It was a tricky issue. Drug companies have been reaching for new heights of pricing. They routinely raise the cost of older medicines and then peg new ones to these levels.

Yet Pfizer knew setting a price too high for Ibrance might backfire. It could antagonize doctors and prompt health insurers to make prescribing the pills a cumbersome process with extra paperwork that doctors dislike.

A look at Pfizer’s long journey to set Ibrance’s price—a process normally hidden from view—illuminates the arcane art behind rising U.S. drug prices that are arousing criticism from doctors, employers, members of Congress and the public.

The average cost of a branded cancer drug in the U.S. is around $10,000 a month, double the level a decade ago, according to data firm IMS Health. Cancer doctors say high costs are unavoidable because all of the options are pricey.

Pfizer’s multistep pricing process shows drugmakers don’t just pick a lofty figure out of the air. At the same time, its process yielded a price that bore little relation to the drug industry’s oft-cited justification for its prices, the cost of research and development.

Instead, the price that emerged was largely based on a complex analysis of the need for a new drug with this one’s particular set of benefits and risks, potential competing drugs, the sentiments of cancer doctors and a shrewd assessment of how health plans were likely to treat the product.

In the end, “we went to the right point where patients get the maximum access, payers will be OK and Pfizer will get the [returns] for a breakthrough product,” Dr. Bourla said.

The process began in November 2011 when Mace Rothenberg, a scientist who oversees Pfizer’s development of cancer drugs, flew to California to review early clinical-trial data on a laboratory compound.

Then called simply PD-0332991, it grew out of work on proteins that help regulate how cells form and divide. In cancer, some of these can shift into overdrive. The research on this won a Nobel Prize. It also set off a hunt by drugmakers for a way to put the brakes on the overactive proteins, called cyclin-dependent kinases.

Visiting Pfizer labs in La Jolla, Dr. Rothenberg saw a slide with two curves veering far apart. It showed that the length of time before breast-cancer patients’ disease progressed was twice as long for those who took Pfizer’s compound in addition to an existing drug versus patients getting just the older drug.

“I think we have something special,” Dr. Rothenberg told the scientists leading the research.

When he got back to New York, he began talking up the compound to win the internal investment needed to develop it, as well as to involve others who would eventually set a price. Pfizer wasn’t going to fund further clinical testing and other development costs if it couldn’t anticipate good financial returns from a resulting drug.

In this case, the opportunity was clear. Pfizer’s novel compound targeted advanced breast cancer fueled by estrogen—a disease for which existing therapies, a decade or more old, offered only a modest extension of life. A drug that could do better would fill an unmet need and could be priced accordingly. So in 2012, while scientists continued their work, Pfizer employees on the commercial side started on the market analysis that would eventually lead to a pricing decision.

More clinical results arriving in December 2012 supported the compound’s promise, but also showed it was associated with lower counts of infection-fighting blood cells. The studies weren’t long enough to answer a key question: whether the compound helped people live longer.

They were encouraging enough to keep the Pfizer pricing team going, though. The team began interviewing cancer doctors, seeking to gauge interest in a possible drug with this one’s profile of benefits and risks.

Importantly, Pfizer wanted to know what the oncologists would consider comparable treatments.

Among the doctors consulted was Debu Tripathy, then co-leader of the Women’s Cancer Program at the University of Southern California. Dr. Tripathy, now at University of Texas MD Anderson Cancer Center in Houston, says he was excited about the prospective drug described, though he would have liked to see evidence it extended lives.

Pfizer’s compound “looks about as good as Herceptin. Maybe you should price it like that,” Dr. Tripathy recalls telling Pfizer.

Herceptin was much cheaper than most other branded breast-cancer drugs, he knew. It cost about $4,775 a month in late 2013, according to its maker, Roche Holding AG, and data firm Truven Health Analytics.

Dr. Tripathy says Pfizer staffers told him it would be better to compare their compound to newer drugs. These are much costlier than Herceptin. Pfizer says Herceptin wouldn’t have been a good benchmark because it wasn’t one of the newest drugs in use and because of differences in how it is taken, the kind of cancer it treats and the length of time it stalls tumor growth.

In 2013, Pfizer hired outside firms to conduct hourlong interviews with more than 125 cancer doctors in six cities, while commercial staffers observed. Doctors said they were impressed, and many said that despite having to monitor patients for infections, they would prescribe “Product X” if the price was reasonable.

