Issue No. 51: Distortions About Drug Prices Impede Health Care Debate

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:

• According to an authoritative study published in May by the IQVIA Institute for Human Data Sciences, net average net drug prices in 2018 were 46% lower than list prices.
• For “protected brands,” IQVIA estimated that, while the average “invoice” price rose 5.5% in 2018, the net price rose only 0.3% (again, compared with general inflation of 1.9%).
• In a study for the research firm Altarum in June, Charles Roehrig showed that in 2017, the retail invoice prices of all drugs sold in the U.S. totaled $319 billion while the net was $212 billion. Rebates have been rising in recent years. In 2013, net was only 26% less than gross.
• Drug Channels, an industry newsletter edited by Adam Fein, tracks the “gross-to-net bubble,” that is, the difference between the WAC and the net that manufacturers receive. The net price, in this case, takes into account not only rebates but also “distribution fees, product returns, chargeback discounts to hospitals, price reductions from the 340B Pricing Program, and other purchase discounts.” The gross-to-net bubble in 2018 was $166 billion, or more than double the 2013 figure.

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.

The Reasons

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.