Discussions of pharmaceutical spending are complicated and obscured by a lack of consensus of precisely how the totals are derived. By using different components, you can come up with totals that vary by as much as $150 billion a year. It is hard to have policy debates when basic assumptions differ so much.
An article in Health Affairs on July 31 attempts to demystify the subject and, with thorough research, comes up with its own, understandable aggregate figures. The article -- titled “Spending on Prescription Drugs in the US: Where Does All the Money Go?” – was the work of Nancy L. Yu, Preston Atteberry, and Peter Bach, all of Memorial Sloan Kettering’s Center for Health Policy and Outcomes (of which Bach is director). In February, the Pew Charitable Trustsalso did an analysis of various sources of pharmaceutical cost totals, but did not posit an estimate of its own.
The Five Common (And Different) Metrics for Drug Costs
The Sloan Kettering researchers began by looking at five commonly used metrics for 2016 and provide an invaluable table comparing them. The first figure is $323 billion, derived from IQVIA’s “Medicine Use and Spending in the U.S.” The lowest number among the five examples, the total includes both retail and non-retail sales of drugs, but it is a “net” figure because it adjusts for (that is, factors out) rebates by manufacturers, plus other discounts and price concessions (including coupons) and ever-growing fees.
The next total from IQVIA (formerly Quintiles IMS) is an aggregate or grossed-up one, again derived from manufacturers’ invoices for both retail and non-retail venues. By contrast with the net figure, this one “includes rebates that flow back to payers and PBMs, as well as other discounts and price concessions and fees.” The total of $450 billion does exclude “gross profits made by pharmacies for dispensing drugs.” IQVIA uses data from Securities & Exchange Commission (SEC) filings, plus direct reports by health firms.
The third metric -- $328 billion – comes from the widely used National Health Expenditures (NHE) data from the U.S. Centers for Medicare and Medicaid Services (CMS). These statistics include retail pharmaceutical sales, but not the costs of drugs administered in hospitals or physicians’ offices. The total is adjusted for rebates to payers and insurers but does not “factor in all manufacturer concessions included in the IQVIA estimates.”
The fourth total, Altarum Institute’s Health Sector Economics Indicators, also uses only retail (and not physician/hospital) pharmaceutical sales, with adjustments for manufacturer rebates only. It comes out at $348 billion -- nearly the same as the CMS number.
Finally, the researchers parse data from the Department of Health and Human Services’ (HHS) Assistant Secretary for Planning and Evaluation (ASPE), which in turn uses CMS’s NHE estimate for retail drugs and constructs “an estimate for non-retail drugs that is informed by the IQVIA and Altarum Institute data.” ASPE comes up with a total of $477 billion, composed of $343 billion for retail drugs and $144 billion for drugs administered by physicians and hospitals. The number does not factor out manufacturer rebates or other concession and fees. (It’s important to note that most of the concessions – that is, rebates and fees from PBMs – are in the realm of specialty drugs and that PBMs and specialty pharmacies are often one and the same. So the PBMs are giving rebates and fees to themselves. All four of the largest specialty pharmacy firms are either owned by PBMs or are in partnerships with them, according to the Drug Channels Institute).
The Researchers’ Own Estimate
Next, the researchers make their own calculations. They write:
Our analysis focuses on the revenue in the pharmaceutical sector, not the funding of it. Although we believe this is an important perspective from which to examine the prescription drug market, we recognize that these are indeed estimates and others will make (and have made) different choices in their approach to quantifying the overall market and its various sectors.
The researchers divide revenues into six categories, beginning with drug makers and then up the chain to the consumer.
Adding it all up, the researchers put a price tag of $480 billion on pharmaceutical costs – or, more accurately, on revenues to the various players in the supply chain. Of the total, just two-thirds goes to the companies that actually discover, develop, make, and market the drugs.
