Prescription Drug Spending in the U.S. Health Care System
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The American Academy of Actuaries’ Prescription Drug Work Group developed this issue brief to highlight prescription drug issues present in our health care system, including cost drivers, the effect on various stakeholders, and possible approaches that might help address the health care cost growth associated with prescription drugs.
Drivers of Growth in Prescription Drug ExpensesChanges in utilization (including the introduction of new drugs) and increases in the unit cost or cost per dosage are the two primary drivers affecting prescription drugs expenditures. Additional factors include delays in introducing generics, higher cost inflation in the United States for pharmaceuticals relative to other nations, and the compensation of numerous stakeholders throughout the pharmacy supply chain.
Increased utilization of drugs is a result of many factors including new approved guidance for prescribing a drug for additional indications or new categories of patients for particular drugs, changes in disease prevalence, revisions in treatment regimen, and more effective disease identification, often as a result of improved access to preventive screening.
Overutilization leads directly to higher health care costs. There are many reasons overutilization occurs, including the way in which the U.S. health care pharmaceutical delivery system works. For example, in a fee-for-service system, many physicians are ultimately paid based on the number of services they provide; pharmacies are reimbursed by the number and day supply of prescriptions they fill, and pharmaceutical manufacturers receive income based on volume of pharmaceuticals that is driven off of formulary placement. Overutilization can also be driven by direct drug marketing that creates demand from patients who observe drug advertisements for a condition they may have and request their physicians prescribe drugs without adequate information on alternatives, contraindications, side effects, or efficacy.
At the same time, nonadherence can be an issue. Nonadherence occurs when patients do not follow appropriate drug treatment protocol, especially maintenance medications, such as those that treat diabetes and hypertension. In 2016, approximately one in seven adults in the United States did not fill a prescription due to cost; the number increases for individuals with two or more chronic conditions.4 Such nonadherence can lead to much higher medical costs for an individual patient if the patient incurs a stroke, heart attack, or some other occurrence as a direct result of failing to take the appropriate level of medicine.
Another component of increases in prescription drug costs is cost per unit. Cost per unit generally increases over time. However, certain external factors may cause the cost per unit to increase materially. Brand drugs typically experience higher price increases as their exclusivity period ends. New brand drugs are often introduced at prices higher than the current drugs they are aiming to replace. Historically, switching to a generic form of a drug tended to result in lower prices, but recently some new generics have had very high unit costs, while some other generics have had substantial price increases as a result of acquisition or repricing. Furthermore, new therapies are often introduced at high unit costs.
The underlying mix of drugs directly impacts the total prescription drug spend. If utilization shifts to the more costly drugs, the increase in unit cost is greater than the average cost inflation due to the change in the underlying drug mix. Formularies are often used to mitigate cost increases due to changes in the underlying drug mix.
Health plans and pharmacy benefit managers (PBMs) develop their own formularies—lists of drugs covered by prescription drug plans—unless precluded, as is the case with some Medicaid state rules. Formularies seek to balance the need to manage costs and provide comprehensive therapeutic coverage, while remaining an attractive option for purchasers, recognizing that patients/consumers may seek out plans with formularies that include drugs they use regularly.
Formulary construction takes into account the review of a pharmacy and therapeutics committee focused on efficacy, safety, and availability of coverage; a separate review may determine the most cost-effective therapies that accounts for impacts of rebates, administration fees, price protection, purchasing discounts and average wholesale price (AWP) discounts. Most formularies incent members to use clinically appropriate and cost-effective medications through lower cost-sharing. Regulatory bodies often oversee the administration of formulary lists, and some may designate which therapeutic classes must be covered and act to ensure that consumers have choices.
Gilead Sciences’ Sovaldi is one example of a specialty drug that is not a biologic medication (however complex to administer) but represents a significant clinical advancement in the treatment of hepatitis C. It first became available in the U.S. market in December 2013 at a price of $84,000 for the most common treatment duration of 12 weeks. At that price, in terms of cost versus outcome, the Institute for Clinical and Economic Review (ICER) found that Sovaldi met the threshold of high care value given the treatment is curative.5 Other clinically advanced medications for hepatitis C became available a year later, and competition led to significant reported net price reductions to about $30,000 for a course of therapy. However, even with this competition, these drugs still cost tens of thousands of dollars through the course of therapy.
