Late last week, The Council of Economic Advisers which operates within the Executive Office of the President released a nearly 30 page white paper outlining issues related to the ongoing increase in costs associated with pharmaceutical drugs. The report was broken into multiple parts, ranging from introducing this issue, describing how Americans are paying higher prices for prescription drugs than the rest of the developed world, and finally how we might improve innovation to reduce the overall price of healthcare. Within the sub-parts of the document were topics including how Medicaid and Medicare procure prescriptions for their participants, how other world markets are benefiting from the U.S. led innovation and development, how middle-men known as Prescription Benefit Managers are inflating the overall cost of prescriptions, and the lengthy process by which drugs become available in the marketplace.
SUMMARY & COMMENTARY
While the original intent of the White Paper was to both outline problems and offer up solutions, the document favored the former, and provided little by way of real policies that might impact the rising cost of prescription drugs. We agree with the information provided in the brief; however it fell short in the areas of solutions only offering few suggestions limited in substance. Healthcare is a real problem in the United States making up 18% of the Gross Domestic Product. Of the $3.4 trillion spent on healthcare each year in the United States, roughly 20% of that number, $457 billion, is on prescription drugs. Said differently, for every $100 generated in the United States, $2.50 is spent on prescriptions.
So what are the problems and possible solutions? To summarize the basics for purposes of this article, the key issues can be summarized (and in some ways were discussed within the White Paper) as follows:
- THE UNITED STATES CITIZEN PAYS FOR THE DEVELOPMENT AND MARKETING OF THE MAJORITY OF PRESCRIPTION DRUGS USED THROUGHOUT THE WORLD. Overall, Americans pay significantly more for prescription drugs than do citizens in countries throughout the developed world – in some cases 5 times more. So why is this? In short, the United States does not have government controlled healthcare nor does it have the ‘price fixing’ structures imposed by the government as do foreign markets. For this reason, Americans pay for roughly 70% of the patented biopharmaceutical profits. So as for a solutions here, barring the U.S. Government’s foreign policy shifting to requiring international markets to pay more, we are really relying on these foreign markets to voluntarily ‘pay their fair share’, which isn’t likely to happen. And while you might be wondering how the pharmaceutical lobby is approaching this topic, they really aren’t addressing it either. Why, you ask? Because the system still works to their advantage. Yes, the U.S. Citizen is left paying the tab, but they are still able to make top line growth margins off of foreign markets, so long as the American’s cover the bottom line expense of development, production and distribution. While the worldwide profit problem is real, unfortunately, there really is no clear solution to solving this problem as there could be numerous unintended consequences to policy actions.
- HOW THE U.S. GOVERNMENT PROCURES PRESCRIPTIONS FOR PARTICIPANTS ON GOVERNMENT PROGRAMS SUCH AS MEDICAID & MEDICARE. Roughly 40% of all drugs purchased within the United States are done so through government programs such as Medicare and Medicaid. With the U.S. Government controlling a significant portion of the purchasing power, they unfortunately do a poor job in managing how they procure these drugs. Medicaid, for example requires manufacturers to sell their product to the government at a roughly 23% discount off of what is known as the “Average Manufacturer Price” or AMP. Sounds good, right? Not so fast – because of this practice, the ‘AMP’ or price for certain drugs often times becomes inflated so that the Manufacturers can increase their overall margins. Since they have to sell their drug to the Federal Government at a specific rate, due to the requirement of AMP discounts, they over inflate the drug to the private market so as not to lose money, rather increase overall profits.
Within the Medicare program, the government actually incentivizes physicians by paying out ‘commissions’ on each drug that they administer within the Medicare Part B platform. In essence, physicians are paid roughly 6% (this has been adjusted to 4.3% due to the sequester) for each drug covered by Medicare Part B that they administer. As is outlined in the White Paper released, a doctor would receive $600 for administering a $10,000 drug while only receiving $60 for a $1,000 drug. In addition to this practice, the Medicare Part D program which covers prescriptions outside of those that are administered by a doctor has a number of provisions that artificially raise the costs for patients thereby increase the overall ability for pharmaceutical companies to increase profits. This include practices such as requiring that there be two non-therapeutically equivalent drugs offered per drug class, not having tiered formularies (different prices for drugs according to values), and the process of requiring discounts on drugs while participants are in their ‘gap’ period also known as the ‘donut hole’ portion of Medicare Part D. This last process incentivizes plan sponsors and Prescription Benefit Managers to charge more so as to get members through the gap portion of their plan and back on the government dime.
While the Executive Office White Paper did offer up solutions to these problems, it stopped short of suggesting that the Federal Government should actively engage in negotiating directly with manufacturers and re-structuring the way by which the negotiated price is established. Instead the solutions offered up within the White Paper included:
- Requiring plans to share drug manufacturer discounts with patients;
- Allowing plans to manage formularies to negotiate better prices for patients;
- Lowering co-pays for generic drugs for patients; and
- Discouraging plan formulary design that speeds patients to the catastrophic coverage phase of benefit and increases overall spending.
- MIDDLE-MEN, CALLED PRESCRIPTION BENEFIT MANAGERS, CONTROL TOO MUCH OF THE DISTRIBUTION. Insurance companies within the United States do not directly negotiate pricing with drug manufacturers; rather they employ the services of Prescription Benefit Managers (PBM’s). Roughly 85% of the prescription drug market is controlled by only 3 of these PBM’s. These companies are responsible for the direct negotiation and distribution of virtually all drugs in the U.S. and their profits account for roughly 20% of the overall prescription drug spend. While the White Paper outlined the issue of PBM’s within the marketplace it stopped short of offering any solutions rather instead stated that, “Policies to decrease concentration in the PBM market and other segments of the supply chain (i.e., wholesalers and pharmacies) can increase competition and further reduce the price of drugs paid by consumers.” So what are the President’s policies on this? No one really knows; however, we at GDP Advisors firmly believe; that a requirement of transparency is the first step in reducing inflated profits as a result of certain, shall we say, questionable practices within the PBM market.
- REGULATIONS KEEP NEW AND LOWER COST ALTERNATIVES OUT OF THE MARKET. Due to FDA regulations and control, the process of developing, testing and bringing a drug to market can take on average more than 8 years and cost upwards of $2.6 billion. Because of this, few companies can afford to engage in this massive undertaking. In addition, because of the time and expense, pharmaceutical manufacturers often need to inflate the cost of their drug so as to recoup their expense of that drugs development, testing and marketing. Once a drug is available in the open market, pharmaceutical companies are able to restrict completion due to U.S. patent laws which allow drugs to be protected for up to 20 years. While the FDA has 4 programs meant to expedite the development and approval process for drugs, as outlined in the White Paper, more can and should be done to reduce the overall timeframe as well as expense of bringing new innovative drugs to market.
In summary, there is no silver bullet to reducing the cost of prescription drugs which are estimated to increase nearly 7% per year through 2025. Because new innovation and development of drugs is necessary to continue to treat diseases and improve the quality of life, by restricting pharmaceutical companies from profit, you dampen the ability to innovate and develop new and better drugs. Rather than hinder the process of innovation and development, the U.S. government should instead promote these things by offering better incentives, easing FDA regulations, eliminating waste within their own offerings and requiring more transparency within the entire healthcare delivery systems. In addition, we as consumers must be more diligent in understanding the healthcare system, where we obtain our drugs, and engage at a higher level within the process. While there may not be a singular solution to the problems outlined within the Executive White Paper, multiple, more micro solutions could have significant impact on the overall spend and trajectory of healthcare within the United States.