When Michael Rea worked as a Walgreens pharmacist, patients always asked him why their prescription medication costs were always rising.
So many asked, in fact, that Rea created a canned response for their queries. “I would refer them back to their insurance partner or PBM or HR department,” Rea says. “That was the extent of the input or help I could give them in the few seconds I had to talk in a busy pharmacy.”
But in 2008, one patient stopped his hamster wheel. The woman asked him which of her eight medications she should skip that month. She was living paycheck to paycheck and had an unforeseen expense, prohibiting her from buying them all. But she was diabetic, she had high blood pressure and cholesterol, and there wasn’t a lot of give.
Rea decided to see what he could do for her. He went home that night and spent the evening calling pharmacies to find out the cash prices of her medications. He analyzed her insurance and drug plans, seeking alternative ways to accomplish the same goals as her current medications did but in a more cost-effective way.
The next day, Rea gave her the information. She took it to her physician and was able to change medications and doses and include other health treatments. After this medication review, the woman was able to save $3,000 on prescriptions over the next year.
Rea decided he might have identified a need in the market and created Rx Savings Solutions, based in Overland Park, Kansas, to meet it. He’s now the CEO. Rea has created a patented algorithm that evaluates patients’ demographic and clinical information and then provides an individualized road map for the most clinically sound, cost-efficient prescriptions for each person.
Rea isn’t the only one out there looking to lower prescription drug costs. Employers, consultants, nonprofits and think tanks alike are trying to figure out how to manage the ever-increasing cost of prescription drugs in the United States. Greater cost-effectiveness analysis and drug importation are just two of a wide range of options being used to reduce spending for individuals and businesses.
According to the Centers for Medicare & Medicaid Services, prescription drug spending accounted for about 10% of the $3.3 trillion in total healthcare costs in the United States in 2016. The percentage of healthcare costs spent on medication is even higher for employers, with experts estimating prescriptions make up at least 30% of their health expenditures.
And there doesn’t appear to be an end in sight. A 2017 report by healthcare information and research firm QuintilesIMS estimates prescription costs will increase by up to 5% annually through 2021, to $405 billion.
And Americans are singular in their healthcare spending. A 2017 report by the Commonwealth Fund found Americans spend 30% to 190% more on prescription drugs annually than nine other high-income nations, including Australia, the United Kingdom, Germany and France. The study’s authors compared four main factors to determine a nation’s medication costs: population, per-person usage, type of medication and cost.
While the United States has a large population, we use about the same number of drugs per person as the other countries. And 84% of medications prescribed in the United States are generic—more than any country except the United Kingdom.
So where is the outlier in the U.S. market? Cost.
Prices for common medications are 5% to 117% higher in the United States than in other nations. Blockbuster and specialty medications are the main culprits for our extensive spending. The Commonwealth report highlighted six popular brand-name medications and found Lantus, an insulin injection for diabetics, costs up to $67 per month in other countries and $372 in the United States. Advair, an inhaler used to prevent asthma attacks and treat chronic obstructive pulmonary disease, costs as much as $74 elsewhere but rings in here at $309. And the controversial hepatitis C drug Sovaldi tops out at about $17,000 in Germany, yet it costs $30,000 in the United States.
The report’s authors attribute the lower prices in other countries to their use of tactics like centralized price negotiations, the creation of national drug formularies and drug pricing based on comparative effectiveness research.
But the U.S. market is more complicated, and many groups—manufacturers, distributors, insurers, pharmacy benefit managers—have their hands in the cookie jar. So it’s difficult to pinpoint how the industry has been able to increase prices, essentially unchecked, for years.
“Fundamentally, drugs are expensive because they can be,” says Ronny Gal, a senior research analyst covering the specialty pharmaceutical industry at New York-based Sanford C. Bernstein & Co. “It is a superior good—people don’t have a lot of choice.”
Gal says he rejects a lot of assumptions made in the debate over why prescription medications are so costly. Intermediaries like PBMs and wholesale distributors, he says, aren’t responsible for the high prices. Nor are drug manufacturers barely scraping by as they claim, trying to recoup massive costs of research and development.
