Enough Is Enough: The Time Has Come to Address Sky-High Drug Prices

8/20/2019 Enough Is Enough: The Time Has Come to Address Sky-High Drug Prices

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Enough Is Enough

The Time Has Come to Address Sky-High Drug Prices

By Topher Spiro, Maura Calsyn, and Thomas Huelskoetter September 2015


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Enough Is EnoughThe Time Has Come to Address Sky-High Drug Prices

By Topher Spiro, Maura Calsyn, and Thomas Huelskoetter September 2015


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1 Introduction and summary

4 Life cycle of a prescription drug

9 Spending on prescription drugs

13 How we pay for prescription drugs

21 Policy recommendations

35 Conclusion

37 Endnotes

Contents


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1 Center for American Progress | Enough Is Enough

Introduction and summary

In any given monh, abou hal o all Americansand 90 percen o seniorsake

a prescripion drug.1 Tese medicaions help millions o paiens figh illnesses

and recover rom injuries; hey also shoren he duraion o common illnesses,

alleviae pain, and rea lie-hreaening illnesses. Simply pu, prescripion drugs

save lives and can preven coslier, more invasive reamens.

Ye no all drugs offer he same value, and oo ofen, paiens and insurers pay

exorbian prices or heir medicaions, even or producs ha are no more effec-ive han cheaper opions. In 2014, more han hal a million Americans ook a

leas $50,000 worh o prescripion drugs each.2 Americans pay ou o pocke or

a much greaer share o prescripion drug coss han hospial coss.3 No surpris-

ingly, almos hree-quarers o he public hinks ha drug coss are oo high.4

And while drug prices keep going up, a significan percenage o new prescripion

drugs are designed o rea he same condiions and offer litle clinical advanage

over exising drugs.5

Spending on prescripion drugs is now growing a a aser rae han spending

on any oher healh care iem or service.6 Furhermore, drug prices are rising

a a rapid enough rae ha hey are affecing he overall rae o healh care cos

growh.7 For example, Medicare’s coss per beneficiary increased by 2.3 percen

during 2014, afer wo years o no growh, due in large par o he almos 11 per-

cen increase in drug coss or he program.8

Tere are numerous reasons why paiens and healh care payers pay such exorbi-

an prices or prescripion drugs. Unlike oher naions, he Unied Saes does no

direcly regulae he prices ha drug companies can charge or heir producs. In

addiion, paen proecion and marke exclusiviy shield drug manuacurers romnormal marke compeiion, giving manuacurers significanly greaer bargaining

power han insurers. Wihou any compeiion or addiional regulaion o prices,

he price is simply wha he manuacurer ses or is monopoly produc.


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All consumers end up paying more or healh care because o hese high prices.

Paiens in need o expensive medicaions ofen will pay housands o dollars per

monh. Bu i is no jus paiens who need hese producs who help pay hese

coss. Rising drug coss also increase premiums and cos sharing or all con-

sumers.9 Tese coss also will coninue o squeeze ederal and sae budges as

Medicare, Medicaid, and oher healh care programs pay or hese reamens. Ahe same ime, drug company profis coninue o increase a a aser pace han any

oher secor o he healh care indusry.10

Tis growing crisis is no susainable. In a previous repor, he Cener or

American Progress recommended several policies ha he nonparisan

Congressional Budge Office, or CBO, esimaes would reduce ederal spending

on drugs by more han $140 billion over 10 years.11 Te ocus o his repor is a

package o new, addiional ideas ha will:

• Lower drug coss across he board

• Ensure ha relaive drug prices reflec he benefis o paiens

• Address drug coss paid or by boh public programs and privae insurance

Te able on he ollowing page summarizes he proposed package.

ogeher, hese reorms will broaden he impac o research, lower coss or pre-

scripion drugs hroughou he sysem, and offer greaer financial proecion or

hose Americans whose lives and healh depend on prescripion medicaions.


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Integrated package of reforms

Encourage true innovation

• Provide transparency on research and development costs.

• Categorize new drugs by their comparative effectiveness. Using a private, independent organization, cat-

egorize new drugs by whether they provide no added benefit, minor added benefit, or significant added

benefit compared with existing drugs.

• Provide star ratings of comparative effectiveness in drug labeling and marketing.

• If drug companies do not invest a minimum amount of money in R&D, require them to pay a refund to the

National Institutes of Health.

Ensure that the system pays for value

• Develop voluntary recommendations of payment ranges to inform negotiations between payers and drug

companies by using a private, independent organization.

• Incentivize drug companies to charge reasonable prices. If negotiated prices fall outside the recom-

mended range, require public justifications and license patents that result from federally funded research

to competitors.

•Level the playing field for private-sector negotiations by aggregating the purchasing power of pharmacybenefit managers and payers.

• Reform Medicare payment for physician-administered drugs.

• Allow payers to pay for success.

• Vary Medicaid drug rebates based on the comparative effectiveness of drugs.

Lower out-of-pocket costs for individuals

• Limit cost sharing in marketplace plans and employer plans.

• Provide cost-sharing information for specific drugs to consumers and physicians and allow insurers to have

more flexibility in designing their drug formularies.


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Life cycle of a prescription drug

Te majoriy o spending on prescripion drugs in he Unied Saes is or brand-

name drugs during heir exclusiviy periods. Brand-name drugs make up only 20

percen o all prescripions in he Unied Saes bu accoun or 80 percen o spend-

ing on drugs.12 Wihin he brand-name marke, a limied number o very high-cos

biologicsdrugs made rom living cellsand oher specialy drugs ha rea

complex, chronic, and lie-hreaening condiions are driving prices even higher.

Tis rend will coninue: Te majoriy o prescripion medicaions are sill chemi-

cally synhesized small-molecule drugs, bu biologics are becoming more commonand comprise abou 40 percen o all drugs currenly under developmen.13

Manuacurers are able o se exraordinarily high prices during a brand-name

drug’s exclusiviy perioda 5-year period or chemical producs and a 12-year

period or biologics.14 Afer he exclusiviy period ends, generic versions may ener

he marke, which in urn drives down prices.

Drug manuacurers deend heir high prices by ciing heir research and develop-

men, or R&D, coss and he ime i akes or he Food and Drug Adminisraion,

or FDA, o approve a new produc. Ye manuacurers charge prices ha no only

allow hem o recoup heir significan R&D expenses bu also o enjoy he highes

profi margins o any par o he healh care sysem.15

New drug de velopment and approval

When developing new drugs, mos pharmaceuical companies rely on basic

researchunded in large par by he ederal governmen and conduced by

researchers a he Naional Insiues o Healh, or NIH, and in academic labora-oriesha sudies he mechanisms o diseases. Pharmaceuical and bioechnol-

ogy companies hen use hese findings as a jumping-off poin or heir applied

R&D effors.


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Industry-sponsored laboratory and animal testing first tests a potential drug

or biologic to determine i its investigational use in people is reasonably sae.16

Companies then conduct clinical, or human, testing, which usually occurs in a

number o phases on increasingly larger groups o patients. Te FDA monitors

these clinical trials, which study the product’s effectiveness and saety in people

and consider side effects; dosing; and interactions with other drugs, ood, and beverages. Tese studies do not, however, compare the drug’s saety and effective-

ness with other medications or treatments used to treat the same illness.

When the company believes it has compiled enough evidence to show that its

product is sae and effective, it will seek FDA approval. Te FDA approves a drug

or marketing and sale i the data show that its benefits outweigh the known risks

or its proposed use. Te ufs Center or the Study o Drug Development17

estimates that it takes eight years or a drug to move rom the start o clinical trials

through FDA approval.18

While the FDA’s standard review time once a manuacturer seeks approval or a

new drug is about 12 months, there are expedited approval pathways available

to products that show early signs o promise or that offer new treatments or

severe conditions with ew existing therapeutic options.19 Some o the expedited

approval programs offer rolling FDA review or a shorter clock or review, while

others also authorize FDA approval based on more-limited clinical trial data.20 In

those cases, the drug is generally subject to postapproval testing, which is particu-

larly important because, as one study has noted, “Drugs that are approved afer

a shortened premarket period or based on … [limited data] may later be ound

to have greater risks or less certain benefits than was initially believed to be the

case.”21 Tese postapproval studies do not, however, include comparing the new

treatments with existing therapies.22

Costs to bring a new drug to market

Te cost o developing new prescription drugs is a highly contested topic.

Pharmaceutical companies commonly cite estimates rom the industry-unded

ufs Center, which in 2014 updated its analysis to conclude that the developmentcosts or a new prescription drug average $2.6 billion.23 Previously, in 2001, ufs

estimated the cost to be $800 million, or about $1 billion in 2013 dollars.24


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Ten and now, he ufs esimaes eaure a number o quesionable mehodologi-

cal assumpions, leading many oher expers o dispue he findings.25 Mos noa-

bly, $1.2 billion o he $2.6 billion esimae represens no acual coss bu insead

he hypoheical reurn on invesmen ha a pharmaceuical company could have

received by invesing he money insead o using i in he developmen o a drug.

