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The Keckley Report

Campaign Issue #2: Controlling Drug Costs

By March 14, 2016March 1st, 2023No Comments

This is the second in the Campaign 2016 series to inform discussion about healthcare issues relevant to the election. Last week, “Medicare for All” was the focus; the March 21 focus will be “Delivery System Reforms: the New Rules for Hospitals, Physicians and Other Providers”

Controlling drug costs is a popular issue in the Presidential primaries and will be a pivotal issue in the general election.

In Wednesday’s Democratic debate, Bernie Sanders accused pharmaceutical companies of “ripping off” consumers and Hillary Clinton has targeted the industry for “predatory pricing” in her ads. On the GOP side, Donald Trump says he will allow Medicare to contract directly with drug makers to negotiate better deals and Marco Rubio has criticized drug makers for “profiteering”. But escalating drug costs is not a new issue, nor is it as simple as soundbites might suggest.

The fact is that the costs of prescription drugs are going up faster than inflation and overall healthcare spending, but like so much in healthcare, it’s a complicated issue.

Background: some basic facts about the biopharmaceutical industry…

1-In the U.S., utilization of prescription drugs is increasing. More than 2.9 billion prescriptions were filled last year in the U.S.—that’s more than 8 per person! Half of our population 90% of our seniors used a prescription drug in the last 30 days, and 67% of physician office visits result in a prescription. As the population ages and grows, the market for prescription drugs will continue to grow.

2-Drug manufacturing is a capital intense, risky business. Per the industry’s trade association, the Pharmaceutical Research and Manufacturing Association (PhRMA), U.S. drug manufacturers spent more than $51 billion in R&D last year (17.9% of revenues) and only 12% of drugs that go through their clinical trials make it to the market.  They say it takes 10 years and $2.6 billion to bring a new drug to market—though the underlying math has been challenged by some industry watchers.

3-The industry is highly regulated.  The U.S. Food and Drug Administration is the primary agency that oversees drug approvals, safety and industry business practices, augmented by laws passed by Congress and in states.  Some key laws:

  • Federal Food, Drug and Cosmetic Act (1938) that defines what requires a prescription and set up the Food and Drug Administration
  • Controlled Substances Act (CSA, 1970) which classifies all drugs into 5 categories and specifies how the manufacture, importation, possession, use and distribution of certain substances is regulated
  • The Orphan Drug Act (1983) that provides drug makers incentives for drug development for rare diseases
  • Prescription Drug User Fee Act (PDUFA, 1992) that allows the FDA to collect fees from drug manufacturers to fund the new drug approval process
  • Medicare Modernization Act (2003) that created the Part C Medicare Advantage and Part D Prescription Drug Discount program for seniors
  • Affordable Care Act (2010) that authorized the Patient Centered Outcomes Research Institute to develop comparative effectiveness research to facilitate transparency about the therapeutic efficacy and effectiveness of drugs and requirements that the industry offer deeper discounts to state Medicaid programs.

And many others. For instance, per the National Conference of State Legislators, more than 1600 bills are currently being deliberated in state houses that would limit/change how drug companies operate in states.  And in every country where a drug company sells medicines, there are regulatory agencies like the FDA that set standards.

4- Spending on prescription drugs is increasing faster than other sectors in healthcare. According to CMS, retail prescription drug spending accelerated in 2014 increased 12.2% to $297.7 billion compared to the 2.4% in 2013. By contrast, hospital spending increased 4.1% and physician spending increased 4.6%. “The rapid growth in 2014 was due to increased spending for new medications (particularly for specialty drugs such as hepatitis C), a smaller impact from patent expirations, and brand-name drug price increases. Private health insurance, Medicare, and Medicaid spending on prescription drugs all accelerated in 2014” Pew forecasts these specialty drugs (drugs that cost more than $600/month including large molecule biologics) will increase from $87B in ’12 to $400B in 2020. So drug pricing overall is not the issue: it’s certain classes of drugs (i.e. biologics/specialty pharma/large molecule drugs) that are the culprit.