Most of the doctors, according to two Pfizer staff members, pointed to three drugs the company should consider as pricing benchmarks: Kadcyla and Perjeta from Roche and Afinitor from Novartis AG.

Like Herceptin, two of these differed from Pfizer’s drug in the kind of breast cancer treated and in how they were administered. Only Afinitor closely paralleled Pfizer’s compound by attacking the same type of breast cancer and being in pill form.

For all three, the cost of treating a patient for a month was between $9,000 and $12,000, including any other drugs that had to be taken with them. These are list prices, from which health plans and insurers negotiate discounts of 20% or so.

Competing factors

The company wanted a price that would maximize its revenue without deterring health plans or keeping the drug from getting to patients it could help. Dr. Bourla recalls telling staff members in late 2014 that the company had “a moral obligation”: The patients had a deadly disease that this drug could help, and “it is our responsibility to get it to them.”

It was time to talk to insurers.

Pfizer hired firms that surveyed more than 80 health-plan officials such as medical directors and pharmacists. They were asked what restrictions, if any, they might place on a drug with this one’s profile, at various monthly prices from $9,000 to $12,000.

Pfizer Pfizer executive Albert Bourla gave final approval last January to a price for the company’s new breast-cancer drug Ibrance, following a years-long process by other Pfizer officials that included testing the views of oncologists and health-plan officials.

At $11,000 a month, one official said the plan “would definitely require physicians to document medical necessity for Product X,” according to a person familiar with the surveys. It was the kind of paperwork obstacle Pfizer wanted to avoid.

Staff members put together a chart estimating the revenue and prescription numbers at various prices similar to those of the three drugs Pfizer had decided to use as benchmarks.

The chart showed a 25% drop in doctors’ willingness to prescribe the new drug if it cost more than $10,000 a month. This indicated Pfizer might collect higher returns by charging toward the lower end of its range.

Pfizer also had been talking with the Food and Drug Administration. The agency agreed in late 2014 to a speedy review, without waiting for results from an elaborate “Phase 3” clinical trial, so that patients with life-threatening conditions could get the drug earlier. This sped up the time to market by about two years.

Pfizer took steps to put the drug in patients’ hands as fast as possible after FDA approval. Oral cancer medicines aren’t dispensed at local drugstores but at specialty pharmacies that help patients gain insurance approvals, remind them to take pills and assist with side effects. Pfizer lined up 24 of these to supply the drug once approved.

Hoping to smooth the drug’s way onto health-plan lists of covered medications, Pfizer economists created a dossier containing data on clinical benefits and risks, plus—important to the plans—the likely effect on their budgets.

The economists mined electronic health records, drug-prescription tallies and health-insurance claims to estimate the number of prescriptions, costs of treating side effects and monitoring patients for infections, and spending that might be avoided if the drug kept cancer at bay longer.

The economists cited a 2012 report showing that a typical million-member commercial health plan spent $320 per member a month, of which the spending on cancer drugs came to just $4.20. Scenarios they ran indicated the new drug, if priced below $10,000 a month, would increase that spending no more than six cents.

The staff felt they finally had it. When they met in November 2014 to nail down a price, they picked a figure just below the cutoff: $9,850 a month. This would be the list price, from which health insurers and pharmacy-benefit managers would negotiate discounts and rebates with Pfizer.

The price they had picked was well below the cost of treatment involving one of the three benchmark drugs Pfizer had identified. But it was close to the price of the other two, and slightly above the price of the most direct competitor, Novartis’s Afinitor.

Then, on Jan. 6, 2015, Novartis raised Afinitor’s price 9.9%. Novartis says it adjusts prices to reflect “an evolving health-care and competitive environment,” new evidence and the need to support R&D.

The new price for the close rival drug put its monthly price $687 above what Pfizer was planning to charge.

Meeting in Dr. Bourla’s New York office three days later, Pfizer staff members mentioned that price increase. Dr. Bourla asked if Pfizer, too, should go higher.

“This may make some plans just not use it, and some will make things difficult and that will frustrate patients,” he recalls being told.

Alternatively, Dr. Bourla asked, should Pfizer charge a lower price than it was planning? Would doing so reach substantially more patients? He says staffers told him that a price closer to $9,000 a month wouldn’t improve health-plan coverage, and Pfizer would be leaving money on the table.

They were back to $9,850. “Let’s go with that,” Dr. Bourla said.

By Jonathan D. Rockoff

Step #1:  Obtain a price list for generic prescription drugs from your broker, TPA, ASO or PBM every month.

