The executive orders that President Trump issued last month had as their goal to “deliver lower prescription drug prices to American patients.” But for nearly all patients, the price of a drug is practically meaningless. After all, 92% of Americans have health insurance, and what they pay for a medicine is determined by the conditions of their policies. The important question is how deeply consumers have to dig into their own pockets to pay for medicines at the pharmacy counter.
In our last newsletter, we discussed the drawbacks of several of the changes the White House proposed, especially drug importation, which imperils safety and won’t cut prices anyway, and a “most-favored nation” policy that imports foreign price controls to the U.S., harming domestic innovation and access to the best medicines.
There are, however, productive alternatives that could reduce out-of-pocket costs immediately, in most cases without Congressional action. One of those is rebate reform, discussed extensively in the last newsletter as well as in No. 58 and No. 45. Rebate reform was resurrected in the July 27 executive orders after being proposed first by the Department of Health and Human Services (HHS) two years ago, placed in the Federal Register, and then rescinded.
We will get to rebate reform at the end of this newsletter, but, first, it’s important to understand the nature of out-of-pocket (OOP) spending on drugs.
Twelve Dollars a Month
When we look at how much Americans pay from their own wallets on drugs, there’s a seeming contradiction. Average OOP spending by Americans is remarkably low, which is why a survey last year by the KFF Health Tracking Poll found that 46% of those filling prescriptions said they found it “very easy” to afford their medicines and another 29% said it was “somewhat easy.” Only 9% said paying for drugs was “very difficult.”
National Health Expenditures (NHE) data, reported in December by the Centers for Medicare and Medicaid (CMS), show that overall health spending (the amount paid by insurers, governments, employers and individuals combined) per capita in 2018 was $10,638. Of that, the bulk ($3,649 a person) was for hospital care and another large chunk ($2,221) was for physician and clinical services. Spending on prescription pharmaceuticals was just $1,026.
Out of the $1,026 for drugs, the actual yearly cost to the patient was $144 per American (see Table 16 of the NHE data). That comes to $12 per month. Out-of-pocket (OOP) spending on drugs is lower now than it was in 2005, when it peaked at $174. More recently, CVS Caremark, the giant PBM with 30% of the U.S. market, reported that “more than two out of three members spent less than $100 out of pocket in 2019.” That’s less than $9 a month.
OOP spending on drugs in the U.S. is in line with the rest of the developed world. As a study last year by Michael Mandel of the Progressive Policy Institute pointed out, “OECD data shows that average out-of-pocket spending ($143 in 2017) is actually lower than countries such as Canada ($144), Korea ($156), Norway ($178), and Switzerland ($215).”
Mandel notes that average OOP spending for persons with at least one prescribed medication dropped 27% from 2009 to 2016, according to a report by the Agency for Healthcare Research and Quality. Plus, “data from the Bureau of Labor Statistics Consumer Expenditure Survey shows that average household spending on prescription drugs fell by 11% between 2013 and 2018.”
The Paradox: OOP Spending Low, Anxiety and Outrage High
These OOP spending averages are low, but consumer anxiety and political outrage are high. Why? Because some people face very high OOP costs for their medicines, and nearly all people worry they may have the same dire situation in the future. For example, Mandel points out that for Americans who perceive their own health as “excellent,” drugs represent just 13% of their total health care OOP spending, but for Americans who says their health is “poor,” drugs represent 43%. (See Figure 2, here.)
The person in excellent health spends $45 a year out-of-pocket on drugs while the person in poor health spends more than $600. “As people become less healthy,” writes Mandel, “they see their out-of-pocket drug spending soar faster than other medical expenses or overall incomes. No wonder they are angry with drug companies!”
The purpose of insurance is to protect against loss – especially the kind of major loss that people have a hard time coping with themselves. So it would make sense for health insurance to provide the most cushioning for those who are most sick and in need of advanced medicines. Instead, those people are often hit the hardest with OOP requirements while the least sick can purchase their medicines for, literally, pennies per week.
Another anomaly is that health insurers design their policies so that Americans pay a far higher proportion out of pocket for prescription drugs than for other health services: 14% compared with only 2.9% for hospital care and 8.4% for physician and clinical services. (See the NHE data at Tables 16, 7, and 8.) This is counterproductive. You would think the insurers would want to encourage the use of medicines. After all, pharmaceuticals lower other costs by keeping people out of hospitals and doctors’ offices. In Newsletter No. 56, we reported extensively on how effectively drugs to combat heart disease and Hepatitis C (HCV) reduce costs in the health care system overall.