5-The public trusts the safety and efficacy of its drugs but think drug pricing needs government attention. The majority of Americans trusts that its drugs are safe and effective (Deloitte) but 67% of adults believe drug companies have “a lot of influence” over what drugs doctors prescribe and the majority think the government should do something to constrain drug price increases. (Kaiser Health Tracking Poll November, 2015)

6-The biopharmaceutical Industry is an influential global industry that is consolidating. There are 4000 biopharmaceutical companies: most are not recognizable names to consumers. PhRMA estimates drug makers will invest $30 billion in capital projects in 2016: $20 billion in companies that operate in North America primarily and $10 billion by others. People who work in the pharmaceutical and health products industry and PACs linked to the industry have given more than $1.2 million to presidential candidates so far, according to the nonpartisan Center for Responsive Politics; the top recipient, Hillary Clinton, has received more than $400,000. And M&A activity in biopharma topped $434 billion last year for 295 deals—more than the rest of the healthcare industry’s deals combined.

So againstthis backdrop, the issue of drug costs looms as part of Campaign 2016 but this is not a new issue in the industry. In January, 2001, J.D. Kleinke wrote “Pharmacy costs are rising in excess of general and medical cost inflation, leading to calls for price and utilization controls by public and private payers. Such controls would be ineffective and counterproductive because they would attempt to reverse two profound, historic phenomena at work in the U. S. health care system.” “The Price of Progress: Prescription Drugs In The Health Care Market” Health Affairs.

What’s new is what makes the issue more politically sensitive now:

1-More of the costs for prescription drugs is hitting consumer pocketbooks. As co-pays go up and high deductible health plans become the norm for employers, consumers are feeling the pinch of drug prices. The AARP Public Policy Institute alerted its members that drug prices have increased at 6 times the rate of inflation since 2006. Drug costs are now a kitchen table issue. And the issue of access to expensive specialty drug prices is a high priority in the industry, with increased investment in mechanisms to fund hardship cases where the drugs are needed for patient care.

2-More media attention is being paid to drug companies that appear to take advantage of the pricing system. The business practices of Turing and Valeant have sparked unflattering attention on the industry’s business model.

3-And transparency about drug prices, their underlying costs for development and business practices in the industry has been minimal at best. The deals between manufacturers and health plans negotiated by Pharmacy Benefits Managers (PBMs), are well kept secrets. And the industry’s use of “pay to delay” and other tactics to keep competitors at bay or secure protection of its patents is still not fully resolved.

The Policy Options

No one wants to pay more than they have to for their prescriptions, and everyone wants access to drugs that offer the best chance for recovery, relief or reversal of a medical problem. It’s the industry’s classic Catch 22: Americans adore the products but hate the price tags, and think the companies are taking unfair advantage.

But unlike many other sectors in U.S. healthcare, the U.S. market is not the only market served by drug makers. As a result, the health policy options that might address drug costs per se is complicated. Most drug manufacturers operate globally. The U.S. market for prescription medications is only one-third of the global market: Japan and Western Europe are substantial markets as are Brazil, Russia, and others. And U.S. corporate tax policies favor relocation of U.S. drug makers to lower tax domiciles via well publicized inversions further complicating drug pricing policymaking. So controlling drug pricing is not as simple as federal price controls. The result would most certainly be further deployment of capital in other markets and erosion of U.S. access to novel medicines.

So what’s on the radar for policies that might constrain drug pricing? A few concepts are gaining momentum…

1-More Transparency: Policies that provide access to information about total and expected out of pocket drug costs for consumers and their effectiveness via digital health technologies at the point of the initial prescription offer promise. Health insurers are particularly keen to expose members to price comparisons and many are providing tools. And in tandem, increased restrictions on direct to consumer drug advertising: the U.S. and New Zealand are the only countries that allow it, and in our system, U.S. drug makers spend $4.8 billion to encourage consumers to “consult your doctor” who most likely has no idea of the drug’s cost or might be incentivized to prescribe a more expensive drug. The output of the Patient Centered Outcome Research Institute (circa Affordable Care Act) is considered a key to fact-based comparisons of a drug’s therapeutic value; combined with price calculators in the hands of prescribers and consumers, transparency about cost-benefits for specific drugs is a promising tipping point.