As Aaron Carrolla well-known healh care policy exper and physicianhaspoined ou, however, research is an essenial expense or a drug company, no an

opional invesmen, and “i a some poin i doesn’ inves in research and devel-

opmen, i won’ be a drug company anymore.”26

In addiion o his, he remaining $1.4 billion o he ufs esimae has is own flaws.

I assumes ha he average drug represens a new molecular eniy, or NME, and

is developed enirely wih pharmaceuical company unding. For he majoriy o

approved drugs, neiher o hese assumpions is rue. Mos approved drugs are no

NMEs; in 2013, he percenage o new drug approvals ha were NMEs was 28 per-

cen, wih he percenage rising o 37 percen in 2014.27 Moreover, mos new drugsare a leas parially unded by he ederal governmen a he basic research sage.28

Finally, he ufs analysis does no acor in he effecs o ederal R&D ax credis.

Given hese concerns, he ufs figure mus be considered an inflaed and imper-

ec yardsick. Unorunaely, however, here has been litle ransparency around

acual pharmaceuical company coss, so i is no possible o ideni y a more reli-

able average cos.

Comparing R&D to other pharmaceutical expenditures

According o he Pharmaceuical Research and Manuacurers o America, or

PhRMAhe pharmaceuical indusry rade groupis member companies

spen $51.2 billion on R&D in 2014, represening 17.9 percen o oal domes-

ic and inernaional sales.29 Tis includes boh preapproval and posapproval

spending; a PhRMA breakdown shows ha abou 14 percen o R&D spending

in 2012 involved addiional research on drugs ha had already received FDA

approval, raher han on he developmen o new drugs.30 Te creaion o biologic

drugs generally requires a larger invesmen in R&D: According o one indusryanalysis, large bioechnology companies spen an average o 46 percen o sales on

R&D in 2012.31


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Pharmaceuical R&D unding is ocused on he clinical rials and applied research

ha develop promising discoveries ino marke-ready medicines. According o

Naional Science Foundaion daa, only 7.7 percen o pharmaceuical R&D

spending goes o he basic research ha leads o he discovery o NMEs.32 By

some esimaes, abou our-fifhs o basic research is unded by he ederal govern-

men and oher public sources.33

Similarly, a recen sudy in Health Affairs halooked specifically a he developmen o he mos ruly innovaive drugs over he

pas wo-and-a-hal decades ound ha he majoriy o hem originaed rom dis-

coveries made by publicly unded basic research, raher han rom basic research

unded by he pharmaceuical indusry.34

Alhough PhRMA argues ha high prices are necessary o recoup is large inves-

men in R&D, profi margins among he op 10 drugmakers ranged rom 10 per-

cen o 43 percen in 2013, wih five o hese companies racking up profi margins

o 20 percen or higher.35 On average, he pharmaceuical secor has significanly

higher annual ne profi margins han almos any oher indusrymore han double he average ne profi margin or Sandard & Poor’s, or S&P, 500 companies.36

Furhermore, an analysis by GlobalDaa ound ha 9 o he 10 larges pharmaceu-

ical companies in he Unied Saes spend more on markeing han on R&D.37

Alhough direc-o-consumer adverising, which is no permited in mos oher

counries, is he mos visible orm o drug adverising here, he bulk o pharma-

ceuical markeing is argeed a physicians. ProPublica, he independen non-

profi invesigaive newsroom, analyzed a new ederal daabase o drug company

paymens o docors and ound ha he mos heavily markeed drugs offered litle

o no added benefi over alernaive herapies; several, in ac, were laer discov-

ered o have major side effecs.38 Genuine breakhroughs and innovaions, on he

oher hand, had considerably lower levels o markeing, since hey were consid-

ered o “sell hemselves” wihou he need or significan promoion o docors or

paiens.39 Tus, unlike in mos indusries, pharmaceuical markeing ofen may be

inversely relaed o innovaion raher han complemenary.


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Me-too drugs imitate a drug that another company has already put on the market,

with little to no real improvement. In some cases, the newer drug’s path to approval

may have overlapped with that of the pre-existing drug.40 And these products may

be improvements over earlier, similar prescription drugs. For example, they may have

fewer side effects than existing drugs.

But in other cases, me-too drug development follows in the footsteps of other drugs

and is a safer, less risky investment for pharmaceutical companies. Investment in

these types of products diverts R&D resources from genuine innovations and delays

the proliferation of generic alternatives, which increases costs throughout the

health system.

While some argue that the addition of functionally similar drugs can reduce prices

through competition, studies have found that these price reductions are generallymarginal or even nonexistent.41 Moreover, in certain cases, pharmaceutical compa-

nies take advantage of shifting market dynamics to price their me-too drugs higher

than the original drugs.42

In addition to me-too drugs, a related practice known as evergreening also drives

up costs. In this practice, pharmaceutical companies faced with expiring patents will

make slight, cosmetic tweaks to an existing product. The tweaked drug then receives a

new period of market exclusivity, delaying generic competition—despite the fact that

there is no real clinical difference between the tweaked drug and the older version.

For example, Abbott Laboratories managed to get three separate patent extensions

for its cholesterol-reducing drug Tricor-1, which it renamed Tricor-2, Tricor-3, and Tri-

lipix.43 None of these subsequent versions improved the clinical efficacy of the drug;

rather, Abbott merely tweaked the dosage of the drug and switched it first from

capsules to tablets and then to delayed-release capsules.44 By delaying generic com-

petition, this single case of evergreening drives up overall U.S. health care spending

by an estimated $700 million every year.45

‘Me-too’ drugs and ‘evergreening’ drive up costs


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Spending on prescription drugs

In 2014, spending on prescripion drugs oaled $374 billion in he Unied Saes,

an increase o 13 percen in one year. Prescripion drug spending is now 15.9

percen o oal healh care spending or an average amily o our.46 Tese coss

grew significanly in he pas year; beween 2014 and 2015, he cos o prescrip-

ion drugs grew by 13.6 percen, compared wih average growh over he previous

five years o 6.8 percen.47

Te healh care sysem is spending more on prescripion drugs or a number oreasons. Some o he increase reflecs new drugs enering he marke ha offer

significan new benefis o paiens wih serious condiions, bu pharmaceuical

companies are also seting high prices or drugs ha do no offer greaer value han

exising producs.48 In addiion, companies also increase prices or brand-name

producs already on he marke a raes ha oupace inflaion.49

As media atenion on he rising coss o prescripion drugs has grown, he phar-

maceuical indusry has downplayed hese coss by noing ha reail prescripion

drugs have consisenly accouned or abou 10 percen o oal healh spend-

ing in he Unied Saes.50 Tis figure comes rom he official Naional Healh

Expendiures, or NHE, esimaes, which in 2013 ound reail prescripion drugs

o represen 9.3 percen o oal spending.51 However, he NHE figure does no

include drugs adminisered by physicians, hospials, and nursing homes raher

han sold hrough reail oules. Many expensive drugs, such as hose used o rea

cancer, all under hese caegories and hus are no accouned or in he 10 percen

figure. For example, drug spending under Medicare Par B, which covers physician-

adminisered drugs, oaled $19 billion in 2013, wihou even accouning or privae

insurance spending on hese drugs.52 Consequenly, he 10 percen figure under-

saes he rue amoun o prescripion drug spending in he U.S. healh sysem.


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Rise in specialty drugs

Specialy drugs generally rea complex, chronic, or lie-hreaening healh condi-

ions and are commonly biologics or complex, large-chemical molecules. Many

specialy drugs have ransormed care or serious illnesses, such as he widely pub-

licized drugs ha offer a cure o mos paiens wih Hepaiis C. Ye oher specialydrugs ener he marke wih high prices bu offer litle improvemen over exising

reamens. Te cancer drug Zalrap, or example, was iniially priced a double

he price o he pre-exising sandard reamen, despie no offering any clini-

cal improvemen.53 When New York’s Memorial Sloan Ketering Cancer Cener

reused o use he drug, he manuacurer cu he price in hal.54

Tere is no sandard definiion o specialy drugs, excep ha hey are exraordi-

narily cosly. Medicare uses a $600-per-monh hreshold or his designaion, bu

many cos significanly more. Te ransormaive Hepaiis C drugs, or insance,

can cos more han $1,000 per day during he 12-week course.55

Oher han heir cos, specialy drugs usually mee one or more o he ollowing

crieria:

• Complex o manuacure

• Require special handling or adminisraion

• rea complex medical condiions

• Require ongoing monioring and clinical suppor

Tere are many ways o quaniy he cos o hese producs or consumers, insur-

ers, and employers. Tey cos a saggering 37 imes more, on average, han ra-

diional prescripion drugs, and in 2013, he healh care sysem spen more han

$80 billion on hese producs.56 Specialy drugs make up only 1 percen o all U.S.

prescripions by volume bu more han 31 percen o prescripions by cos.57

All pars o he healh care sysem ace increasing coss or hese drugs. TeMedicare programwhose beneficiaries are more likely o need hese prod-

ucssaw is coss or hese drugs increase by more han 45 percen in 2014.58

Commercial spending or specialy drugs increased by more han 30 percen in

2014, and Medicaid’s coss or hese drugs increased by more han 35 percen in

he same year.59


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In he nex wo years, he share o specialy drugs by cos is expeced o increase

o 44 percen o all prescripion drug spending.60 By 2020, spending on specialy

drugs could quadruple, reaching abou $400 billion, or 9.1 percen o naional

healh care spending.61

Tese esimaes reflec several rends. Firs, more specialy drugs are enering hemarke. oday, specialy drugs make up abou 40 percen o all drugs currenly

under developmen and will represen abou 60 percen o new drugs enering

he marke in he nex ew years.62 O he specialy drugs currenly under develop-

men, abou hal are oncology drugs.63

Second, more paiens are using hese producs. Millions o Americans currenly

ake specialy drugs o rea condiions ha include Hepaiis C and auoimmune

and inflammaory disorders such as rheumaoid arhriis. And as he Federal Drug

Adminisraion coninues o approve hese producs, millions more people may

sar o ake specialy drugs o rea ar more condiions.