Step #2:  In addition, request an electronic copy of all your prescription transactions (claims) for the billing cycle which coincides with the date of your price list.

Step #3:  Compare approximately 10 to 20 prescription claims against the price list to confirm contract agreement.  It’s impractical to verify all claims, but 10 is a sample size large enough to extract some good assumptions.

Step #4:  Now take it one step further. Check what your organization has paid, for prescription drugs, against our pharmacy cost then determine if a problem exists. When there is a 5% or more price differential (paid versus actual cost) we consider this a problem.

Multiple price differential discoveries means that your organization or client is likely overpaying. REPEAT these steps once per month.

— Tip —

Always include a semi-annual market check in your PBM contract language. Market checks provide each payer the ability, during the contract, to determine if better pricing is available in the marketplace compared to what the client is currently receiving.

When better pricing is discovered the contract language should stipulate the client be indemnified. Do not allow the PBM to limit the market check language to a similar size client, benefit design and/or drug utilization. In this case, the market check language is effectually meaningless.

IN 1990, SCIENTISTS in Italy published a study comparing the efficacy of two heart medications. After looking at more than 12,400 cases, they concluded that the newer and more expensive drug provided no significant improvement in health outcomes. The study was controversial and, not surprisingly, contested by Genentech, the company behind the costlier option. It also kick-started a conversation about the rising cost of medicines. The price tag of the new drug in the study was $2,200 per dose, after all.

How quaint. Today, many drugs cost more than $30,000 a pop. In the past 50 years, prices for cancer drugs have increased a hundredfold, and spending on specialty drugs is forecast to double yet again by 2020. The industry’s riposte to any criticism about pricing is predictable: Regulations are complicated, biology more so, and R&D is expensive. Prices have to cover the costs. Get over it, or go find a naturopath.

That is only partly bullshit. Dealing with the chemistry of tomorrow and the regulatory hurdles of today is expensive. Yet in some European countries, the same name-brand prescription meds cost about half what they do in the US, according to a 2008 McKinsey study.

How then might we come up with a reasonable way to tether prices without quashing the incentive to innovate? Well, it’s complicated. Patent law, gobs of health care legislation, insurance, taxes, lobbyists, ethics—prescription drug costs touch all of them and more. But there are steps we can take to reel prices in. First is shifting away from monopolistic pricing to a more competitive model. Second is designing mechanisms that link the cost of drugs to the value delivered to patients, insurers, society, and even science. The time to move on this issue is now, while the spectacle of a young man named Martin Shkreli is still fresh in mind.

Yeah, that guy. Earlier this year, Shkreli’s company, Turing Pharmaceuticals, increased the price of a recently acquired drug from $13.50 to $750 a pill. The medicine, Daraprim, is used to combat parasites, especially for patients with immune-system deficiencies like HIV.

Within a day, Shkreli was being lambasted on every platform and outlet imaginable. His brashness and previous job as a hedge fund manager only made the bull’s-eye bigger. “He even looks like a prick,” a fellow parent said to me on his way into a PTA meeting in late September.

Yet Shkreli wasn’t breaking any laws. As physician Peter Bach, director of the Health Policy and Outcomes program at Memorial Sloan Kettering Cancer Center, put it, the Shkreli dustup shows that the system is “so broken even a child could manipulate it.”

Bach made headlines in 2012 when he and his colleagues refused to offer patients a new drug because they didn’t see sufficient health benefit to justify the $11,000 monthly cost. Weeks later the drugmaker cut the price by 50 percent. It was a rare victory that, like the Shkreli episode, illustrates just how fragile the market for drugs really is.

In Europe, regulators refuse to approve drugs that have a poor cost-benefit ratio. In a typical marketplace, forces like competition and regulation help keep prices down. You and me? We don’t care what it costs to make a saucepan. If the product provides us with value, we’ll pay for it. If we can get the same value out of a different saucepan that’s half as expensive, we’ll buy that one.

The marketplace for medicines in the US is nothing like that. Instead of thinking of drug companies as free-enterprise actors, we should think of them as “fragile little birds that the protective hand of government carefully shields from the harsh vagaries of truly free, competitive markets,” writes Uwe Reinhardt, professor of economics at Princeton. That protection comes in the form of patents and market exclusivity, plus laws against reselling drugs. Rising drug prices across the industry force insurance companies’ costs to ratchet up too, despite their best efforts to negotiate better deals. Meanwhile, Medicare, which should have huge bargaining power, isn’t permitted to negotiate with manufacturers.