We noted, for example, that Hepatitis C “drugs are a comparative bargain – and comparisons, measuring one alternative against another, are what public policy is all about. HCV infection, which afflicts more than 3 million Americans, is responsible for 40% of all chronic liver disease in the United States, and one consequence is a liver transplant. The average estimated cost of such a procedure in 2017, according to a study by the research firm Milliman, was $813,000, or nearly ten times the original cost” of the original HCV drug Solvaldi. Today, through competition, the cost of HCV drugs has dropped considerably.
We can achieve substantially more adherence to prescriptions if OOP costs fall. For example, a study in the journal Arthritis Care & Research found that Medicare beneficiaries not qualifying for low-income subsidies 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, leading to more sick people for expensive physician and hospital care.
Back in 2015, before he served Commissioner of the Food & Drug Administration (FDA), Scott Gottlieb, a scholar at the American Enterprise Institute, told CNBC’s “Squawk Box” that America did not really have a drug cost problem. “What we have,” he said, “is an under-insurance problem. People are now under-insured, especially if they get a disease like cancer.”
In some cases, people are making their own decisions to under-insure, but in most cases, people cannot possibly get the coverage they need. Insurers demand too much co-insurance for specialty drugs.
With that background, let’s look at five ways to lower OOP costs immediately: 1) allowing co-pay assistance for Medicare Part D, 2) limiting monthly OOP spending for state residents, 3) capping OOP payments for Part D, and 4) easing the path for bringing biosimilars to market, and 5) rebate reform.
Five Areas for OOP Reductions….
1. Co-Pay Assistance
In recent years, co-pay assistance – typically, through the use of cards or coupons – has become critical for many families with commercial insurance as high deductibles, co-pays (flat fees), co-insurance (proportional payments), and rising annual spending limits have become regular features of health insurance policies.
When high OOP costs deter people from filling their prescriptions, they get sicker and often have to seek hospital care, raising overall costs in the health care system, as dozens of studies have shown. Here are just two pieces of research….
For the sickest Americans, however, OOP costs are rising, and, as the situation worsens, co-pay coupons, which now cover hundreds of drugs for millions of Americans insured through commercial plans, have been filling the gap. Issued by drug manufacturers and distributed by physicians or pharmacists, coupons can save patients around $6 for every $10 they have to pay out of pocket.
A statewide study of coupons released in July by the Massachusetts Health Policy Commission found:
Coupon programs and their uptake have expanded in Massachusetts. The number of branded drugs that offered coupons rose from 278 in 2012 to 701 in 2018. Among commercial prescription fills where a coupon could have been used, the percent of claims in which a coupon was used increased from 2.1% in 2012 to 15.1% in 2018. The average coupon value per claim was $229 in 2018, more than double the average in 2012.
But these coupons apply only to commercially insured Americans. The Office of the Inspector General (OIG) for the Department of Health and Human Services (HHS) has ruled that “pharmaceutical manufacturers may be liable” under the federal Anti-Kickback statute if they offer coupons for “drugs paid for by Medicare Part D.” The statute prohibits the “solicitation, receipt, offer, or payment of remuneration to induce the purchase of any item or service” under a federal health program.
The OIG’s ruling, however, is an interpretation that can change – especially during this period of high unemployment and widespread anxiety over family finances because of COVID-19. It seems hardly fair that seniors on Medicare are deprived of co-pay relief that is widely offered to younger Americans with commercial policies.
As an alternative to a revised ruling by the OIG of HHS, President Trump could direct the federal Center for Medicare and Medicaid Innovation (CMMI), which is charged with “developing new payment and delivery service models,” to test a model allowing drug manufacturers to provide co-pay assistance to Part D beneficiaries.
The policy would be a temporary one, tied to the COVID-19 pandemic, which has put extra pressure on family finances.
Insurers argue that, by footing all or part of the bill, pharmaceutical companies are encouraging patients to use more expensive brand-name drugs, rather than cheaper generics. But, in fact, the whole idea of co-pay relief is to help people who can’t pay for costly medicines.
A study by IQVIA examined prescription data from 2013 to 2017 and found that co-pay coupons used by commercially insured patients on branded drugs that have lost patent exclusivity represent only “0.4% of the total commercial market volume.” The Massachusetts study found that “the percentage of all drug claims that used a coupon in 2018 was quite low (3%) because most prescription fills are for generic drugs (which do not offer coupons).” Remember as well that patients attempting to use coupons for branded drugs have already been approved by their insurer for that medicine.