Benefits vs. Costs for New Treatments
Pharmaceutical and biotech industries are experiencing significant growth because many new treatments recently have been launched, and others are working their way through the U.S. Food and Drug Administration (FDA) approval pipeline. These new therapies come with a financial cost. Some examples include:
A key question becomes whether a new prescription treatment merits a substantially higher cost. Several organizations globally are attempting to address this question. For example:
† Biallelic RPE65 mutation-associated retinal dystrophy
While Sovaldi was a breakthrough in treatment protocols for a deadly disease, other specialty drugs are often used to treat symptoms that aren’t necessarily curative, but still have a high cost. Some examples include disease-modifying therapies (DMTs) for multiple sclerosis (MS). These drugs do not cure MS; however, they are intended to reduce relapses and progressive disability. In a 2017 report, ICER found that, with one exception, all of the DMTs studied exceeded the threshold of $150,000 per quality-adjusted life year (QALY).6
The introduction of more of these specialty pharmacy medications is contributing significantly to unit cost inflation.7 At the same time, many specialty drugs may help avoid more expensive procedures in the future. For example, unchecked hepatitis C can result in a liver transplant or liver cancer. A transplant is generally more expensive than the new drugs, and may result in greater overall trauma to the patient and larger chances of future complications and health risks. Even so, not all individuals with untreated hepatitis C will require transplants, so the likelihood of requiring more expensive treatments must be considered when considering overall health care costs.
Additional Drivers of Prescription Drug Cost Increases
- Lack of a central negotiating authority. In Canada and many European countries, it is common for the government to take responsibility for transactions with pharmaceutical companies. However, others believe these savings may be difficult to realize in the United States, especially because there is a ban on a federally required formulary.9 The federal government cannot negotiate prices for any populations other than Medicaid beneficiaries and military veterans. The commercial populations are subsidizing the low cost in these negotiated areas.
- Access to all approved drugs. The U.S. public and its health care system prioritizes accessibility and opportunities for coverage to all FDA-approved drugs to treat a condition. The U.S. health system uses tools such as cost-sharing and formulary to try to drive utilization to lower-cost alternatives but rarely completely eliminates coverage for a high-cost drug with no alternative. In contrast, other countries limit access to drugs where value is not, in their estimation, demonstrated to be significantly better than alternatives. Some state Medicaid programs are moving in this direction, creating state mandated preferred and non-preferred drug lists, where sometimes less than half the drugs in a particular therapeutic category are available without prior authorization.
- Greater ability to pay. Prices may be higher due to the ability of U.S. health insurers to absorb those prices. Some patients are largely shielded from the high cost of these drugs due to mandated limits in insurance out-of- pocket costs. In addition, a large portion of the drug development and research processes are absorbed by the American payer as a result of their ability to pay.
- Regulatory environment. The FDA must review all of the clinical trials and determine if the drug is safe, effective, and its benefits to users outweigh its risks, which can take longer and cost more than reviews by other nations. Furthermore, the United States has requirements for patent and exclusivity periods. The general term for a new patent, which the FDA requires to be submitted for new drugs, can be up to 20 years. Similarly, the FDA can grant exclusive marketing rights for drugs that meet certain statutory requirements for varying periods (e.g., seven years for orphan drugs) that may or may not run concurrently with the patent period.10 An example of this is the seven-year exclusive marketing rights granted to orphan drugs (drugs for treatment of rare diseases).
Numerous Links in the Pharmacy Supply Chain
In addition to drug manufacturers, the pharmacy supply chain can include wholesalers, PBMs, physicians and hospitals, and retail and mail order pharmacies. Historically, prices along this pipeline have been determined as a percentage of a benchmark, such as average wholesale price (AWP), average sales price (ASP), or wholesaler acquisition cost (WAC), which is usually directly related to the list price set by the manufacturer.
The list price does not account for the additional areas that are acquired and negotiated by the PBMs. These amounts can influence coverage decision and may or may not be retained by the PBMs. These amounts include rebates, formulary administration fees, price protection, purchasing discounts, and group purchasing organization fees. This practice can exacerbate the lack of transparency and the potential for cost increases that outpace the incremental value added of the downstream supply chain. This may not be apparent to the end payer (i.e., Medicare, employer, etc.)
Impact of High and Increasing Prescription Drug Costs on PayersIn many situations, use of prescription drugs may lead to better overall health outcomes and even lower overall health care costs. However, increased prescription drug use without an accompanying increase in quality of care or life, or lower overall health care costs, may have a negative effect. Rapidly increasing prescription drug costs can have a significant effect on the various stakeholders in the health care system:
- Insurers, Government, and Other Payers— Prescription drug costs represent a significant issue for payers as they try to maintain a balance between revenue and costs. Increases in costs due to utilization increases, unit cost increases, and changes in the mix of drugs increase the burden on budgets, as well as making prescribed drug costs difficult to predict. Copay coupons can influence the mix and often make the brand less expensive than or comparable in cost to the generic to the patient, but at the expense of the insurer and patient over time.