Between 2006 and 2015, about 67% of the largest drug companies’ profit margins increased 15% to 20%, while profits among large non-drug companies worldwide increased 4% to 9%, according to the Government Accountability Office. Yet between 2008 and 2014, spending for drug research and development increased from $82 billion to just $89 billion. At the same time, federal spending was stable, but other incentives, like the orphan drug credit for medications that treat rare diseases, increased more than fivefold from 2005 to 2014.
Gal also says it’s not necessarily the pharmacy benefit managers, pharmacies and others in the distribution chain that are at fault for rising prices. They are trying to maximize their profits and get their piece of the pie. But their take is based on the original high price.
As the Commonwealth report notes, generic drugs are relatively well utilized and are often (not always) a less expensive alternative to name brands. But it’s the new, specialty medications—which have little to no competition and lots of marketing clout—that are breaking the bank.
“As old drugs become generic and new ones come in, those newer ones are being priced 10 times more than the old drugs,” Gal says. Often, there isn’t much patients can do about prices. “If you are in anaphylactic shock and I’m holding an EpiPen in my hand that can save your life, how much is that worth?”
The cost of medications used to treat such maladies as cancer, rheumatoid arthritis, asthma and diabetes have risen in the past five years “more than anyone could have expected or some think is warranted,” says Shawn Bishop, vice president for the Controlling Health Care Costs program at the Commonwealth Fund in New York.
Specialty drugs have boomed in the past couple of decades. In 1990, there were only 10 on the market, says the Pew Charitable Trust. Now there are more than 300, with nearly another 700 in development. More than 500,000 Americans are plagued by annual drug costs greater than $50,000, an increase of 63% since 2014.
And employers are paying the lion’s share of those expenses. It has been estimated that about a third of total healthcare spending is attributable to drug costs. And Chris Labrecque, president of the employee benefits group at Insurance Office of America, says about 85% of those costs can be traced to the specialty market.
Part of the issue is groundbreaking new drugs like Kymriah, approved by the Food and Drug Administration in 2017 for the treatment of childhood leukemia. It has been shown to be highly effective for about 20% of patients who don’t responded to other treatments. The manufacturer, Novartis, set the cost for the treatment at $475,000. Manufacturers set prices by amortizing the lifetime value of a cure, which is something not seen in other areas of medicine, Labrecque says.
“I broke my leg when I was six, and the doctor reset it,” he says. “Should I have paid him for the lifetime value of not limping? I think it’s price gouging and they have positioned themselves financially to defend it.”
Managing these costs is increasingly challenging for employers because they don’t want to employ cost controls. They worry it will look like rationing or cost-shifting to employees. But rationing is already occurring naturally when people like Rea’s customers are forced to forego needed medications because of the costs.
Though businesses are typically conservative when it comes to making changes in healthcare, Bishop says enthusiasm for change has increased as costs continue to rise. Employers are in a good place to affect the market because not only do they pay the bill, they also have a vested interest in keeping costs down. They may want to retain good benefits for their workforce, but Bishop says employers understand that raising deductibles and increasing co-pays on medications (enabling them to keep rich benefit plans) result only in employees paying more for drugs and other healthcare services.
“We are on the precipice of getting some more expensive drugs into the system, and how are we going to manage it?” he says. “We are already starting from a pretty high base if you are looking at employers’ spend.
They want broad access to care, but at the current price points, they just aren’t sure they are paying for it correctly.”
One way to cut costs is through state and federal legislation. To date, the federal government has done little to sway the prescription drug market with the exception of some movement in Medicare. States, on the other hand, have taken up the torch.
Some are doing simple things that don’t require legislation, like pooling public employees with prisoners to leverage a greater number of covered lives for negotiations with pharmaceutical companies. Some are joining purchasing pools to get the same result.
But Jane Horvath, a senior policy fellow at the National Academy for State Health Policy, says these are short-term measures. “Those net some discounts but not enough to change the trajectory of what is going on,” Horvath says. “They are staying one step behind the band. When prices go up, they are still just getting a 10% discount on those higher prices.”
Some states have taken the legislative route. Horvath says more than 100 bills were introduced in 2017 and nearly as many already have been in 2018. Some are focused on curbing high prices—New York passed a law to cap Medicaid drug spending. Maryland, known for its progressive healthcare market, is considering creating a commission to set ceiling rates for high-priced drugs. States are also focusing on increasing transparency, requiring pharmacy benefit managers to disclose their manufacturer rebates and forcing manufacturers to justify prices that seem unusually high.
