, of course, is Azar’s boss. The White House has not officially rejected importation, but it has not embraced it either. After DeSantis’s statement, Judd Deere, a presidential deputy press secretary, said that Trump “has instructed his staff to meet with the governor to learn more details about what he is considering…. The Administration also looks forward to educating Governor DeSantis on the many policy options the Trump Administration has proposed to reduce costly drug prices for American families.” (P.S.: None of those options includes importation.)
In the past, Trump has shown an interest in importation. During the campaign, his seven-point health plan included this sentence: “Allowing consumers access to imported, safe and dependable drugs from overseas will bring more options to consumers.”
It appears, however, that the President has abandoned his affection for importation – at least for now. Instead, his Administration has focused on removing regulatory barriers to letting private-sector competition work its will on prices.
As a result, President Trump has presided over the first decline in drug prices in decades. The latest data from the Bureau of Labor Statistics show that the average price of a drug prescription in America was 0.4% lower in March 2019 than it was in March 2018. That marks the eighth time in the last 11 months that drug prices were below year-ago levels. The President has a strategy that is working. He apparently doesn’t have to turn to what his HHS Secretary calls a “gimmick.”
Some 3.8 billion prescriptions were filled at U.S. pharmacies last year – a figure that does not include drugs dispensed by hospitals and in doctors’ offices. Ensuring that these medicines don’t sicken or kill people is an enormous task, and it’s working. Americans have confidence in their supply of prescription drugs. But would they still, in the face of a flood of medicines from other countries?
The FDA explains on its website:
Many drugs sold in foreign countries/areas as "foreign versions" of approved prescription drugs sold in the United States are often of unknown quality with inadequate directions for use and may pose a risk to the patient's health….
The manufacturing facilities and procedures for approved products are also carefully regulated by FDA to ensure product integrity…. FDA cannot assure the consumer that the drug purchased in the foreign country/area would be the same product his or her physician's prescription is written for.
Former FBI Director Louis Freeh led a team on an extensive study in 2017 of the effects of importation on security. He concluded that importation “would increase the threat of illegitimate products entering the United States, fueling criminal organizations’ activities and profits “and that “already overburdened law enforcement and regulatory capacity would be unable to ensure a safe prescription drug supply.”
The Freeh Report noted that the 1987 Prescription Drug Marketing Act established a “pedigree” requirement for prescription drugs. The Act says, “A drug pedigree is a statement of origin that identifies each prior sale, purchase, or trade of a drug, including the date of those transactions and the names of all the parties to them.” It took over a century to develop this closed system, and it works well – despite constant challenges. Adding importation to the pedigree would present a bureaucratic nightmare.
The volume of the illegal and counterfeit drug trade is staggering. The World Customs Organization pegs the global market for counterfeits at $200 billion, says the Freeh Report. In Operation Pangea last year, Interpol agentsconducted raids in 116 countries, seizing 10 million units of medicines and arresting 859 suspects.
With all these safety concerns, an important issue is who will be held accountable if a patient suffers an adverse event because of faulty imported medicine. Clearly, legislators will be blamed, but will there be liability for the pharmacies and distributors who are sending medicines back to the United States? Inevitably, someone will be held responsible.
But What About Canada?
Even imports from highly developed nations to the U.S. would endanger Americans’ health. Counterfeit drugs from countries like China could be shipped to Canada and then sent to the United States. An FDA official testified in 2007, “Of the drugs being promoted as ‘Canadian,’ 85 percent appeared to come from 27 countries around the globe.”
More recently, Gottlieb, the FDA Commissioner, stated in February, “When a consumer goes online to buy medicines purportedly from Canada, they may get a medicine sourced from elsewhere that could be counterfeit, expired or misbranded.” Gottlieb made the comments while the FDA was issuing anenforcement letter to the Canadian company CanaRx, which the U.S. regulator accused of “facilitating the distribution of unapproved new drugs and misbranded drugs to U.S. consumers. These drugs are potentially dangerous to U.S. consumers.”
Last year, another large online Canadian pharmacy, Canadadrugs.com, was fined $34 million for shipping counterfeit cancer drugs like Avastin and Altuzan into the United States. The company’s domain name was seized by the U.S. Department of Justice and the FDA.
Canada is a country with a population of 37 million, just one-ninth that of the United States. In fact, Florida alone has a population that is 22 million, or about 60% that of Canada. How could Canada ensure that drugs that leave its borders are safe for millions of Floridians or tens of millions of Americans? Are state legislators in Florida ready for the consequences of unsafe or counterfeit medicines poisoning their constituents?
Finding Medicines to Re-Import
Canada’s size also plays a role in any assessment of whether importation would actually save U.S. patients any money. Understand first that importation is actually re-importation. In the best-case scenario of politicians in states like Florida, drugs would go from U.S. manufacturers to Canada and then come back to the United States.
In Canada, the prices of branded drugs are set by the Patented Medicine Prices Review Board.
Imagine a drug that currently costs $100 per monthly prescription in Canada and $130 in the U.S. Imagine as well that the drug manufacturer sends enough pills to Canada to fill 100,000 monthly prescriptions. Now imagine that a small slice of Americans want access to those drugs – say, 20,000 prescriptions. Where will the pills come from?
It’s doubtful that the U.S. manufacturer would have to acquiesce in diverting an increased supply of the drug from the U.S. to Canada, where the company would receive less money. That makes little sense. As Azar said last year:
[Canada is] a lovely neighbor to the north, but they’re a small one. Canada simply doesn’t have enough drugs to sell them to us for less money, and drug companies won’t sell Canada or Europe more just to have them imported here.
So where do the 20,000 prescriptions come from? From Canadians who need them. Would Canada’s government allow such a diversion? Highly unlikely.
