Journalists learn about intricacies of prescription drug pricing

Liz Seegert

About Liz Seegert

Liz Seegert (@lseegert), is AHCJ’s topic editor on aging. Her work has appeared in Kaiser Health News, The Atlantic.com, New America Media, AARP.com and other outlets. She is a senior fellow at the Center for Health, Media & Policy at Hunter College in New York City, and co-produces HealthStyles for WBAI-FM/Pacifica Radio.

Photo: Phillip Bradshaw via Flickr

Many Americans think they pay too much for their prescription drugs, especially those who need life-saving medications for cancer and hepatitis C. Why are drug costs so high in the United States? How can reporters better explain the cost squeeze to their audiences?

These were among the questions that Sarah Emond, M.P.P., executive vice president at the Institute for Clinical and Economic Review (ICER) in Boston and Peter Bach, M.D., director of the Memorial Sloan Kettering’s Center for Health Policy and Outcomes in New York City addressed at the Feb. 15  meeting of AHCJ’s New York chapter. Dan Goldberg of Politico moderated the session.

Peter B. Bach

The focus on high drug prices started in the 1980s during the height of the HIV epidemic, when organized activists began speaking out about access, cost and other systemic concerns, Bach noted.

Since then, there have been several clarifying moments in which people couldn’t believe the price tag married to the description of a drug’s benefit – such as a $50,000 cancer drug that extended life for an average of 17 days. It’s been hard to reconcile those numbers as reasonable.

In the past 36 months, there has been greater attention to how prices were affected (or not) by the Affordable Care Act (ACA). Changes in both the private and Medicare markets – along with greater use of co-insurance and high deductibles – meant patients began paying a higher percentage of a drug’s cost. They became more sensitive to prices.

Two very different parables about drugmakers and their products are the controversies surrounding the actions of former Turing Pharmaceuticals CEO Martin Shkreli, and the Food and Drug Administration’s 2016 approval of Giliad’s Hepatitis C drug Solvaldi. Both events point to dysfunction within the health system about unfettered, unregulated drug pricing.

Shkreli was a wealthy hedge fund investor who resigned from Turing after being indicted on securities fraud charges in 2015. While at Turing, he became notorious after acquiring Daraprim – an anti-malarial and anti-parasitic drug in use since the 1950s – and remarketing it as life-saving toxoplasmosis drug for both AIDs and non-AIDS patients. He then hiked Daraprim’s cost from $13 a pill to $750.

Shkreli became “sort of this cackling evil cartoon character kind of playing the system, and everyone loved to hate him,” Bach said.

In the case of the highly effective Solvaldi, Gilead skillfully convinced the FDA to allow them to use the term “cure” in its marketing, which Bach called “unprecedented” for a new drug approval.

The company reminded doctors and public health professionals that hepatitis C “was a big problem and they had a cure. They were the other cackling cartoon character.” Bach said.

PBMs’ blockbuster challenge

Sarah K. Emond

In the 1990s and early 2000s many new, expensive blockbuster drugs were introduced as other expensive drugs were going off patent and could be sold as less expensive generics, Emond pointed out. A good example is atorvastatin, the generic version of popular cholesterol drug Lipitor.

Pharmacy benefits managers (PBMs) and health plans back then could better absorb the cost of new expensive drugs because they could shift people to generics for other conditions. But when the number of drugs going off patent slowed, and PBMs still had the same bucket of money for drug spending but less flexibility.

“Martin Shkreli taught people a lesson, which is that drug companies get to set the price of a drug and nobody else gets to,” Emond said. It’s how free market capitalism works, but people are generally blind to the actual cost of a drug.

It’s the doctor, not the patient, who decides what to prescribe. They are making those decisions, typically, with little information about cost, Emond added. Now with more patients in high-deductible plans with a coinsurance model, there’s sticker shock.

“You’ve got this dysfunctional system where a price is set by one actor, but the person who is ultimately paying for it is divorced from knowing what that price is,” she said. “That’s another reason we got to this place where people question how a pill can cost $1,000.”

Determining the true cost of a drug that passes through many hands is convoluted. For example, pharmaceutical manufacturers make arrangements with wholesalers, who take their cut. A wholesaler then sells to buyers that include specialty pharmacies, retail pharmacies, or hospitals. On the retail end, prices are further complicated by aspects of a patient’s health plan and which pharmacy benefits manager the insurer uses.