In the US, an analogous strategy for dealing with drug pricing would be to establish some kind of connection between a drug’s price and the value it confers. This past summer, Bach and colleagues at Sloan Kettering introduced an online calculator called DrugAbacus, which compares present-day costs for dozens of cancer drugs with theoretical prices determined by adjustable variables like side effects, R&D costs, predicted years of life added, and the number of people each drug could help. (Other organizations, including the Institute for Clinical and Economic Review, also have a system for calculating value-based pricing.) “This is about finding the right prices,” Bach says. “If prices are reasonable, people will be OK to pay them.”

Tyrone’s comment:  Third party payers, such as self-funded employers, are better off when micro-managing the pharmacy benefit as opposed to a macro approach. Relying too heavily on TPAs, ASOs, benefits consultants and brokers may cost more in the long run. Far too often they are not PBM experts but rather connectors of buyers and sellers. One solution for drug cost-containment, develop the requisite talent in-house.

It’s a start anyway. “I don’t know if I’m missing some of the domains,” Bach says. “This is going from ‘I’d like to price based on values but don’t know how’ to having some kind of attempt to do so.” At a minimum, DrugAbacus and other cost-assessment tools put more information into the marketplace, which is healthy.

In the meantime, don’t let up on the Shkrelis of the world. Remember what happened after the avalanche of outrage? He backtracked (some). According to a 2006 paper in the Rand Journal of Economics, drug costs are influenced by the mere presence of public debate.

Who knows? Perhaps citizens of the near future will ultimately owe Martin Shkreli a debt of gratitude for inadvertently fast-tracking change to a system that once looked immovable.

by David Wolman

Before they can get two more weeks’ worth, a nurse at the university’s pharmacy partner has to confirm they are doing well enough.

The policy, called “split fill,” is designed to avoid paying for drug prescriptions that go half-unused if patients develop side effects and must stop them. It is part of a growing effort to rein in a drug bill the university says rose 8.9% last year, roughly double the rate for other health expenses.

“I don’t want to penalize the patients, but what the drug companies have to realize is they put us in that box” by charging such high prices, said Stephen Schondelmeyer, a pharmacy professor who advises the administration on its benefits for nearly 39,000 employees, retirees and family members. Some of the cancer drugs cost as much as $13,500 a month.

Rising drug costs are forcing tough decisions on those who foot the bill for much of American health care: employers. The pinch is most acute for the many large employers that, like the University of Minnesota, are self-insured—hiring an insurance company to administer benefits but paying the bill themselves.

Employers have for years been shifting more health costs to workers, through higher premiums and deductibles. With drugs, they face a growing challenge. Specialty medications for ills such as cancer and multiple sclerosis are so pricey that despite making up only about 1% of prescription volume at the University of Minnesota, they account for 28% of its drug costs, said Kenneth Horstman, director of benefits and compensation. Pharmacy costs are about 17% of its health plan’s spending, up from less than 14% in 2013.

Nationally, employers’ pharmacy costs are rising about 9.5% this year and will go up 10% in 2016, according to Aon Hewitt, a benefits consultant. The firm expects employers’ other medical costs to rise far less, 4.5% this year and 5% in 2016.

“This is a tsunami,” said John Bennett, president and chief executive of Capital District Physicians’ Health Plan in Albany, N.Y., a nonprofit insurer with corporate clients. Pharmacy costs are “the single biggest driver of our medical inflation in the last few years.”

In tackling them, employers are becoming more aggressive. Many have expanded requirements that doctors obtain advance approval from health-plan administrators for certain costly drugs, a practice called prior authorization. For instance, about 89% of employer health plans now mandate prior authorization for certain anti-inflammatory drugs for diseases like rheumatoid arthritis, up from 61% in 2007, according to survey by drugmaker EMD Serono Inc.

Another increasingly common strategy is “step therapy,” which requires that patients be treated with lower-cost drugs before the health plan will pay for a more expensive option. This year, about 69% of employers had step-therapy rules, compared with 56% in 2011, according to the Pharmacy Benefit Management Institute, a research organization.

A newer tactic is pursuing supply contracts that cap annual price increases for drugs at a set percentage, says Jim DuCharme, CEO of Prime Therapeutics, a pharmacy-benefits manager that negotiates such deals.

The University of Minnesota’s health plan is among the more ambitious in attacking drug costs. Its efforts include resisting drug-company programs that help patients with their copays, which encourage use of expensive brand-name drugs over cheaper options.

