Issue No. 37: The Truth About Drug Prices:They’re Rising Less Than Inflation

Two new reports refute the notion – so cherished by politicians of both parties – that drug prices are “skyrocketing.” In fact, they are rising less than overall inflation.

The first report, issued Nov. 14 and titled, “Prescription Drug Costs Trend Update,” comes from the Blue Cross Blue Shield Association. BCBS is a behemoth, a network of 36 companies that provide commercial coverage to 88 million Americans who last year spent $100.2 billion on prescription drugs.

That is an increase of $2.2 billion, or 2.2%, over last year. And 2.2% is almost precisely the same rate of increase as that of the Consumer Price Index over the same one-year period. Hardly a skyrocket. 
 
Total Spending vs. Average Prices

There is a difference, however, between the increase in total spending and the increase in the prices of components of that spending. Spending could rise 2.2% without any price increases at all -- simply on an increase in utilization, the number of prescriptions written from year to year.

For example, Express Scripts, a giant pharmacy benefit manager (PBM), reported earlier this year that utilization by its members with commercial health plan rose 0.7% in 2017. For CVS Caremark, another giant, utilization increased 1.7%. And Prime Therapeutics, a large PBM, reported that commercial utilization rose 3.2%.

How much did utilization rise for BCBS’s commercial-plan members? According to the notes accompanying the report, total spending and utilization figures were “adjusted for year-over-year membership growth.” Fine, but, unfortunately, BCBS does not provide statistics on the growth in total utilization.

BCBS does, however, provide data on increases in the use of medicines for which spending was the highest. Of the top 10 medications, utilization rose for six, declined for three, and stayed the same for one. The average utilization gain was 2.6%. If we use that figure across all BCBS drugs, then the price of the average prescription actually declined, as it did, dramatically, for clients of Prime Therapeutics, for whom the reduction was 3.2%.

Prime seems to be something of an outlier. Express Scripts reports that, for commercial clients, average prices rose 0.8% in 2017 (and 44% of the plans for which it serves as a PBM saw the average price of a drug decline). And CVS Caremark reports that its prices rose just 0.2%.

The Effect of Rebates

Another obstacle to transparency on pricing is this admission by BCBS, “The findings in this report do not include the impact of drug rebates. Drug rebates are given at the level of negotiated contracts, not at the level of prescription drug claims, and vary by a number of factors (e.g., market segment, pharmacy benefits manager, manufacturer, insurer, etc.)”

Opaque rebates from manufacturers, as required by PBMs, are endemic to the drug supply chain. What is the effect on rebates on actual spending? BCBS doesn’t know precisely, but the report’s notes provide an estimate for 2017 with the assumption that “rebates continued to grow in 2017 similar to rebate growth experienced in 2016 compared to 2015 and if other market dynamics are ignored.” Under these conditions, instead of increasing 4%, branded drug spending would have increased 1% to 2%.”

Altarum Reports Prices Rise Just 0.8% for Year Ending Oct. 31

These small average price increases – all less than the rate of inflation – are confirmed by the second recent health-cost report. On Nov. 15, the Altarum Center for Value in Health Care estimated that prescription drug prices in October were up only 0.8% compared with the same period 12 months previously. That tiny gain follows an increase of 1.0% for the 12 months from Nov. 1, 2016 to Oct. 31, 2017. Other health care prices in 2018 are rising at a rate below inflation as well, including those at hospitals, which increased 1.3%, and “physician and clinical services,” which, like drugs, were up 0.8%.

An appropriate headline a story about both these reports would have been: “Drug Prices Rise More Slowly Than Inflation.” Man bites dog!

Media Emphasizes Rise in Cost of a Few Drugs

But that is not how the media played it. After all, slowly rising drug prices don’t fit the political narrative being promoted by many Democrats and Republicans. So the media focus was on the fact that the cost to BCBS of some drugs increased. Thus, most headlines resembled this one on Philly.com, the site of the Philadelphia Inquirer and Daily News: “Small number of brand-name drugs drive prescription spending to $100B, Blue Cross report finds.”

That headline is accurate, but it misses the main point for two reasons. First, as we just noted, despite all the commotion over drug spending, costs and prices did not rise very much last year. Second, the fact that branded drugs are more expensive than generic drugs is hardly a shock. In fact, it is the way the system is supposed to work.

