At a press conference announcing the Administration’s plan to replace Obamacare, the new Secretary of Health and Human Services, Tom Price, referred to the “incredible increase in drug prices.”
Really? In its recently released Drug Trend Report, a thorough 116-page tome, Express Scripts, a large pharmaceutical benefit manager (PBM), found that per-person spending on prescription drugs rose 3.8% in 2016 – a decline of more than one-fourth compared with the growth rate in 2015. And, more directly addressing Dr. Price’s comment, the report found that “prescription utilization increased by 1.3%, while unit cost increased by 2.5%.”
That figure – 2.5% – is exactly equal to the year-over-year increase in the Consumer Price Index, that is, the inflation rate.
This 2.5% increase is confirmed in statistics reported recently by a smaller PBM, Prime Therapeutics, with 20 million members.
Specialty Prices Rise More
Some drug prices increased more than others, of course. New pharmaceuticals, many of them attacking terrible diseases like cancer, involve enormous investment. “Specialty medicines,” a phrase describing drugs of high complexity and cost, increased in unit cost by 6.2% in 2016 while their use rose 7.1% for a total spending increase of 13.3%. But spending on traditional drugs, according to the Express Scripts study, actually declined by 1% as unit costs fell by 2.3%.
Those traditional drugs are the ones most of use; they accounted for two-thirds of all drug costs in 2016.
Express Scripts also reported that “nearly one-third of our clients saw per-person spending on prescription drugs decrease in 2016 [our emphasis].” And the average out-of-pocket cost for a prescription rose a mere 9 cents, or less than 1%.
Still, Americans insured by Express Scripts paid out-of-pocket 15% of the total costs of their medicines. That is the same proportion that all Americans paid, according to the latest figures from the Centers for Disease Control. And 15% is a significant number, compared with the tiny portion of their hospital expenses Americans pay out-of-pocket: just 3%.
There are awfully few sectors of the economy where prices actually fall. But take a look at what’s happening with medicines, according to the Drug Trend Report…
Blood-Pressure and Heart Disease: Unit Cost Down 9%
Spending on drugs to treat high blood pressure and heart disease fell by 9.1% in 2016 as utilization increased 1.5% and unit costs dropped an incredible 10.6%. Generics account for 98% of all spending on these drugs, which are great examples of how drug prices fall over time after the initial breakthroughs. In addition, these heart-disease drugs preventspending in other parts of the health-care system. Patients who take their medicines stay out of doctors’ offices, clinics and hospitals. By the way, Express Scripts sees blood-pressure and heart-disease drug costs falling even more in 2017 and declining by a total of 29% over the next three years.
The unit-cost of cholesterol drugs dropped 6.5%, and the cost of asthma drugs fell 2.6%. Traditional drugs for pain and inflammation, which are used widely, increased only 0.9% in unit cost.
The number-one traditional medicine (based on spending), according to Express Scripts, is the diabetes drug Lantus. Its unit cost fell last year even though utilization rose 2.3%. Two other drugs in the top 10 – for heartburn/ulcer and for attention-deficit disorder – also fell in price.
Drugs for Hepatitis C -- a disease that afflicts the liver and can lead to cancer, a liver transplant, or death – have been the object of intense political interest ever since the introduction of Sovaldi in late 2013 at a list price of $1,000 per pill, or $84,000 for a full 12-week regimen. That list price bore little relationship to the amount insurers actually paid. For example, a CMS data release last year showed that in 2014, the average cost of a full Hep C treatment was about $27,000. The pent-up demand for these drugs – which actually cure the disease – played a significant role in increasing overall U.S. drug costs.
Big Decline for Hep C as Competition Increases
Lately, more anti-Hep-C drugs have been approved, and competition has driven down prices further. The unit cost of Harvoni, the most popular medicine in the class, dropped 4.3% last year, and, according to Express Scripts, the average cost of a Hep C drug fell 6.7%. Utilization dropped 27.3% for a total spending decline of about one-third. The forecast for the next three years is for spending to fall 65% below 2016 levels.
Part of this decline is the result of a backlog of patients being cured of the disease. Hepatitis C drugs are practically unique in that way. Unlike, say, drugs for chronic diseases like HIV/AIDS or diabetes, they are not taken forever. Still, some patients with Hepatitis C – and other diseases – may be denied the care they need as PBMs get between doctor and patient.
Yes, the price of specialty drugs has been rising. Six of the 10 most popular drugs in this class increased in unit cost by double-digits in 2016 – but none by more than 17.9%. That was Humira, an anti-inflammatory, whose utilization increased 10.5%.
Not All Drug Spending Goes to Companies That Make Drugs
PBMs like Express Scripts work for health insurers, and their job is to keep drug spending down. It is an important function, and the PBMs are rewarded for their efforts, but the opaque system of rebates and discounts they promote obscures the amount actually realized by manufacturers of medicines.
A study published in January by the Berkeley Research Group found that, on average, “brand manufacturers realize less than half of total drug expenditures” and that “over time, the share of gross drug expenditures realized by stakeholders declined for manufacturers and increased for non-manufacturers.”
In other words, branded-drug companies, often painted as the villains of the health-care system, make less off the sale of their product than non-manufacturers. The Berkeley study found that 42% of initial gross drug expenditures go to pharmacies, wholesalers, patients, governments, insurance companies, and PBMs, often in the form of rebates and fees. The rest is split between brand manufacturers (39%) and generic makers (19%).
Drug Prices Rises Are Not ‘Incredible’
No one is saying that the price of some drugs isn’t increasing, but the overall increase in drug prices is not “incredible.” It is equal to inflation. And drug costs overall – including utilization – are rising at a lower rate than costs in the hospital and physicians-and-professional-services sectors of health care, as the recent Altarum study showed. And those sectors are both far larger than pharmaceuticals.
The key is that the web of health-care costs is complicated, and it needs to be addressed in a serious and sophisticated manner. The Berkeley study strikes just the right tone:
Within the highly complex U.S. pharmaceutical market, myriad entities play a role in the process of making, shipping, filling, and paying for a prescription drug, and the dollars spent on prescription drugs are not realized by any one stakeholder.
As competition in the pharmaceutical marketplace has increased in recent years, brand manufacturers have been making larger payments for market access to their medicines. Government-mandated discounts and fees have also increased over the last five years. Many of these discounts are not plainly visible, leading to misperceptions about the relative share of gross and net drug expenditures realized by brand manufacturers.
An informed discussion about pharmaceutical spending and affordability must be supported by an understanding of the role played by all entities involved in the distribution and purchase of medicines and a recognition of the discounts that lead to far lower net spending than is commonly reported based on invoice price figures.
All true. And also true are two much simpler notions: 1) Drug prices are not rising astronomically, and 2) drugs comprise only about one-eighth of total health-care costs. Policy makers can’t make good policy unless they understand those facts
Online newsletter dedicated to helping you understand the costs and benefits that sometimes lie obscured in our complicated health care system