It sounded like a good idea at the time, but now, 26 years after Congress established it, the 340B Drug Pricing Program has become the object of critical reports, derisive comments by government officials, and the first small steps at reform.
The program was meant to help poor hospital patients through a somewhat convoluted process. Under the law, if drug manufacturers want to be eligible to participate in Medicaid, they have to provide outpatient medicines at prices discounted by 20% to 50% to hospitals that serve a disproportionate share of low-income Americans.
Such hospitals, as well as affiliated clinics, “can realize substantial savings through 340B price discounts and generate 340B revenue by selling eligible outpatient drugs at a higher price than the discounted price at which the covered entity [i.e., the hospital] obtained the drug,” according to a review earlier this year by the House Energy and Commerce Committee.
The intent of 340B, whose name refers to the section of the Public Health Service Act that authorizes it, was that hospitals would use the extra revenue (the difference between the price at which they sell the drug and the discounted amount they pay for it) to help indigent and uninsured patients.
Gains From 340B Profits Aren’t Going to Low-Income Patients
But that isn’t happening. In a study published in the New England Journal of Medicine in February, Sunita Desai of the New York University School of Medicine and Michael McWilliams of the Harvard Medical School concluded, “Financial gains for hospitals have not been associated with clear evidence of expanded care or lower mortality among low-income patients.”
Another study in 2016, by Avalere Health for the Alliance for Integrity and Reform of 340B, found that in fiscal 2014 charity care represented less than the national average (2.2% of costs) at 64% of 340B hospitals.
Hospitals are ignoring the intent of the 1992 because… well, they can.
As Rena Conti of the University of Chicago and Peter Bach of Memorial Sloan Kettering wrote in Health Affairs:
340 B hospitals are not required to pass along their discounts to patients or insurers or to demonstrate their investments in outpatient programs for the poor. Consequently, these providers can generate 340B profits by pocketing the difference between the discounted price that they paid for the drugs and the higher reimbursement paid by insurers and patients.
Sen. Charles Grassley (R-IA) made this point in a 2013 letter to the administrator of the U.S. Health Resources and Services Administration:
Hospitals can elect to sell all of their 340B drugs to only fully insured patients while not passing any of the deeply discounted prices to the most vulnerable, the uninsured. This is contrary to the purpose of the 340B program since much of the benefit of the discounted drugs flows to the covered entity rather than to the vulnerable patients that the program was designed to help.
Program Quadruples in a Decade
Meanwhile, the 340B program has ballooned in size. Some 40% of all hospitals in the United States now participate as well as thousands of affiliated clinics, for a total of 38,396 covered entity sites, up from 8,605 in 2001.
“It is estimated that discounted drug purchases made by covered entities under the 340B program totaled more than $16 billion in 2016—a more than 30 percent increase in 340B program purchases in just one year,” states the E&C Committee report. Total drug purchases under the program quadrupled from 2007 to 2016 and now represent 5% of all the money spent on medicines in the country and more than half of all U.S. hospital drug purchases, up from 20% in 2009.
The growth of 340B has made the program unmanageable. The network now includes thousands of “contract pharmacies.” As Wayne Weingarten wrote in a December report by the Pacific Research Institute:
As identified in a 2014 report from the Inspector General of the Department of Health and Human Services, contract pharmacies add “complications” to the 340B program. These complications include diversion of 340B discounted medicines to non 340B-eligible patients, receiving duplicate discounts from both Medicaid and the 340B program when such duplication is prohibited, and not offering the 340B discounted price to uninsured patients, the raison d’etre of the program.
Originally, the law allowed only safety-net clinics without an in-house pharmacy to contract out pharmacy services to a retail pharmacy. Then, writes Weingarten, “the 2010 guidance allowed any covered entity, including large hospitals, to establish unlimited relationships with contract pharmacies…. Some hospitals have responded by building networks of hundreds of contract pharmacies that includes Walgreens, Rite Aid, CVS, and Wal-Mart – private, for-profit companies that clearly do not require government support.”
In addition, 340B-qualified hospitals buying up physicians’ practices in neighborhoods that are far from poor. The Desai-McWilliams study found, for example, that facilities owned by hospitals eligible for 340B had “230% more hematologist-oncologists than expected in the absence of the program” and that “program eligibility was associated with lower proportions of low-income patients in hematology-oncology.” In other words, buying up practices of physicians specializing in blood disorders and cancer – specialties associated with more expensive medicines -- gave the 340B hospitals a broader footprint in higher-income areas.
The Conti-Bach study, which looked carefully at the expansion patterns of 340B hospitals concluded:
The primary purpose of the 340B program was to give assistance to low-income and uninsured patients. Since its inception, the program has experienced expansions. However, we observed significant growth in the number of newly registered 340B DSH [facilities with a “Disproportionate Share” of indigent patients] hospitals and exponential growth in the number of outpatient clinics affiliated with them since 2004.
We focused on whether these expansions have been associated with a shift away from the program’s core focus on low-income and uninsured populations. We found that 340B DSH hospitals serve communities that are poorer and have higher uninsurance rates than the average US community. However, beginning around 2004, newly registered 340B DSH hospitals have tended to be in higher-income communities, compared to hospitals that joined the 340B program earlier.
We also found that, compared to 340B DSH hospitals, their affiliated clinics tended to serve communities with socioeconomic characteristics that were more similar to the average US community…. These results suggest that the expansions among 340B DSH hospitals run counter to the program’s original intention.
Our findings are consistent with recent complaints by stakeholders and media reports suggesting that the 340B program is being converted from one that serves vulnerable communities to one that enriches participating hospitals and the clinics affiliated with them
Reforming the Program
The Trump Administration on Jan. 1 took the first step toward reforming the program. Drawing on a 664-page proposal it issued in July, the Centers for Medicare and Medicaid Services laid down new rules that it said would “lower out-of-pocket drug costs for people with Medicare and empower patients with more choices.”
The rules apply to only a small slice of the 340B program -- just to “certain Medicare Part B drugs.”
Instead of reimbursing hospitals at the Average Sales Price (ASP) of a drug plus 6%, CMS will reimburse at ASP minus 22.5%. A Sloan Kettering report in 2016 made it clear that eliminating the mark-up would not cause hardship to 340B hospitals. The 6% premium over ASP…
appears to understate the profit associated with the administration of “Part B” drugs, due to higher gross profits to doctors and hospitals from their commercial insurance contracts and steep discounts available to 340B hospitals. The collective gross profit across all patients and care settings is around 49% but is not evenly applied as the blended profit margin for doctors is around 16% while it is around 140% for hospitals. The subcategory of hospitals in the 340B program earn a blended profit margin of around 210% (other hospitals are at 98%).
CMS is not pocketing the $1.6 billion in savings from the reduction. Instead, it is increasing reimbursement rates for other services the hospitals provide. Also, Medicare patients will benefit because their copayments are based on the CMS reimbursement rate, which is being cut nearly 30%. Seema Verma, the administrator of CMS, noted that Medicare beneficiaries will benefit “from the discounts that hospitals receive under the program by saving an estimated $320 million on copayments for these drugs in 2018 alone.”
Peter Bach of Sloan Kettering told Kaiser Health News, “If Medicare reduces the reimbursement amount, that will directly reduce what patients pay. Patients will see lower prices.”
The Future of 340B
While the reforms leave the vast majority of the 340B program untouched, the changes may foreshadow a major shakeup. Joe Grogan, associate director for health programs at the White House Office of Management, called 340B “really screwed up” in remarks Nov. 14 before a cancer research conference in November, as reported by Politico.
The program, he said, is “incredibly flawed in how it’s operating” and has grown “far beyond its intent.” Grogan said that in many instances 340B isn’t operating to meet its stated purpose of helping hospitals serve low-income and uninsured patients.
The day before Grogan’s remarks, the American Hospital Association (AHA), the Association of American Medical Colleges, America’s Essential Hospitals filed a lawsuit against the Department of Health and Human Services, asking for an injunction to prevent CMS from implementing the 340B changes. Rick Pollack, the president of the AHA, said in a press release, “From its beginning, the 340B Drug Pricing Program has been critical in helping hospitals stretch scarce federal resources to enhance comprehensive patient services and access to care.”
AHA also launched an advertising campaign, which probably appears baffling to anyone unacquainted with government acronyms. Some 228 members of the House signed a letter to Administrator Verma, saying, “We are deeply concerned [about] this misguided policy.” And, as Sally Pipes of the Pacific Research Institute, a conservative think tank, wrote in Forbes, “A bipartisan group of senators – including supposed fiscal hawks like Sens. John Thune (R-SD) and Rob Portman (R-Ohio) – are trying to block the reform.” She added:
That’s disappointing. Hospitals are exploiting 340B to enrich themselves at the expense of poor patients. Their abuse of the program drives up the health tab borne by taxpayers and everyone with private health insurance. Lawmakers committed to limited government ought to overhaul 340B rather than defense the broken status quo.
On Dec. 29, the U.S. District Court dismissed the hospital associations’ suit on jurisdictional grounds. The plaintiffs appealed to the U.S. Court of Appeals for the District of Columbia, which granted an expedited schedule. Briefs are flying back and forth, and oral arguments are scheduled for May 4.
Even if the lawsuit is resolved soon, the fight over 340B is far from over. A program that was much admired when President George H.W. Bush signed it, has grown beyond recognition, with its intent distorted and obscured. The Trump Administration, which wants to make good on its promises to cut health costs and rationalize government programs, clearly has 340B in its sights.
“Like it or not,” wrote Adam Fein on his Drug Channels blog in July, “change may finally be coming to the out-of-control 340B program. Let’s hope Congress can get the program refocused on genuine safety-net providers and financially needy patients.”
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Americans spend more on drugs than people who live in other rich countries. In his State of the Union Address in January, President Trump described the disparity as “very, very unfair.”
The extent of the difference, however, is a complicated matter.
A CNN report in 2015 said that “Americans pay anywhere from two to six times more than the rest of the world for brand-name prescription drugs.” A study reported by Scientific American says that U.S. prices are triple those of the United Kingdom. But such comparisons pit U.S. list prices against final negotiated prices in Europe: apples vs. oranges. A more accurate comparison would take into account U.S. discounts and rebates and use actual average selling prices for U.S. medicines.
A study published March 13 in JAMA by Irene Papanicolas, Liana Woskie, and Ashish Jha of the Harvard Chan School of Public Health looked broadly at health-care costs in the U.S. and other high-income countries. It found that U.S. prescription-drug spending and total pharmaceutical spending (including drugs administered in doctors’ offices and hospitals) were each nearly double that of the average of the 11 countries (seven from Europe plus the U.S., Canada, Australia and Japan) studied.