For example, he FDA recenly approved he firs wo producs in a new class o

drugs o rea high choleserol, and expers expec more in he coming monhs.64

Te firs wo o hese drugsknown as PCSK9 inhibiorsare priced a abou

$1,200 per monh, even higher han anicipaed.65 Tese medicaions should help

millions o Americans who canno olerae or do no respond o sains, he class

o drugs mos commonly used o rea high choleserol. Bu he drugs’ coss will

place added financial pressure on insurers, employers, and paiens.

High choleserol is ar more common han oher condiions reaed wih drugs

wih similar price ags. oday, here are abou 70 million paiens wih high

choleserol.66 Even hough he majoriy o hese consumers can coninue o ake

sains, millions o paiens will quali y or he cosly new PCSK9 inhibiors.

Moreover, paiens mus coninue o ake hese drugs indefiniely, unlike he new

reamens or Hepaiis C, which cure mos paiens afer he 12-week reamen

period. As a resul, his new class o drugs alone could add $150 billion o sysem-

wide coss.67

Increasing prices after market entry

Mos media atenion on he rising coss o prescripion drugs is ocused on he

enry o blockbuser specialy drugssuch as he new Hepaiis C reamens

o he marke. Bu his is no he only reason ha drug spending is acceleraing so


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quickly. Companies are also increasing prices or exising producs ar in excess o

inflaion. A recen AARP Public Policy Insiue sudy ound ha reail prices or

brand-name prescripion drugs increased by nearly 13 percen in 2013, which is

more han eigh imes he general inflaion rae.68

For example, he prices or cerain orms o some brand-name insulinssuch asHumulin and Lanusrose by up o 160 percen beween 2007 and 2014, com-

pared wih a 12 percen increase in he Consumer Price Index over he same ime

period.69 Similarly, in 2013, he average annual cos o one brand-name medica-

ion used o rea a chronic healh condiion was nearly $3,000, compared wih

nearly $1,500 in 2006.70

Tis rend is also presen in he marke or specialy drugs, and i conribues o

rising prices. For insance, he manuacurers o wo specialy drugs ha rea

rheumaoid arhriisEnbrel and Humiraboh raised prices or hese prod-

ucs by abou 17 percen in 2014.71 Tese price increases ollowed a previous 15percen bump in 2013.72 Consan price increases add o he burden o paying or

hese already expensive drugsespecially or paiens who need hese producs o

rea chronic condiions. Anoher example is Novaris’ drug Gleevec, which was

a huge breakhrough in reaing chronic myeloid leukemia. Afer he drug’s price

more han ripled beween 2001 and 2012, a coaliion o more han 100 leukemia

expers decried hese increases in a medical journal.73

In some insances, hese price spikes were he resul o a new company buying he

righs o he drug. For example, when Horizon Pharma acquired he pain medica-

ion Vimovo, i increased he price by 597 percen on he firs day.74 As a resul,

Horizon earned more han eigh imes as much or he drug in 2014 as he drug

had earned in he year beore he price increase, despie he ac ha ewer paiens

acually received i.75 In 2015, Horizon increased he price again by anoher 75

percen, bringing he cumulaive price markup under Horizon’s ownership o

more han 1,000 percen o he original pricedespie he ac ha no clinical

improvemens o he drug had been made.76


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How we pay for prescription drugs

Tere is no one price or a drug: Medicare, Medicaid, and differen privae pay-

ers all pay differen amouns or he same produc, and depending on a paien’s

source o insurance, he paien’s share o he drug cos will also differ. Federal law

ses broad parameers or how much he Medicare and Medicaid programs pay or

prescripion drugs, and paymen by privae payers varies depending on discouns

and rebaes ha hose insurers and employers negoiae wih drug manuacurers.

In addiion, depending on he ype o drugand especially on how he drug isadminiseredhe paymen mehodology will differ, even or drugs aken by he

same paien. For example, drugs ha paiens ake a home all under a plan’s pre-

scripion drug benefi. For hese producs, a pharmacy benefi manager, or PBM,

or specialy pharmacy usually negoiaes he price, and when he paien purchases

he drug a a pharmacyor by mail orderhe or she pays specific cos-sharing

amouns se by he plan.77 (See “Supply chain” ex box)

Drugs adminisered by docors or oher healh care providersincluding mos

cancer drugsare usually covered by healh plans no as prescripion drugs bu

insead as par o he plan’s medical benefi.78 For hese drugs, docors and oher

healh care providers will generally purchase he drug, and insurers will pay hem

or he medicaion, along wih a separae ee or adminisering he drug.79 Cos

sharing or hese producs will differ rom cos sharing or sel-adminisered drugs

as well.80

Because drug prices differ significanly depending on he ype o drug and he

payer, and because or each drug here could be muliple rebaes and discouns

paid a various poins in is disribuion, lowering sysem-wide spending or

prescripion drugs will require a variey o reorms. Te ollowing overview sec-ions offer specifics on Medicare and Medicaid mehodologies or cerain pars o

he healh care sysem. Tese descripions are no comprehensive bu insead are

inended o provide sufficien conex o undersand he policy recommendaions

presened laer in his repor.


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PBMs administer pharmacy benefits for insurers and employers in both the public

and the private sector, which collectively provide health insurance for about 210

million people, which is roughly two-thirds of the U.S. population.81 These entities

not only process claims but also essentially help create the plan’s drug benefit. They

negotiate with drug companies to obtain discounts, rebates, or other price conces-

sions. For example, the manufacturer may give rebates to encourage the use of

certain drugs, such as an additional discount if the manufacturer’s drug is the most

commonly prescribed drug from a class of similar medications.82 Patients do not

directly benefit from these discounts when they purchase the drug from the phar-

macy; if their out-of-pocket costs are 20 percent of the price of the drug, they will

pay 20 percent of the negotiated retail price, not 20 percent of the price after rebates

are counted.83 But rebates may reduce health care premiums if they end up back

with the insurer or employer and are used to lower health care costs.

PBMs also set up pharmacy networks that channel patients to preferred pharmacies

that have lower cost sharing for patients. Most also have their own mail order and

specialty pharmacy businesses that provide lower-priced prescriptions to patients.

They also review clinical data to evaluate new drugs, allowing them to make

contracting and coverage decisions based on this information, including lists of

preferred drugs, and to create incentives to encourage the use of generics.84

PBMs regularly face a variety of allegations about their business model, especially

the lack of transparency about rebates from drug companies. For example, lawsuits

have alleged that PBMs pocket rebates from manufacturers that should be passed

along to plan sponsors.85 The Affordable Care Act, or ACA, increased transparency

for PBMs who administer Medicare Part D benefits and in the new marketplaces, but

other arrangements between PBMs, pharmacies, and pharmaceutical manufacturers

continue to be secret. Given that more than 200 million Americans are covered by

health plans that use PBMs, and that these entities play a role in almost two-thirds

of all prescriptions dispensed in the United States,86 greater transparency is critically

important to make sure that these organizations pass along savings and function as

counterweights to drug companies.87

Pharmacy benefit managers


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The pharmacy supply chain adds additional complexity to the issue of drug prices.

If the flow of prescription drugs were similar to that of nonhealth care-related

consumer goods, it would be easy to track the drug and its costs from the manu-

facturer to a wholesaler, then to a pharmacy, where the patient would purchase the

drug. But the prescription drug market differs in a number of ways.88 First, various

players throughout the system negotiate various direct or indirect discounts. Health

plans or PBMs, for example, negotiate discounts and rebate amounts directly with

the manufacturer at the top of the supply chain, and retail pharmacies will negoti-

ate discounts or rebates separately with manufacturers.89 Wholesalers also will offer

separate prompt-pay or volume discounts.90

In addition, insured consumers only pay for a portion of the cost of a drug; their

health plan covers the rest of the cost. This means that each person who arrives at

the pharmacy to purchase a drug will pay an amount that is based on insurancecoverage and their cost-sharing requirements, and the pharmacy will receive the rest

of the payment from a third party.

