When it comes to pharmaceutical prices, some things are certain. First, drug prices, especially for specialty pharmacy, are too high. It is also unlikely that prices will go down anytime soon – pharmaceutical giant Pfizer recently raised the prices of 41 drugs (effective January 15, 2019). Second, previous strategies that purchasers explored or implemented to address drug pricing have largely been ineffective and drug prices remain a significant portion of health expenditures. In 2015, drug spending accounted for 21% of expenditures. Compared to the 23% employers spent on inpatient hospital care in 2013, pharmacy is a substantial cost.
Why have some of these avenues led to dead ends?
Relying on market forces
Supply, demand, transparency, competition, and consumer behavior – market forces – have been looked at as potential levers to lower drug prices. In theory, the market will only allow for products at an acceptable point intersecting price and quality, and companies will compete to offer such products. But health care is unlike other markets, and regular market forces may not apply, or even exist. For one, most drug manufactures barely face competition for their products (mainly due to patents, exclusivity, evergreening, and other price protections), allowing them to charge obscenely high prices. Some laws, such as patent laws, even allow monopolies to occur. Moreover, consumers of health care do not act like regular retail consumers, as lifesaving drugs are not an optional buy. When the market environment drug companies are operating in is structured to favor them, relying on market forces is not a feasible strategy.
It should be noted that government intervention in the market, while not a natural or free market force as those noted above, is still a market force in the form of market regulation. While this may be an option, drawbacks include how government moves slowly, policies may introduce unintended consequences, and agencies and laws are not currently set up to tackle the issues related to drug pricing practices. The market is buzzing with government activity in this area, however. Just this month, the Senate Finance Committee held a hearing titled “Drug Pricing in America: A Prescription for Change” featuring health care expert Mark Miller of Arnold Ventures.
Relying on public shaming
When Mylan raised the price of its EpiPen 400% from $50 per single injector to over $600 for a two pack, public outcry from consumers, policymakers, and many other stakeholders was loud and swift – protests outside Mylan’s headquarters, intense media scrutiny, social media erupting with fury, and even a House Oversight Committee hearing. Yet, despite all the outrage, not much has changed. The fleeting news and social media cycle have long since moved on to other topics, the drug industry still operates much the same way, and it has taken over three years for Mylan to release a generic version of the EpiPen (at $300) and for a competitor to enter the market. Public shaming, while it creates huge waves initially, is not by itself a sustainable strategy to reduce pharmaceutical prices. Drug companies need only ‘ride out the storm’ before public ire shifts to something or someone else.
Relying on pharmaceutical benefit managers
Employers and other health care purchasers have long worked with pharmaceutical benefit managers or PBMs in their pursuit of greater value in pharmacy. The PBM acts as the middle man between the purchaser or health plan and the drug manufacturer, negotiating lower prices in exchange for volume on their behalf, and ultimately passing those savings on in the form of cheaper drugs. In theory, the incentives of the PBM and the purchaser should be aligned; however, this may not be reality. For instance, PBMs take a cut of the negotiations in the form of the “pharmacy spread” – the difference between what the health plan is billed and what the PBM pays in rebates to the drug company. This means the PBM may not be incentivized to pass the full savings on to plans or purchasers and relying on them as a strategy brings its own risks.
It’s time that purchasers start looking to forge new paths and fresh strategies when it comes to controlling drug costs.
Consider CPR member Self-Insured Schools of California (SISC). Tired of rising drug prices, market failures, and wary of PBMs, SISC set out to reassess its pharmacy program and implement comprehensive formulary management. During CPR’s Fall 2018 webinar John Stenerson from Self-Insured Schools of California and Tom Cordeiro from Integrity Pharmaceutical Advisors, LLC discuss what they’ve learned and their strategy for success.