The paper did not state whether the U.S. data included discounts and rebates, but the dollar figures are much higher than those in a September study by the Quintiles IMS Institute, which removed discounts and rebates and calculated “net manufacturer revenue” for all drugs (including those administered in doctors’ offices and hospitals).
Some drugs are actually cheaper at home than abroad. In 2004, a report from the FDA began, “If you think all drugs from Canada are cheaper than U.S. drugs, think again.” Generics now account for 89% of all U.S. prescriptions, and the FDA looked at the seven top-selling generics in the U.S. in 2004: “For six of the seven drugs, the U.S. generics were priced lower than the brand-name versions in Canada. Five of the seven U.S. generic drugs were also cheaper than the Canadian generics.”
More recently, Canada’s Globe and Mail reported in 2014 that a study by the University of Ottawa and the Bruyere Research Institute found that Canadians are “spending much more than people in the…United States” for six drugs studied, including popular medications for cholesterol and high blood pressure.
It’s also important to look beyond medicines. U.S. health-care costs overall are far higher than in other high-income countries. Look at compensation for professionals. The March JAMA study found that the average general practitioner in the U.S. earns $218,000 a year, or 63% more than the average for the high-income countries in the survey. Canada pays its GPs an average of just $146; France, $112,000; Australia, $87,000. U.S. specialist physicians earn $316,000, or 73% more than average. U.S. nurses make an average of $74,000, or 42% above average.
An MRI in the U.S. costs an average of $1,119, according to another study. ; in Australia, $215. Appendix removal is $15,930 on average in the U.S. and $6,040 in Switzerland. In the U.S., heart bypass surgery is $78,318; in the U.K., $24,059. These differences are more significant than drug-price differences because hospitals represent about one-third of U.S. health spending while prescription drugs represent about one-tenth.
Innovative Medicines Do Cost More Here
Still, there is no doubt that individual branded innovative medicines cost more – to consumers and government and private insurers -- in the United States than in other rich countries. For example, the JAMA study found that Advair, an asthma medicine cost $155 per month (after discounts) while the same drug in Canada was $74; in Japan, $51; and in Germany, $38.
Humira, the highest-grossing drug in the United States, treating such diseases as rheumatoid arthritis, costs $2,505 in the U.S. but an average of $1,436 in the seven high-income countries that supplied data. A 2015 study by Bloomberg, using data from IHS and SSR Health, found that, accounting for discounts, the breast-cancer treatment Herceptin cost $4,754 per month in the U.S. and $3,186 in Germany.
Why Other Rich Countries Have Lower Drug Prices
The reason other wealthy countries have lower drug prices is no secret: Those countries have nationalized, single-payer health-care systems. The government is the monopsony – that is, sole – purchaser of medicines and the decision-maker on which patients (if any at all) will have access to medicines. Even when governments aren’t direct purchasers, they impose price controls – in Canada, through a “Patented Medicine Prices Review Board.” For new drugs, Canadian prices cannot exceed the median price in other comparator countries, which themselves have price controls.
The result is that U.S. consumers fund pharmaceutical innovation, and the rest of the world benefits at low cost. As the JAMA study says, “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.” The authors cite 2006 research by Henry Grabowski and Y. Richard Yang that concluded, “Country-level analyses for 1993–2003 indicate that U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.”
The reason for the dominance is that U.S. companies plough their profits, mainly earned domestically, into research and development that helps patients everywhere.
Thus, other rich countries are “free-riding,” as a February study by the President’s Council of Economic Advisors (CEA), titled “Reforming Biopharmaceutical Pricing at Home and Abroad,” explained:
The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.
Price Controls at Home Would Harm Everyone’s Health
The U.S. has consistently rejected a single-payer, European-style system – for example, “Hilarycare” in 1993 and Democratic proposals that preceded the final Affordable Care Act in more recent years. But if the U.S. did adopt price controls at home, the losers would be Americans themselves, who would see drug innovation decline and with it their own health. Cutting prices in the U.S. would lead to fewer new medicines being developed and thus shorter, unhealthier lives than would otherwise be the case.
The U.S. accounts for nearly half of all branded pharmaceutical revenues in the world while other developed countries represent only about one-fourth. The CEA estimates that 70% of OECD patented pharmaceutical profits come from sales to U.S. patients. “Thus, innovators across the world rely heavily on Americans paying market prices to underwrite returns on investments into products that improve their health.”
After all, as a January study by Dana Goldman and Darius Lakdawalla of theUSC Schaeffer Center for Health Policy and Economics notes, “The most recent evidence suggests that it takes $2.5 billion in additional drug revenue to spur one new drug approval, based on data from 1997 to 2007.”
So the U.S. faces an “innovation-access” tradeoff. If revenues and profits are reduced, then investment in research and development will fall as well. The result would be a sharp decline in new treatments – and in overall health – for Americans as well as foreigners.
A study by Thomas Abbott and John Vernon, published as a working paper by the National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.”
Conversely, what would happen if other OECD countries lifted or significantly relaxed price controls? The USC Schaeffer study notes:
Using a previously published economic-demographic microsimulation, we estimate that if European prices were 20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years. Encouraging other wealthy countries to shoulder more of the burden of drug discovery — including higher prices for innovative treatments — would ultimately benefit patients in the United States and the rest of the world.
What Can Be Done?
Despite all these arguments based on health, economics, and the law, there remains the political issue. Americans don’t like the fact that Canadians, Japanese, Australians and Europeans can buy drugs at a lower price. It is, as President Trump said, “very, very unfair.” Can anything be done?
The CEA report has a section headed, “Limiting Under-Pricing of Drugs in Foreign Countries,” but, curiously, the Council does not offer a recommendation on how to limit that under-pricing.
Through tough bargaining, of the sort that the Trump Administration favors, the United States can pressure other rich countries to relax, or end, their price controls. The countries could still provide tax credits or direct subsidies to their citizens for drugs and other health services if their aim is to ease the burden of health-care costs.
The Administration, for example, recently got South Korea to ensure equal treatment for U.S. drug manufacturers in a renegotiated bilateral agreement; in the past, only Korean companies received the advantage of premium pricing.
Price controls badly distort trade and may be impermissible under current trade agreements – and can certainly be changed in future ones. The U.S. exported$47 billion in pharmaceuticals in 2015, and that figure could be far higher without foreign price controls.
More than 200 U.S. economists tackled the price-disparity issue in a public2004 letter. They wrote: “The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives.”
Among the signers were the late Nobel Prize winner Milton Friedman and President Trump’s top economist, Kevin Hassett, who was then at the American Enterprise Institute.
One current proposal calls for appointing a special USTR negotiator with jurisdiction over complicated issues of pharmaceutical trade, sanctions for countries that cheat on current agreements, and tough negotiations for future agreements.
At the same time, regulatory reforms in the U.S. such as easing the path for generic and biosimilar drugs to provide competition, could lower spending here while maintaining high levels of investment in innovation.
Meanwhile, the first rule in health care is to do no harm, and it’s critical that the U.S. avoid steps that would harm pharmaceutical innovation – and the nation’s health at the same time.
When people talk about high drug costs, they are really talking about high out-of-pocket costs to them under their insurance plan – especially huge open-ended obligations if they become sick with cancer or a debilitating auto-immune or infectious disease. It is this understandable anxiety that feeds the political reaction to drug expenses. That reaction, in turn, leads to misdirected proposals that would further block patient access to medicines and deter investment in developing new medicines that save lives.
But there is another approach – reforming the design of insurance plans by limiting what insured individuals and families have to pay out of their own pockets. In the case of Medicare, a simple legislative change, already recommended by a government commission, would have a major effect; in the case of commercial plans, a sensible readjustment will do the trick. These changes could be shaped in a way that has minimal effect on premiums.
But before we get to details, let’s review what we are really talking about when discuss high drug spending….
So what is the problem?
Too Many People Reaching Too Deeply Into Their Pockets
It is that some Americans have to reach deeply into their own pockets to pay for certain medicines when they get sick. A big reason is that health insurance is different from other forms of insurance.
Insurance is meant to pay for the consequences of an adverse event you might not be able to afford yourself. For example, your auto insurance reimburses, not for a new set of windshield wipers after the old ones have worn out, but for expensive bodywork after your car is in a bad accident. Health insurance doesn’t work that way. Many generic drugs cost an insured patient nothing at all under a typical health plan, but certain cancer medicines, for example, can cost thousands or tens of thousands of dollars out-of-pocket.
Specialty drugs – treatments, for example, that miraculously harness patients’ own immune systems to battle cancer – are costly to develop and to provide. More and more of these specialty drugs, which treat a range of complex diseases, will be coming to market in the years ahead. There were 240 immuno-oncology drugs in development at the end of 2017.
Only a tiny slice of the population needs such drugs, and the aim of insurance is to protect such patients against the catastrophe of having to pay for expensive medicines on their own. Just three out of 1,000 Express Scripts members had annual medication costs greater than $50,000 in 2016.
A Cap for Medicare Part D
Even insurance under Medicare Part D has this flaw. Medicare insurance for prescription drugs is, overall, an excellent program. As Kenneth Thorpe, a professor of health policy, wrote recently:
Part D is a rare public-policy success story celebrated by Republicans and Democrats alike. It has a unique structure in which the government, instead of providing health coverage directly, manages a market of private options. Patients have the freedom to choose among dozens of competing plans.
Yes, but the federal government mandates a complicated payment structure for Part D. First, enrollees pay a $405 deductible; beyond that, their insurers pay 75% of retail drug costs up to $3,750 in a year. Then enrollees enter the “doughnut hole, which requires a payment of 44% of the cost of brand drugs and 35% of the cost of generics. In 2018, enrollees exit the doughnut hole when the prescribed drugs reach a total of about $8,400 in retail cost; next comes the catastrophic part of the plan, where the insurer and the government cover 95% of drug costs.
The doughnut hole is set to end next year, but, if you have high drug costs, your liability in the catastrophic zone of coverage is open-ended. There is no out-of-pocket cap. You pay 5%, and that obligation can be devastating for many families.
Express Scripts, for example, reports that in 2016, the average prescription for specialty drugs to treat inflammatory conditions like rheumatoid arthritis and Crohn’s Disease cost $3,600 per month, or more than $40,000 a year. This means that, after you have emerged into the catastrophic portion of Part D insurance, you will owe about $1,600 out of pocket. Oncology drugs are even more expensive, and, of course, many Americans have more than a single condition.
In 2016, the Medicare Payment Advisory Commission proposed that the government should “eliminate enrollee cost-sharing the out-of-pocket threshold.” The report pointed out that for the population of patients with high out-of-pocket costs, those costs persisted out into the future. That sounds like a sensible solution.