Supply chain

Medicare

Like oher pars o he healh care sysem, Medicare does no have one mehod o

paying or prescripion drugs. radiional Medicare pays or cerain caegories o

prescripion drugsincluding drugs adminisered in docors’ offices or hospial

oupaien deparmensbased on he drug’s average sales price plus 6 percen o

ha price, or ASP plus 6. Te ASP is essenially an average o he pricesne o

rebaes, discouns, and oher price concessionscharged by he manuacurer in

he commercial marke, and when a drug is adminisered o a paien, he provider

receives he Medicare paymen direcly, regardless o how much he provider paid

or he drug. In 2013, Medicare and beneficiaries paid more han $19 billion or

Par B-covered drugs paid or under ASP plus 6.91


19/45


Tis price srucure encourages physicians and hospials o negoiae lower prices

or specific drugs, bu i also creaes a sronger financial incenive or providers o

prescribe higher-cos drugs when lower-cos alernaives may be jus as effecive.92

As he Medicare Paymen Advisory Commission, or MedPACan independen

commission ha advises Congress on Medicare paymen issueshas explained:

Since 6 percent of a higher priced drug generates more revenue for the provider

than 6 percent of a lower priced drug , selection of the higher priced drug may gen-

erate more profit, depending on the provider’s acquisition costs for the two drugs. 93

For exraordinarily expensive specialy drugs, his 6 percen margin can generae

significan revenues or he physician pracice or hospial. Tis incenive is urher

magnified or hospials ha paricipae in he ederal 340B Drug Pricing Program

inended o lower drug prices or so-called saey-ne hospials and oher healh

care providers ha serve higher-need and lower-income paiens. Hospials in

he program can purchase mos oupaien drugs a very seep discouns whileconinuing o receive he usual ASP plus 6 paymen amoun.

In addiion o he ASP plus 6 paymen amoun, Medicare makes an addiional

paymen or adminisraion o he drug o he oupaien deparmen o he hospi-

al or he physician office, and he program also pays an addiional dispensing ee

o pharmacies ha dispense oher Par B drugs.

Medicare also offers beneficiaries coverage o prescripion drugs ha are no

covered under radiional Medicare hrough privae healh plans approved by

Medicare under Medicare Par D. Beneficiaries covered by radiional Medicare

can enroll in a sand-alone prescripion drug plan, or beneficiaries may obain

drug coverage when hey enroll in Medicare Advanage Plans.

Medicare’s paymens o hese privae plans are based on bids submited by each

plan sponsor, and Medicare ses cerain sandards and requiremens or each plan.

Bu wihin hese broad parameers, each plan sponsor has he flexibiliy o design

he prescripion drug benefisuch as differen ormularies and cos-sharing

amounswihin he broad requiremens o he Medicare program. Medicare is

prevened by ederal law rom negoiaing drug prices or Par D; raher, each plansponsor separaely negoiaes pharmacy neworks and specific price discouns

usually using a PBMjus as hey do in he privae marke. In addiion o paying

a premium or coverage, beneficiaries pay differen deducibles, copaymens, and

coinsurance amouns depending on he plan’s design. Low-income beneficiaries

qualiy or financial assisance o help wih hese ou-o-pocke coss.


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Medicaid

Sae Medicaid programs have he flexibiliy o se prescripion drug paymen

policies as long as hey comply wih ederal requiremens, some o which are

complex and highly echnical. In some ways, Medicaid paymen rules are similar

o hose o Medicare. Saes pay or prescripion drugs based on heir ingrediencoss, which is inended o reimburse pharmacies or he prices hey pay o pur-

chase drugs.94 Saes calculae his amoun using various approaches, bu in many

cases, saes will ake a se percenage reducion o various lis prices or a drug.95

Pharmacies also receive a separae dispensing ee. In saes where Medicaid-

managed care plans cover drugs, he sae pays or drug expenses as par o he

paymens i makes o he plan, and hen he plan separaely negoiaes paymens

o pharmacies.

Te greaes difference beween Medicaid drug paymen policies and hose o

oher pars o he healh care sysem is he Medicaid Drug Rebae Program, whichis designed o guaranee ha he Medicaid program receives he lowes prices

available o privae payers, accouning or discouns and oher price concessions.

Te rebae program requires manuacurers o pay a minimum rebae o saes

and he ederal governmen as a condiion or Medicaid covering heir drugs.

Manuacurers mus pay a rebae on all Medicaid-covered drugs, including drugs

paid or by Medicaid-managed care plans. In 2012, Medicaid drug rebaes oaled

$16.7 billion.96 In addiion o he ederal rebae requiremens, 45 saes and he

Disric o Columbia also have supplemenal rebae agreemens.97

Cost sharing: The share of costs that individuals pay out of their own pockets

through coinsurance, copayments, and deductibles. Out-of-pocket costs are costs

that individuals pay directly for health care services that are not reimbursed by

insurance, such as to doctors, for items such as prescription drugs or for noncovered

services. Out-of-pocket costs do not include premiums.

Copayment: A fixed amount that an individual pays for a covered health care item

or service after they meet their deductibles, usually at the time of service.

Key terms


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Coinsurance: A type of cost sharing in which individuals must pay a percentage

share of the costs of a covered item or service after they meet their deductibles.

Deductible: The amount that patients owe for covered health services before the

health insurance plan begins to pay any costs.

Formulary: A list of prescription drugs that a health insurance plan covers. Drug

formularies are often organized by tier, with different tiers having different cost-

sharing levels based on safety, effectiveness, and cost. A common tiered formulary

includes the following four tiers: generic drugs, preferred brand-name drugs, non-

preferred brand-name drugs, and specialty drugs.

Payers: Entities other than consumers that pay for health care. Private payers

include insurers and organizations that sponsor health care plans, such as employers

or unions. Public payers include the Medicare and Medicaid programs.

Consumers

Tese high drug prices are increasing coss or all consumers. Firs, rising drug

prices conribue o he growh o premiums. Second, paiens are paying a larger

share o he coss o heir prescripion drugs because o increasing deducibles and

greaer ou-o-pocke coss.

Te ACA capped ou-o-pocke coss or individuals and amilies enrolled in

healh plans hrough he new markeplaces, as well as mos employer-sponsored

healh plans. Te annual limis in 2015 are $6,600 or an individual and $13,200

or a amily plan.98 While hese limis are an imporan new consumer proecion,

individuals wih chronic condiions who need expensive prescripion drugs mus

sill pay housands o dollars per year and will quickly reach his ou-o-pocke

limi, in some cases paying housands o dollars per monh during he sar o he

plan year.

Cos sharing has been increasing or all healh care services, bu as drug prices

have grown a an even aser rae han prices or mos oher healh care services,

insurers increasingly have argeed his area o spending. Insurers generally design

plan benefis o keep premiums as low as possible, especially in he new marke-


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places. When aced wih increasing drug prices, insurers hereore respond by

increasing deducibles and cos-sharing amouns, which shif a greaer share o

coss o individuals wih greaer healh needs. How much a consumer acually

will pay ou o pocke or prescripion drugs varies based on he srucure o heir

healh insurance plan, bu overall, paiens are paying a greaer share o hese coss.

Paiens who need prescripion drugs mus firs reach heir deducible. High-

deducible plans wih lower premiums and high deducibles$1,000 or single

coverage and $2,000 or amily coverageare increasingly common in employer-

sponsored plans.99 Consumers enrolled in markeplace plans ypically ace even

higher deducibles. Te average deducible or a silver plan is more han wice he

average deducible or an employer plan. Bronze plans can have deducibles ha

exceed $5,000 or an individual and $10,000 or a amily.100

Once a consumer reaches he plan’s deducible, he ou-o-pocke share ha

paiens pay or heir medicaions can sill be exraordinarily high. Healh plansincluding markeplace planscommonly place he mos cosly producs on a

specialy drug ormulary ier and impose very high coinsurance or hese drugs.

Cos sharing on markeplace plans, including he mos common silver plans, is

even higher; many plans charge 40 percen coinsurance or high-cos specialy

drugs, wih some plans requiring 50 percen coinsurance.

An analysis o markeplace plans in 36 saes by Avalere Healh ound ha he

number o plans using specialy iers increased sharply rom 2014 o 2015. In

2015, or insance, abou 30 percen o all plans placed all brand-name HIV/AIDS

drugs on he specialy ier.101 A growing number o plans also placed all drugs used

o rea serious, lie-hreaening diseases such as HIV, cancer, and muliple sclero-

sis on he highes cos-sharing specialy ier.102 As a resul, paiens who need hese

and oher liesaving medicaions ace housands o dollars in ou-o-pocke coss

per monh beore hey reach heir ou-o-pocke limi.