- Insured Members—As plan costs for prescription drugs increase, insured member costs will likely increase through higher cost sharing and premium contributions. The Affordable Care Act (ACA) does provide for a maximum out of pocket (MOOP) limit for drug and medical costs combined for the commercial market. The MOOP for 2018 is $7,350 per person per year, which can represent a substantial percentage of income for most individuals. Cost increases to employers and other plan sponsors over the past several decades have resulted in increased cost sharing, increased member contributions to premiums, and even elimination of some employer or other sponsored health plans. Pharmacy claims are subject to the deductible in high-deductible health plans, exposing members to more cost sharing.
- Government Programs—Increasing plan costs for government health care programs will likely cause issues for individuals enrolled in these programs and for the public as a whole. Individuals enrolled in government programs may be forced to pay higher premium contributions and/or cost sharing, or incur more rigid plan eligibility requirements. Government programs also may consider not covering or restricting the use of some of the highest-cost drugs for fiscal reasons.
- Uninsured Population—Drug prices are usually higher for uninsured individuals than for insured members because some payers can negotiate lower prices due to their contracting efforts, so price increases can be more of a challenge for this population. Costs and subsequent increases in costs may be offset partially by a discount drug card, copay coupons, or subsidies provided by patient assistance programs. Discount drug cards have also been used in commercial populations. While these cards can help reduce out-of- pocket spending, especially for the uninsured and low-income population, they can cause increased prescription drug spending as costs shift to higher-cost drugs. This, in turn, can lead to higher premium increases.
Options to Address SpendingPharmaceutical treatments may enable patients to achieve a quality of life inaccessible without pharmaceutical management of their conditions when used appropriately. Expensive treatments may mean a person who is disabled can continue to live an active, productive life.
To that end, there are many possible steps that can be taken to address the rising costs of pharmaceuticals both by policymakers and by payers of health care costs. At the federal level, a few of the potential changes that have been suggested by stakeholders include:
- Streamlining the drug approval process. The FDA approval process is different for brand and generic drugs. While the multi- phase process for a brand drug approval can take several years, the generic approval process, while still lengthy, can be more abbreviated. Expediting the brand and generic approval process would lower costs through reduced research costs and administrative fees, offering these new prescription drugs sooner to individuals that can prevent use of more expensive treatments, and for generic medications, introducing additional generic competition more quickly, which has been a recent major focus of the FDA.
- Eliminating tactics that discourage generic utilization. Shifting utilization to generic drugs has long been an effective means to lower prescription drug costs, but there are often obstacles put in place by brand manufacturers to preserve their market share. Laws or regulations are being discussed and could be enacted to prevent brand manufacturers from paying generic companies to delay manufacturing. Additionally, manufacturers use copay coupons to offset cost-sharing barriers to continued use of brand medications.
- Allowing prescription drug imports. Purchasing prescription drugs outside the United States, where drug costs can be significantly lower, has been discussed as a way to lower costs for several years. However, allowing for the importation could introduce other risks, such as the government being unable to guarantee the safety and efficacy of these drugs. Many of these drugs are manufactured in countries with less stringent standards than those in the United States, and there is no guarantee these products would meet the FDA approval. Furthermore, savings realized by wholesalers, pharmacies, and other purchasers from importing prescription drugs may not necessarily be passed back to the consumer.
- Negotiating or regulating drug prices. Currently, under the Medicare Part D program, the federal government is not allowed to negotiate directly with drug manufacturers, in contrast to Medicaid and commercial payers. The Medicare Part D program is one of the largest users of medications, and taking advantage of its size by wringing out better pricing and higher rebates could help lower prescription drug costs. Broader regulations around price increase limits and transparency are being considered at the state and federal levels as a mechanism to limit pharmacy costs.
Health insurers, government agencies, and others that pay for health care services have several options to slow the growth of prescription drug costs.
Incorporating Value-Based Review Process
Several entities, such as ICER and DrugAbacus, are attempting to determine whether drug prices are reflective or consistent with their value.12 These entities can provide purchasers, such as insurance companies, PBMs, and government agencies, with a more quantitative means of determining whether a price is commensurate with its value as well as whether a particular drug should be added to or removed from a formulary.
Similar studies have been required by many states over the years when considering newly proposed mandated health benefits to be included in insured benefit programs. These studies generally focused on three areas of analyses: medical efficacy, social impact/benefit, and financial impact.
These kinds of analyses are appropriate for existing drugs as well as new drugs. Before retaining a particular drug in a formulary, the drug company would need to demonstrate that its inclusion met the medical efficacy and increased social and financial impact criteria.
