Sound Policy and not Rhetoric will Fix Healthcare Cost Woes

By Robert Popovian
June 23, 2015 at 5:00 am ET
The spectacular headlines about “unsustainable drug prices” could leave the impression that pharmaceutical companies are to blame for all of the ills associated with healthcare financing in the U.S. The truth is a bit more subtle and far less headline grabbing. Medicines are responsible for cost savings by avoiding other high cost conditions through the cycle of innovation and generic entry. In fact, the government’s own forecast put medicine spending growth in line with the rest of healthcare. One needs to analyze prices of pharmaceuticals in the context of a highly competitive healthcare ecosystem where prices fluctuate based on competitors in the marketplace, the impact of pharmaceuticals on overall healthcare costs and finally, the quandary of how best to evaluate cost, the benefit or cost, or the value of pharmaceuticals. The healthcare system would be better off in the long run if we scrutinized not just the costs of drugs, but also the benefits and compared them to the investment in other healthcare services.

To start off, let’s address the role of competition. For the last 12 months, the bogeyman fingered by payers for reductions in services, increases in premiums and ballooning out of pocket costs for healthcare has been the price tag for the newly discovered cure for hepatitis C. The truth is that as soon as competition was introduced in this market via an equally efficacious biopharmaceutical, the negotiated prices for these medicines dropped by greater than 50 percent. I must have missed the story noting the impact of competition. Secondly, everyone forgets that sooner or later all branded medicines have competition through the loss of patents and introduction of generics or, in the case of biologics, introduction of biosimilars. No drug is immune from this phenomenon and no other segment of the health care system is subject to it. There is no generic version of a hospital admission. Today’s expensive medicine is tomorrow’s less expensive generic drug; while today’s expensive admission to the hospital is tomorrow’s even more expensive admission to the hospital. Finally, a fiction repeated by some is that Medicare does not negotiate for lower drug prices like the Veterans Administration (VA) does. The truth is that Medicare does negotiate for lower drug prices through the private sector. This approach has made Medicare Part D a model of fiscal responsibility, but has also, through numerous studies, validated the fact that Medicare patients have better access to medicines than the VA or Medicaid patients.

The true economics of the role drugs play in the overall healthcare cost scheme complicates the simple high drug costs demagoguery even further. For example, a recent study by Avalere Health estimated that the ten breakthrough drugs currently in the developmental pipeline will cost the U.S. government nearly $50 billion over the next decade. What the analysis neglected to mention was that this number equals 0.38 percent of Medicare and Medicaid spending for that same time period. In addition, according to the Centers for Medicare and Medicaid Services (CMS), biopharmaceuticals are still only expected to account for around 10 percent of all healthcare spending for the foreseeable future, a datum since the inception of Medicare in the late 1960’s. More recently, based on a large body of research showing that better use of medicines can reduce spending on other medical services, the Congressional Budget Office (CBO) estimated that in the U.S., for every 1 percent increase in medicine utilization, total Medicare program costs of all by 0.2 percent.

To confound matters further for the drug cost critics, when you add the value proposition to the cost calculus it becomes even more obvious that in most cases biopharmaceuticals are the most cost-beneficial healthcare intervention. Medications not only have a positive effect on health, but also impact healthcare costs by resulting in fewer trips to the emergency room, fewer surgeries, or a delayed need for long-term care. For example, medications were associated with a 27 percent reduction in cardiovascular health care costs, and for every dollar spent on diabetes medicines we spend $7 less on diabetes services elsewhere. Perhaps the most compelling is the notation from the Centers for Disease Control (CDC) that the use of new drugs and expanded use of existing drugs are identified as one of the factors that has driven the death rate down by 60 percent over the last 75 years.

Ultimately, it is true that we no longer can ignore the impact of high cost drugs on a small number of patients. We need to advocate for policies that improve access and affordability for patients who suffer from debilitating illnesses like cancer. Thus, here are some overacrching policy suggestions of how we can fix the system. One, we can no longer maintain a siloed reimbursement scheme where we do not evaluate the impact of healthcare interventions on total healthcare costs and patient outcomes. We need a system that helps us decipher which invervention is the most beneficial one – a biopharmaceutical or a hospitalization. Two, we need a new insurance model where the most cost-beneficial intervention is not the one that the patient has to pay the most out of pocket for as a percentage of the cost. We have figured out how to pay for expensive medical and surgical interventions without bankrupting the patient; we need to do the same for medicines. Three, we need to put an end to policies that artificially inflate drug costs. For example, when physician practices are purchased by large hospital systems, these hospital systems increase the cost of administering drugs by approximately 50 percent because of switching the site of care from an outpatient to an inpatient setting. Four, we need to invest in programs that help pharmaceutical adherence such as medication synchronization. For instance, non-adherence costs U.S. tax payers more than $200 billion annually which is more than what we spend on oncology, diabetes, respiratory and mental health drugs combined. Five, we need to investigate conceptual policies like payments that are aligned to outcomes for all segments of healthcare, not just drugs. These models are being tested and applied in markets both in the U.S. and in Europe. Six, we need to streamline drug discovery and development and reduce the costs that go along with it so that we may can make life saving drugs available to patients cheaper and quicker while not compromising on safety. This includes investment and utilization of biomarkers or clinical trial designs that rely on surrogate markers that can then be investigated further for outcomes in a real world setting. This also involves a serious commitment to precision medicine. Seven, we need to develop data systems to support better decision making. We can no longer afford to deliver and evaluate healthcare based on systems from the mid 20th century. We live in a technology driven world that reshapes itself faster than we have ever contemplated. Why should we expect any less from our healthcare system?

We are at the cusp of a great revolution in drug discovery and development. Great strides have been taken in Congress recently to support this endeavor through the 21st Century Cures Initiative. It is time to end the blame game. Put all of the healthcare marbles on the table and evaluate which ones bring the best value. Let’s have an honest conversation without the inflated rhetoric about the entire healthcare ecosystem and the costs associated with each segment all at once and then decide which segment, which therapy and which interventions are the most valuable.

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