Oher consumers are no exemp rom his rend: Average coinsurance or spe-

cialy drugs is 29 percen in employer plans.103 And more han hal o Medicare

Par D enrollees are in plans ha charge 33 percen coinsurance or specialy

drugs.104

And as he underlying prices or drugs increase, hese coinsuranceamouns become even less affordable. Rising drug prices and increased cos

sharing creae a financial burden or paiens whose medicaions are becoming


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increasingly unaffordable. No surprisingly, high deducibles and rising cos shar-

ing increase he risk o nonadherence o medicaion use. As researchers noed in a

sudy in Te New England Journal of Medicine ,

Different changes in formulary administration may have dramatically different

effects on utilization and spending and may in some instances lead enrollees todiscontinue therapy. Te associated changes in copayments can substantially

alter out-of-pocket spending by enrollees, the continuation of the use of medica-

tions, and possibly the quality of care.105

Anoher sudy ha ocused on paiens wih muliple sclerosis who were enrolled

in a plan wih coinsurance ound ha a 10 percen increase in cos sharing caused

a 9 percen decline in reamen adherence.106


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Policy recommendations

Te ragmened, siloed naure o he U.S. healh care sysemogeher wih he

complexiy o prescripion drug paymen policiescreaes a number o chal-

lenges or policymakers who wish o improve his par o i. Bu cerain reorms

can help across he enire healh care sysem, such as hose ha encourage a

greaer invesmen in research and developmen and require comparaive effec-

iveness research, or CER, so ha payers, docors, and paiens have a beter

undersanding o how new reamens compare wih prior opions. Because prices

paid by privae insurance are linked o prices paid by public programs, reormsha address he ormer will also address he later.

Tese reorms mus also recognize ha high prices can be appropriae or cerain

ruly innovaive, liesaving drugs. In hose cases, he challenge or policymakers is

o find a way o pay or hese producs wihou passing along oo much o he bur-

den o paiens. Successul long-erm reorms mus also lower overall coss insead

o simply shifing hem. For example, limiing cos-sharing amouns wihou also

adoping reorms o lower overall coss or prescripion drugs jus masks he larger

issue by shifing coss rom paiens wih high-cos prescripions o payers, who

will in urn resrucure benefis or raise premiums o accoun or hese added coss.

Encourage true innovation

Te pharmaceuical indusry commonly responds o quesions abou drug coss

by redirecing atenion o is R&D effors and noing he innovaive naure o

is producs. Bu as deailed above, he indusry-generaed numbers abou is

R&D spending pale in comparison o is markeing budges and profi margins.

Furhermore, no all new drugs are innovaive, even hough payers and paiensconinue o pay increasingly high coss or newly approved drugs.


25/45


Reorms ha encourage boh addiional R&D and comparaive effeciveness

research can help remedy hese relaed challenges. Greaer R&D invesmens

ulimaely will lead o addiional reamen opions, and CER will help deermine

i a drug is ruly innovaive or i i is jus new.

Provide transparency on R&D costs

Mos pharmaceuical companies spend significanly more on markeing han on

R&D.107 Tis is worrying boh because i suggess ha pharmaceuical companies

may be underinvesing in R&D and because analyses sugges ha he mos heavily

markeed drugs are generally hose ha offer litle o no improvemen over exis-

ing herapies.108

Te ollowing able compares revenue wih he amoun o R&D unding and spend-

ing on markeing or he op-grossing brand-name pharmaceuical companies.

TABLE 1

2013 revenue, R&D, and marketing budgets for major pharmaceutical

companies, in billions

Total

revenue

R&D

spending

Ratio of R&D

to revenue

Marketing

spending

Ratio of

marketing

to revenue

Novartis $58.8 $9.9 16.8% $14.6 24.8%

Pfizer $51.6 $6.6 12.8% $11.4 22.1%

Hoffmann-La Roche $50.3 $9.3 18.5% $9.0 17.9%

Sanofi $44.4 $6.3 14.2% $9.1 20.5%

Merck & Co. $44.0 $7.5 17.0% $9.5 21.6%

GlaxoSmithKline $41.4 $5.3 12.8% $9.9 23.9%

AstraZeneca $25.7 $4.3 16.7% $7.3 28.4%

Eli Lilly and Company $23.1 $5.5 23.8% $5.7 24.7%

AbbVie $18.8 $2.9 15.4% $4.3 22.9%

Note: Johnson & Johnson is excluded since its numbers include nonpharmaceutical revenue and spending.

Souce: Adapted from Richard Anderson, “Pharmaceutical industry gets high on fat profits,” BBC News, November 6, 2014, available at http://

www.bbc.com/news/business-28212223.


26/45


Oher han his aggregae inormaion, very litle is known abou he R&D coss

o individual producs or how hose numbers compare wih markeing and sales

budges despie he significan and ongoing public invesmen in his indusry.109

Ye ederal and sae healh care programs and individual paiens pay billions o

dollars each year or hese producs a prices ha conribue o indusry-leading

profis and mulimillion dollar execuive salaries. Over he nex 10 years, manu-acurers o brand-name prescripion drugs will receive more han $1.1 rillion in

revenues rom he sale o oupaien drugs o ederal healh care programs, includ-

ing Medicare and Medicaid.110 Drug companies also receive billions o addiional

dollars in ederal unding hrough he R&D ax credi.111

Federal axpayers also suppor drug companies indirecly when he governmen

unds basic research a universiies and a oher insiuions and organizaions. A

ederal lawhe Bayh-Dole Acgives privae-secor eniies inellecual prop-

ery righs o cerain discoveries and innovaions ha resul rom ederally unded

research.112 Beore he Bayh-Dole Ac, he ederal governmen owned he inel-lecual propery developed rom ederally suppored R&D and generally issued

licenses or use o he inellecual propery on a nonexclusive basis, which made

hese discoveries ar less atracive or drug companies o develop because heir

compeiors also would have use o he research.113 Afer his change o ederal law,

universiies and oher ederally unded insiuions no only receive grans rom

he Naional Insiues o Healh bu also are allowed o sell or license heir inven-

ions o hird paries, including pharmaceuical companies. In his way, axpayers

underwrie an even greaer share o pharmaceuical R&D.

For hese reasons, policymakers in several saes are pressing or greaer rans-

parency rom pharmaceuical companies. Legislaors in Massachusets, Norh

Carolina, Pennsylvania, and New York have inroduced legislaion ha would

require drugmakers o publicly disclose cerain inormaion or expensive drugs.114

Te drug cos ransparency bills differ in heir precise requiremens, bu hey all

would require pharmaceuical companies o disclose mos or all o he ollowing:

he oal coss o producion or he drug; R&D coss or specific drugs, includ-

ing deails on R&D paid or wih public unds; markeing spending or he drug;

differen prices charged or he drug, including inernaional raes; and oal profi

made rom he drug.

ransparency abou he oal coss o R&D, producion, and sales and markeing

budges is criical. In addiion, policymakers should require drug companies o

repor he amoun o heir R&D budges ha is spen on basic research, as well as

R&D effors ha have no resuled in any approved drugs.


27/45


By improving ransparency, laws such as hese would require pharmaceuical

companies o jusiy high prices and provide much-needed conex o policymak-

ers and he public. Boh policymakers and axpayers could hen gain a clearer

picure o how drug companies are using more han $1 rillion in axpayer money

o advance innovaion. Increasing ransparency in he prescripion drug marke

is also consisen wih he rend o overall ransparency in he healh care sysem. As healh care coss coninue o squeeze ederal, sae, employer, and individual

budges, payers and consumers are seeking more inormaion abou he coss o

heir care and seeking lower-cos, higher-value reamens.

Categorize new drugs by their comparative effectiveness

oday, a variey o organizaions conduc CER, including insurers; pharmacy

benefi managers; and various nonprofis, including he Paien-Cenered

Oucomes Research Insiue, or PCORI, and he wholly privae Insiue orClinical and Economic Review, or ICER. Pharmaceuical companies also conduc

heir own CER, including CER ha oreign regulaors require as par o heir

drug approval processes.

Addiional CER is needed o properly inorm paymen policy, bu an imporan

saring poin is aggregaing hese daa and requiring pharmaceuical companies o

submi any CER daa hey may have rom heir own sudies as par o his effor.

Te secreary o Healh and Human Services should ceriy a research-based,

independen eniy wih adequae sakeholder paricipaionincluding insurers,

providers, and paien represenaivesas a clearinghouse or his inormaion

o assess independenly indusry-sponsored CER and o conduc addiional,

independen CER o supplemen exising sudies. Tis could be PCORI, ICER, or

anoher organizaion ha mees hese sric crieria.

For each newly approved drug, he organizaion would consider CER conduced

by he drug’s manuacurer, as well as is own independen analysis o he produc.

Te organizaion would hen evaluae wheher each new drug provides no added

benefi, minor added benefi, or significan added benefi compared wih he exis-

ing drug. Added benefis should include measures such as improved healh saus,shorened disease duraion, exended lie expecancy, reduced side effecs, and

improved qualiy o lie.


28/45


Provide star ratings on comparative effectiveness in labeling and marketing

Afer a drug is assessed o provide zero added benefi, minor added benefi, or

significan added benefi, drug companies should include his inormaion in heir

labeling and markeingincluding in direc-o-consumer adverisemens. Te

inormaion would be conveyed o physicians and paiens hrough easy-o-under-sand sar raings, allowing hem o compare heir reamen opions.