Other states save money by importing drugs from countries such as Canada and Australia. Unlike busloads of seniors crossing the border to Canada to buy their prescriptions before Medicare Part D was enacted, passing important legislation would allow states to do it on a wholesale basis.
The cost savings of looking to other nations can be substantial. In 2016, Kaiser Health News compared the cost of some popular brand-name drugs in Canada and Brooklyn. Most drugs in Canada were 50% to 75% cheaper than the same drugs in the United States. This savings can be small, as in the price of the generic version of the cholesterol drug Crestor, costing $6.82 here for a 30-day supply (the same amount in the name brand is around $175) and $2.58 in Canada. It can also be more significant, as with the leukemia treatment Gleevec, where the name brand runs around $336.33 per 400-mg. pill in New York and $48.77 in Canada (the generic is closer to $125 per pill).
Horvath says importation is not the ultimate solution but state legislation pushing it does place pressure on the industry and federal government to do something. The National Academy for State Health Policy has its own model drug importation program to guide states and smaller groups or just for certain medications, such as those in the expensive specialty market. To cut costs, employers are using this option more frequently.
Gary Becker, founder and CEO of Baltimore-based ScriptSourcing, has spent 33 years learning how to help businesses mitigate risk and cut spending. Three years ago, he added international health tourism and mail-order programs to his other offerings and has written more business than in his three previous decades in the industry.
“There is a huge appetite for savings and helping employees better adhere to their medications by cutting the high cost of prescription drugs,” Becker says. “The things we are doing are not status quo, but we have had a tremendous amount of success.”
ScriptSourcing comes into an organization and gets a detailed PBM report so it knows which medications each employee is taking as well as the dosage and cost. Then, the company identifies drugs that are eligible for its solutions and works with employers to encourage employees to take part in a voluntary plan.
Its mail order option (in which the company sources medications from “tier-one” countries Australia, New Zealand, Canada and the United Kingdom) reduces the cost of brand-name drugs such as Wellbutrin by an average of 70%, Becker says.
ScriptSourcing also works with a network of healthcare centers around the world where it sends people for treatment and medication. Because of the high cost of some specialty drugs, employers can save thousands by flying people elsewhere for treatment.
For example, a patient in Becker’s program went to San Diego, traveled an hour south to Mexico two days in a row and received the chemotherapy treatment Revlimid. Each day, he returned with a six-month supply of the brand name medication for around $100,000. In the United States it costs $160,000. Another of his employers saved more than $30,000 by sending an employee to Mexico for injections of the immunosuppressant Humira. In the Cayman Islands, patients can save $60,000 for a 90-day supply of Harvoni, the hepatitis C drug.
Not all specialty medications are available internationally, but for those that are, he says, pharmaceutical tourism saves 25% to 75% of the cost of U.S. medications. One client with 1,200 employees recently saved $1 million in its first year. Another, with 65 employees, saved $2.1 million in seven years.
Not everyone is sold on traveling to receive medications. According to the Centers for Disease Control and Prevention, patients have to be aware of some issues that include errors that can occur when dealing with healthcare providers and pharmacists that aren’t native English speakers and the potential that medication could be poor quality or counterfeit. Also, according to the U.S. Food and Drug Administration, it’s technically illegal to import medications that aren’t approved by the FDA. The organization concedes, however, it does not enforce the policy as long as the drug is considered safe, it’s for the patient’s use and not for commercialization, and an individual brings in less than a three-month supply.
“About 80% of workers live paycheck to paycheck, and 70% of families have $1,000 in savings or less,” Becker says. “There are people out there making a choice between food and other expenses or medication.”
Employers don’t want to see their workforce making these kinds of choices. And they know reducing healthcare spending can make them more competitive.
“People value that pharmaceutical companies are curing diseases and prolonging life,” Becker says. “But it doesn’t quite sit well with an employer whose spending is so out of control and across the border medications are one third of the cost.”