University officials hold monthly brainstorming sessions in a Minneapolis hotel with people from about 15 other large employers to discuss cost-saving drug strategies. The university has “been able to test a number of strategies that go a lot further than other employers,” said Carolyn Pare, president and CEO of the Minnesota Health Action Group, which organizes the sessions.

As employers push back, employees sometimes feel their access to drugs is being restricted, and costs increasingly foisted upon them. The university last year increased its highest patient copay to $75 from $60, applying it to branded drugs such as Flovent asthma inhaler and the antibiotic Zyvox.

Amy Boemer, a library manager who has diabetes, said her doctor switched her to a new insulin product this year because the university made it a “preferred” drug, and her cost would have risen if she wanted to stick with her old one. She says the new insulin isn’t controlling her blood sugar as well.

“What’s frustrating to me is I was on a drug, had been on it for two years,” said Ms. Boemer. “It worked for me. It’s frustrating they’re making me change it.”

The university chose a new preferred insulin “based on price, delivery and drug effectiveness,” said Mr. Horstman, the benefits director. He said plan members can ask their doctor to file an application for coverage of a different insulin if it is medically necessary, and if the university’s pharmacy benefit manager agrees, the drug will be covered with just a $10 copay. Or the patient can take a nonpreferred insulin anyway, but for a $75 copay.

Officials don’t exclude drugs on cost alone, said Kathryn Brown, vice president for human resources. She said they make coverage decisions “in a way that allows them to provide the benefit to employees who need them, but also allows our self-insured plan to continue to be viable.”

The university’s plan has monthly premiums for family coverage of about $300. The national average is $413, according to the Kaiser Family Foundation. The university doesn’t make employees pay a percentage of the price of the most expensive drugs—a practice called coinsurance that is increasingly common elsewhere.

So far, the university has declined to pay for two new drugs—each priced at over $14,000 a year—for people who need greater cholesterol reduction than they can get from statins. It is awaiting more information on efficacy and potential discounts before deciding on coverage, Mr. Horstman said.

The university became self-insured in 2002, switching from a plan for state government employees and adopting one of its own called the “UPlan,” in a bid to get better control of costs.

At the vanguard of the cost-control effort is Dr. Schondelmeyer, who holds two pharmacy doctorates and has had 40 years’ experience studying pharmaceutical economics. Outside the classroom, the university’s health plan serves as his laboratory, where Dr. Schondelmeyer, 65 years old, tests cost-saving ideas as an adviser to the benefits and compensation department.

Employees sometimes stop him in the hall and ask, “What are you doing about the high prices that drug companies are charging us? How can we put pressure on them?” he says.

“It’s tougher personally and corporately” to make decisions about drugs that affect colleagues, he says. “I make every decision with the thought of, ‘How does this impact individuals at the institution and their loved ones?’ ” Covered by the plan himself, he declines to say what drugs, if any, he uses.

Decades ago, Dr. Schondelmeyer became an advocate of generic drugs for cost control. Research he did at the University of Kentucky on generics’ safety and effectiveness convinced him that wider use of them could hold down costs while preserving health outcomes.

The university is already close to maximizing that strategy. Its usage of generic drugs has risen to 84% of prescription volume from about 50% a decade ago, encouraged by lower copays.

A way pharmaceutical companies try to thwart the shift to generics is with coupons that can reduce patients’ copays for brands to the same level as for generic drugs, or even to zero. University officials say that while the coupons cut costs for patients, they raise them for the payer, because of how they encourage use of more-expensive branded drugs.

Dr. Schondelmeyer says some companies leave coupons with doctors and their staffs to be handed out to patients. A doctor who gives them out—telling patients the coupons are a way to save on a branded-drug prescription—may not think about the cost impact to a health plan.

“On the surface it sounds like a good deal for the employee, but a zero-dollar copay may mean the patient is using a $500-a-month drug when a $50 drug is better,” Dr. Schondelmeyer said.

The university, with his support, began plotting a response last year. It has a benefits advisory committee made up of employees, which meets monthly. At a meeting a year ago, Karen Chapin, a university manager of health programs, told members that drugmakers were using coupons to counter generics and keep patients on branded drugs. At another meeting two months later, she outlined a plan to eliminate coverage for some “heavily couponed” brands.

In the summer, the UPlan stopped covering about 90 branded drugs for which manufacturers were distributing copay coupons, including the Nasonex allergy treatment and Belsomra insomnia drug, both from Merck & Co. Patients can still get coverage if their doctors can show the drugs are medically necessary.

