Are your competitors spending less on their employee medical claims?

In recent months several major Pharmaceutical companies have published the aggregate increase in the price of drugs they manufactured in 2016 as compared to the price of these same drugs in 2015. Two of these studies resulted in the companies calculating year-over-year increases in drug prices of 3.5% and 5.5%, respectively.

Yet, studies performed by independent organizations have generally resulted in significantly higher estimates of Rx charge trend levels, and prescription drugs are often seen as a significant driver of total medical spend. So why the difference?

There are likely several differences in methodology between these studies including the selection of drugs to be included in the analysis, whether charges are analyzed net or gross of rebates, and how brand-to-generic shifts are accounted for. But one important difference to consider when reviewing published year-over-year drug prices is whether the analysis is properly capturing the impact of drugs that did not exist in the base year. The reported increases in prescription drug prices often mask the impact of the biggest pricing lever available to pharmaceutical companies: new drug pricing. 

New Drug Pricing

When the price of a new drug is initially set, that price becomes an anchor for existing patients and payers, and future increases in the price of that drug are constrained by what will be perceived as reasonable. For a drug being offered for the first time, no anchor yet exists, and therefore, pharmaceutical companies have greater freedom to justify a high price. Some of the most glaring examples include the introduction of Sovaldi in late 2013 at a price of $82,000 for a course of treatment, and the release of Spinraza in late 2016 at a price of $750,000 for the first year of treatment.

In addition, a drug company can make a minor change to an existing drug that does not necessarily increase its efficacy. This gives the company the ability to effectively reset the price that patients and payers will perceive as reasonable, and effectively increase prices faster than what will be apparent in a simple year-over-year comparison of a fixed basket of drugs.

These strategies are particularly effective for drugs without a strong brand or generic competitor in their therapeutic class. 

Results of Our Analysis

Brand

Brand drugs released since 2012 are on average 30% - 80% costlier than those previously available. For Medicare the weighted average gross drug price per days supply (PPD) was about 30% higher for new drugs as compared to existing drugs. For commercial health plans the PPD difference was 50%, and for Medicaid the difference was 80%. 

Generic

Generic drugs released since 2012 cost two to eleven times more than those previously available. The weighted average PPD of new drugs was 2.2 times more than existing drugs for Medicaid, 6.4 times higher for Commercial, and 10.8 times higher for Medicare. Given that many new generic drugs are introduced as a result of brand patent expirations, we removed from our analysis both the brand/specialty and generic forms of certain drugs associated with a patent expiration.

Specialty

Specialty drugs released since 2012 cost almost three times more than those previously available for the Medicare population. A portion of this impact is driven by the high profile drugs used to treat Hepatitis C. When removing Hepatitis C drugs from the calculation, specialty drugs for Medicare are still more than twice the price of existing drugs. For the Commercial market, the new specialty drugs introduced to the marketplace, ignoring hepatitis C drugs, are 30% higher than existing drugs. For Medicaid there is not as significant of a difference in the cost of new vs existing specialty drugs. 

Several Therapeutic Classes Show Notable New Drug Costs

We identified several key therapeutic classes that experienced both significant pricing differences for new drugs entering the market compared to existing drugs, and also had sizeable new drug penetration within the class. Using the metrics described in the methodology section we identified several of the top therapeutic classes where drug spend was most heavily driven by new drug pricing. These include:

- Hepatitis Agents: This class of drugs prominently featured costly new cures that impacted the Hepatitis market beginning in December 2013. 

Per day costs of the cures are close to 20 times higher than the previous maintenance treatment drugs. Note that the previous drugs used to treat Hepatitis C did not cure the disease, and that curing the disease lowers downstream medical expenses. This distinction should be considered when quantifying the financial impact of these drugs. 

- SSRIs: For Commercial and Medicaid this therapeutic class was in the top five in spend for classes meeting the defined thresholds. Per day costs increased from about $0.20-0.40 per day to a range of $5-6 or more per day. 

- Metabolic Modifiers: In the Commercial and Medicaid market, new Metabolic Modifier drugs cost over 20 times and 30 times the price of legacy drugs in the class, respectively. In 2014 the new drugs accounted for over a quarter of all drug spend within the class in both markets. 

Drivers of Rx Cost Increases

Numerous factors drive price increases in the pharmaceutical industry, for example:

- Most patients pay only a small portion of the actual drugs price, making them price insensitive.

- Payers are limited in their ability to influence a physician’s choice of prescription.

- In some markets health plans are required to cover a wide range of drugs within each therapeutic class independent of their relative efficacy.

- Price controls and lack of patent protections in some countries shift costs to the U.S. market.

- Coupling authorized generics with copay discount coupons on branded medications allow pharmaceutical companies to effectively price discriminate between insured and uninsured patients.

- Increasing drug prices is a way for pharmaceutical companies to grow revenue in an industry facing decreasing marginal gains from increasing R&D costs, long FDA approval times, and loss of patents on existing drugs. 

Strategies for Mitigating New Drug Pricing Impacts

There are a number of strategies that payers can implement to manage the impact associated with new drug pricing. Examples of these include:

- Developing evidence-based prescription drug management protocols tailored to the specifics of a patient’s situation,

- Contracting drug prices based on clinical outcomes to shift a portion of risk to the pharmaceutical company,

- Building Rx spend into shared savings programs and bundled payment arrangements to shift a portion of risk to the provider,

- Implementing a value-based cost sharing structure that incentivizes use of the most efficacious drug, not necessarily the most expensive,

- Selectively incorporating new drugs into a health plan’s formulary and encouraging generic utilization when possible, and

- Negotiating post-of-sale pharmacy rebates that would bring the cost of new, higher cost drugs more in line with existing drugs. 

We relied on several data sources including Truven Health Analytics’ Commercial and Medicaid MarketScan datasets as well as Medicare Part D experience from proprietary sources. While we did not audit or verify these data or other information, we did not identify any outstanding concerns with these data sources for the purposes of this study. 

Jason Siegel, Drew McStanley, and David Walters are consultants for Wakely Consulting Group, with over 32 years of combined experience. They are member of the American Academy of Actuaries and meet the Academy’s qualification standards. This article reflects the authors’ findings and opinions.

Posted 9:48 AM  View Comments

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