Businesses need an incentive to invest the $3 billion it costs to bring a single new medication to market. That incentive comes through intellectual property protection. A drug patent generally lasts 20 years from the time of creation. Because development and regulatory approval take so long, a typical drug has monopoly protection for about a dozen years. (By contrast, Mickey Mouse isprotected for 95 years.) Those dozen years allow a drug company to earn profits that can then be plowed into R&D for future drugs.

Meanwhile, when the patent runs out, other companies can produce generic copies, and competition drives market prices down. Generics offer lower prices in perpetuity. Over the past decade, generics, which account for 89% of all prescriptions, have saved Americans $1.7 trillion, generating $253 billion in savings in 2016 alone. It’s a system that provides not only constrained costs but also powerful innovation.

Drug companies do not need patent expirations to provide competition for branded medicines. They try to win patents for different medicines to fight the same disease more efficiently.

For example, in 2014, the drug Sovaldi was approved as a cure for Hepatitis C. Immediately, far less effective medicines that were previously being used to fight the disease were pulled from the market. Then, over the next few years, long before Sovaldi’s original patent was scheduled to expire, a half-dozen new patented Hepatitis C drugs were approved, reducing the course of therapy, targeting other genotypes, and producing fewer side effects. Today, eight popular medicines aimed at the disease are made by five separate companies. Competition is holding down prices, and more people are being cured.

Specialty Drugs: Comparing Apples to Oranges

The BCBS study makes a great deal of the fact that generic drugs represent 83% of prescriptions filled by its members but only 21% of the total costs. But that is to be expected. Total spending on generics fell 3% for BCBS members last year.

What is remarkable – but again, unremarked upon in media reports – is that increase of just 4% (which is, in fact, just 1% to 2% after rebates are taken into account) in spending on branded drugs for BCBS clients. Again, we can’t tell how much the average price of a branded drug rose for BCBS, but for Prime the increase was 2.7% for “specialty” medications, the most expensive class of branded drugs; for CVS Caremark, it was 3.7%.

The introduction of so many new specialty drugs in recent years makes aggregate price and spending comparisons even less meaningful. The Food & Drug Administration approved 46 new drugs in 2017 and 52 so far in 2018. From year to year, we aren’t comparing the same group of medicines; we are comparing a better group of medicines to a necessarily inferior one since R&D keep improving pharmaceutical offerings (especially, in recent years, in the field of cancer).

Three Good Reasons for All the Attention for Drug Costs

A recent “deep dive” from the news service Axios seemed, at least in part, to buck the current political narrative on drug prices. It carried the headline, “We’re not spending as much as you think,” and made the point that spending on drugs is far less than spending on hospitals and on doctors’ and other professional services. Wrote Mike Allen of Axios:

In 2016, the U.S. spent a little less than $330 billion on the kind of drugs you pick up at a pharmacy, according to federal data. That's about 10% of all health care spending. Add in drugs that are administered by a doctor, and various estimates put the total closer to $450-475 billion, or 10-15% of health care spending.

So why all the attention for drug costs? Allen offers three explanations:
First, “a few products can drive big spikes.” Spikes, yes, but declines, too. He cites the 2014 Sovaldi introduction, but he neglects to note the effects of recent competition. Express Scripts reports, for example, that per member per year spending on Hepatitis C drugs fell 31% in 2017.

Second, “the future is trending toward more expensive drugs.” Absolutely true. Miraculous new life-saving biological products, especially, are absorbing a higher proportion of total spending – which is precisely why we need regulatory changes to make it easier to bring biosimilars to market to compete, the way that generics compete with small-molecule traditional medicines. Critics who complain about drug costs rarely offer solutions. Why aren’t they campaigning for a faster, more fluid pathways for biosimilars.

Third, Allen writes, “insurance deductibles keep getting bigger, which means people have to pay more of their own costs out of pocket. And while you may not have been to the hospital in a long time, millions of Americans use prescription drugs every day.” Also, true. But the problem goes beyond deductibles. Insurance plans are perversely structured so that patients have to dig deeply into their own pockets to pay far too much of the tab for the most advanced medicines while getting common generics, in many cases, for no out-of-pocket costs at all.

​Previous issues of this newsletter have examined both biosimilars andinsurance-plan design. But policy makers and the people who influence them can’t develop effective solutions unless they gain perspective on the problem itself. For that, they need facts, not distortive narratives, about actual drug costs and prices.