Still, if they really think generics are being avoided because of coupons, the OIG and CMMI could simply order that coupons can be applied only to branded drugs for which a generic does not exist.
2. State Caps on Monthly Spending
A New England Journal of Medicine study found that at least 21 states to limit OOP costs for prescription drugs (see Table S1 here). In most of those states, legislation still awaits passage, but on Jan. 21, the Governor of New Jersey signed into law a bill that requires that at least one-fourth of the plans that each health insurer offers in the state must include a cap on monthly OOP payments for a single prescription. For silver, gold and platinum plans, that limit is $150; for bronze plans, $250. The cap applies to deductibles, co-pays, and co-insurance.
Other states have variations on the theme. Vermont imposes annual, rather than monthly caps. California’s law is much the same as New Jersey’s but with higher ($250 and $500) caps. Washington state requires capped co-pays (that is, flat fees) rather than co-insurance (a proportion of the cost of the drug) for its silver and gold plans. Four out of five insurance plans have specialty tiers for advanced medicines, with co-insurance typically ranging from 20% to 50%. Delaware, Louisiana, Connecticut and Maryland apply caps only to drugs in specialty tiers. New York bans such tiers altogether.
States are not waiting for the federal government to tackle the OOP problem. They are moving on their own to new standardized plan designs. A feasibility study in Washington state, for example, found that residents wanted lower deductibles and “more transparent and predictable cost sharing (co-payments rather than co-insurance)” and that these aims can be achieved with only modest increases – or even decreases – in premiums.
Research published in the New England Journal of Medicine on Aug. 6 concluded that OOP savings can be achieved “without detectable increases in health plan spending, a proxy for future insurance premiums.” The article by Kai Yeung of the Kaiser Permanente Washington Health Research Institute and colleagues examined the effects of requirements in Delaware, Louisiana and Maryland that capped monthly OOP outlays at $150 per 30-day supply of specialty medicines only.
The researchers worked with a sample of 27,161 commercial-plan members who had rheumatoid arthritis, multiple sclerosis, hepatitis C, psoriasis, psoriatic arthritis, Crohn’s disease, or ulcerative colitis – diseases that call for specialty drugs. Yeung and colleagues found that the patients in the 95th percentile of spending saved an average of $351 a month each. But patients with lower spending needs (even in the 75th percentile) were largely unaffected. The researchers wrote:
Our results suggest that the [monthly cap] policies may be well aligned with health economic principles for insurance coverage. Insurance functions best when it provides coverage for treatments that are high-cost, that are for rare conditions, and that patients value…. Aside from being used to treat relatively rare conditions, specialty drugs may be good candidates for generous coverage because they tend to be clinically important medicines.
Society should want to encourage the development of such medicines – not deter innovation, which would be the consequence of the “most-favored nation” proposal that we discussed in the last newsletter. That reference-pricing measure was aimed directly at specialty drugs.
Importantly, the researchers conclude, “Since a primary function of insurance is to spread the financial risk of catastrophically high spending for a small population, we interpret the caps as strengthening this risk-spreading function without detectably increasing spending for the broader population.” In other words, premiums would be unlikely to rise.
Not only is it economically baffling to place such a heavy burden on the sickest Americans, it appears highly unfair. A study published by the Centers for Disease Control and Prevention (CDC) last year looked at spending among cancer survivors aged 18 to 64. The CDC report stated:
Financial hardship was common; 25.3% of cancer survivors reported material hardship (e.g., problems paying medical bills), and 34.3% reported psychological hardship (e.g., worry about medical bills). These findings add to accumulating evidence documenting the financial difficulties of many cancer survivors.
Insurance companies and PBMs, however, oppose redesigning their policies to limit monthly OOP costs (the PBMs argue that caps will encourage physicians and patients to choose more expensive branded drugs over generics), and not just state but Congressional legislators are stepping in. Sens. Elizabeth Warren (D-Mass) and Ron Wyden (D-Ore) in 2018 introduced the Capping Prescription Costs Act, which set a limit of $250 per month in OOP costs for individuals and $500 for families. The bill died in committee.
The Trump Administration could boost the chances for monthly caps by publicly supporting legislation in the states and in Congress.