High Annual Limits in Commercial Plans
Most private health plans have annual out-of-pocket limits for total spending on covered services, but even with that limit, out-of-pocket spending can be high. This is especially true as plans continue to increase deductibles and shift more costs to enrollees. The Affordable Care Act, despite its title, has annual out-of-pocket limits that are astronomical for some Americans: $7,350 for an individual plan and $14,700 for families (and these figures do not count premium payments). The median household income in the U.S. is about $60,000, so, under ACA health plans, families can be spending one-fourth of their before-tax pay on health care.
Even a few thousand dollars can be a burden. Between 2005 and 2015, the proportion of enrollees in employer-sponsored health insurance plans with out-of-pocket expenses (again, not including premiums) that exceed $1,000 a year rose from 17% to 24%. Some 12% in 2015 had expenses exceeding $2,000 and 2% paid more than $5,000, according to an analysis by Peterson-Kaiser Health System Tracker.
A Bias Against Drugs
High out-of-pocket costs are symptomatic of the bias insurers have against drugs and in favor of other parts of the health-care system. For example, the actuarial value – that is, the percentage of total average costs for benefits that a plan will cover – is 72% for hospitals, 71% for professionals and other, and just 54% for drugs in silver ACA Exchange plans with combined medical and pharmacy deductibles. A rational health insurance plan would weight drugs at least equally and probably more heavily than hospitals and doctors given that they can lower costs for other services.
Medicare has the same problem. Hospitals represent 40% of total Medicare spending and only 9% of the average recipient’s out-of-pocket costs: a ratio of 4.4. But pharmaceuticals represent 12% of total spending and 19% of out-of-pocket costs: a ratio of 0.6!
In Issue No. 20, we reported on the Kaiser Family Foundation’s detailed annual survey of health benefits. One finding was that more and more insurers were adding a fourth, fifth, or even sixth tier to their policies for higher-priced, or specialty drugs. In 2016, some 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. Specialty tiers usually require a higher out-of-pocket payment from patients, and insurers are now more likely to require onerous coinsurance (that is, a percentage of the cost of the drug after the deductible) rather than copayment (a flat fee for a prescription drug that is predetermined by their health insurance plan).
Kaiser found that coinsurance for drugs on a specialty tier can exceed 25% in employer plans. According to the BCBS Network of Michigan website, their Medicare Advantage enrollees pay 45% of the retail cost of Tier 4 non-preferred brand-name and generic drugs and between 25% and 33% of the cost of Tier 5 specialty drugs.
Facing high out-of-pocket costs even when using their insurance, many Americans simply decline to fill their prescriptions.
A study in the Journal of Oncologic Practice by Sonia Streeter and colleagues found that “abandonment” rates for cancer-drug prescriptions soar when the out-of-pocket costs exceed $100. The researchers found that one-tenth of new oncolytic prescriptions went unfilled and that “claims with cost sharing greater than $500 were four times more likely to be abandoned than claims with cost sharing of $100 or less.” And this is cancer, a disease that everyone knows is frequently fatal.
In other words, high insurance out-of-pocket costs make Americans sicker – and that, in turn, causes total health-care spending to rise.
A Meaningful Out-of-Pocket Spending Limit
One way to address the problem is a flat out-of-pocket spending limit on drugs. A study last year by the consulting firm Milliman, commissioned by the Leukemia and Lymphoma Society, modeled the impact of a cap of $150 per prescription on popular Silver-tier individual exchange plans under the ACA. The cap would take effect regardless of whether or not a member had met their deductible. The analysis concluded: “Assuming no other changes to benefit design, a $150 prescription drug cost sharing cap per script for a typical Silver plan in the individual market would increase monthly premiums by about 0.7%, or less than $3 per month” in 2016 and an estimated 0.8% in 2017 or 2018.
The Milliman researchers noted that “only small copay increases in other benefits are necessary to approximately offset premium increases resulting from the $150 cap, such as increasing copays to PCP [primary-care physician] visits and generic medicines by $1 to $5.”
States like Colorado and Montana now require a subset of insurance plans sold within their states to offer this kind of real insurance – that is, plans with fixed copays and no deductibles for medicines. The action taken in these states helps enhance the choice of benefit designs available to patients – and provides patients with options with lower up-front costs and smooths out expenses over the plan year.
The federal government can help address high-drug-cost anxiety by ending catastrophic exposure on Part D Medicare policies, as the Medicare Payment Advisory Commission has recommended. This step of providing a “real cap” on out-of-pocket spending for Medicare drugs, plus state action and some public and official pressure, could encourage commercial insurers to offer sensible insurance too.
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The health-care spending data being released lately can make your head swim. Let’s try to make some sense of it – and then turn to a refreshing new report from the President’s Council of Economic Advisers.
In Newsletter No. 24, we reported on National Health Expenditure [NHE] figures for 2016, according to actuaries of the Centers for Medicare and Medicaid Services. Overall health costs rose 4.3%, the smallest increase since 2013, and pharmaceutical costs rose only 1.3%.
Then, in Newsletter No. 26, we reported on data gleaned by Express Scripts, the largest pharmaceutical benefit manager (PBM), which found that in 2017, drug spending for its private clients rose only 1.5% -- the smallest increase since the company became gathering records in 1993. The rise was consistent with data previously reported by another large PBM, Prime Therapeutics, which found that in the first half of 2017, spending increased at 0.8% compared with the same period the year before.
We also noted in that newsletter that the Health Care Cost Institute (HCCI) reported an increase in total health expenditures for 2016 of 4.6%, about the same as the CMS report. But HCCI found that pharmaceutical spending was up 5.1%, compared with 1.3%, according to CMS. The difference could mainly be explained by the fact that CMS was looking at costs net of discounts and rebates while HCCI looked at gross costs.
A New Report Projects Spending Through 2026
With us so far?
Now, we have a new report on National Health Expenditures (NHE) from CMS, issued on Feb. 14, and summarized in a Health Affairs article by Gigi Cuckler and seven other officials of CMS.
This report consists not of hard data but of forecasts through 2026. For 2017, CMS believes that the increase in NHE was 4.6%, just a few ticks above the 4.3% in 2016. Also for 2017, CMS estimates that pharmaceutical expenditures (net of rebates, etc) will increase by 2.9% -- higher than what the PBMs indicated but still a small increase and well below overall NHE.
But in 2018 and the years after, CMS expects major increases in pharmaceutical spending – 6.6% in 2018 and about the same annually through 2026. These are only guesses, but they are disturbing on their face and require some explanation.
First, prescription-drug expenses are forecast to rise 6.3% annually, on average, from 2017 to 2026; overall, NHE is projected to rise 5.4% -- less than a percentage point difference. Second, forecasting drug costs is a difficult proposition. CMS proved that a year ago when it predicted that drug spending in 2016 (which had ended a month before) would rise 5%. Spending actually rose just 1.3%.
Consider the factors that boost drug spending. Begin with prices of the vast majority of medicines, both generics and branded drugs. The trend for these medicines is flat to down, as the PBM data show clearly. Next, look at utilization. Americans are using more medicines every year. That’s a good thing since taking prescription drugs prevents patients from getting sicker and moving into the more costly parts of the health-care system: physician visits and hospitals. Next, examine which branded drugs are losing their patent protection. Medicines are unique in health care because their prices go down over time as more competitors enter the market and benefits continue in perpetuity, but, as it happens, the dollar-value of branded drugs whose patents expire in 2018 will be lower than in years past; hence, that estimated 6.6% increase in costs.
Now the story grows more complicated. To a great extent, the CMS projections of higher drug-cost growth is the result of forecasts that new drugs – especially more costly and more powerful specialty drugs, such as cancer immunotherapy treatments – will enter the market. In other words, increased spending reflects not so much drug-price inflation as innovation, so apples are not being compared to other apples.
One way to reduce drug spending growth would be to pass a law banning pharmaceutical research. No new immunotherapy drugs to fight cancer would mean no increase in costs from innovative drugs entering the market.
In fact, we are living in a golden age of medicines. Already this year, the Food & Drug Administration has approved Erleada, to treat prostate cancer; Symdeko, for cystic fibrosis; Biktarvy, to treat HIV infections; and Lutathera, for cancerous tumors of the pancreas or the gastrointenstinal tract. When a new drug comes on the market to treat a disease that has been effectively treated before, then, by definition, drug costs will rise. But lives will be prolonged or saved. Without weighing the benefits, citing costs is meaningless.
Some Perspective on All Those Numbers
Despite the deficiencies of huge, aggregate numbers, the NHE projections do allow us to put health-care costs into perspective. For example….
Where the Money Is: Hospitals
Hospitals are where the money is. Hospital spending is more than three times drug spending, but unlike medicines – whose use increases every year, mainly through innovation – hospitals are on the decline. A special section in the Wall Street Journal on Feb. 26 points out, “Traditional hospital care is too costly and inefficient for many medical issues.” The number of community hospitals has fallen from nearly 6,000 in 1980 to fewer than 5,000 today despite an increase of 100 million in the U.S. population. Hospital stays have been dropping since 2007.
A provocative article in the New England Journal of Medicine’s Catalyst in December was headlined, “Do Hospitals Still Make Sense?” It notes that inefficiency is built into the system:
In the not-too-distant future, health delivery systems will, and should be, paid for keeping people healthy and out of the hospital rather than for procedures and admissions. The economic framework of health care will be turned upside down, with profit being directed toward maintaining the health of populations rather than toward just thwarting illness.
It is unlikely, however, that this glorious day will arrive through the leadership of existing mega-hospitals. As the authors – Jennifer Wiler, Nir Harish, and Richard Zane – write,
It is challenging, if not impossible, for most large hospitals, with their high fixed costs, to morph into nimble, low-cost businesses. The delivery models that will succeed are those that do not simply extend the reach of the hospital but begin to entirely replace the hospital as we know it.
This is the real cost challenge: disrupting the incumbent system that accounts for one-third of NHE. The impact will be far greater than playing around at the edges, focusing, as so many politicians do, on the category that accounts for one-tenth of NHE – which also happens to be the category where huge innovation is occurring.
The CEA’s Refreshing Report
The Council of Economic Advisers recently weighed in on the issue of drug pricing, with a 29-page report. One of the CEA’s three members is Tomas Philipson, a leading health economist from the University of Chicago, and, while the report is not perfect, it reveals Philipson’s depth of knowledge and free-market orientation.
This report is valuable not so much for its recommendations (though many are excellent) but for its approach to a complex issue. It is refreshing to read a sentence like this in a government report: “It is misleading…to consider only the prices of these new drugs without evaluating the well-being of patients before the drug became available.”
The report uses the example of a patient diagnosed with HIV in the early 1990s. “Before new breakthrough therapies for HIV emerged, the price of a longer life was prohibitively high because a longer life could not be bought at any price anywhere in the world.” In fact, the price could be called infinite. But once HIV drugs were developed and marketed in 1996, “the price of a longer and healthier life for HIV-positive individuals decreased dramatically: it reached the equivalent of the price of the new, patented drugs.”