There are many ways of negotiating, including using the values ICER defines for certain drugs to negotiate discounts and rebates.
To date, there has been limited success creating risk-based contracting for drugs. Some of the barriers include data collection and availability and outcomes measurement, as well as a number of legal and regulatory concerns (e.g., FDA regulations, anti-kickback statutes, and Medicare/ Medicaid price reporting requirements).13
However, there have been some value-based initiatives where the price of the drug is dependent on the patient’s outcome.
Express Scripts SafeGuardRx has launched programs aimed at diabetes, hepatitis, cholesterol, and oncology.14 For example, for its Diabetes Care Value Program, Express Scripts guaranteed per-patient spending caps will result in participating plans experiencing an average increase in diabetes drug-spend in 2017 that is approximately half of what the industry is currently forecasting for U.S. commercial payers.
In 2017, Harvard Pilgrim Health Care signed a three-year value-based care contract with drug maker AstraZeneca for two therapies used to treat acute coronary disease and type 2 diabetes.15 The arrangements will use patient outcomes as a measure of the effectiveness of each treatment, which will be incorporated into reimbursement rates for the drug manufacturer. For example, AstraZeneca’s Brilanta, a medication that treats acute coronary disease by lowering a patient’s chance of having a repeat heart attack or suffering a fatality from one, is part of the arrangement. Harvard Pilgrim will monitor the number of return hospitalizations for patients treated with Brilanta after they are discharged from the hospital. Any reduction in return visits achieved for acute coronary syndrome will be measured against patients receiving an oral antiplatelet therapy. If a reduction in visits is recorded, that will factor into the price paid for the drug.
Benefit Plan Modifications
Health insurers and self-funded employers have already begun to address the rapid increase in pharmacy costs via benefit plan modifications. These modifications are generally of two types—those focused on financial factors and those focused on member behavior.
Proponents say that these programs encourage safe, cost-effective medication use by allowing coverage when certain conditions are met. Opponents assert these programs may encourage doctors to move away from more expensive—and from the patient’s perspective, possibly more effective—treatments, which are typically newer, toward less expensive, and possibly less effective alternatives, during which time the patient must prove that they either cannot tolerate the less expensive alternative and/or cannot achieve the desired results, which extends the recovery time.
Preferred pharmacy network
Some payers give consumers reduced cost- sharing as an incentive to use their preferred pharmacy network. The preferred pharmacy networks consist of pharmacies that have agreed to higher discounts in exchange for the potential increase in volume of prescriptions filled.
Part of the specialty pharmaceutical management strategy involves determining whether coverage should be through the medical benefit or pharmacy benefit. Historically, oral medications have been managed under the pharmacy benefits while medications that are injected are considered medical benefits. Because the costs and usage of specialty drugs are growing quickly, this determination becomes more important, and the determination of medical benefit or pharmacy benefit usually requires a drug-by-drug analysis.
Then, within both the medical benefit and the pharmacy benefit, there are multiple avenues for distribution that should also be optimized. Under the medical benefit, site of care optimization can occur between physician offices, hospitals, and infusion clinics. For the pharmacy benefit, the distribution can be handled by retail pharmacies, traditional mail pharmacies, and specialty pharmacies. Specialty pharmaceutical management programs focus on the value proposition of clinical support as a means to ensure the highest medical return on investment—medical cost offset relative to increased pharmacy spend—is achieved.
Increasing Pricing Transparency
In the U.S. health care system today, prescription drug costs per unit are often not known by the prescribing provider or the individual taking themedicine. In situations where lower-cost drugs have efficacy at least as good as their higher-cost counterparts, better transparency can provide opportunities to lower both patient out-of-pocket payments and premiums.
Providers participating in gain- and loss-sharing programs would also benefit from pricing transparency by allowing them to more easily reach their goals while increasing quality of care, especially if done in conjunction with a comparative effectiveness approach.17 Provider access to unit cost data would be especially beneficial in situations where patients have reached their out-of-pocket maximums and have no incentive to use more-efficient drugs that maintain or increase quality of care.
CVS Caremark announced18 that it will begin providing real-time visibility to member-specific medication costs and available lower-cost therapeutic alternatives at the point of prescribing and at the pharmacy. This enhanced visibility to the patient’s benefit across all points of care could help eliminate potential dispensing delays, improve patient outcomes through increased medication adherence, and lower costs for members and payors.