A public awareness campaign should help inorm he public o he sar raings

and heir meaning. As paiens and docors sar o look or hese sar raings, he

incenive or drug companies o develop producs ha qualiy or his designaion

will increase. Oher raings have successully encouraged privae-secor innovaion

in his way. Te Naional Highway raffic Saey Adminisraion’s 5-Sar Saey

Raings sysem, or example, has encouraged saey innovaions, and consumers

know o look a hese raings o make more inormed purchasing decisions. Te

raings also evolve as he saey o vehicles improves; he agency coninues o looka ways o encourage urher saey advances.115

Tis shif may no occur quickly, bu even incremenal changes o how pharma-

ceuical and biomedical innovaion is defined will sar o couner he indusry

message ha every new drug is innovaive and worhy o a large price ag.

Incentivize drug companies to invest more in R&D

As deailed above, axpayers no only direcly and indirecly subsidize pharma-

ceuical R&D, bu drug companies also will collecively receive abou $1.1 rillion

rom he sale o brand-name oupaien prescripion drugs o ederal healh

program beneficiaries in he nex decade.116 Te pharmaceuical indusry ben-

efis rom sizable axpayer assisance when developing is drugs, hen charges he

ederal governmen and axpayers exorbian prices. Simply pu, he drug indusry

profis rom muliple levels o public suppor.

Te Affordable Care Ac guaranees ha premium paymens o insurers benefi

consumers; he law’s medical loss raio, or MLR, policy requires insurers o spendmos o heir revenue rom premiums on medical expenses or consumers.117 Tis

policy guaranees ha consumers see a reurn on heir premium dollars. Similarly,

policymakers should ensure ha public suppor or pharmaceuical R&D is a

sound invesmen o axpayer dollars ha leverages addiional research spending

by drug companies.


29/45


Drug companies should inves a minimum percenage o heir revenue in R&D.

I a company does no mee his minimum over a five-year period, he com-

pany should be required o reund a porion o he revenue derived rom public

programs, up o he shorall amoun. Te reund would be dedicaed o a new

Research Incenive Fund o suppor NIH. Tis incenive would ensure ha a

larger porion o he public’s paymens o he pharmaceuical indusry would bereinvesed in research o ransorm care.

Ensure that the system pays for value

Reorms ha increase he ransparency o pharmaceuical R&D and inorm

paiens and providers abou CER daa are imporan. Bu he criical nex sep is

o ensure ha payers use his inormaion. Te ollowing proposals would boh

lower overall drug coss and pay or drugs based on heir benefis o paiens.

Develop voluntary payment recommendations to inform private-

sector negotiations

Te independen, exper organizaion ha evaluaes he comparaive effecive-

ness o new drugs also should recommend volunary ranges o price increases

or drugs ha provide zero, minor, or significan benefi compared wih exising

drugs. When a drug is used or differen purposes, he organizaion should recom-

mend differen ranges i he various uses provide differen levels o added benefi.

Paymen or drugs wih zero added benefi would have a recommended price

equal o he price o exising drugs ha rea he same disease or condiion. Drugs

wih minor added benefi would have a recommended price increase ha is up o

a cerain percenage higher han he price o exising drugs ha rea he same dis-

ease or condiion. And drugs wih significan added benefi or reaing a specific

disease or condiion would have a recommended price increase range higher han

he range or drugs ha provide minor added benefi.

Exising effors by various researchers o evaluae he value and effeciveness o

prescripion drugs can help inorm his work. For insance, Dr. Peer Bach oMemorial Sloan Ketering Cancer Cener has developed an online research ool

called DrugAbacus, which allows users o consider he value o cancer drugs

based on differen acors, including paien benefi, side effecs, and he cos o

discovering and developing he reamen.118 Based on he value assigned o each


30/45


acor by he user, DrugAbacus will hen compare he price o he drug based on

hose resuls wih he acual price o he drug.119 ICER also has sared a new drug

assessmen program o analyze cerain new drugs, seleced based on heir poen-

ial o change paien care or affec healh sysem budges.120 ICER will publish

repors deailing is findings, which will include a value-based price benchmark or

each drug based on he benefi ha he drug provides o paiens.121

Using hese recommended ranges, insurers and PBMs will be armed wih inor-

maion o srenghen heir negoiaing posiion and negoiae he bes possible

prices wih drug companies. Te independen analysis o a drug’s comparaive

effeciveness also should help shield payers rom claims ha hey are raioning

care or rying o skimp on expensive new producs.

Incentivize drug companies to charge reasonable prices

Afer consideraion o he recommended range o prices discussed above, i a

negoiaion beween a drug company and a payer were o resul in a price ha ell

ouside he recommended range, addiional ransparency would be riggered. Te

drug company would need o submi he final price, as well as a deailed jusifica-

ion or he increase, o he privae, independen organizaion, which would hen

pos ha inormaion on is websie in a consumer-riendly orma.

In addiion, i he final price exceeds he recommended range by more han 20

percen, i would be deemed unreasonable. I he drug’s paen resuled rom

ederally unded research, he ederal governmen could hen license he paen o

compeiors or he developmen o cheaper generic versions.

Tis incenive is auhorized under exising sauory law. Under he Bayh-Dole

Ac, in cerain circumsances, he ederal governmen may exercise is “march-in

righs” o license paens ha resuled rom ederally unded research bu ha are

now owned by drug companies.122 Tese righs apply when a drug company has

no achieved “pracical applicaion” o he researchmeaning ha is benefis are

no “available o he public on reasonable erms.”123 Tey also apply when “acion

is necessary o alleviae healh or saey needs.”124

Tus, i a drug company is nocharging a reasonable price or a drug, or i is pricing harms public healh by sub-

sanially resricing access o he drug, he ederal governmen is well wihin is

righs o ensure he availabiliy o cheaper generic versions.125 A price ha exceeds


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he range recommended by a privae, independen organizaion by more han

20 percen would be presumed o be unreasonable and o harm public healh by

subsanially resricing access o he drug.

Tis incenive or drug companies o charge reasonable prices is more han air

given ha axpayers paid or he developmen o hese drugs. More han 9 perceno all new drugsand nearly one-quarer o prioriy-review drugs ha were con-

sidered o be especially imporanwere paened using ederally unded research

and would hereore be subjec o his incenive.126 However, because drug compa-

nies may no disclose ha heir paens resuled rom ederally unded research, i

is likely ha more drugs would be affeced.127 Furhermore, many o he drugs ha

would be subjec o his incenive are cancer drugs, which end o have excepion-

ally high prices.128

Level the playing field to improve private-sector negotiations

Drug manuacurers ener conrac negoiaions wih insurers, oher payers, and

PBMs wih significanly greaer marke power. For brand-name drugs, paen pro-

ecion and marke exclusiviy give manuacurers a monopoly on heir producs.

Manuacurers se he iniial price, and negoiaions are guided by ha asking

price, wih final paymen amouns se as a discoun off ha price. In many cases,

he numerous payers in he healh care sysem lack he marke power o push back

in a meaningul way agains drug manuacurers’ price demands.

o creae a more compeiive markein which prices are based on value raher

han he exreme marke power o one playerhe purchasing power o pay-

ers and PBMs should be aggregaed o negoiae prices or specialy drugs. Any

healh plan or PBM ha offers a Medicare plan or plan hrough he markeplaces

would paricipae. Tese paries would receive a limied anirus waiver o allow

hem o negoiae wih drug manuacurers on behal o boh Medicare drug plans

and heir commercial business. Te final, negoiaed prices would be published,

along wih a ranscrip o he negoiaions, o promoe ransparency hroughou

he enire process. In exchange or his anirus exempion, PBMs would have o

disclose heir conracual relaionships wih drug manuacurers and pharmacies,including any rebae paymens ha flowed rom drug manuacurers, so ha insur-

ers and oher payers could beter undersand hese arrangemens and decide how

o srucure heir uure conracs wih PBMs. For example, his inormaion helps

insurers negoiae or lower ees, which in urn lowers coss or consumers.


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Reform Medicare payment for physician-administered drugs

Medicare paymen or physician-adminisered drugs should be changed o elimi-

nae any financial incenive or docors o prescribe more cosly reamens. As

discussed above, Medicare’s ASP plus 6 paymen ormula pays providers based on

a drug’s average sales price and adds an addiional 6 percen o he price o coveroverhead.129 As a resul o his paymen being srucured as a percenage raher

han as a fla ee, physicians earn more or choosing expensive drugs over less

expensive alernaives.

