The System is Working – A Not-So-Surprising Finding

Every year, the month of March brings a few surprises. There may be an unexpected blizzard in Washington, D.C., a heat wave in Minneapolis or even rain in Southern California.

Turns out, the surprise this year was that drug spending didn’t grow as fast as it did in 2014. Annual reports by the two largest Pharmacy Benefit Managers (PBM) asserted they helped to slow down prescription drug spending for their clients through the negotiation of price concessions from drug companies, and by using formularies to control access to medications – which they have done routinely for the past several years.

Thus, they claimed to have reduced the much publicized double digit growth in biopharmaceutical spending to about 5 percent in 2015. Of course this is no surprise; the major PBMs have a lot of leverage when negotiating as their membership is larger than many European countries. Their findings puts drug expenditures very much in line if not lower than the growth in other segments of the healthcare system, including insurance premiums.

But, given that appropriate use of medicines is recognized by the federal government and most health economists to save money in other parts of healthcare, we need to ask if this slowdown in drug spending will have a positive or negative long term effect on overall healthcare costs and outcomes.

A closer look at the national drug expenditure data shows there are many factors at play. According to IMS Health data from December of 2014, drug price increases have hovered around 6 percent for the past 5 years if one takes into account mandatory and negotiated rebates and price concessions that biopharmaceutical companies provide to both private and public payers – compared to retail price growth of between 9 to 14 percent.

To further confirm the point, one must look at the Medicaid drug expenditures for the past decade based on the report produced by the Medicaid and CHIP Payment and Access Commission (MACPAC). In the report, MACPAC illustrates that in 2014, even though fee-for-service Medicaid was the fastest growing payer of outpatient prescription medicines, the net expenditures remained flat compared to 2012 (a year after the Affordable Care Act was implemented) due to deeper discounts from gross spending at 63 percent. This was a whopping 100 percent increase in rebates and price concessions by the biopharmaceutical industry compared to 2007.

Finally, a report by the Assistant Secretary for Planning and Evaluation of the Department of Health and Human Services provides further proof that the growth in drug expenditures is also driven by factors that are independent of drug price increases or increased use of brand name biopharmaceuticals.

In the report, the Assistant Secretary concludes that factors that contributed to drug expenditure increases from 2010 to 2014 include population growth (10 percent); increase in prescriptions per person (30 percent); economy-wide inflation (30 percent); and either changes in the composition of drugs prescribed toward higher priced products or price increases for drugs (30 percent). In simple terms, the majority of factors that contributed to an increase in drug expenditures were due to dynamics over which biopharmaceutical companies had very little control.

So the reports from the PBMs demonstrate: PBMs don’t necessarily pay the list prices for medicines; PBMs can control access to important medicines on formularies or add administrative steps for patients to access the medicines they have been using chronically, and; the list price of medicines doesn’t truly depict how much biopharmaceuticals contribute to overall healthcare costs.

These annual reports support the data published annually by CMS, and recently by Health and Human Services, that illustrates that pharmaceuticals consume on average only 10 to 16 percent of healthcare expenditures in the United States now and in the foreseeable future since medicines are the only part of healthcare with built-in price reductions in the form of patent expirations.

Consider that when breakthrough medicines become generic the cost of that treatment declines, while the medicines themselves continue to add value in perpetuity. Today’s expensive medicine is tomorrow’s less expensive generic. On the other hand, today’s expensive admission to the hospital is tomorrow’s even more expensive hospital admission.

The PBM reports, however, did leave several issues un-answered. First, what happened to overall healthcare costs? Was there a decrease in overall costs or more likely an increase? Second, what about the patient outcomes? Do the formularies limit access to medicines that can help avoid hospitalizations? Did patients end up in the emergency rooms because the medicines they were taking for chronic conditions have an administrative hurdle, a high co-pay or are no longer covered? Did patients end up going to their provider for additional visits because they were switched to a different medicine that now requires further therapeutic adjustment? Did patients become non-adherent because of a disruption in therapy?

It is important to understand that healthcare costs are like a balloon – one can squeeze and reduce costs in one segment, but inevitably and more often than not costs will increase in another segment. This is especially true about biopharmaceuticals. Also, it is important to note that there is absolutely no peer reviewed published data that demonstrates that restricting access to medicines reduces overall healthcare costs, improves patient outcomes and helps patients achieve a better quality of life.

For those of us who work for the biopharmaceutical industry, the finding from the PBMs’ reports wasn’t a surprise as we have observed the fluctuation in pharmaceutical expenditure phenomenon in the recent past. In the early 2000’s, growth in drug spending was considered high. However, as competition and patent expiration took affect, the growth rate eventually leveled off and was close to zero by the end of the decade. Meanwhile, as drug expenditures fluctuate year over year, the more lasting and important effect is improvement in the health of people who take these lifesaving treatments.

Robert Popovian is the Senior Director of Pfizer US Government Relations.