Greater provider and patient ability to increase efficiency in drug usage and increase quality of care would lessen variability in trend increases from year to year, making it easier for actuaries to predict costs for future years and provide more financial certainty for individuals, employers, and governmental programs. Several web-based resources can help consumers find the lowest cost for drugs from local pharmacies.19 In addition, one of the best sources of drug prices may be the member’s own insurance carriers, most of which provide online tools to steer patients toward the lowest-cost prescriptions.
ConclusionThe U.S. health care system is extremely complex, and the prescription drug component is no exception. Most Americans are affected in one way or another by the U.S. health care financing system, whether through premium contributions, taxes, fees, out-of-pocket costs, access to care, and family income for those who work in various parts of the health care industry. Making significant changes to the system will be difficult because it affects so many people and makes up a substantial share of our economy.
The important cost drivers of high prescription drug spending are:
- Increasing utilization driven by factors including new indications for a drug, direct marketing to consumers, and the incentives in a fee-for-service system.
- Increasing average cost driven by factors including the exclusivity of the drug and higher prices of the newer versions of drugs.
- Changes in drug mix that are driven by the formulary, benefit design, and availability of alternative drugs.
Several ideas discussed in this issue brief may help lower prescription drug spending, such as outcome-based reimbursement, pricing transparency, reference pricing, and benefit plan modifications.
This paper discusses many important issues related to prescription drugs but is not designed to be an all-encompassing account. As with health care in general, there is no single issue that, once resolved, will make the health care financing system an efficient system with high quality of care. Rather, there are many issues, including those described in this issue brief, whose resolution will increase the effectiveness of our health care system either through increased efficiency, lower costs, increased quality of care, or an enhanced quality of life. In future work, we will examine some of these options in more detail.
American Academy of Actuaries; “Controlling Health Care Spending Growth.” Accessed at actuary.org/controlling-health-care-spending-growth/.
Micah Hartman et al.; “National Health Care Spending in 2016: Spending and Enrollment Growth Slow After Initial Coverage Expansions”; Health Affairs 37(1): 150-160; January 2018. Note that the “retail prescription drugs” category excludes drugs purchased directly from physicians or hospitals (e.g., infusion drugs).
Gigi Cuckler et al., “National Health Expenditure Projections, 2017-2016”; Health Affairs 37(3); March 2018.
Dana O. Sarnak et al.; “Paying for Prescription Drugs Around the World: Why Is the U.S. an Outlier?” Commonwealth Fund issue brief; October 2017.
ICER examines the cost-effectiveness of prescription drugs compared to the clinical effectiveness. It defines high care value as meeting a threshold of less than $50,000 to $100,000 per quality-adjusted life year (QALY), meaning year of life gained; low care value is defined as $101,000 to more than $150,000 per QALY.
Disease-Modifying Therapies for Relapsing Remitting and Primary-Progressive Multiple Sclerosis: Effectiveness and Value; Institute for Clinical and Economic Review; March 6, 2017.
Rabah Kamal and Cynthia Cox; “What are the recent and forecasted trend in prescription drug spending?”; Kaiser Family Foundation; Dec. 20, 2017.
Sarnak; op. cit.
Chuck Shih, Jordan Schwartz, and Allan Coukell; “How Would Government Negotiation of Medicare Part D drug Prices Work?”; Health Affairs blog; Feb. 1, 2016.
“Patents and Exclusivity”; FDA/CDER SBIA Chronicles; May 19, 2015.
Prescription Drugs: Innovation, Spending, and Patient Access; Office of the Assistant Secretary for Planning and Evaluation; Dec. 7, 2016.
Petre B. Bach and Steven D. Pearson; “Payer and Policy Maker Steps to Support Value-Based Pricing for Drugs”; JAMA; Dec. 15, 2015.
Alison Sexton Ward, Mark Linthicum, Michelle Drozd, Alison R. Silverstein, Joe Vandigo; “Regulatory, Legal Uncertainties Are Barriers to Value-Based Agreements for Drugs”; Health Affairs blog; Nov. 4, 2016.
Lisa LaMotta; “Express Scripts puts pricing cap on diabetes drugs”; BioPharma Dive; Aug. 31, 2016.
Jess Migneault; “Harvard Pilgrim Enters Outcomes-Based Pharmaceutical Contracts”; HealthPayer Intelligence; June 2, 2017.
Christine Huttin; Drugs and Money, Prices, Affordability and Cost Containment; 2003.
American Academy of Actuaries; Comparative Effectiveness Research; November 2017.
Evan Sweeney; “CVS Health adds real-time, member-specific drug pricing into e-prescribing”; Fierce Healthcare; Nov. 29, 2017.
Examples include: Drug Price Search [https://www.rxpricequotes.com], GoodRx [http://www.goodrx.com], LowestMed [https://www.lowestmed.com].