In an interview, Merck CEO Kenneth Frazier said, “There’s a legitimate role to be played for assisting patients with copays for medically necessary products, when there is an economic barrier to their using the products they need.” He said Merck sets prices for drugs based on their benefit to patients and the health-care system, and whether they address an unmet medical need.

Newer, high-price specialty drugs pose a particular challenge to the university because there typically aren’t lower-cost alternatives. That is where the split-fill strategy comes in.

Last year, Dr. Schondelmeyer and university officials began considering it for initial prescriptions of certain costly cancer drugs, among them Sutent, made by Pfizer Inc. Some can have side effects, such as rashes, that may cause patients to stop taking them and leave part of a one-month prescription unused.

Asked about the policy, a Pfizer spokeswoman said that “cost control interventions must consider individual patient care in order to minimize complications and burdens for patients including disruptions in treatment at critical moments in the management of their disease.”

University officials began briefing the benefits committee on a split-fill plan in the fall of 2014 and adopted it in February, for nearly 20 drugs.

A new patient gets an initial two-week supply, and then seven to 10 days later, a nurse at a specialty pharmacy the university uses to dispense such drugs calls to ask how the patient feels.

If he or she reports a serious side effect, the nurse tells the patient to stop taking the drug, then contacts the patient’s physician to discuss a dosing adjustment or alternative drug. If the patient is tolerating the medicine, the nurse authorizes the next two-week supply.

During the split-fill period, the patient faces no copay. After three months, the patient begins receiving the pills in monthly supplies, but also with a $10 copay.

Amy Monahan, a law professor on the benefits advisory committee, said some members worried the system could be burdensome because a patient has to keep going back to the pharmacy, “and this is someone obviously dealing with a very serious illness and you want to make sure you’re not imposing this horrible burden on someone.” Patients can pick drugs up at a pharmacy or have them delivered to their homes.

Samith Kochuparambil, a Minneapolis oncologist, said he agreed with the concept in principle but had practical concerns, such as that outside pharmacy nurses wouldn’t know a patient’s health history well and might mistake a patient’s pre-existing health condition for a drug side effect.

Since the program began in February, a small number of patients have had prescriptions filled this way, with no complaints so far, said Mr. Horstman, the benefits director. It is too soon to know if it is saving money, but it has done so elsewhere. Diplomat Specialty Pharmacy in Flint, Mich., installed a split-fill program for employer and insurer clients in 2010 and found they could save about 19% on the targeted drugs, said Atheer Kaddis, a senior vice president.

Given the trend in drug prices, said Dr. Schondelmeyer, “At some point, we can’t keep writing blank checks.”

By Peter Loftus

Step #1:  Obtain a price list for generic prescription drugs from your broker, TPA, ASO or PBM every month.

Step #2:  In addition, request an electronic copy of all your prescription transactions (claims) for the billing cycle which coincides with the date of your price list.

Step #3:  Compare approximately 10 to 20 prescription claims against the price list to confirm contract agreement.  It’s impractical to verify all claims, but 10 is a sample size large enough to extract some good assumptions.

Step #4:  Now take it one step further. Check what your organization has paid, for prescription drugs, against our pharmacy cost then determine if a problem exists. When there is a 5% or more price differential (paid versus actual cost) we consider this a problem.

Multiple price differential discoveries means that your organization or client is likely overpaying. REPEAT these steps once per month.

— Tip —

Always include a semi-annual market check in your PBM contract language. Market checks provide each payer the ability, during the contract, to determine if better pricing is available in the marketplace compared to what the client is currently receiving.

When better pricing is discovered the contract language should stipulate the client be indemnified. Do not allow the PBM to limit the market check language to a similar size client, benefit design and/or drug utilization. In this case, the market check language is effectually meaningless.

[Click to Enlarge]

Why do medications cost so much, particularly specialty drugs that treat the most serious conditions? Mostly because U.S. drug companies can price them however they want. Some of their justifications are reasonable — for instance, high prices fund research. Others, like the notion that drug treatment lowers total medical costs, are far from proven.

But pharmaceutical companies don’t deserve all of the blame for high drug prices. Lots of other actors in purchasing, distribution, and brokerage have greater incentives to keep prices high than to lower prices or choose drugs that reduce longer-term medical and business costs, like absenteeism.

We believe that employers have the greatest potential to influence some of those actors and, ultimately, to chip away at high drug prices. To appreciate the power that employers have in this area, you must first understand how competing incentives work in the world of drug pricing.