2-Expanded Medicare Advantage (Part C) Plans: 31% of seniors participate in Medicare Advantage plans that integrate their drug therapies into coordinated care, and seniors prefer MA plans over standalone Part D plans (Elliot et al Medicare Prescription Drug Plan Enrollees Report Less Positive Experiences Than Their Medicare Advantage Counterparts Health Affairs March, 2016). Sponsors of MA plans have important incentives to construct tight formularies, manage medication dispensing and encourage medication adherence by patients. And the same construct can be readily applied to the Medicaid, commercial and individualinsurance markets via collaboration with state departments of insurance (especially in provider sponsored health plans where physicians and pharmacists use interoperative electronic medical records to share medication management data (the promise of ‘meaningful use’).

3-Integration in Provider-Sponsored Systems of Health: Many major health systems are now sponsoring health plans and building a full suite of retail health services in their regions. These organizations were early participants in shared risk arrangements with Medicare via accountable care and bundled payment programs. Most are now moving integrating the delivery of care with its financing via sponsorship of their own health plans (McKinsey, Deloitte). In these, medication management and adherence are central to care coordination, and maintaining lower drug costs key to keeping insurance premiums competitive. And retail pharmacy—56,000 including 2850 that operate walk in clinics—is an important business unit in these systems whereby pharmacists, nurse practitioners and health coaches are able to direct patients to remedies including OTC and alternative health that mitigate the need for more costly prescriptions.

4-Leveraging U.S. R&D in Trade Pacts: In Campaign 2016, trade pacts are getting attention in both parties as middle-class job creation becomes a central issue. The same drugs sold in the U.S. cost 5-198% less in other countries due to their purchasing policies. The U.S. might integrate drug pricing concessions in its negotiations so that U.S. taxpayers pay less.

5-Patent Law Changes: The issue of drug pricing is most acute around specialty drugs where manufacturers face the highest risk and understandibly protect their patents aggressively. Shortening patent protections somewhat via tax credits and other means could lend to quicker access and lower costs in targeted classes.

6-Direct Contracting: Allowing Medicare to purchase drugs directly from manufacturers instead of through middlemen (PBMs/private Part D plans) is thought to be a useful mechanism to constrain drug costs.

7-Drug Importation: The public is not confident in the safety and efficacy of drugs approved in other systems, and it’s currently against U.S. law to important drugs. Nonetheless, mail-order pharmacies—some that operate illegally and some that are reputable—are increasingly relevant to drug policies as price sensitivity increases. And for medications that address chronic conditions, the case can be reliably made that imported drugs in these classes from countries with credible drug review policies should be considered.

No doubt, all of these will be discussed if drug costs continue at double digit increases, and the answer to escalating drug costs not solved anytime soon.

What we know for sure is that federal price controls are off the table for the time-being as a reluctant Congress prefers other means. And we know drug prices will be front and center in Campaign 2016.


P.S. For access to prior reports, go to Next week: Issue #3:

Key Facts-

Utilization: 48.7% of persons used at least one prescription drug in the past 30 days, 21.8% used 3 or more prescription drugs and 10.7% used 5 or more prescription drugs in the past 30 days: 10.7% (2009-2012). Use rates are increasing in every age group: (Health, United States, 2014)