“If you think about the practicalities of trying to feed a large section of the U.S. market from Canada, it doesn’t make much sense,” said Michael Law, a pharmaceutical policy expert and associate professor at the University of British Columbia’s Centre for Health Services and Policy Research, quoted byKaiser Health News. “There are too many steps along the way where people will shut it down.”
In limited cases, the FDA does allow the direct importation of some drugs from Canada for personal use. According to a paper, “Drug Reimportation Practices in the United States,” by Monali J. Bhosie and Rajesh Balkrishnan in the Journal of Clinical Therapeutics and Risk Management in 2007, “A few US drug companies have already cut off drug supplies to the Canadian pharmacies that sell prescription drugs to US consumers. This has led to serious drug shortages at these pharmacies.”
Not only manufacturers but insurers may be reluctant to cooperate with a drug importation scheme. Will insurers agree to pay for imported drugs? After all, a half-price $100,000 is still $50,000. Will patients be able to use their insurance to pay for imported medicine?
According to CBO, the Price Reduction Is 1% or Less
But suppose that U.S. manufacturers did send extra drugs to Canada and suppose that Canada allowed importation. In that case, middlemen, including distributors and pharmacy benefit managers, would certainly take a cut. Simple economic theory would lead to the conclusion that the final U.S. price would be set, not by the price in Canada but by forces of supply and demand in the United States.
In 2004, during a congressional session when a drug-import bill passed the House but died in the Senate, the Congressional Budget Office (CBO) conducted what is probably the most definitive report on the prospective effects of importation.
The CBO concluded that “permitting the importation of foreign-distributed drugs would produce at most a modest reduction in prescription drug spending.” Even if imports were allowed from “a broad set of industrialized countries,” the reduction would be about “$40 billion over 10 years, or about 1 percent. Permitting importation only from Canada would produce a negligible reduction in drug spending.”
The report is worth quoting at length on the process and the economics that would prevent the kind of savings that some politicians expect:
Permitting the importation of foreign-distributed drug products would not necessarily result in much additional volume reaching the United States. Many foreign governments…might act to limit exports to avoid shortages. Furthermore, the possibilities of parallel trade are limited by drugmakers’ ability to restrict shipments of patented drugs to markets outside the United States, effectively limiting potential imports. Drugmakers could also try to stipulate in sales agreements that prices be contingent on products not being sold across borders.
While an individual can fill a prescription in another country and realize savings reflecting the full difference in price, the same would not be true for the health care system as a whole. Potential overall savings would depend not just on the price difference but on the size of the parallel trade market, with greater potential savings accompanying greater potential import volume. For example, expanded parallel trade with Canada by itself would offer sharply limited prospects for aggregate savings given the small size of the drug market in Canada.
CBO defines “parallel trade” as the “legal movement of products across borders without the explicit consent of the manufacturer, usually in response to price disparities.” Studies of parallel trade in pharmaceuticals in Europe have found “only limited effects on patients and health insurance systems, and on the prevalence of low prices,” according to Joan Costa-i-Font of the London School of Economics. An academic paper he wrote with Panos Canavos concluded, “Instead of a convergence to the bottom in EU pharmaceutical prices, the evidence points at ‘convergence to the top.’”
The same phenomenon could repeat itself if importation is allowed into the United States. “Obviously, manufacturers respond to these sorts of threats of importation by trying to raise prices in the countries that could become sources of export,” said Patricia Danzon, a professor emeritus at the Wharton School at the University of Pennsylvania, quoted in the Washington Post.
The Truth About Canadian Vs. U.S. Prices
Certainly, some individual medicines are cheaper in Canada, but many are not, according to the Bhosie-Balkrishnan study cited above: “A Canadian study of 27 top-selling generic prescription drugs concluded that three-fourths of those drugs cost less in the US, and Canadians could save millions by access to the US versions.” That study confirmed a smaller one by the FDA itself, which found that five of the seven top-selling generis in the United States were cheaper than the same generics in Canada.
In 2014, Canada’s Globe and Mail reported that a new study by the University of Ottawa and the Bruyere Research Institute found that Canadians are “spending much more than people in the…United States” for six drugs studied, including popular medications for cholesterol and high blood pressure.
Generics account for nine out of ten U.S. prescriptions, and an extensive studyof the prices of generics around the world found that U.S. generics, on average, cost just 8% more than Canadian.
Finally, comparisons between individual Canadian and U.S. drug prices frequently pit apples against oranges. Unlike the Canadian price, the U.S. price is almost always gross – that is, without the subtraction of discounts and rebates. As HHS has pointed out, “The average difference between the list price of a drug and the net price after a rebate is 26 to 30 percent.”
Importing More Than Drugs
While re-importation is largely a myth, it is far from an innocuous idea.
Canada, Europe and other countries have been free-riding on U.S. innovation for decades. The funds needed to develop new medicines come from the profits that drug manufacturers earn, and those profits come mainly from the United States because the nationalized health care systems of foreign governments control drug prices.
The dangerous strategy that is gaining favor today is not merely the importation of drugs but the importation of those price controls – indeed, the importation of an entire top-down, government-run health care system. Incredibly enough, the Trump Administration has proposed setting the prices of some medicines using an index of prices in other countries.
Importing features of nationalized health care systems to the U.S. will have two consequences: innovation will be more rare, and access to medicines will be more limited. The disparity between U.S. and foreign drug prices rankles Americans, and it should. But there are other ways to address it. The most obvious is for the Trump Administration, which prides itself on its ability to press other governments into trade deals that are beneficial to the U.S., to demand that other countries stop fixing the price of U.S. goods (in this case, drugs) they import.
The White House can start by naming a special pharmaceutical negotiator to the Office of the U.S. Trade Representative. That will have more effect on ending the drug-price disparity that all the importation “gimmicks” politicians can devise.
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