Competition then drove down the price further. The report concludes, “The example of innovative HIV drugs makes the essential point that even though the price of the drug was considerable and drug spending rose, the effective price of better health declined.”
How to lower the effective price of health care further? By “preserving incentives to innovate.”
The report notes that “the fixed costs of developing and bringing a drug to market are typically large…[and] the incentive to innovate is driven by whether expected profits exceed those high fixed R&D costs,” which are about $2.6 billion per new prescription drug approval “inclusive of failures and capital costs,” according to the Tufts Center for the Study of Drug Development. And “government policies have a major influence on the size of these fixed costs.”
The report notes that the FDA has put in place programs to speed up the entry of therapeutic drugs, but “there is still room for improvement – the average time of development and entry of new drugs of more than a decade is too long.”
The report also zeroes in on “biosimilars,” which, according to the FDA, are “highly similar to and [have] no clinicially meaningful differences from” existing branded biological products. Those biological products are large-molecule drugs that treat difficult illnesses such as cancer and auto-immune disease. Says the CEA report:
Lack of competition for biologics, including those with expired patents and data exclusivity periods, is one potential reason prices remain high. Eighteen of the top 30 selling biologics were first licensed in 2004 or earlier, suggesting that prices have remained high despite relevant patent expirations.
CEA says that one problem is that the FDA has not finalized guidelines for demonstrating biosimilar interchangeability yet. “Speeding up the issuance of final guidelines could add certainty and attract additional biosimilar applicants.” In addition, economics incentives such as buy and bill will continue to promote use of more expensive originator biologics compared to biosimilars.
High Prices ‘Result From Government Policies’
The report concludes that “many artificially high prices result from government policies,” and the CEA recommends not just changes to drug approvals but changes to Medicaid and Medicare – for example, giving Part D beneficiaries access to negotiated discounts at the pharmacy counter.
The report also advocates reducing Part B reimbursement for hospitals under the 340B drug rebate program, which has been distorted beyond its original purposes. The CEA proposes that some savings go to the Treasury and other savings to hospitals based on their uncompensated care. (The report devotes extensive coverage to 340B, which cries out for reform, as we noted in ourNewsletter No. 14.)
We will have more on 340B in an upcoming letter.
Hard on the heels of President Trump’s complaint in his State of the Unionaddress about “the injustice of high drug prices,” a new report says that total spending on medicines rose last year by only 1.5%.
Concerns about drug costs have been common among policy makers and within the media in recent years. But the truth about drug costs – and health-care costs in general – is often obscured by rhetoric.
Here are some key facts:
Drug Spending in 2017
The report from Express Scripts is a blockbuster. It shows that unit costs (that is, the cost of the average prescription, or what can be roughly called “price”) rose just 0.7% while utilization (how many prescriptions are issued per health-insurance subscriber) rose 0.8%. Unit costs rose considerably less than the Consumer Price Index, which, according to preliminary figures, was up 2.1% in 2017. In 2016, according to Express Scripts, unit costs rose 2.5% and utilization 1.3%.
The data are even more remarkable when you drill down. “Nearly half of our commercial plans saw their drug spending per beneficiary decrease in 2017,” reports the company. And spending on traditional medicines – that is, the vast majority of commonly used generics and branded drugs – actually declined by 4.3%, “due primarily to a 4.9% drop in unit costs.”
Meanwhile, spending on specialty drugs rose 11.3%, “the lowest increase we’ve seen,” according to Express Scripts. (The increase in 2016 was 13.3%.) The 2017 spending was driven, not by unit costs (which rose just 3.2%) but by increased utilization (8.1%) – a healthy development because it means that these advanced and effective drugs are getting to more Americans, mitigating the virulence of diseases and preventing long hospital stays and early death. (We will have more on the report in our next issue.)
The new Express Scripts numbers dovetail nicely with figures from Prime Therapeutics that we noted in Issue No. 22. Prime found that, for the first half of 2017, overall spending on drugs (both by Prime and its clients) for the firm’s commercial business rose 0.8%, and, again, the driving force was not increased prices but more use of medicines.
Average unit costs (that is, cost per prescription) fell by 2.8% while utilization rose 3.6%. For Prime clients, the unit cost of traditional drugs fell 8.6% while specialty-drug prices increased 3.7%.
Drug Spending in 2016
The data from the two PBMs are powerful, but, unfortunately, a breakdown of prescription-drug and health-care costs for the entire nation in 2017 will have to wait many more months. Still, there is little doubt about the trend.Competition is driving down the costs of traditional medicines and thus offsetting the effect of the costs of miraculous new medicines. As a result, we’re seeing total spending on drugs rising at less than the pace of inflation.
In Issue No. 24 of this newsletter, we examined a mass of data for 2016 presented in a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS).
According to the researchers, the increase in spending on prescription drugs in the United States in 2016 was only 1.3% -- by far the smallest rise in any health-care category. The increase for drugs contrasts with a 4.3% rise overall for national health expenditures (that 4.3%, by the way, is the smallest increase since 2013).
The report noted that annual increases in drug spending of 12.4% in 2014 and 8.9% in 2015 were aberrations, caused largely by pent-up demand for new drugs that cure Hepatitis C and by millions of uninsured Americans gaining access to medicines under the Affordable Care Act.
The researchers wrote that the 1.3% increase in 2016 “is more in line with the lower average annual growth during the period 2010-13 of 1.2% -- a rate that was driven by the shift to more consumption of generic drugs.”
HCCI vs. CMS: How to Reconcile?
But nothing is ever simple in the world of health-care costs. On Jan. 23, the Health Care Cost Institute (HCCI) issued its annual Health Care Cost and Utilization Report for 2016. That report looked at employer-based commercial health insurance data for Americans under age 65, and the increase in total spending was about the same as the CMS actuaries reported: 4.6%.
But the increase in prescription-drug spending was far different: 5.1% vs. 1.3%.
Why the discrepancy? Axios Vitals, an online news service, reported the high HCCI figure for drug costs; then, the next day, issued a clarification to provide “additional context to add to the institute’s math on price increases – specifically, drug prices…. HCCI tracked the rising list prices for pharmaceuticals but didn't account for widespread rebates. (Insurance programs often don't pay the full list price.)” Thus, wrote Sam Baker in Vitals, it is “worth noting that some of these price increases aren't always as steep in practice as they look on paper.”
To put it simply, the CMS data (like the Prime and Express Scripts data) subtract rebates from the PBMs, mainly to the employers who pay for commercial insurance; the HCCI data do not. (Imagine if you buy a car for $40,000 and the car dealer later sends you $5,000 as a rebate. What is the actual cost of the car? Clearly, it’s $35,000. Statistics that do not account for rebates give a foggy picture of total costs.)
Of course, if you are looking at year-to-year comparisons and rebates proportions stay constant, then there is no effect, but rebates have been rising. Citing QuintilesIMS data, Adam Fein reported in his blog Drug Channels that, while total undiscounted drug spending rose a little less than 40% between 2012 and 2016, off-invoice rebates, discounts, and other prices concessions more than doubled. “An excellent study by Berkelely Research Group (BRG) found that pharmaceutical manufacturers received only 62% of the list price of brand-name and generic drugs,” Fein wrote.
Pernicious Effects of Rebates
“Unlike care received at an in-network hospital or physician’s office, negotiated discounts for medicines are not shared with patients with high deductibles or coinsurance,” says the trade group PhRMA, which has been urging health plans to “share the savings” directly with patients rather than sending rebates to employers.
Rebates are not only unfair to consumers; they also foster pernicious incentives. In 2016, before he was nominated as Commissioner of the Food & Drug Administration, Scott Gottlieb told a congressional committee:
The problem is that our current system provides incentives for companies to push list prices higher, only to rebate the money later on the back end. Yet the rebates don’t benefit consumers equally, and they don’t necessarily help offset the costs paid by those who need a particular drug. The rebates eventually make their way back to health plans to help offset the collective costs of premiums.
But if a patient needs a particular drug, they will increasingly find that they are paying the full, negotiated price at the pharmacy counter. They never see the real ‘net’ price, after the rebate is applied much later. The rebate is paid to the health plan, not the patient buying the drug.
Gottlieb’s proposed solution is to replace after-the-sale givebacks with transparent up-front discounts. He is now in a position to help reform current practice.
Comparing Categories of Health-Care Spending
The Health Affairs article by the CMS researchers pointed out that prescription drugs accounted for 9.9% percent of total national health-care spending in 2016, compared with 9.7% in 2009. (Figure 1 of this Brookings Institution report shows that the 10% level is the same as in 1960.) Drug spending rose at a considerably lower rate than GDP in five of the seven years reported in the article. By contrast, hospital spending increased considerably faster than GDP in five of the seven years and about the same in other two.
Take a look at page 153 of the Health Affairs issue. It shows that in 2016, hospital expenditures were $1,083 billion; professional services cost $881 billion; and prescription drugs, $329 billion. In other words, hospitals account for about one-third of total health costs; doctors and other professionals, one-fourth; drugs, one-tenth.
Over the seven years covered in the report, hospital spending increased by $261 billion; drug spending, by $76 billion.
Meanwhile, the HCCI report shows one reason why hospitals deserve scrutiny.
“Surgical admissions,” says the report, “experienced a 16% decline in utilization from 2012 to 2016.” But, at the same time, total surgical spending over the period rose 9%. The average cost of a surgical admission was $41,702.
One reason for this trend may be that more simple surgeries are taking place in out-patient settings, while complicated and expensive surgeries are left for hospitals. Another is labor. A study by the Progressive Policy Institute found that rising labor costs, mainly at hospitals, “accounted for almost $65 billion in added health care costs in 2015, or 47 percent of the total increase in personal health care spending.” Hospital spending is more than triple prescription-drug spending. Where would you focus your attention if you wanted to control health costs in America?
The Value of New Medicines
In clarifying his Jan. 23 report on the HCCI study, Sam Baker of Axios Vitals wrote that some “expensive new drugs are far more effective than existing treatments. Improved products, of any kind, will always cost more.”
This may be the single most overlooked fact about drug costs. Let’s return to the new Hepatitis C drugs. In more than 90% of cases, these drugs cure the disease completely in only a few months. They are far more effective, with fewer side effects, than previous treatments. Yet reports on prices, or unit costs, of Hepatitis C medicines do not take into account the fact that these drugs are qualitatively different than their predecessors.
The acceleration of dramatic new discoveries – especially in the field of oncology drugs – makes this apples-and-oranges distortion even worse than in the past.
