American spending on retail prescription drugs hit $425 billion, according to a report by the IMS Institute for Healthcare Informatics. That, and year-over-year growth of around 12 percent is likely to capture headlines. But dig a little deeper and you’ll find that rebates and other discounts that pharmaceutical companies offer insurers slashed that spending to $310 billion. For patent-protected-drugs this is especially important – these price concessions cut price growth by between 77 and 81 percent. That’s great news for the health care system and for insurers – but unfortunately, the neediest patients with the highest costs don’t benefit much from these concessions. That’s due for a change.
“Reducing [the] up-front burden is more important than reducing average premiums if we want to encourage the rapid take-up and development of highly effective medicines.”
Our payment system for prescription drugs can be described, at best, as mind-boggling. Start with a manufacturer – a pharmaceutical company that either developed a drug, or bought a competitor that did. They sell the drug to wholesalers for a price based on a “wholesale acquisition cost” (WAC). Pharmacies then purchase drugs from wholesalers, again, based the WAC. Related to this price is the “average wholesale price” (AWP) which is best thought of as a “list price” that no one pays. Insurers typically pay pharmacies for drugs using AWP as a benchmark.
Now, with all of these terms we’re still not getting to what actual prices are. Neither WAC nor AWP are ultimately representative of the net payments drug manufacturers receive. Various discounts and rebates – such as those that drug manufacturers pay insurers and pharmacy benefit managers – reduce list prices significantly.
But wait – there’s more!
It’s not just insurers that pay for drugs. As the IMS report indicates, patient cost-sharing is an important part of the whole scheme – and average cost-sharing has grown by over 25 percent since 2010. Nationally, around 15 percent of drug spending is borne directly by patients in the form of various cost-sharing mechanisms like copays or coinsurance. While these are designed to reduce unnecessary use of branded and less effective drugs when good alternatives are available, in recent years, the somewhat blunt approach to cost-sharing has come under fire (correctly so) from patient advocates and other groups.
Worse still is that when a patient is required to pay 50 percent coinsurance for a drug with a list price of $8,000, and a net price of $5,000 (after rebates, discounts and other price concessions), the patient will pay 50 percent of $8,000 ($4,000) rather than the $5,000 ($2500). That’s a 38% higher payment by the patient, based on a price that no one pays. For those of us concerned about patient access to effective medicines– and if you’re a health policy researcher you should be – that should be troubling.
In theory, when PBMs negotiate these sorts of price concessions, the reduced net drug spending should result in lower insurance premiums for everyone. And there’s some evidence that rebates do flow back to employers.
Even so, when we’re dealing with highly effective, expensive, curative therapies, high coinsurance can easily deter the use of these drugs. Reducing that up-front burden is more important than reducing average premiums if we want to encourage the rapid take-up and development of highly effective medicines. And in the case of diseases like cancer – which will affect roughly 1 in 3 women, and 1 in 2 men, over the course of their lifetimes – spreading these costs over larger population bases ensures that current patients aren’t disproportionately bearing the costs of innovative new medicines.
Health care spending (including drug pricing) as it stands today, is unsustainable in a health care system moving to a value-, and outcomes based payment framework. For a drug to cost $100,000, benefits will need to be clearly defined and well-justified. And eventually, a change will need to happen.
But until we develop a more holistic way of paying for health care – that factors in all costs and benefits – extending the benefits of the current system to patients should be a priority. One simple way of doing so is to base coinsurance on the net-of-rebate price. The current approach: sticking patients with a price that nobody pays only serves to hurt the neediest and the most ill.
This piece originally appeared at Forbes
This piece originally appeared in Forbes