From he perspecive o overall Medicare spending, he added 6 percen is no

huge, bu i is significan: According o a recen Medicare Par B paymen daabase,

i amouns o abou $690 million annually, or almos $7 billion over 10 years.130

Ye or he mos expensive physician-adminisered drugs covered by Par B, his

paymen srucure creaes disored incenives or docors ha could drive up coss

and influence reamen decisions. Te 10 drugs wih he highes overall level oMedicare expendiures accouned or $368 million o he $690 million in 2013.131

Tere are several alernaive approaches ha could remove or curail he cur-

ren incenive o choose more expensive drugs. Te Medicare Paymen Advisory

Commission has analyzed wo differen defici-neural approaches, wih he firs

being a $24 fla ee per drug per day and he second being a blended paymen

ha incorporaes a 2.5 percen paymen along wih a $14 fla flee.132 Te Obama

adminisraion’s fiscal year 2016 budge would reduce he 6 percen paymen o 3

percen o he ASP, while also permiting he Deparmen o Healh and Human

Services o experimen wih subsiuing a budge-neural fla ee in place o he

percenage-based paymen.133 Te Congressional Budge Office esimaes ha his

would save $7 billion over 10 years.134

Anoher opion would be o esablish wo paymen alernaives, such as a 3 per-

cen add-on and a fla ee ha is sufficien o cover overhead coss, wih Medicare

paying whichever o he wo opions is he lowes or any paricular drug. Tis las

opion recognizes ha or exremely low-priced drugs, a fla ee migh acually

increase coss.

Te Ceners or Medicare & Medicaid Services, or CMS, should es hese di-

eren approaches and expand he mos successul one. Te ACA esablished he

Cener or Medicare & Medicaid Innovaion, or CMMI, o es paymen and

delivery sysem reorms and expand hem i hey reduce coss while mainaining


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he qualiy o care or improve he qualiy o care wihou increasing coss. o es

hese reorms, CMMI may waive exising sauory requiremens. CMMI should

design a model o no only compare savings beween he differen approaches, bu

also o assess how well he differen models adequaely cover provider overhead

and i he reorms aler prescribing paterns.

Regardless o he specific approach aken o reorm he ASP plus 6, Medicare

reimbursemen or physician-adminisered drugs also should maximize savings

rom generics and biosimilarsgeneric versions o biologic drugs. oday, when

a chemical drug covered under Medicare Par B has a generic version, Medicare

paymen is based on he ASP plus 6 o all he equivalen drugs. Medicare opera-

ionalizes his policy by assigning he same reimbursemen code o each o hese

drugs.135 As biosimiliars sar o ener he marke, Medicare should encourage

greaer use o hem by assigning approved biosimilars o he same code as he

brand-name biologic. Medicare should hen pay or all drugs based on he ASP o

he generics or biosimilars, raher han an inflaed ASP ha includes he brand-name price.

Allow payers to pay for success

Some new drugs are high cos, bu heir benefis relaive o exising drugs may be

uncerain. In such cases, Medicare should pay he high cos only i he new drugs

urn ou o be successul, providing significan benefis relaive o exising drugs.

Iniially, Medicare paymen or he new drug would be based on he lower cos o

exising drugs. Bu i he new drug improves average oucomes in real-world popu-

laions, Medicare would hen supplemen he iniial paymens, ulimaely paying a

higher oal price or he new drug. CMMI should design a pay-or-success model

o es his reorm.

A Health Affairs evaluaion o similar privae-secor programs ound ha hese

ypes o pay-or-success models work bes when a drug has an objecive, clearly

defined oucome such as blood glucose levels or specific reducions in he number

o paien racures.136 Te evaluaion also ound ha his paymen model is no

appropriae or drugs ha rea diseases wih long and uneven progressions.137

CMMI should use hese crieria in selecing drugs or his paymen model.


34/45


Many drugs are used o rea several differen condiions. For example, physicians

prescribe drugs or off-label uses ha are differen rom he uses approved by

he FDA. In paricular, cancer drugs are commonly used o rea differen ypes

o cancers.138 While drugs may work very well or one condiion, hey may no

work as well or anoher condiionye payers pay or hem a he same price

regardless o which condiion hey are being used o rea.139

For example, hedrug arceva works beter agains lung cancer han pancreaic cancer.140 Similarly,

Abraxane works much beter agains breas cancer han lung cancer.141

I is exceedingly difficul or payers o pay differen amouns or differen uses o

a drug based on is effeciveness or each use. Te bigges obsacle o his value-

based paymen is ha he FDA assigns drugs Naional Drug Codes, or NDCs, ha

do no speciy heir use. Payers use hese codes or paymen and claims.142 o rem-

edy his problem, he FDA should issue NDCs ha differeniae each approved

use o a drug as well as off-label uses. Tese more specific codes will also aciliae

more daa collecion on real-world oucomes.

Vary Medicaid rebates based on comparative effectiveness

Insead o seting a single deaul rebae amoun, rebaes should vary based on CER

classificaion. o increase he likelihood o adopion, his proposal would be bud-

ge neural. Ta is, he overall rebae amoun would remain consan, bu wihin

ha amoun saes could vary he rebaes, wih higher-value drugs paying a smaller

amoun han he minimum 23.1 percen under curren law. o offse his amoun,

saes could hen impose greaer rebaes on lower-value, more cosly producs.

Lower out-of-pocket costs for individuals

Lowering overall spending or prescripion drugs will do litle o improve he

healh or financial well-being o paiens i individuals coninue o ace high cos-

sharing amouns. A key piece o any prescripion drug paymen reorm mus be

adoping reorms o ensure ha required cos sharing is no excessive, especially

or he mos expensive specialy drugs.


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A number o saes have passed legislaion o limi ou-o-pocke spending on pre-

scripion drugs. Te ACA’s ou-o-pocke annual limis sill apply in hese plans,

bu consumers’ spending on prescripion drugs is urher capped wihin hose

oal amouns.

For example, New York prohibis specialy iers, and he sae markeplace’s san-dardized silver-level plan design has no deducible or prescripion drugs.143 Te

sandard benefi design or silver-level plans offered in Covered Caliorniaha

sae’s markeplaceincludes a separae $250 deducible or pharmacy benefis.144

Afer meeing he deducible, consumer cos sharing or drugs is generally limied

o $250 per monh.145 Legislaion would expand his limi o healh plans sold

ouside he markeplace.146

Oher saes also have passed legislaion o proec paiens. Maine and Vermon

limi yearly ou-o-pocke expenses or prescripion drugs o $3,500 and $1,250

per year, respecively.147 And Louisiana, Delaware, and Maryland all limi copay-mens o $150 per monh afer he consumer has me a plan’s deducible. Alaska

has required ha insurers give consumers 90-day noice beore implemening

specialy iers.148

One analysis recenly ound ha hese limis would no affec premiums maeri-

ally.149 However, i drug prices coninue o rise a heir curren pace, limis on cos

sharing alone, wihou addiional changes o lower he overall coss o drugs, will

resul in high premiums or higher cos sharing or oher healh care services.

Limit cost sharing in marketplace plans

Te secreary o Healh and Human Services should adop similar requiremens

or silver-level plans in all exchanges. A sandardized benefi plan should, a a

minimum, include monhly ou-o-pocke limis or prescripion drugs and a

separae, smaller deducible. ogeher, hese wo changes will give paiens wih

chronic condiions greaer predicabiliy abou heir ou-o-pocke expenses.

Te Caliornia limis would cap cos sharing or drugs a $3,250 per year.150 For

low-income enrollees, his amoun may sill be prohibiively expensive, causingpaiens o skip doses or o enirely orego criical medicaions. Consumers should

no spend more han 5 percen o heir income on prescripion drugs.


36/45


In exchange or hese cos-sharing limis, insurers should have greaer flexibiliy

in designing heir ormularies. oday, plans mus cover a specific number o drugs

in various caegories, based in par on wha he original benchmark plan cov-

ered. I insurers have flexibiliy when designing heir ormularies, plans will have

greaer leverage in negoiaing coss wih insurers, which will help limi premium

growh.151

For example, i a benchmark plan covered 10 drugs in a paricular ca-egory, insurers would be able o design a ormulary wih five drugs. Paiens would

sill have access o an appeals process and coverage or he drug i medically neces-

sary. In addiion, paiens currenly aking a drug would have coninued access o

he drug unil he compleion o he appeals process.

Limit cost sharing in employer-sponsored plans

Te recen rend o employers shifing healh care coss o employees hrough

higher cos sharing, and especially by he use o high-deducible plans, has placedmuch o he financial burden or higher drug prices on employees.152 For his

reason, policymakers should cap prescripion drug cos sharing or he millions o

Americans enrolled in employer-sponsored plans. New limis will guaranee ha

employees share in he savings ha resul rom reorms o lower drug prices.

Policymakers should exend a yearly limi o $3,250 or prescripion drug spend-

ing o individuals wih employer-sponsored insurance, as well as he monhly $250

limis. Tis yearly amoun is higher han he curren mean ou-o-pocke maximum

or prescripion drugs or individuals enrolled in employer-based plans, bu i will

offer imporan new financial proecions or employees wih significan prescrip-

ion drug coss whose yearly expenses ar exceed hose o he average employee. 153

Provide cost-sharing information for specific drugs to consumers

and physicians

In addiion o new financial proecions, consumers need addiional inormaion

abou heir prescripion drug coverage and coss when choosing heir markeplace

plans, especially i insurers have addiional flexibiliy when designing ormularies.