3. A Ceiling for Part D
Incredibly enough, Medicare Part D -- the pharmaceutical benefit, mainly for seniors, that was introduced in 2006 -- does not provide any cap on annual OOP spending on prescription drugs. In addition to paying monthly premiums, beneficiaries pay some level of cost-sharing for each prescription (either a flat co-pay or a percentage of the cost of the drug, depending on the tier the drug is on) until they have spent several thousand dollars. Then they enter what is called the “catastrophic phase” of coverage, where they have to pay co-insurance of 5% on the price of their drugs. The official Medicare website says that after you hit this phase, the system “assures you only pay a small coinsurance amount or copayment for covered drugs for the rest of year.”
Small? Not really. For the people who have drug costs high enough to get into the catastrophic phase, their expenses are significant. A research piece last year by Juliette Cubanski, Tricia Neuman, and Anthony Damico of the Kaiser Family Foundation examined the effects of the lack of a Part D OOP cap on Medicare enrollees. Among their findings:
Under authorities associated with the CMMI, HHS Secretary Alex Azar can develop and implement reimbursement reforms to Medicare. When it comes to bringing relief at the pharmacy counter to seniors, there’s a simple one waiting for him: expand on an existing pilot model called the Part D Senior Savings Model (which helps patients with diabetes by capping costs for insulin at $35 per month) and broaden the focus to high-cost drugs and reduced cost-sharing in the catastrophic phase of the benefit.
Essentially, this would create a cap on the amounts that seniors have to pay out-of-pocket each year for high-cost specialty drugs by eliminating their 5% obligation in the catastrophic phase of Part D. Manufacturers who want to participate in the pilot would have to put more skin in the game by negotiating rebates with plans that cover the 5% cost sharing and the additional costs plans may expect.
Congress has been considering an OOP cap for Part D for many months now, but the legislation is stalled. In the meantime, the Administration can take action.
4. Easing the Route to Market for Biosimilars
In the past few years, pharmaceutical price increases have moderated significantly and, by some measurements, have actually declined. Express Scripts, a large PBM with a 23% market share, stated in its latest Trend Report that the average prescription filled by its members cost 0.9% less in 2019 than the year before. A big reason is that early in the Trump Administration, the FDA initiated regulatory changes that have led to more generic drug approvals – a record 1,171 last year. Competition from generics, which account for nine out of ten prescriptions, drives down the prices of branded drugs.
Generics are copies of small-molecule drugs, the vast majority of medicines. But some of the most dramatic innovations are coming from what are called biological products (or biologics), which are complex, large-molecule treatments “produced through biotechnology in a living system, such as a microorganism, plant cell, or animal cell,” according to the FDA. A biosimilar’s relationship to a biologic is nearly the same as the relationship of a generic is to a small-molecule drug. Or, as the FDA states, a biologic is “highly similar to and has no clinically meaningful differences from an existing FDA-approved” biological product.
Biological products are among the most costly medicines. For example, the biologic Humira, a monoclonal antibody which treats various types of arthritis, Crohn’s Disease, and other conditions, was the top-selling drug in the world last year, with $20 billion in sales. Other biologics among the 10 best-selling drugs are Herceptin and Avastin for cancer and Rituxan, which treats lymphoma, leukemia and rheumatoid arthritis.
Unfortunately, U.S. approvals of biosimilars have lagged. The FDA has approved only two so far in 2020 and 28 in all. Even then, biosimilars are delayed or prevented from reaching the market because of expensive battles to surmount patent thickets or because of pressure applied by incumbent branded drugs to PBMs. Several companies, for instance, engaged in settlements to delay until 2023 the launch of biosimilars with Humira as reference product – even though some of those biosimilars were approved by the FDA as early as 2016 and 2017.
By contrast, Europe has approved more than 60 biosimilars, and they face fewer barriers in getting to market. The U.K. alone is expecting to save about $400 million from Humira biosimilars by next year, and just one U.S. firm, Biogen, estimates that it saved patients in 20 European countries a total of more than $2 billion from its biosimilars in 2019.
An IQVIA study found that total net spending on all biologics rose from $84 billion to $126 billion between 2014 and 2018 while spending on biosimilars increased from $200 million to a mere $1.9 billion. There is no doubt that biosimilars can have an impact. For instance, the market share of the insulin biologic Lantus fell 30% in a little over two years after the introduction of a biosimilar. But biosimilars clearly are not fulfilling their promise.
In an early study, the CBO estimated that biosimilars would reduce prices by 40%. Research by the Pacific Research
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