When politicians and journalists criticize the cost of individual specialty drugs, the response should be, “Compared to what?” What is the value of a breast-cancer drug that can extend the life of a patient by five years, compared to the previous gold-standard treatment? There are objective and subjective answers to such a question, and those answers – whatever they may be -- are far from zero. Innovation, by its nature, often raises prices because it offers something better.
The Power of Generics and Bio-Similars
But what makes medicines different from, say, surgeries, is that prices decline over time as patents expire, and more competitors appear. Express Scripts reported that 86% of its clients’ prescriptions are being filled with generics.
“When patents and exclusivity run out and generics enter the market, how much do they lower drug spending? A lot,” says a report from the Hutchins Center at Brookings. A 2014 National Bureau of Economic Research paper by Rena Conti of the University of Chicago and Ernst Berndt of MIT found “substantial price erosion after generic entry” – 38% to 46% for physician-administered drugs and 25% to 26% for oral drugs.
A study by Henry Grabowski, a Duke economist, and two colleagues, found that the average new drug has market exclusivity for about 13 years; then, in the first year that generic entry is possible, an average of eight competitors enter the marketplace if the drug’s gross sales are $250 million to $1 billion. The market share of the innovator drug drops to an average of just 11%.
Policies that increase competition from generics (which now account for about nine out of every ten prescriptions, up from one out of three in 1994) – as well as from biosimilars, which the FDA deems interchangeable with a sophisticated biologic product – may be the best way to constrain the cost of drugs while encouraging innovation through market forces.
New, miraculous medicines will, however, still be expensive – which is why insurance was invented. Currently, insurance for drugs, in a perverse twist, lets subscribers pay little or nothing for low-cost generic medicines while requiring them to contribute large amounts out of their own pockets for more costly specialty drugs.
Finally, the HCCI report reminds us that, if policy makers want to have an impact on costs, they should turn their attention toward the destructive effects of the rebates of which PBMs seem to be so fond and toward the categories where the money is: hospitals and out-patient care.
As we pointed out in our last newsletter, U.S. spending on prescription drugs rose only 1.3% in 2016, according to a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS). That was by far the smallest rise in any health-care category.
The growth rate for drug spending declined dramatically in 2016 from the previous two years (which were distorted by new drugs that cure Hepatitis C, for which there was pent-up demand) and was more in line with the 1.2% average annual growth rate from 2010 to 2013.
These figures offer a powerful rejoinder to politicians and pundits who single out the price of drugs as the culprit for rising health-care costs. But the rejoinder is even stronger when you realize that these numbers on spending don’t tell the whole story. The spending figures reflect changes in the price of drugs, yes, but also the volume of drugs used and the mix of drugs used, as newer products are introduced and older products become available in generic form.
“Revenue growth has been driven by new products and volume growth from existing products; price has been a net negative driver,” said a September report from the QuintilesIMS Institute.
Specifically, the report found that growth in the use of existing drugs averaged 2.6%, increases in revenues from new drugs averaged 3.8%, and prices of existing drugs rose 3.3% but declined an average of 2.5% when newly available generics are included. Yes, declined . The lifetime trajectory of most drug prices, unlike the prices of other goods and services, is downward. Over time, new drugs face competition, both from branded competitors with medicines that attack the same disease, and from makers of generics, which reach the market when patents expire.
New Medicines and Total Drug Spending
Let’s focus on the effect of new drugs on total spending. Consider an intractable disease – for example, a form of cancer for which there has not been an adequate treatment. Now assume that a new drug is discovered that substantially increases the life expectancy of someone afflicted with that cancer. Suddenly, a number of patients – assume 50,000 – at last have a beneficial treatment for their disease. Say that the drug costs $2,000 a month. Thus, over a year this medicine adds $1.2 billion to total spending on health care. Rather than a loss to society, this spending is an enormous gain, extending and enhancing the lives of people with the disease.
Now let’s do some back-of-the envelope calculations. Altarum Institute’s Health Sector Economics Indicators brief for Dec. 15 was headlined: “New CMS data reveal lower health spending growth, led by prescription drugs.” During the past three years (Nov. 1, 2014, to Oct. 31, 2017, the period covered in the report), spending on prescription drugs rose from $307 billion to $351 billion. That is an increase of about $140 per American. These figures, however, do not include the cost of medicines administered in doctors’ offices or hospitals.Estimating those amounts for the three-year period, based on history and forecasts, brings the total increase per capita to around $180; let’s just round it up to $200, or less than $70 a year.
So here’s the question: Is it possible that new drugs alone, approved over the past three years, justify the increased costs? No doubt.
Over the three years, the Food & Drug Administration approved 124 new medicines. Here are a few examples , each from a different pharmaceutical company: Entresto (developed by Novartis), a treatment for chronic heart failure; Ibrance (Pfizer), for certain kinds of breast cancer; Keytruda (Merck), for non-small-cell lung cancer; Epclusa (Gilead), a cure for Hepatitis C; Tecentriq (Genentech), an immunotherapy for lung and bladder cancer; Ocrevus (Roche), a drug that staves off disability for multiple-sclerosis patients; Venclexta (AbbVie), for leukemia; Syndos (Insys), for treatment of anorexia associated with AIDS and nausea associated with chemotherapy; and Dupixent (Regeneron and Sanofi) for eczema.
Huge breakthroughs are occurring in cancer. Last year alone, the FDA issued 16 oncology approvals, medicines that fight cancers of the blood, breast, lymph nodes, ovaries and more. A report in June by America’s Biopharmaceutical Companies, in conjunction with the American Cancer Society, found that 248 immuno-oncological drugs are now in development. The medicines harness a patient’s own immune system to fight cancer, the way that system fights bacterial infections.
Overall, since 2000, some 500 drugs have been approved by the FDA, and, currently, nearly 7,000 medicines are in development, about three-quarters of them considered “first in class” treatments. Not all of these drugs will make it to market (the process is long and expensive), but the ones that do will provide a boost to health that is worth a lot more than $70 a year.
A New $850,000 Drug
Still, it is disingenuous to ignore the high price tag for individual medicines. Luxturna, for example, was approved on Dec. 19. Developed by Philadelphia-based Spark Therapeutics, it’s described by the FDA as the “the first directly administered gene therapy approved in the U.S. that targets a disease caused by mutations in a specific gene.” Luxturna treats children and adults with an inherited form of retinal dystrophy that affects 1,000 to 2,000 Americans and can result in blindness. FDA Commissioner Scott Gottlieb hailed the breakthrough, saying that “we’re at a turning point when it comes to this novel form of therapy.”
The treatment’s cost is $425,000 per eye. "It's wildly expensive,” said Dr. Steve Miller, chief medical officer of ExpressScripts, the nation’s largest pharmacy benefit manager (PBM). But, Miller added, “To be very frank, I think they've priced it what I'll call responsibly."
Why responsibly ? First, analysts were expecting a price of over $1 million, given the drug’s effectiveness. “Patients who participated in the [clinical] trial…described, in interviews and in testimony to a panel of FDA advisers, seeing snowflakes for the first time or being able to read again,” said a report on the CNBC website. Second, it’s a one-time treatment; the costs don’t recur. Third, Spark is negotiating to allow government insurance (such as Medicaid) to pay for the drug over time, on an installment plan. And fourth, Spark is offering a refund if the treatment does not work as advertised. As Bloomberg reports:
In an agreement with the Boston-area insurer Harvard Pilgrim Health Care, Spark will get the full price of treatment up front. If patients don’t get an immediate benefit -- measured at 30 days, or a long term one -- measured at 30 months, Spark will have to give some of the money back in a rebate.
The details of the rebate program have not been announced, but the strategy is in keeping with an innovation called “value-based pricing” – which should more properly be called “value-based reimbursement” since drug manufacturers are reimbursed by private and government insurers. The list price is far from what manufacturers receive under normal circumstances after insurers, hospitals, and PBMs take their debates, discounts, and fees.
A plan like Spark’s represents a positive innovation in the realm of health-care costs because it emphasizes the benefit side, not just the cost side: If the benefit (or value) is reduced, then the cost is reduced as well.
Value-based reimbursement puts the right framework on analyzing costs. It gets us thinking, for example, about the impact of medicines on the use of other health care services. Keeping patients out of the hospital and doctors’ offices, drugs reduce overall health-care costs for the nation. And a true calculation of value-based reimbursement would look not only at the present but the far-off future. A statin that reduces cholesterol eliminates heart attacks which, without the drug, might occur 20 or 30 years out.
Michael Porter’s Value-Based Prescription
Michael Porter, the Harvard economist, offered a prescription for value-based health-care system eight and a half years ago in the New England Journal of Medicine . He wrote:
The central focus must be on increasing value for patients — the health outcomes achieved per dollar spent. Good outcomes that are achieved efficiently are the goal, not the false “savings” from cost shifting and restricted services. Indeed, the only way to truly contain costs in health care is to improve outcomes: in a value-based system, achieving and maintaining good health is inherently less costly than dealing with poor health.
Right now, Porter writes, “The focus is on minimizing the cost of each intervention and limiting services rather than on maximizing value over the entire care cycle.” But if we put the patient in the center of the system and focus on how we can improve his or her health, we are likely to find that medicines are the key to reducing health-care costs throughout the entire system. Drugs provide not only innovation but also a model for holding down expenses through competition.
Despite the uproar from politicians over pharmaceutical prices, the increase in spending on prescription drugs in the United States in 2016 was only 1.3% -- by far the smallest rise in any health-care category. The stunning figure was part of a mass of data presented in a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS).
National health expenditures (NHE) rose in 2016 by 4.3%, the lowest rate since 2013. According to the article, “the slowdown was broadly based,” but the decline in the growth rate of spending on medicines was particularly dramatic.
The statistics show that the sharp rise in drug spending in 2014 and 2015 – at rates of 12.4% and 8.9%, respectively – was an aberration. “In particular,” said the article, “strong growth in spending for drugs to treat hepatitis C contributed to higher overall spending growth in 2014 and 2015.” In addition, during this period, millions of uninsured Americans gained access to medicines under the Affordable Care Act.
The Health Affairs article continued:
The 2016 rate of prescription spending growth is more in line with the lower average annual growth during the period 2010-13 of 1.2 percent – a rate that was driven by the shift to more consumption of generic drugs…. Despite these large fluctuations in growth rates over the past several years, retail prescription drugs’ 10 percent share of national health expenditures in 2016 is similar to the share in 2009.
Prescription-drug spending rose at a considerably lower rate than GDP in five of the seven years reported in the article (again, the outliers were 2014 and 2015). By contrast, hospital spending increased considerably faster than GDP in five of the seven years and about the same in other two.
Here is a comparison of increases in 2016 by spending category:
The Health Affairs article also reveals that drug utilization – that is, the number of prescriptions dispensed – increased 1.9%. Since total spending increased at a lower rate, unit prices for medicines actually declined in 2016.