Tere are several models or increasing ransparency or consumers. For insance,

Covered Caliornia has aken imporan seps o increase ransparency abou

drug coss or enrollees.154 Plans mus give consumers an esimae o heir ou-o-


37/45


pocke coss or specific drugs and explain o enrollees how o obain drugs no

lised on he plan’s ormulary.155 Plans mus also repor ormulary deails, such as

“coverage, iering, and uilizaion managemen inormaion,” on a sandardized

emplae, including or drugs covered under he plan’s medical benefi.156 Tis

inormaion mus be updaed monhly on he plan’s websie. Covered Caliornia

also links direcly rom is own websie o he plans’ ormulary pages.

For he 2016 plan year, insurers offering plans on he ederal markeplace mus

pos plan-specific ormularies on heir websies so ha consumers can compare

hem while shopping.157 Tis is an imporan updae, bu unlike he Caliornia

requiremens, CMS does no require plans o pos his inormaion in a sandard-

ized emplae, which would make comparisons easier. Insead, he ormulary

mus be machine readable so ha hird paries can develop ools o help shop-

pers compare.158 Moreover, here is sill no ederal markeplace requiremen ha

insurers pos specific cos-sharing inormaion on he ormulary; insead, insurers

mus pos inormaion regarding cos-sharing iers, which consumers can use oesimae coss.159

Neiher CMS’ nor Caliornia’s approach offers consumers he same level o deail

abou poenial ou-o-pocke coss as Medicare Par D’s Plan Finder. Mos impor-

an or consumers is he eaure on he Par D Plan Finder ha allows people o

compare plans’ cos sharing and coverage or specific drugs hrough an online

ool. For he 2017 plan year, CMS should implemen similar requiremens or he

ederal markeplace in order o improve comparison shopping.

Also, docors should have access o heir paien’s cos-sharing inormaion as par

o heir e-prescribing sysems so ha hey can consider specific ormulary and ou-

o-pocke coss when making prescribing decisions. Tis inormaion will allow

docors o chooserom clinically appropriae reamen opionshe drug ha

minimizes a paien’s ou-o-pocke coss.


38/45


Conclusion

Drug companies currenly benefi rom a sysem ha avors heir ineress over

hose o paiens, axpayers, providers, payers, and he larger healh care sysem.

Wihou significan reorms, prices or prescripion drugswhich are already

exraordinarily highwill coninue o rise a a rae ha is unsusainable or ami-

lies, businesses, and sae and ederal budges.

Some policymakers may dismiss acion o address drug prices as poliically unen-

able. Tis view represens he allacy ha wha has happened beore will coninueo happen. Furher, hree hings have changed. Firs, and mos imporanly, he

American public is now demanding acion a unprecedened levels. Second, i is a

ruism ha wha canno coninue will no: Drug prices have become so high ha

hey are simply unsusainable and mus come down. Tird, imporan pars o his

repor’s proposed ramework can be achieved wihou he need or congressional

legislaion. Te evaluaion o drugs and pricing guidelines can be implemened

independenly o governmenand a criical incenive or drug companies o

charge reasonable prices is auhorized under exising sauory law.

All ha is needed is he will o challenge he saus quo and he powerul ineress

ha seek o proec heir monopoly prices and economic rens. Te American

public has said loudly and clearly ha enough is enough. Te ime has come or

axpayers o ge a beter deal ha lowers heir coss, improves public healh, and

jumpsars rue innovaion.


39/45


About the authors

Topher Spiro is he Vice Presiden or Healh Policy a he Cener or American

Progress, where he leads he Healh Policy eam ha includes ormer Obama

adminisraion official Zeke Emanuel, ormer Medicare adminisraor Don

Berwick, and Sen. om Daschle (D-SD). Spiro’s work has been published in Te New York imes , Te New England Journal of Medicine , Te Christian Science

Monitor , Te Atlantic , Poliico, Te Hill, and he Annals of Internal Medicine. He has

also esified beore Congress and appeared on Naional Public Radio.

Maura Calsyn is he Direcor o Healh Policy a he Cener. Prior o joining

he Cener, Maura was an atorney wih he Deparmen o Healh and Human

Services’ Office o he General Counsel. During her ime here, she served as he

deparmen’s lead atorney or several Medicare programs and advised he depar-

men on implemenaion o he Affordable Care Ac. Beore joining he Office o

he General Counsel, Calsyn worked as a healh care atorney a wo inernaionallaw firms.

Thomas Huelskoetter is he Research Assisan or Healh Policy a he Cener.

Prior o joining he Cener, he was a legislaive affairs inern wih he Cener

on Budge and Policy Prioriies and a policy and research inern wih Presiden

Barack Obama’s re-elecion campaign in Virginia, and he also spen eigh monhs

eaching high school English in France. Huelskoeter graduaed rom Kenyon

College in 2012 wih a bachelor’s degree in poliical science.

Acknowledgments

Te Cener or American Progress hanks he Peer G. Peerson Foundaion or is

suppor o our healh policy programs and o his repor. Te views and opin-

ions expressed in his repor are hose o Te Cener or American Progress and

he auhors and do no necessarily reflec he posiion o he Peer G. Peerson

Foundaion. Te Cener or American Progress produces independen research

and policy ideas driven by soluions ha we believe will creae a more equiable

and jus world.

Te auhors would like o hank ormer Healh Policy eam inern Jusin Morgan

or his research assisance on his repor.


40/45


Endnotes

1 National Center for Health Statistics, Health, UnitedStates, 2014: With Special Feature on Adults Aged 55–64 (U.S. Department of Health and Human Services, 2015),available at http://www.cdc.gov/nchs/data/hus/hus14.pdf.

2 Ana Swanson, “How new drugs helping millionsof Americans live longer are also making them gobroke,” Wonkblog, June 30, 2015, available at http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/30/how-new-drugs-helping-millions-of-americans-live-longer-are-also-making-them-go-broke/.

3 Agency for Healthcare Research and Quality, MedicalExpenditure Panel Survey (U.S. Department of Healthand Human Services, 2012), tables 2, 5, and 7.

4 Bianca DiJulio, Jamie Firth, and Mollyann Brodie, “KaiserHealth Tracking Poll: June 2015” (Menlo Park, CA: KaiserFamily Foundation, 2015), available at http://kff.org/health-costs/poll-finding/kaiser-health-tracking-poll-

june-2015/.

5 Optum, “The Growth of Me-Too Drugs,” March 9, 2015,available at https://www.optum.com/thought-leader-ship/metoodrugs.html.

6 Sean P. Keehan and others, “National Health Ex-penditure Projections, 2014–24: Spending GrowthFaster Than Recent Trends,” Health Affairs 34 (8) (2015):1407–1417.

7 Altarum Institute, “Hospitals and Prescription DrugsLeading Health Spending Acceleration,” Press release,April 10, 2015, available at http://altarum.org/about/news-and-events/hospitals-and-prescription-drugs-leading-health-spending-acceleration#sthash.ncALR-WzD.dpuf.

8 Boards of Trustees of the Federal Hospital Insuranceand Federal Supplementary Medical Insurance TrustFunds, “2015 Annual Report of the Boards of Trustees ofthe Federal Hospital Insurance and Federal Supplemen-tary Medical Insurance Trust Funds” (2015), available

at https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrust-Funds/Downloads/TR2015.pdf.

9 Christopher S. Girod, Scott A. Weltz, and Susan K. Hart,“2015 Milliman Medical Index” (Seattle: Milliman, 2015),available at http://us.milliman.com/uploadedFiles/insight/Periodicals/mmi/2015-MMI.pdf .

10 Sam Ro, “Here Are The Profit Margins For Every SectorIn The S&P 500,” Business Insider, August 16, 2012, avail-able at http://www.businessinsider.com/sector-profit-margins-sp-500-2012-8.

11 The Center for American Progress Health Policy Team,“The Senior Protection Plan” (Washington: Centerfor American Progress, 2012), available at https://www.americanprogress.org/issues/healthcare/re-port/2012/11/13/44590/the-senior-protection-plan/.

12 Aaron S. Kesselheim, “Rising Health Care Costs and Life-Cycle Management in the Pharmaceutical M arket,” PLoSMedicine 10 (6) (2013): e1001461, available at http://

journals.plos.org/plosmedicine/article?id=10.1371/ journal.pmed.1001461.

13 Leigh Purvis, “Consumer Perspectives on Biosimilars”(Washington: AARP Public Policy Institute, 2014),available at https://www.ftc.gov/system/files/docu-

ments/public_events/Follow-On%20Biologics%20Workshop%3A%20Impact%20of%20Recent%20Legis-lative%20and%20Regulatory%20Naming%20Propos-als%20on%20Competition/purvis.pdf .

14 Market exclusivity is separate from patent protection.See Food and Drug Administration, “Frequently AskedQuestions on Patents and Exclusivity,” available athttp://www.fda.gov/Drugs/DevelopmentApprovalPro-cess/ucm079031.htm (last accessed August 2015).

15 Yahoo Finance Industry Browser, “Sectors: Health-care: Industry List,” available at https://biz.yahoo.com/p/5qpmu.html (last accessed July 2015).

16 Food and Drug Administration, “Investigational NewDrug (I

Documents

Enough Is Enough: The Time Has Come to Address Sky-High Drug Prices