Not everyone has to shop in Canada to save money on prescription drugs. Consultants and other organizations are working to cut spending in different ways. The term “value-based” is the current darling in healthcare. In the prescription drug realm, it can mean a few things. One is value-based contracting, where drugs aren’t paid for if they don’t meet the outcomes promised by their manufacturers. Another is value-based benefit design, in which patients pay lower co-pays for medications perceived to have a high value and keep costs lower by reducing hospitalizations and complications down the line.
The San Francisco-based Pacific Business Group on Health (PBGH) is piloting its own value-based option, the waste-free formulary. According to Lauren Vela, the organization’s senior director of member value, most formularies created through PBMs get value by optimizing rebates, which is different from actually creating value.
“If a drug is $100 and you are getting a $50 rebate, that’s great…unless there is an equivalent $7 drug out there that is just as good,” Vela says. “That is what is going on in the system, and it’s happening a lot.
Employers are getting a bigger rebate, but they are actually paying more to get the drug.”
The PBGH definition of value for this project includes finding drugs that are the same clinically, then putting the ones in the formulary that are the least expensive, minus rebates. Their goal is to get waste out of the formularies by subtracting high-cost drugs that don’t add value. Most of the culprits in the system fall under a couple of categories: combination drugs that are cheaper if taken separately; “me-too” medications, which are chemically similar to a drug already on the market but tweaked slightly; and drugs that have less expensive, over-the-counter equivalents.
The challenge with many of these, Vela says, is patients are paying the price for a new drug when less-expensive generics, or even name brands, are available. A 2008 analysis of 42 new drugs approved over 18 months found nearly three quarters offered no new treatment advantage over options already on the market. Some were more convenient to use, but only 13% addressed an unmet need or were more effective than existing medications.
“That is part of why drug prices are trending upward,” Vela says. “Employers just pay whatever they think they need to pay. They need to just get rid of drugs on their formularies that add no value and are high cost. It’s simple math.”
Consultants in the industry work with employers to comb through data, track drug use and spending, and search for waste or areas where they can save on particular medications. If consultants have been successful in doing this with individual businesses, Vela questions why it couldn’t be done en masse.
PBGH is currently piloting its waste-free programs in California, looking at data from a range of employers to get a sense of whether the process would work across larger groups with different pharmacy benefit managers and formularies. Vela says they start by reducing the drugs on a lot of formularies that shouldn’t be there—culprits like the combinations and me-toos. Those are easy to find and remove. Then, they analyze spending more closely to see what other medications are covered that shouldn’t be. The template for most would look very similar, with some slight differences depending on the workforce makeup.
“Ultimately there would be one formulary with the highest-value drugs available,” Vela says. “They would look much the same, but if one organization has a bunch of diabetics, their insulin benefit might look a little different.”
PBGH would create this formulary and offer it across employer groups. And a key to its success will be its use by physicians—getting doctors to prescribe the most high-value drugs at the beginning. Vela says physicians appear to like the idea but need to have the information at their fingertips or it won’t be used. She is working with groups to create a point-of-care decision-making tool to help providers with this task.
It’s too early to have a lot of data on the PBGH program, but Vela says the first few case studies they have done have been highly successful at cutting employers’ costs.
Rea says the algorithm his company created has also helped reduce prices for a lot of employers. The company takes claims information for an organization, puts it into the system and considers local pharmacy costs and other therapies to find the best therapies for the lowest cost. Then, the company sends employees a link that explains how to get those savings. Rea says the company tends to find savings in areas similar to those in the PBGH program—substituting a pill for a capsule to save 40% or using two medications instead of combination drugs.
During his time analyzing medications, Rea says he’s learned saving money is about breaking down preconceived notions about what drugs cost and why. He also stresses more knowledge is always better. “The chance consumers can be taken advantage of is high,” Rea says. “The less information they have, the less chance they are going to find the route to the lowest-cost medications.”
Absent using his software or a program like PBGH’s, he says insurance brokers need to look not only at the sticker price but also at where the variances are in cost and at the use of generics. He says there are tremendous savings to be had if purchasers look deeper into the system.
IOA’s Labrecque agrees with this assessment. He has spent time talking with frustrated clients, brokers and employers large and small all seeking greater transparency. “Warren Buffett said it’s not until the tide goes out that you see who’s swimming naked,” he says. “We need to make the tide go out. It’s on us to develop solutions out there instead of just pointing to the side of the road and saying, ‘Look, there’s a car wreck.’”