The authors recognize that the $323 billion that goes to manufacturers is “essentially 10 percent of total health care spending based on a CMS estimateof $3.3 trillion in national health expenditures for 2016.” Adding in all the shares of all the other participants, the total comes to 15%.
But is that last 5% of health costs appropriate? That’s a question being asked more frequently – especially because, as the article states, the industry “is characterized by a complex and often opaque system of distribution and reimbursement, in which the business models of multiple intermediaries rely on revenue from fees, price mark-ups, and after-the-fact rebates.”
The researchers conclude by pointing, with apparent sympathy, to…
recent calls by Food and Drug Administration Commissioner Scott Gottlieb for greater transparency in price negotiations involving PBMs, distributors, drug stores, and payers; appeals by the pharmaceutical industry and government to limit the scope of the 340B program; and deliberations by CMS to begin instituting point-of-sale rebates to reduce the out-of-pocket burden on patients.
At this critical time, we can thank Nancy Yu and her colleagues for clarifying where the money goes – so that we can have an informed and intelligent debate.
Bringing Those Costs Up-to-Date
Altarum’s latest estimates put prescription-drug sales at $355 billion for the year ending June 30, 2018. That is an annualized increase of 3%. By contrast, the increase in spending for the 12-month period was higher for other categories of personal health care: 4.4% for hospitals, 5.7% for physician and clinical expenditures, and 5.9% for nursing care facilities. Remember that Altarum’s data do not include physician- and hospital-administered pharmaceuticals and factor out manufacturer rebates but not mark-ups, fees or other concessions made to the intermediaries.
Hospital expenditures for the year ending in June were $1.17 trillion – or more than the entire gross domestic product of all but 15 countries and greater than triple the Altarum-reported prescription-drug sales figure.
Ohio Health Agencies Boot PBMs
The Health Affairs article points to the “complex and often opaque system of distribution and reimbursement” in the pharmaceutical sector and the high level of expenditures that go to middlemen. On Aug. 14, the state of Ohio decided it had had enough with what is called “spread pricing” – that is, the wide gap between what pharmacy benefit managers get from state taxpayers for drugs and what those PBMs pay pharmacies for them.
According to an article in the Columbus Dispatch, Ohio Medicaid officials “directed the state's five managed care plans Tuesday to terminate contracts with pharmacy benefit managers using the secretive pricing method and move to a more transparent pass-through pricing model effective Jan. 1.”
The decision follows a study commissioned by a government agency that revealed “PBMs billed taxpayers $223.7 million more for prescription drugs in a year than they reimbursed pharmacies to fill those prescriptions,” according to an earlier article by Dispatch reporter Catherine Candisky. The article continued:
That 8.8 percent difference, known as the price spread, represents millions kept by CVS Caremark and Optum Rx…. Largely pass-through operations, PBMs are employed to negotiate drug prices with manufacturers and process drug claims. The study said PBM fees should be in the range of 90 cents to $1.90 per prescription. CVS Caremark billed the state about $5.60 per script; Optum charged $6.50 — three to six times higher.
Mike DeAngelis, a CVS official said that PBMs produce savings for Ohioans. He cited another state analysis that “determined that taxpayers would pay $133 million more annually for Medicaid prescriptions if PBMs were eliminated.” There’s no doubt that PBMs effectively hold down drug costs. The question is whether they have been profiting from the lack of public knowledge about those spreads.
CVS Caremark went to court to block the release of the Medicaid consultant’s study because, the PBM says, it contains proprietary information. CVS agreed to the release of the study’s executive summary, which contained the $223.7 million figure. Now, however, that court case may be moot with the announcement that Ohio will “be booting all pharmacy middlemen,” according to the Dispatch.
West Virginia’s Medicaid agency unilaterally kicked out PBMs last year, and legislators in both that state and Kentucky have introduced bills last month to have state agencies take over the role of PBMs. It’s doubtful that additional government authority and bureaucracy are the solution, but the questioning of the role of middlemen is intensifying.
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