PBMs can negotiate with a specific manufacturer for a better drug price depending on how many large health plan clients they represent. But in return for a discount or manufacturer price rebate, a PBM may be asked to agree to make a particular drug easier for patients to obtain, a process called utilization management. Lower prices received by the drugmaker and wholesaler are offset by a higher volume of sales.

So who benefits from that rebate? Sometimes, the rebate savings is passed through the system. The health plan pays less and passes the discount on to the patient by way of a lower copay or coinsurance. However, other rebates may be tied to goals like a volume target, and PBMs may retain those savings. Confused yet?

There are two pathways through the intermediary chain. One is the path that the drug follows, the actual manufacturing. Then there’s the money, which doesn’t travel that same route. The two tracks are divorced from each other, which is what allows for this complexity, Bach said. A manufacturer like Mylan, makers of EpiPen, may charge something much different than what it costs a consumer at the pharmacy.

On the hospital end, the flow tracks more closely with the product. Patients and insurers are billed for the cost of the drug, plus some markup. The size of the markup may be dictated by the negotiating power of the hospital or physician group.

Ultimately, people with high deductibles or high coinsurance end up with a tremendous financial challenge to obtaining the drugs they need, Emond said. “At the end of the day, you have an access problem because the prices are unaffordable.” Money is taken away from other parts of the budget to help compensate for this increase in pharmaceutical spending.

“It’s not sustainable,” she added.

Calculating alternatives

This is where organizations like Emond’s ICER come in. When looking at a new drug, ICER’s value assessment framework marries the long-term benefit to patients with health system affordability. They examine fundamental questions of efficacy, does the drug do what it says it does, and effectiveness – is it better at doing that than something else already approved? Is the additional cost of the added value of a more effective drug worth it? Does it represent a good long-term value for the patient?

“Taking an objective look at the data and its long-term value can translate into a price that is fair,” she said, citing the case of a new class of injectable cholesterol-lowering drugs called PCSK9 inhibitors that initially are priced at $14,000 per month. Compare that with generic statins – which cost roughly $800 per year – for potentially avoidable heart attacks, strokes, hospitalizations, and quality of life. Additional data sets and surveys showed consumers’ “willingness to pay,” for certain outcomes. That price turned out to be $4,000 per month, not $14,000.

With health care in such flux, there may be some room for states to act as laboratories for value-based pricing, not only for Medicaid but also for state employees and pensions. That can add leverage to negotiations. “But like most aspects of drug spending, it’s very complicated,” Emond said.

What are the trade-offs? Health today versus health tomorrow due to the innovation. Everything else is noise. “It breaks my heart that people can’t take a drug like Gleevec, a highly effective treatment for chronic myeloid leukemia, because of the copay,” Bach said. “People who take the drug, live. People who don’t, die.”

Addressing the affordability crisis

Our current system also rewards doctors for prescribing more expensive drugs. Why prescribe the generic when you can make more money prescribing the brand? In response to my question on medication affordability for older adults, Bach does not think patients should have to make financial trade-offs. How we treat people who can benefit from biomedical research but who cannot help themselves or who are financially limited, is the litmus test by which we should measure our system, Bach said. “And we get an F.”

The press can play an important role in highlighting the affordability crisis of drugs, said Emond, who pointed to Gilead’s eventual substantial discount on Solvadi. After a storm of negative media coverage, the price dropped nearly in half, from $84,000 to $46,000. She encouraged the press to continue focusing on this “extremely challenging, complicated problem, in a way that consumers and others can see how it’s affecting our health care budget.”

Bach agreed that it is vital that stories of over-the-top drug pricing get told. Nobody knows if we are spending the right amount on drugs, he pointed out. Moreover, we do not know if we are spending it on the right drugs, either.

3 thoughts on “Journalists learn about intricacies of prescription drug pricing

  1. Paul Burke

    I see the incentives for drug companies, but could you explain how “Our current system also rewards doctors for prescribing more expensive drugs”? That can apply to cancer drugs where the doctor gets a markup as a percent of the drug cost, but how does it apply to most drugs, which patients get elsewhere? Even for cancer drugs, doctors say the percent markup does not create an incentive, but just pays for partial batches which expire before the full batch can be used, and other costs which are proportional to the drug cost. I’d think doctors have some incentive to prescribe cheaper drugs, when they’re aware of big price differences, to increase patient compliance and keep patients in the doctor’s practice, which is why most doctors are happy with generic drugs. Ads and reps do push expensive drugs on doctors, and a few get consulting income if they prescribe a brand a lot, but I’m missing how most doctors are rewarded for prescribing more expensive drugs.

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