The article also reported that total spending on generic drugs (including brand-name generics) declined in 2016. Generics constitute 84% of all prescriptions.
So why do Americans feel drug costs – and health-care costs in general – are high? The data have a good answer. It turns out that out-of-pocket spending, which includes consumer co-payments, deductibles, co-insurance, and spending for services that are not covered, rose 3.9% in 2016 -- the “fastest rate of growth since 2007 and higher than the average annual growth of 2.0 percent in 2008-15.” One major reason is the rise in the proportion of covered workers who were enrolled in high-deductible plans from 20% in 2014 to 24% in 2015 to 29% in 2016. “At the same time,” says the article, “average private health insurance deductibles for single coverage plans increased 12% in 2016.”
You might think that higher out-of-pocket costs may give workers an incentive to be better shoppers of health services, but research shows that they cause them to cut back on services they truly need, such as preventive care and medications. Those services help reduce costs in the future.
The new statistics confirm what any sophisticated analyst already knew: prescription drugs are a small portion of total health expenditures and can deliver a big bang for the buck (the hepatitis C drugs being a good example: they obviate the need for a liver transplant that can cost more than a half-million dollars).
But critics of drug spending persist. Consider a new report from the National Academies of Sciences, Engineering and Medicine called “Making Medicines Affordable: A National Imperative.” The report goes wrong at the start by stating, “Spending on prescription drugs has been rising dramatically.” It has not. According to the CMS actuaries, from 2010 to 2016, drug costs rose from $253 billion to $339 billion, or 30%. Hospital costs over the same period rose from $822 billion to $1.1 trillion, or 32%. Overall NHE rose from $2.6 trillion to $3.3 trillion, or 28%. In other words, drug spending is rising about the same as health spending in general and a bit less than hospital spending.
A study released in May by the IQVIA Institute for Human Data Science concluded, “Real net per capita drug spend has been relatively unchanged over the past decade.” Adjusted for inflation, spending by all parties (insurers, government agencies, employers, and individuals) on drugs per American was $811 in 2007 and $895 in 2016. That’s a compound annual growth rate of 1.1%.
The National Academies report also makes the claim: “Drug costs are a significant part of the nation’s total spending on health care.” It depends on what you mean by “significant.” Is 10% of total spending significant? Today, drugs represent 10.1% of total HCE, according to the Centers for Disease Control. In 1960, they represented 9.8%. Overall, hospital spending is triple drug spending, and physician and clinical spending is twice drug spending.
Also, it is critical to understand the forces responsible for increases in drug spending. As a September report from the QuintilesIMS Institute stated, “Revenue growth has been driven by new products and volume growth from existing products; price has been a net negative driver.” Specifically, the report found that growth in the use of existing drugs averaged 2.6%, increases in revenues from new drugs averaged 3.8%, and prices of existing drugs declined an average of 2.5%.
We hardly want to discourage the development of new drugs, and we certainly want people to use more medicines that make them healthy and keep them out of the hospital. So rising revenues in those areas are beneficial. Because of competition, especially from generics as branded drugs lose patent protection, drug costs – unlike costs in other parts of the health-care system fall over time.
The QuintilesIMS study concludes, “Net revenue growth for prescription medicines will average 2–5% through 2021; growth will be driven by new and existing products and offset by patent expiries.” That’s similar to the revenue growth range of practically every industry in America.
Proposals That Will Harm Health
If you get the problem wrong, it is hard to get the remedy right. In the “National Imperative” report, the proposals to lower costs– which we have heard many times before – would, in many cases, make matters worse. As the dissenting view accompanying the report states, “The committee’s recommendations, if actually implemented, will lead to unintended consequences that will damage the health of people in the United States and damage the health of an industry whose innovations are essential to addressing unmet medical needs in the future.”
Among the remedies proposed is to have Medicare, all 50 Medicaid state programs, the Veterans Administration and other government programs negotiate drug prices as a single block, giving them more market power as purchasers. But the top three pharmaceutical benefit managers (PBMs) already have tremendous market power, and and recent results show they use that power to keep costs down even as utilization rises. Unfortunately, some of the mechanisms that the PBMs use operate on a foundation of perverse incentives (such as rebates) that can come at the expense of the health of patients. Importantly, recent data reveal that patients aren’t directly benefiting from the savings incurred by some of the schemes utilized the PBMs. Still, more government involvement in medicine-buying will inevitably lead to more limited choices and access to care for Medicare and Medicaid beneficiaries. That has been the experience in Europe and Canada.
There is no doubt that some drugs are indeed costly, but that’s why insurance was invented – to mitigate the pain of unexpected, big expenses. Unfortunately, the structure of health insurance policies is changing, with patients responsible for a larger proportion of the costs of advanced medicines. As we have pointed out before, the trend in insurance-policy design is to cover the cost of inexpensive generics almost entirely and to force patients to pay hundreds or thousands of dollars for specialty drugs. This is backwards.
As Adam Fein wrote last summer Drug Channels:
These benefit designs essentially discriminate against the very few patients undergoing intensive therapies for such chronic, complex illnesses as cancer, rheumatoid arthritis, multiple sclerosis, and HIV.
According to the Kaiser Family Foundation’s Annual Survey of Employer Health Benefits for 2016, more and more insurers are adding a fourth tier to their coverage plans. Last year, 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. And copayments (that is, what insured people pay out of their own pockets) are, on average, more than nine times higher for fourth-tier specialty drugs than they are for first-tier generics. That multiple has nearly doubled since 2004.
As a result, writes Fein, even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.” About one-fifth of plans with a specialty-drug tier have no limit at all on what a patient pays in coinsurance.
The Year Ends, the Myths Persist
This edition ends our newsletter’s first year, and, just as at the start of 2017, politicians and media are still purveying pernicious myths about health-care costs. But a flood of data shows otherwise. There is probably no better example of the prevailing misunderstanding than the conclusion of the prestigious National Academics that “spending on prescription drugs has been rising dramatically.”Our impression, however is that, slowly but surely, minds are changing.
No one denies that reasonable steps need to be taken to constrain spending – and the smartest step is to increase competition. We have a tried-and-true mechanism in generics and their analogue for sophisticated biologic products called biosimilars.
Our mission continues in 2018: to inject sanity and facts into the debate over health-care costs, so that decision-makers in the public and private sector can make wiser choices.
Issue No. 23: Biosimilars Hold Hope for Lowering Drug Costs and Improving Patient Access, But Challenges Surface
Over the past decade, generic drugs have kept a lid on the cost of health care and increased the access of Americans to effective pharmaceuticals. The big question now is whether medicines based on more complex, previously patented biological products can have a similar – or even greater -- impact. Despite recent legislative changes, barriers remain to the kind of competition that is already having a beneficial effect on costs and increasing access in Europe.
The Generic Success Story
Today, about 90% of all U.S. drug prescriptions are filled with generics, compared with just 57% in 2004. The average out-of-pocket cost for a generic prescription is just $8, and many generics cost insured patients nothing at all. Express Scripts, the largest pharmaceutical benefit manager (PBM), reports that “prices for the most commonly used generic medications [are] down 8.7% this year  and 73.7% lower than the 2008 base price. As a result, the unit cost of the average commonly used medicines (as opposed to what are termed “specialty” drugs) fell last year by 2.3%.
A generic is a medicine that “works in the same way and provides the same clinical benefit as its brand-name version,” according to the Food & Drug Administration (FDA). It is the “same as the brand-name medicine in dosage, safety, effectiveness, strength, stability, and quality.” On average, generics come to market 13 years after a patented, branded drug, and that branded drug quickly declines in both price and revenues.
Cost Savings From Biosimilars?
Now, enter biologics. These are complex medicines, which, according to the FDA, “are manufactured through biotechnology, derived from natural sources or, in some cases produced synthetically.” Biologics treat a wide range of conditions, including rheumatoid arthritis, inflammatory bowel disease, and several types of cancer. Seven of the 10 best-selling drugs in the U.S. in 2015 were biologics, including such well-known names as Humira and Avastin, and global sales of all biologics are estimated to reach $390 billion in 2020, or more than one-third of today’s total pharmaceutical revenues.
It would seem logical that, just as generics have reduced the overall costs of branded, conventional, small-molecule medicines, the process would be repeated for biologics and biosimilars. A biosimilar is a medicine that has no clinically meaningful difference with its branded biologic and, as a March article in Scientific American put it:
People in medicine and policymaking have counted on what they sometimes call a “biosimilar revolution” to push prices down, much as generics have frequently replaced high-priced brand-name drugs in the past. Some have predicted cost savings from biosimilars in the U.S. and Europe to be as high as $110 billion by 2020.
But the analogy is not exact. Identical generic versions of small-molecule drugs can be chemically synthesized, but that is not the case for complex biologics. Manufacturing a biologic is a far more complicated, expensive task than making a small-molecule drug, and there are regulatory differences as well.
‘No Clinically Meaningful Differences in Safety and Effectiveness’
Still, as patents expire for biologics, biosimilar medicines are being developed to compete with their branded counterparts. A biosimilar is not completely identical structurally to the branded product, but it is “highly similar,” in the words of FDA Commissioner Scott Gottlieb and Leah Christi, associate director for therapeutic biologics in the FDA’s Office of New Drugs. An approved biosimilar, they wrote in October has “no clinically meaningful differences in terms of safety, purity and potency (safety and effectiveness) from — an already FDA-approved biological product, called the “reference product.”
Making a biosimilar requires an investment that dwarfs what’s needed for a generic small molecule drug. A biosimilar typically takes five to seven years to develop at a cost reported to be more than $100 million in some cases, not including regulatory fees. By comparison, a generic version of a small-molecule drug takes about two years at a cost of $1 million to $2 million. As a report by the Congressional Research Service (CRS) points out: “The biologic drug Remicade contains over 6,000 carbon atoms, almost 10,000 hydrogen atoms, and about 2,000 oxygen atoms.”
Some drug companies, nevertheless, are hard at work producing biosimilars that work the same as patented biologics currently on the market. Just asthe Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxman Act, cleared a regulatory path for generics, the Biologics Price Competition and Innovation Act of 2009, part of the Affordable Care Act, or Obamacare, has facilitated the development of biosimilars.
So far, seven have been approved by the FDA. The first, in March 2015, was Sandoz’s Zarxio, a biosimilar to Amgen’s Neupogen; the drug stimulates the production of white blood cells to fight infection for cancer patients. The latest approval is for Mvasi, developed by Amgen and Allergan and authorized on Sept. 14. A biosimilar to Genentech’s Avastin, Mvasi treats types of lung, brain, kidney, colorectal, and cervical cancers.
