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Searching for a Way Out of the Maze of High Drug Costs

10.15.2018

Employers and consumers alike have been lost in a maze of high and rising prescription drug prices for decades. Earlier this year, the Trump administration announced a multipronged “blueprint” it hopes will lead to some relief. Meanwhile, many employers continue to look to outside entities for help controlling costs. Let’s look at where things stand and whether there’s any cause for optimism.

Spending on the rise

Data from the Kaiser Family Foundation (KFF) provides a backdrop. The organization’s research found that inflation-adjusted annual per-capita retail spending on prescription drugs grew from $251 in 1996 to $1,019 in 2016 — a 306% increase (15% annualized).

The KFF’s projection for the future annual growth rate is considerably more modest, around 6%. But that estimate starts from a high cost base and is about double average annual wage increases. Plus, the data indicates that prescription drugs will continue to grow as a proportion of overall health spending.

Problems with PBMs

It’s also noteworthy that the basic strategy most employers use to keep drug costs under control — contracting with a pharmacy benefit management (PBM) company — can lead to unexpected and counterproductive results.

A 2017 investigation by the New York Times and ProPublica found that employees are frequently paying more for drugs, especially generics, through their health plans than they could by simply paying out of pocket at local drugstores. The report’s authors garnered better deals on 40% of the most commonly used prescription drugs by buying directly from a retailer.

PBMs still play an important role in drug cost management, but employers need to review their contracts carefully to try to get to the bottom line. Given the complexity of that task, it’s not surprising that a Google query for “PBM contract analysis consultants” yields multiple pages of search results.

Some have questioned whether PBMs should be held to a fiduciary standard. In effect, this would require them to serve their customers without regard to how their policies would affect their own profitability. Presumably, such an idea wouldn’t find favor with PBMs and their supporters in Congress.

Truth in advertising

Alex Azar II, Secretary of the U.S. Department of Health and Human Services (HHS), described the Trump blueprint as “a historic plan for bringing down the high price of drugs and reducing out-of-pocket costs for the American consumer.” But most of the language in the document is general and raises as many policy questions for Congress and regulators as it prescribes solutions.

One of two proposed “immediate actions” in the blueprint is to encourage drug companies to lower prices by asking the Food and Drug Administration to “evaluate the inclusion of list prices in direct-to-consumer advertising.” The hope is that such price disclosures would embarrass drug companies into lowering prices, forgoing increases or perhaps simply cutting back on consumer advertising.

The other proposed immediate action is aimed at Medicare and, in theory, could have spillover benefits in private markets. It’s to have Medicare — via the Centers for Medicare and Medicaid Services (CMS), the federal agency that manages the Medicare program — update its drug-pricing dashboard “to make price increases and generic competition more transparent.”

Blueprint analysis

Rachel Sachs, a professor at Washington University’s law school and expert on health policy issues, published an analysis of the entire blueprint in Health Affairs, a health policy journal.

Her review was mixed. She applauded some of the proposals and the goals behind them, but also noted that many aren’t new and she was skeptical of others. For example, “it is not clear,” she wrote, that requiring drug companies to include list prices in their ads “would have a significant impact, or any impact at all, as public shaming has not always been an effective tool against the industry.”

She was equally dubious about the proposal to beef up Medicare’s drug pricing dashboard: “It is difficult to discern the causal mechanism between increased pricing transparency and lower costs, especially as industry will likely argue, as it has in the past, that list prices are not accurate representations of what patients actually pay.”

But the blueprint’s list of “future opportunities” contains two ideas that impressed her:

  1. Have the CMS consider restricting or reducing the use of rebates (discounts given by drug companies to incentivize PBMs and drug distributors).
  2. Penalize drug companies that raise prices beyond stipulated limits by limiting their ability to sell certain drugs that other pharmaceutical companies can provide to Medicare patients.

She noted that “the use of confidential rebates has become a central feature of our drug reimbursement system, and restricting or reducing their use would significantly change the ways in which drugs are distributed and reimbursed.”

But Sachs also noted that rebate schemes are beginning to be disrupted by acquisitions of PBMs by major health plans. Also, should this ever come to pass, employers would need to read the fine print of their PBM contracts, because some of them allow the PBM to re-rate the contract if there’s a change in the laws and regulations governing rebates.

Finally, Sachs observed that the second “future opportunity” mentioned above — penalizing drug companies — “might be one of the most politically divisive actions HHS could take” because of its potency to stir controversy. This assessment doesn’t bode well for its ultimate enactment.

Future developments

When trying to get a grip on the issue of prescription drug prices, employers need to keep in mind a certain analogy: Squeeze a balloon in one place and it bulges in another. To that end, an analysis of the Trump blueprint by consultants at Mercer warns that “many of these proposals could result in public sector gains at the expense of private health plans.” Work with your benefits advisors to stay informed of future developments.

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