Competing Incentives

Hospitals, for example, can take advantage of the 340B pricing program, which allows them to buy drugs at 30% to 50% of the retail price but then bill at full price for patients with insurance. And even organizations that, theoretically, are paid to help hold down drug costs sometimes have incentives to do the opposite. Take insurers and pharmacy benefit managers (PBMs), which are hired to manage drug costs for employer-based health plans.

Indeed, it’s smart for employers like GE, IBM, and Google to contract with these specialist entities and have them decide which drug among several competitors their employees should get first, at what cost, and which medical policies should govern the use of that drug. After all, insurers and PBMs can spread the costs for research, negotiation, and decision making about drug-reimbursement policies across all of their clients.

However, PBMs and insurers may have business objectives that differ from those of their clients. For one, they’re not always at risk for the cost of drugs — the clients are. Also, a PBM or a pharmacy department of an insurer gets a substantial portion of its drug-related profit from rebates. These are payments negotiated with manufacturers that return, via the PBM or payer intermediary, a percentage of the drug’s price to the payer — for example, to an employer that contracts with a PBM or an insurer.

Here’s a simplified version of how these rebates work:

To get the business, the PBM or plan typically guarantees a minimum rebate on every prescription, say $60. On a $300 script, that’s a 20% net reduction in the cost to the employer (final price: $240). As an incentive for the PBM or plan to negotiate even harder — maybe get a 30% rebate (in this case, another $30) — it often takes home 30% to 50% of anything above the guaranteed rebate. In this example, if the split were 50/50, the employer would pay $225, net, for the prescription and the PBM would get $15. Not a bad deal.

[Click to Enlarge]

In the old days — maybe five years ago, when most prescriptions ranged from $200 to $400 — rebates worked to the employer’s advantage. But for a specialty drug, costing say $50,000, a rebate of 20% means that the employer pays a net $40,000 and the PBM pockets $10,000 (plus other fees for processing and, sometimes, for handling the prescription through a specialty pharmacy division). Meanwhile, the $60 guarantee becomes meaningless.

Now let’s assume both a smaller rebate (10%) and a lower price ($25,000) for the same drug. The $60 rebate is still meaningless, but now the net cost to the employer is $22,500 (much better than $40,000) and the PBM’s profit is just $2,500. If you’re the PBM, do you want the manufacturer to price the drug at $50,000 or $25,000?

It’s also true that very large employers sometimes get virtually the whole rebate, not a 50/50 split. But don’t cry for the plans and PBMs, which know how to tack on various fees, often including a specialty pharmacy fee of about 2%. That cost covers the overhead and profit margin of a necessary part of the distribution system. But 2% on a $500 drug is $10; on a $50,000 drug, it’s $1,000. Again, a higher drug price means a more profitable supply chain.

(Insurance companies would argue, by the way, that they shouldn’t be lumped in completely with PBMs, because most insurers manage their pass-through and full-risk businesses with the same pharmacy policies. For the full-risk business, insurers care about drug prices, at least to the extent that they can’t just raise premiums for employers.)

Options for Lowering Prices

The easiest way to lower drug prices would be with a single-payer system, which most European countries have. That payer would be on the hook for all medical costs and would therefore have the incentives — and the clout — to negotiate lower prices. But we can’t envision that happening in the U.S., where some political players would cry “socialism.” So we’re left looking to employers and the Centers for Medicare and Medicaid Services (CMS), which runs Medicare.

Changing CMS reimbursement practices is a Sisyphean task, given the congressional and lobbyist opponents. Even a relatively small proposal last year — narrowing the “protected classes” rules that, in essence, require reimbursement for all drugs in six therapeutic areas — was shot down decisively by drug companies, patient advocacy groups, and legislators.

Employers’ weak-kneed behavior is more baffling — no other group has a greater stake in buying smarter. But employers have always been reluctant actors in the health care system, as they feel out of their depth. Some companies, like Honeywell and Nielsen, have taken tough steps to control costs, with no loss in employee satisfaction. But don’t count on a sea change in employer buying behavior — when push comes to shove, they can always shift costs to their employees.

What Employers Can Do

Employers must recognize that, like it or not, the buck stops with them. Patients can hardly negotiate for themselves, but employers can be much more aggressive in getting PBMs and payers to have skin in the drug-pricing game.

