Today's Managing Health Care Costs Number is 50%
Health care costs have risen much more slowly over the last few years than over the last few decades. This is good news for
· Business, where smaller health insurance cost increases allow more room for wage increases and increased competitiveness
· Patients who have been hammered by cost shifting
· Government where exhaustion of the Medicare trust fund is now predicted to be further away
The one type of expense that is driving a large portion of medical cost trend over the last few years, and will likely continue in coming years, is pharmacy costs. Pharmacy costs increased slowly through the 90s and early 00s – because many blockbusters went generic. Generic medications cost 20% less in the first few months, and often cost 90% less a year or more after generics come to market. We’ve all gotten a good deal on meds – whether it’s statins for cholesterol or SSRIs for depression – there are a lot of world class drugs available at a consumer cost of $50 or so a year.
Why are pharmacy costs rising so rapidly? The costs of specialty pharmaceuticals have skyrocketed. These are good drugs –they are letting us treat diseases like rheumatoic arthritis and multiple sclerosis which in the past defied our therapies. We can now cure Hepatitis C, keep patients with HIV alive for near-normal life expectancies, and sustain people with previously lethal metabolic errors like Gaucher’s and Pompeii Disease. New drugs for people with Cystic Fibrosis will extend their lives and their quality of life. There are no generics (or bioequivalents) of these in the US, and these drugs are expensive. They often cost $30,000 or more a year; some cost $300,000 a year.
Specialty pharmacy represents about 38 % of pharmacy costs – and this is predicted to increase to 50% by 2018.
There’s another ugly reason why drug costs are going up so rapidly, and it has nothing to do with innovation and newly cured diseases. The brand name pharmaceutical companies have been raising prices at a rapid rate, especially for drugs that are about to lose their patent protection. And some companies have been making a fortune by becoming the only manufacturer of old school generic drugs, and hiking their prices to the levels previously reserved for innovative specialty drugs.
Julie Appleby of Kaiser Health News concluded last week that there wasn’t much we could do. The solutions that she listed and rejected:
1. Disclose drug development costs. This is irrelevant – drugs are priced based on what the market will bear – not based on their development cost. Any requirement that a percentage of reimbursement is spent on R&D will probably incent wasteful R&D and creative accounting.
2. Cap consumer copayments. This will actually increase the cost of medications. Patient cost sharing is just about the only lever to keep pharmas from raising prices higher – so limiting these will be self defeating. One solution that Appleby did not consider was to ban pharma programs to cap consumer cost share except for those without means. Medicare already bans these programs – which encourage patients and their doctors to use cost-ineffective medications.
3. Pay for effectiveness. Instead of paying per pill or per milligram, pay the pharma companies for a drug’s success, whether it’s more months of life for oncology drugs, or decreased LDL cholesterol for statins or the new PCSK9 inhibitors. This isn’t easy to administer, and current regulations require pharmas to give rebates to all state Medicaid agencies if they ever sell their drugs for a lower price. So rebates given for drugs that were less effective could lead to large Medicaid liabilities, making “pay for impact” unattractive to the pharmaceutical companies. We might need a safe harbor for this type of payment reform to gain traction.
Austin Frakt has also been writing about pharmaceutical pricing – and he’s looking at the effectiveness of reference pricing programs. A reference price is set based on the cost of a widely available medication, and the patient pays any excess cost beyond this. Reference pricing has been used in Germany for decades, and it encourages doctors and consumers to choose the most cost-effective drugs, and encourages pharmaceutical companies to choose lower list prices. Frakt points out that reference pricing encourages innovation that is genuinely valuable – as opposed to current pricing approaches which reward “me too” drugs. Reference pricing does put patients in the middle, though – as they could bear the difference between allowable charge and reference price.
I think there is an element of government failure in the high cost of pharmaceuticals. Government has been slow to use its antitrust enforcement to prevent “pay for delay” where brand name pharmaceutical companies pay generic companies to delay entering the market. We’ve extended timeframes for patent protection, and we’re extending patent protection through free trade agreements too. There has been little investigation of the various intermediaries who appear to be just processing claims or even negotiating for lower rates –but which are actually helping keep drug costs high because this increases their own margins. Valeant just acknowledged that it fully controls a specialty pharmacy which exists just to promote its expensive drugs and protect patients and physicians from health plan policies designed to discourage the use of cost-ineffective drugs. Medicare prohibits manufacturers from offering coupons or copayment forgiveness to patients who are not in financial distress – this should be extended to those with private insurance.
Government also has inadvertently raised the cost of employer sponsored health plan pharmacy through the Medicaid “most favored nation” pricing arrangement. This arrangement would appear to save Medicaid money – but paradoxically helps keep prices high for every purchaser since the cost to the pharma of giving anyone a discount is so high. Here’s a link to an old post that reviews why this “discount” raises our costs.
CMS is acting as a prudent purchaser for diagnostic tests and for cognitive and procedural services. However, pharmaceuticals are paid for by private parties under Medicare Part D - and CMS is prohibited from negotiating prices with pharmaceutical companies.
The US is unique among developed countries in not either regulating drug prices or mandating group negotiation. I don't see us moving to full-scale price regulations; our political culture is just too opposed to such an approach.
Dealing with the rapid rise in costs of pharmaceuticals will take multiple different approaches, and the specialty expenses will rise as we have more personalized and genomically-designed drugs. We need to address this issue now - and government is likely to need to be part of the solution.
Note that as always this blog represents my personal point of view.