  • Under 18 years 20.5% (1988–1994) 23.8% (1999–2002) 23.5% (2009–2012)
  • 18–44 years 31.3% (1988–1994) 35.9% (1999–2002) 38.1% (2009–2012)
  • 45–64 years 54.8% (1988–1994) 64.1% (1999–2002) 67.2% (2009–2012)
  • 65 years and over 73.6% (1988–1994) 84.7% (1999–2002) 89.8% (2009–2012)
  • Volume: In the U.S., 2.915 billion prescriptions were written in 2014: 2.3 billion in physician offices, 329 million in hospital outpatient departments, and 286 million in hospital ED departments (National Ambulatory Care Survey)
  • Access: 67.2% of physician office visits, 72.5% of hospital outpatient visits, and 80.3% of hospital ED visits result in a prescription (CDC)
  • Generics: 88% of all scripts are generics, up from 49% in 2000 (PhRMA)
  • Price increases: “Between 2006 and 2012, prices rose 3.6 to 7.6 percent; in 2013, the average price increase for more than 600 brand name, specialty and generic drugs was 9.4 percent.” (AARP Public Policy Institute)


New drug approvals in 2015: 51 (FDA)

  • Adverse drug events: adverse events from prescribed medications caused 123,000 deaths and 800,000 serious patient outcomes in 2014 (FDA)
  • Prescription Drug abuse: in 2014, 47,055 people died from drug overdoses jumping to 15/100,000from 9/100,000 in 2003.The trend is now similar to that of the human immunodeficiency virus, or H.I.V., epidemic in the late 1980s and early 1990s. Highest in rural areas. National Center for Health Statistics, CDC Note: The U.S. Senate voted 94-1 (March 10, 2016) in favor of the Comprehensive Addiction and Recovery Act, a bill that battles drug addiction (especially heroin/opiod) on multiple fronts as Senate members called prescription drug abuse a “pandemic” sweeping the country. And Walgreens announced (February 9, 2016) it will sell heroin overdose antidote naloxone, a heroin overdose antidote, without a prescription in 500 stores in 39 states that operate 24 hours/day.
  • U.S. drug costs vs. other developed countries: “The United States spends considerably more per capita on prescription drugs than other countries in the Organization for Economic Cooperation and Development (OECD). Drawing on the Intercontinental Medical Statistics Midas database, we examined the variation in drug prices among selected OECD countries in 2005, 2007, and 2010 to determine which country paid the highest prices for brand-name drugs, what factors led to variation in per capita drug spending, and what factors contributed to the rate of increase in drug spending. We found that depending on how prices were weighted for volume across the countries, brand-name prescription drug prices were 5-198% higher in the United States than in the other countries in all three study years. (A limitation is that many negotiated price discounts obtained in the United States may not be fully reflected in the results of this study.) A contributor to higher US per capita drug spending is faster uptake of new and more expensive prescription drugs in the United States relative to other countries. In contrast, the other OECD countries employed mechanisms such as health technology assessment and restrictions on patients’ eligibility for new prescription drugs, and they required strict evidence of the value of new drugs. See comment in PubMed Commons belowHealth Aff (Millwood). 2013 Apr;32(4):753-61. doi: 10.1377/hlthaff.2012.0920.Higher US branded drug prices and spending compared to other countries may stem partly from quick uptake of new drugs. Kanavos P1, Ferrario A, Vandoros S, Anderson GF
  • Drug efficacy & effectiveness: “Innovative medicines developed by America’s biopharmaceutical research companies have helped increase childhood cancer survival rates from 58% in 1970 to 83% today and have contributed to declining death rates for patients battling diseases such as HIV/AIDS (85% decline since 1995), heart disease (30% decline between 2001 and 2011) and cancer (22% decline since 1991)….With more than 7,000 innovative drugs in development worldwide by biopharmaceutical companies and over $500 billion invested in R&D since 2000, hope is certainly on the horizon.” (PhRMA) 
  • Medication adherence: It is estimated that 3 out of 4 Americans do not take their medication as directed. The U.S. health care system could save $213 billion annually if medicines were used properly. Medicines can also reduce the projected impact of diseases. In the fight against Alzheimer’s disease, new medicines approved by 2025 that delay the onset of Alzheimer’s disease by five years would reduce the number of people with the disease by approximately 40% and avoid $367 billion annually in long-term care and other health care costs by 2050. (PhRMA)