At the time of the approval of Mvasi, FDA Commissioner Scott Gottlieb said:
Bringing new biosimilars to patients, especially for diseases where the cost of existing treatments can be high, is an important way to help spur competition that can lower healthcare costs and increase access to important therapies. We’ll continue to work hard to ensure that biosimilar medications are brought to the market quickly, through a process that makes certain that these new medicines meet the FDA’s rigorous gold standard for safety and effectiveness.
Gottlieb’s focus on biosimilars is encouraging, but the U.S. is late to the biosimilars game and there are challenges.
Europeans Are Ahead on Biosimilars
The European Medicines Agency authorized its first biosimilars in August 2007 and so far has approved a total of 37 such products. A study by QuintilesIMS, published in May, found that European biosimilars have not only lowered health-care costs but also have increased patient access:
For most classes, there is a significant increase in consumption since biosimilar entry in countries which had low starting volumes. There are also some countries which already had high usage of classes before biosimilar entry, such as Sweden with Anti-TNF’s [drugs such as Humira and Remicade, which treat inflammation], which show a significant increase in consumption.
For a class of drugs termed G-CSF, which stimulate the bone marrow to produce white blood cells (an example is Neupogen), increased access in some European countries has been especially significant, with consumption rising 500% in Slovakia and 164% in Norway. The study adds:
The increased competition of biosimilars entering the market has an impact on not just the volume of the directly comparable referenced product, but also the volume of the whole product class…. All products in these therapy areas, including biosimilars, are contributing to this increased patient access.
What Is Hindering U.S. Progress on Biosimilars?
But it’s not merely the late start that is preventing the United States from gaining the full benefits of biosimilars.
Amgen’s biosimilar Amjevita was approved a year ago, with hopes it would compete with Abbvie’s Humira, America’s top-selling medicine. But the market launch was tied up in lawsuits, and last month Amgen agreed to a settlement that will delay Amjevita’s appearance on the market until 2023.
Meanwhile, Johnson & Johnson has focused on its relationship with insurance companies to limit competition for its biologic Remicade, which combats such illnesses as rheumatoid arthritis and Crohn’s disease, against Pfizer’s Inflectraand Merck’s Renflexis, both biosimilars approved by the FDA and on market in the United States. Inflectra and Renflexis seem to be fostering just the sort of competition Gottlieb and other policy makers want, lowering costs with the goal to increase access.
J&J’s efforts to defend the drug triggered a lawsuit in September by Pfizer. Originally, claimed Pfizer, health insurance companies had classified Inflectra at parity with Remicade (whose technical name is infliximab), meaning there was no reason to favor one drug over the other. “However,” said a Pfizer statement, “insurers reversed course after J&J threatened to withhold significant rebates unless insurers agreed to ‘biosimilar-exclusion’ contracts that effectively block coverage for Inflectra and other infliximab biosimilars.”
In other words, according to Pfizer, J&J was using its contractual relationships with insurance companies to block the use of a competitor’s product. “These anticompetitive practices are preventing physicians from trying and patients from accessing the biosmiliar,” said the Pfizer statement.
Wrote reporter Lydia Ramsey in Business Insider last month: “While there has been a lot of hope that biosimilars will help save the US healthcare system billions on costly, biologic drugs, it's taking longer than expected to get to that point.”
It is not hard to see why.
In addition to the obstacles that are the source of the Pfizer-J&J suit, biosimilars have to contend with misunderstandings by physicians and patients about the nature of biosimilars. The FDA’s website has made a good effort to show that, when it approves a biosimilar, it will work like a biologic and it does not differ in any meaningful manner in safety or effectiveness. But the FDA still has more work to do in providing education beyond a placement of materials on their website. While the FDA is one source for information, physicians also have to contend with information about biosimilars from a variety of stakeholders. Some of that information is misleading on the safety and efficacy of biosimilars.
Adding to the complexity of the situation, biologics are generally administered by physicians, who have to contend with a complicated system of insurance reimbursement that may not support biosimilar uptake. Just last month, the Center for Medicare and Medicaid Services reversed its biosimilar coding and reimbursement policy under Medicare Part B to support the uptake of biosimilars. It will be important that other insurers support similar policies in the setting of physicians’ offices.
Biologics are life-changing drugs that require hefty R&D costs, long development times, and complex manufacturing. They are expensive. The best way to control the cost of these medicines and provide greater access is through legitimate competition following a period of patent exclusivity. We have seen the process work for generics, and it can work for bioimilars as well.
Still, if physicians don’t recognize that FDA-approved biosimilars work the same as biologics, they won’t prescribe them. Insurers, too, need to realize that in the long run, biosimilars offer cost savings and access that will help their clients. Policy makers should focus on ensuring that a competitive system can operate freely, and the FDA and other institutions must make it a priority to enhance education about these medicines. Biosimilars offer great hope, but they need active support from multiple stakeholders to help realize their potential.
Despite what you hear from politicians, most drug prices are going down.
That’s the clear conclusion of the mid-year report of Prime Therapeutics, one of the nation’s largest pharmaceutical benefit managers (PBMs). For its commercially insured patients, Prime says the unit cost of drugs – that is, the average price of an individual prescription -- fell by an average of 2.8% for the first half of 2017. At the same time, utilization – that is, total prescriptions written – increased by 3.6%. So, overall, spending on drugs by Prime’s commercial clients increased by 0.8% for the first half of 2017 compared with the same period last year.
As Adam Fein wrote on the Drug Channels blog:
The data demonstrate that public perception of outrageous drug spending growth has not caught up with 2017’s realities. Sorry to be the bearer of non-fake news.
Prime, which recently entered into a partnership with Walgreen’s, is a PBM for more than 20 million Blue Cross-Blue Shield members in 14 states. Its report confirms other recent reports that drug prices are rising minimally.
For example, during the full year 2016, members of the CVS Health PBM experienced unit-cost increases in 2016 of only 1.2%. Total spending rose 3.2% because of more utilization, but 38% of commercial clients saw their spending on drugs decrease. Express Scripts reported that unit costs rose 2.5% in 2016 and total spending, 3.8%. “The average member out-of-pocket cost for a 30-day prescription was $11.34, only a 9-cent increase from 2015,” reported the PBM, which is the nation’s largest. For CVS members, prescription-per-month costs fell 39 cents. (Insured families pay about 15% of the total cost of medicines.)
Drilling Down on the Prime Therapeutics Data
But let’s get back to the Prime mid-year update, issued on Oct. 12, and do some drilling down.
Prime divided up its report among commercial, Medicaid and Medicare clients. For commercial members, the unit cost of “traditional” drugs, including generics – which account for about nine out of ten prescriptions – and commonly used brand-name drugs, declined a stunning 8.6%. Even after accounting for increased usage, total spending on traditional drugs dropped 5.1%.
The unit cost of “specialty” drugs – highly advanced medicines, often administered in hospitals and doctors’ offices and treating such diseases as cancer – rose 3.7% on average. Utilization of specialty drugs rose 11.5%. Remember that for health costs overall, an increase in the use of these powerful medicines is a good thing. Patients taking innovative drugs have a better chance of avoiding expensive stays in hospitals, whose share of total health-care spending is more than three times greater than that of medicines.
For Prime’s Medicare Part D clients, the mid-year report was even better. Overall, unit costs fell 0.7%, utilization rose 0.6%, so total spending dropped0.1%. Here is the breakdown:
Prime also has Medicaid clients. For them, results were even better – thanks to decreases in unit costs for both traditional and specialty drugs. Overall, despite a 1.8% increase in utilization, Medicaid-client spending dropped 1.8% for the first half of 2017. Here are some details on the traditional vs. specialty breakdown:
The reduction in unit costs for specialty medicines for Prime’s Medicaid clients appears to be the mainly the result of a 35% drop in spending on Hepatitis C drugs, a category where competition has accelerated and where the medicines are quickly curing patients, who then have no need for the drug.
Top Spending Categories: Diabetes, Autoimmune, Cancer
The top spending category is diabetes, which ranks first for Medicaid and Medicare among Prime clients and a close second for commercial clients. Overall, one in every seven dollars of spending, according to the report, went to diabetes.
Among conditions treated by commercial clients, autoimmune diseases (such as rheumatoid arthritis, psoriasis and Crohn’s) ranked first. In fourth and fifth places were cancer and multiple sclerosis. Together, these three conditions represent one-quarter of all Prime patient spending – and all those conditions are treated with specialty drugs. Spending on such medicines is rising: by 25% for autoimmune, 20% for cancer and 4% for MS during the first six months of 2017 compared with the same period last year. By contrast, for six of the seven other top 10 drugs on the Prime list, spending fell.
The best antidote for rising prices is competition, which is having a powerful effect on traditional drugs. But specialty drugs are another matter. They are often biological products, and, as we noted in our last newsletter (see Issue No. 22 here), the competitive process that has worked with generics for traditional medicines is often thwarted for biologics. If policy makers truly want to have an effect on drug prices, they should turn their attention to clearing a path for biosimilars.
The Role of Drugs in Overall Health-Cost Increases
Altarum Institute’s Center for Sustainable Health Spending last week came out with data through Sept. 30, and the numbers provide important perspective on the real role that drug spending plays in overall health costs.
For example, let’s compare spending over the two-period ending this September. According to the Altarum data, total national health spending rose by $288 billion. Of that increase, hospital spending accounted for $76 billion; physician and clinical spending, $65 billion; and pharmaceuticals, $31 billion. A category termed “Administration and net cost of health insurance expenditures” registered an increase of $33 billion.
Here’s another way to look at the two-year rise…
Calculations based on Health Sector Economic Indicators, through September 2017;
Altarum Institute’s Center for Sustainable Health Spending
These figures, of course, do not say anything about the quality of the treatment provided. For drugs, at least, innovation is providing helping people live better and longer. That extra $50 or so a year is buying better medicines.
By the way, health spending overall increased 4.3% for the year ending Sept. 30, compared with an increase of 3.7% for GDP – not a lot of difference.
Still, there’s good reason to be worried about how much we spend on health care – now 18% of GDP or about twice as much as the average developed nation. This difference is exaggerated by the lack of social spending in the U.S. compared to other countries. Spending on family benefits and incapacity accrues to good health, and, as a proportion of GDP, France, for example, spends half-again as much as the United States. Still, we can’t address costs coherently unless we peel away the mythology and look straight at the facts.
It’s Not Surprising That the U.S. Spends More on Health Care Than
Other Countries; We’re Richer
The focus on how much we spend on health care, however, is distracting us from concentrating on the real problem: how we spend those health-care dollars. At 18% of GDP, the U.S. does indeed spend more than any other country in the Organization for Economic Co-operation and Development, or OECD. But this should not be surprising.
