It was reported this past week that more than two-dozen drug manufacturers are planning to raise the list price of many of their products in early 2019. On the surface this seems to be a delayed ‘slap in the face’ at President Trump who has made lowering the cost of drugs a primary objective. Many of these same manufacturers had announced back in mid-2018 that they had intended to raise prices; however, following public shaming from the White House later relented, stating that they would delay those rate hikes until 2019, and now it appears that those chickens have come home to roost.
BEYOND THE TALKING POINTS - HOW DID WE GET HERE
Lowering the cost of drugs was a campaign promise made by then candidate Donald Trump and has been a top priority of his Administration. The President went so far as appointing former drug executive Alex Azar to head the Department of Health & Human Services. Under the leadership of Secretary Azar, the Administration has taken key steps in their approach. Following the release of a White Paper in February of 2018 outlining issues surrounding the drug industry and its impact on American citizens, HHS announced some of the most aggressive steps we’ve seen by an Administration in an attempt to tackle the rising costs of prescription drugs. These steps included:
- Requiring Manufactures to provide the price of the drug in their ads (this proposal is set to be a requirement by April of this year).
- Proposed a change in how Medicare Part B pays for drugs announcing that CMS will adjust payments to a level consistent with international pricing.
- Continuous public shaming of manufacturers, PBM’s and the industry overall.
Needless to say, drug companies aren’t very happy about this and have chosen to proceed with their original intent to increase prices following their pause from last year.
Originally, drug prices were going to increase approximately 10% (when announced last year); however, recent announcements from manufacturers seem to be lower in 2019 with prices set to increase on average roughly 6.3%. The talking point from the Pharmaceutical industry is that this is just “keeping up with inflation” however, they what they really mean is that they are keeping up with medical inflation (or what we refer to as medical trend) which, according to PWC was approximately 6% in 2018. The overall inflation rate in the U.S. was closer to 2%, so the proposed increase is more than triple the actual inflation rate. Another talking point of the drug companies is that they are only changing the “list price” of the drugs and that many Americans likely will not see an increase due to their insurance formulary structure and rebates.
That’s the same as me saying we’re keeping your auto payment the same, just extending the term of the loan another year. Allow me to explain my analogy. First, we must understand that Health Insurance is simply the finance mechanism of the health care industry. In the same way, insurance companies are NOT interested in taking losses – don’t believe me, just look at their stock prices over the past decade. So, in essence, your claims costs today (not your copays or deductibles, rather what the insurance company shells out on your behalf), will ultimately become your insurance premiums tomorrow. So, when a pharmaceutical company states that while their list price is going up, but your copay likely won’t, that doesn’t mean you’re not impacted – you are – you are paying that increased cost eventually.
The other “fun fact” of the day is that prescriptions in the U.S. are not sold directly to the public from the manufacturers rather they are sold via distributors known as Pharmacy Benefit Mangers. These “PBM’s” are responsible for price negotiation and setting the formularies utilized by insurers. Here’s where it gets really interesting…as of 2016 there were approximately 30 PBMs in the United States; however, three of them (Express Scripts, CVS Health, and OptumRx) control nearly 80% of the distribution. But wait, there’s more – of those three, each is owned by or owns one of the few remaining insurance companies (Express Scripts is owned by CIGNA, CVS owns AETNA and OptumRX is owned by United Healthcare). Oh, and how do PBM’s get paid? For the most part, they are paid a percentage of the list price of the drug – yes, a commission.
So, for those of you not following along, Big Pharma is raising prices, but telling you not to worry because your insurance company is likely going to keep your copay the same; however, your insurance company is going to increase your monthly premiums at your next renewal based on the claims you generate, all the while, because the insurance company likely owns the PBM listed on your ID card, they are getting the profits on the increased drug price…how do you say collusion?
Yes, this is yet another example of where our healthcare system has found itself in the conflict of capitalism and care.
Oh, and not to continue to pour salt into the proverbial wound, but here is another fun fact for you…while they seem to be unhappy with the Administration, Pharma has done well since Trump has taken office. Pfizer, for example, reported revenues of $54b in 2017 and also reported that they would see an approximate $11 billion gain for the new tax laws signed into law by President Trump.
BUSINESS AS USUAL
Drug companies raising their prices isn’t a new occurrence, rather them not raising prices would be the anomaly. And because this is the normal process, it’s important to note some of the reasons why pharma companies might raise the price of drugs. One major reason is to make a last stitch effort to squeeze profits out of a drug that may be coming off of patent or going over the counter.
The drugs that are seeing the greatest increase have seen a decline (or are expected to) in overall worldwide revenue (per each specific drug) as generics have come to market. At its peak in 2005, Lipitor generated $12.8b but it came off of patent in 2011. In 2017 the drug generated $1.9b in revenue. Viagra has held steady in revenues over the years, but a new generic, Teva, hit the market in December 2017 and is having an impact on the once popular drugs earnings. And finally, revenues generated by the anti-inflammatory drug Celebrex have dropped 21% from its peak in 2013.
Again, while given the current climate surrounding healthcare in the U.S., this is a big story and while I’m not defending the manufacturers, these increases are actually consistent with the process of increasing costs as drugs come off of patent, are seeing reductions in revenue, or pharma just keeping up with medical trend.
WHAT CONSUMERS SHOULD KNOW:
While it may seem like an uphill battle, consumers do have some power in all of this. Here are some key steps we can all take to combat these increases:
- First, be a consumer. Just because you've always taken a drug, doesn't mean that there aren't generic alternatives and/or biosimilars. If the drug you are on is no longer under patent protection, see if there might be an alternative.
- Next, the pharmacy you use might not have the best overall price on your drug. It's important to shop around. Websites like www.goodrx.com are free to use and will provide consumers with the best information as to where costs are, even what alternatives (non-name brand) drugs might be available.
- Third, don't be fooled by copays. In the end, the actual cost of the drug is what becomes your health insurance premiums tomorrow. Insurance companies are not interested in taking a loss, so saying something like "it doesn't matter where I go to get a drug, I still have a $20 copay" is naive and lazy. If you will think about your insurance card, more like a credit card and realize that eventually the balance will be due - you just might start to think differently about how you use it.
- And finally, if you are an employer providing health insurance to your employees, know who your PBM is and how they are working for you (or are they at all?). While working with an insurance owned PBM still might be in your best interest, you should at least know how they are pricing drugs, setting the formulary and how it will impact you in the long run. If you are the employer and you are sponsoring the plan for your employees, you actually have more power than you may think to control how this whole process operates.
In the end, the solution to the healthcare woes in the U.S. are all of our responsibility. We all need to step up to the plate and do our part.