Benefits and Compensation

Transform Market Rules to Stop Drug Price Gouging, AHIP Execs Advise

Runaway prescription drug pricing poses a threat to health plan solvency and to the financial well-being of individuals, because a distorted market allows profit-seeking entrepreneurs to game the system with anti-competitive pricing, health plan executives told attendees at AHIP’s national health policy conference on March 9.

Drug spending is growing faster than any other component of health care, causing it to take up an ever larger piece of national health expenditure. speakers said. Health plans cannot handle the problem alone.

If health plans shift cost to plan members, through higher deductibles and other out-of-pocket expenses, then patients respond by delaying or not seeking care. Since 2009, cost sharing has doubled, and accordingly over the same time span, the percentage of people forgoing care they need has gone from 29 percent to 40 percent, Diane Holder, president of the University of Pittsburgh Medical Center’s insurance services division, explained to attendees.

Drug companies get away with price gouging because when people are sick or dying, they are willing to give up their last penny to live or be cured, John Bennett, M.D., president and CEO for the Capital District Physicians’ Health Plan, said.

But the speakers complained about companies that used the power of market exclusivity to corner the market on, then raise the prices for, generic drugs that they did not pay to research and develop. They also complained about exorbitant prices when R&D costs were paid long ago.

Similarly, egregious price hikes in the year or months before a brand name turns generic is “madness,” Bennett said. He called that “improperly trying to get the entire life value of a drug in one year.”

Generic Fun House

Some bad examples of a dysfunctional market allowing anti-competitive profiteering appeared in the last two years, in the generic drug market.

The most salient example involves reviled drug entrepreneur Martin Shkreli, who stole headlines when his company, Turing Pharmaceuticals, raised the price of Daraprim, a life-saving drug used by AIDS patients, by 5,000 percent. But this was far from being the first example of wild price increases that Bennett said cannot be attributed to recouping R&D costs, production costs or innovation.

  • Gleevec, an important biologic for treating leukemia, sold for $3,000 per month in 2005; but in 2015, it jumped up to $11,000 per month. A generic version of Gleevec was recently approved by the U.S. Food and Drug Administration. While the generic conversion will surely bring the price down, the company had been spiking its prices in order to capture as much money as it could in the waning days of the treatment’s exclusive patent, commentators have noted.
  • The price for Albuterol, a mainstay treatment for asthma that has been generic for a very long time, is four times as expensive as it was 10 years ago.
  • Metformin, a pre-diabetes medication that lost patent protection in 2002, was $100 per month in 2010, but now it’s $1,500 per month. According to news reports, the molecule was acquired by Valeant Pharmaceuticals, which increased the compound’s price 800 percent within a few months of buying it. Sarcastically remarking on all these recent examples, Bennett said: “What could possibly be the explanation?”

Market Reform: Protection from Price Abuse?

In such situations, prescription drug prices are rising due to drug companies’ desire to maximize profit, and not due to the value the drug is bringing to people, or to the cost of research and development, according to Brad Wilson, president and CEO of Blue Cross and Blue Shield of North Carolina.

To reform a market that is allowing such anti-competitive pricing occur, the health plan executives suggested the following changes, some of which would require government intervention.

  • Eliminate pay-for-delay arrangements, under which patent holders pay generic manufacturers not to bring lower-cost alternatives to market. According to the Federal Trade Commission, such arrangements cost American drug purchasers more than $3.5 billion per year.
  • Curb direct-to-consumer drug advertising.
  • Promote transparency by requiring manufacturers to disclose more on how prices are set: including, (1) the percentage of the price that’s to recoup research and development investments; (2) how much of the price is going to manufacturing, promotion, administration, rebates; and (3) disclosure of transaction prices and profits earned overseas.
  • Allow Medicare to negotiate costs. Add to this binding arbitration over price-setting disputes, and you will force manufacturers to set their prices reasonably to begin with, Nichols said. If Medicare could take into account what things cost, Medicare and other health payment systems would be able to pay for value and avoid paying inflated prices, Nichols said.
  • Using reference-based pricing and relative efficiency units to justify paying less-than-billed amounts.
  • Reduce biologic market exclusivity from 12 years to seven years.
  • Shorten patent exclusivity on brand-name drugs from 20 years to something shorter. Nichols also suggested tying market exclusivity to reasonable pricing. Companies would retain the right to charge whatever they want, but in response to abusive pricing, market exclusivity for that product could be withdrawn or curtailed.

The ACA’s Aggravating Effect

Amounts paid by BCBSNC for prescription drugs increased 16 percent in 2015, about double the growth rate of inpatient hospital, outpatient care and physician office visits, Wilson said.

Drug spending expansion is even worse in individuals newly insured under the Affordable Care Act. Drug spending by ACA plan members increased 30 percent in 2015. Spending on specialty drugs increased 33 percent in 2015, he said.

Ninety percent of all total small-molecule prescriptions are for generic equivalents, notwithstanding the problems with generic pricing, said Len Nichols, Ph.D., a professor of public health at George Mason University. And as a result, some brand-name drug makers are migrating their development pipelines into biologics (generic protection in the U.S. markets for biologics lasts for 12 years).

Exchanges Chases Insurers Out

ACA health plans lost BCBSNC $400 million in the last year, and the company is trying to figure out what to do about it. “The ACA is economically unsustainable without some changes,” Wilson said.

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