First, when one adds in social spending, which includes family benefits, incapacity and other activities that impact health, the proportion of total spending to GDP is about the same. The U.S. devotes about 19% to social spending while many countries in the OECD spend over 25%., including Denmark, at 29%, and France, at 32%. Second, the fact that the U.S. spends more on health care is entirely expected when one considers the wealth and income of the United States. For example, the per-capita GDP of the U.S. is 46% greater than that of the average nation in the European Union and 39% greater than Japan’s.
Richer nations naturally tend to spend more on things that improve overall quality of life. And health care – along with education and entertainment -- tops the list. So the fact that the U.S. spends more on health care proves only that the U.S. is a wealthy country. What we really need to know is what is causing the inefficiencies in our system and what do we need to do to fix the problem. We can’t address costs coherently unless we peel away the mythology and look straight at the facts.
First Study of Multi-Year Cancer Costs
A good example of a clear-eyed view comes from a study by Gabriela Dieguez, Christine Ferro and Bruce Pyenson of the research firm Millman Inc., presented Nov. 7 to the Cancer Innovation Coalition. The study represented the first multi-year research into the costs of cancer. Specifically, the researchers examined records of 145 million Americans with commercial insurance and looked at treatment for lung, colorectal and breast cancers, starting a year before diagnosis and ending three years after diagnosis.
Over the entire four-year period, a patient with lung cancer incurred $282,000 in costs; with colorectal cancer, $165,000; breast cancer, $101,000 (all cancers in the study were diagnosed in 2011). Out-of-pocket costs were $11,000 for lung and $8,000 for both colorectal and breast cancers.
The researchers also examined the categories in which the costs were incurred, and the results are eye-opening. The costs of “chemotherapy, chemotherapy administration, and related drugs (including related outpatient and professional services)” were, of course, roughly zero before diagnosis. About a year later, cumulative cancer-drug costs had slowly increased to about 20% of cumulative total costs and levelled off there for the remaining two years of the study. By contrast, cumulative hospital inpatient, professional services (unrelated to chemo), and facility costs peaked at over 80% of total spending shortly after diagnosis, then levelled off a year later at 60%.
As for monthly out-of-pocket (OOP) costs, let’s use colorectal cancer as an example. Those monthly costs peak in the month of diagnosis at $914, then quickly drop to about $100. Cancer drugs accounts for an average of about 10% of OOP costs for the entire three-year post-diagnosis period.
The cost of cancer drugs gets a great deal of publicity, but, in reality, the Millman researchers show, those costs represent a small proportion of total treatment expenditures and an even smaller proportion of out-of-pocket costs.
Again, to get health-care policy right, we need to deal with fact and not myth.
A Flawed Study Fails to Refute the Basic Fact That Drugs Are Risky and Costly to Develop.
It’s Time to Focus on Supply and Demand.
Developing a drug is a risky and hugely expensive undertaking. Some 90% of publicly traded biopharmaceutical companies are not expected to make a profitthis year, and, profitable or not, such companies require massive investments in research and development.
How massive? The most thorough study of what it costs to a develop single new drug was conducted by three PhD economists: Joseph A. DiMasi, director of economic analysis at the Tufts Center for the Study of Drug Development, Henry G. Grabowski of Duke, and Ronald W. Hansen of the University of Rochester. Their papers on the subject go back to 1979 and have been cited by other researchers, including those of the U.S. government, to analyze policy questions. DiMasi and Grabowski wrote the chapter, “R&D Costs and Returns to New Drug Development: A Review of the Evidence,” in The Oxford Handbook of the Economics of the Biopharmaceutical Industry.
Tufts Research, Published in 2016, Examined 106 Drugs at Random
The most recent estimates of the three researchers were published in the May 2016 issue of the Journal of Health Economics. They looked at the research and development costs of 106 randomly selected drugs from a survey of 10 pharmaceutical firms.
These data were used to estimate the average pre-tax cost of new drug and biologics development. The costs of compounds abandoned during testing were linked to the costs of compounds that obtained marketing approval.
The researchers determined that the average out-of-pocket cost per new compound approved by the Food & Drug Administration was $1.4 billion.
They then capitalized out-of-pocket costs incurred during the process at a discount rate of 10.5% (in other words, this was the annual cost of the capital that was deployed for the research and could have earned money elsewhere). That exercise yielded a pre-approval cost estimate of $2.6 billion. They then added post-approval R&D costs and finished with an estimate of $2.9 billion, all in 2013 dollars.
DiMasi and his colleagues did not simply say: OK, here is what was spent for R&D on a particular drug that was approved by the FDA. They appropriately added in costs for drugs that underwent costly R&D but were not approved. The Tufts study, as it is often called, also appropriately adds in the cost of capital – standard operating procedure for an analysis of this sort.
Critics, who sometimes have a political agenda – see, for example, this press release from 2001, issued by Ralph Nader’s organization – have attacked the Tufts research for years, offering much lower figures for the cost of developing a drug. But the critics’ work has been consistently inadequate.
Study by Two MDs Looks at 10 Drugs That Were Out-of-the-Gate Winners
In this vein comes a study published by JAMA Internal Medicine on Sept. 11 by Vinay Prassad of the Oregon Health and Science University and Sham Mailankody of Memorial Sloan Kettering Cancer Center. Both are medical doctors (Prassad also has a master’s degree in public health), but neither is an economist. And it shows.
Prassad and Mailankody took what can only be called a quick-and-dirty approach. That is not necessarily a disparagement. Great economics papers are often simple and elegant. In this case, the researchers looked at only 10 drugs, produced by 10 companies. Each of the companies received FDA approval for its drug between 2006 and 2015 and had no drugs on the market prior to the approval. The authors used filings with the U.S. Securities & Exchange Commission to determine R&D spending by the companies during the period when the successful drugs were under development.
They found that the median cost of R&D was $648 million. They added another $109 million for a 7% per annual cost of capital or $145 million for a 9% cost of capital. Either way, their figures are less than one-third those that DiMasio and colleagues came up with.
The study, however, contained serious deficiencies. Quoted by STAT News, Bernard Munos, a senior fellow at FasterCures, said, “The study starts with a good intent, but suffers from severe flaws that invalidate its results…. An informed debate on R&D costs and drug prices must rest on rigorous analyses. This one fails the test.”
The biggest problem is that Prassad and Mailankody focus only on winners. They looked at small companies that each gained FDA approval for their first drug. Of course, such companies will have lower costs than companies that have several successful drugs and many more drugs that fail to gain approval.
Study Understates the Cost of Clinical Failure
Failure is norm for developing cancer drugs. These 10 companies were exceptions – and good for them, but bad for anyone trying to make important policy decisions based on their experience. Between 1998 and 2014, only 10 drugs were approved by the FDA for lung cancer, compared with 167 unsuccessful drugs in the clinical development pipeline. That is a success rate of just 6%; for melanoma, the success rate during the period was 7%; for brain cancer, 4%.
The authors say they accounted for failures by including R&D costs associated with all the not-yet-approved drugs in the portfolios of the 10 companies. But even if all those drugs fail, the companies in the study would achieve an astounding success rate of 23%.
As DiMasi himself, interviewed by STAT News, put it:
There are a number of serious flaws with this study…. Most importantly, it includes only a small set of companies that were relatively successful in development during the period they analyzed. As a result, it inadequately adjusts for risks across the industry and so undercounts the costs of investigational cancer drug failures.
Derek Lowe’s blog In the Pipeline, published by Science Translational Medicine, writes that neglecting to account adequately for the cost of failure “sinks the entire paper.” He continues,
We have in this business somewhere around a 90% failure rate in the clinic. Picking companies’ first approvals disproportionately selects for the fortunate ones who succeeded their first time out. In other words, this estimate ignores (as much as possible) the cost of clinical failure, and that cost is one of the central facts of the entire drug industry.
Evidence of this “central fact” is that companies are willing to pay huge sums in order to avoid failure risks. In 2011, for example, Gilead Sciences paid $11 billion to purchase Pharmasset, a company that was developing – but had not even gained approval for – a Hepatitis C drug.
Out of 127 Attempts, Just 4 Medicines for Alzheimer’s Symptoms
By downplaying failure, the Prassad-Mailankody study misses the main dynamic of drug discovery. Only 0.2% of molecules show enough promise for testing in humans and only 20% of medicines starting phase I human clinical trials receive FDA approval. Since 1998, there have been 127 projects started by the biopharmaceutical industry for treatment of symptoms associated with Alzheimer’s Disease, and only four medicines have been approved. But failures provide lessons that lead to innovation – as recent approvals for lung-cancer medicines have shown.
Another example of how years of failed research can lead to improved care is in Chronic Myelogenous Leukemia (CML). After the approval of the first breakthrough therapy for CML and multiple agents afterwards, the five-year survival of patients afflicted with this deadly disease has increased from 31% to 89%. This achievement is due to the resiliency of researchers undeterred by initial failure.
To gain FDA approval for a single product, researchers, on average, test more than 10,000 promising compounds. More than 200 scientists work for close to 15 years, conducting more than a dozen human clinical trials involving over 3,000 patient volunteers.
Other Problems With the Prassad Study
There were other problems with the Prassad-Mailankody study as well. It did not include early R&D costs, nor the post-approval costs that were cited in the 2016 Tufts study. In addition, it understated capital costs at 7% to 9% while the Tufts research used 10.5%, based on a widely accepted capital-asset pricing model. And, by focusing on smaller companies, the researchers gave a distorted picture by minimizing failure. Large, established biopharmaceutical companies have significantly higher failure rates because they stay in business after several iterations of unsuccessful tries. On the other hand, smaller companies that do not succeed immediately tend to quickly faze out of the arena of medical research.
More important, unlike Prassad-Mailankody, the Tufts study is a serious piece of research, built on detailed evidence developed over many years. In a section of their 2016 paper, the authors carefully examine and respond persuasively to the arguments of their critics. The 2016 paper is the fourth in a series of analyses of drug costs by DiMasio and his colleagues, and it found that out-of-pocket costs had increased at an annual rate of 9.3% between the 1990s and the 2000s and early 2010s.
It is an undeniable fact that developing a new drug is expensive and getting more so. Companies that develop successful drugs are rewarded, and then plow their profits into more R&D in the hopes of developing future successful drugs.
The three largest U.S. pharmaceutical companies by revenues last year produced average returns on total capital of 15% and returns on share equity of 20%. Those returns are good but hardly out of line with other well-run companies, such as Microsoft, with capital returns of 20% and equity returns of 31%, or Procter & Gamble, with returns of 15% and 19%, respectively.
Drug-company returns are absolutely necessary for new research. After all, the funding (the nearly $3 billion per drug) comes from private investors. They won’t invest – and innovation won’t be forthcoming – without the generation of adequate profits.
In the end, we can’t have a meaningful discussion of health-care costs unless we approach the basic facts in a rigorous, dispassionate fashion. The Tufts study has done that, and, try as they might, critics can’t lay a glove on it.
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