Our sense is that PBMs, at least, are willing to listen. Express Scripts, for example, recently proposed capping its customers’ total exposure to the PCSK9-inhibitor class of cholesterol-lowering drugs. If their customers spend more than a pre-set amount, Express Scripts eats the overage. Certainly, Express wouldn’t do this without a clear idea of how much its clients would be spending. Notably, those clients must agree to follow Express’s rules about who gets the expensive drugs — and must use Express’s specialty pharmacy. But it’s a very good start.

We certainly don’t expect employers to start writing drug-coverage policies and doing their own contracting. But, as seasoned buyers, they know how to negotiate with suppliers, such as insurers and PBMs — and they should not be afraid to do it. It’s now easier to understand the tradeoffs among competitive drugs, thanks to tools like the Institute for Clinical and Economic Review’s new assessment reports, RealEndpoints’ RxScorecard, and the National Comprehensive Cancer Network’s evidence blocks.

Combine these tools with contracting that does not focus entirely on rebates, and employers may begin to change the rules of a game they will otherwise continue to lose.

by Robert Galvin, MD and Roger Longman

Step #1:  Obtain a price list for generic prescription drugs from your broker, TPA, ASO or PBM every month.

Step #2:  In addition, request an electronic copy of all your prescription transactions (claims) for the billing cycle which coincides with the date of your price list.

Step #3:  Compare approximately 10 to 20 prescription claims against the price list to confirm contract agreement.  It’s impractical to verify all claims, but 10 is a sample size large enough to extract some good assumptions.

Step #4:  Now take it one step further. Check what your organization has paid, for prescription drugs, against our pharmacy cost then determine if a problem exists. When there is a 5% or more price differential (paid versus actual cost) we consider this a problem.

Multiple price differential discoveries means that your organization or client is likely overpaying. REPEAT these steps once per month.

— Tip —

Always include a semi-annual market check in your PBM contract language. Market checks provide each payer the ability, during the contract, to determine if better pricing is available in the marketplace compared to what the client is currently receiving.

When better pricing is discovered the contract language should stipulate the client be indemnified. Do not allow the PBM to limit the market check language to a similar size client, benefit design and/or drug utilization. In this case, the market check language is effectually meaningless.

As soon as officials address one problem with prescription costs, another arises. It’s like the arcade game Whac-A-Mole, in which a toy mole pops his head up, and as soon as you whack it down, another pops up from a different hole, and then another and another.

New state comptroller’s statistics, obtained by Government Watch, show that taxpayers funded nearly $332 million in prescriptions for the 200,000 participants in the state health benefits program during the 12 months that ended June 30 — up about $53 million, or 18.8 percent, from the previous year’s $279 million.

Moreover, the cost per participant jumped by an even higher percentage — 24.7 percent — because there were fewer state employees, retirees and family members participating in the program during the more recent year.

Comptroller Kevin Lembo, the elected official in charge of running the state employees’ health plan, has been using the Whac-A-Mole analogy for the past year in conversations about the problems with prescription drug costs. He did it again in a phone interview Friday.

“Something else always pops up. You always feel like you’re chasing the next problem, and you’re battling people sitting in rooms thinking of how to take advantage of programs designed to support the health and life of others,” he said.

Tyrone’s comment:  This phenomenon, “Something else always pops up…” is referred to as ballooning.  In other words, when one loophole is closed the traditional PBM will look for another loophole to account for the lost revenue.  Traditional PBMs have internal staff whose sole purpose is to drive incremental revenue from client contracts.  To make matters worse, this process of hiding cash flows doesn’t begin until the ink is dry on the contract!  The only sure fire way to avoid this pitfall [overpayments] is to enter into a fiduciary agreement. 

He attributed the latest $53 million escalation to a general skyrocketing of costs in the national pharmaceutical market, something that he said the state government has little influence over and that Congress needs to fix.

“The factors behind rising pharmacy costs include market consolidation, new pricing models and outright profiteering. Projections indicate no future relief as pharmacy costs are expected to continue to rise at an exorbitant rate in the coming years. Meanwhile, pharmaceutical companies are recording historic profits,” Lembo said in written testimony he submitted this past week to the U.S. House Democratic Steering and Policy Committee. It’s an all-Democrat panel co-chaired by U.S. Rep. Rosa DeLauro, who represents Connecticut’s 3rd Congressional District.

Based on Congress’ record of dealing with major health care issues, any quick solution is doubtful. But it appears that a Connecticut problem that reared its head in the past few years has been pretty much whacked.

That $24 million problem was compounded drugs — mixtures of medicines, typically produced by big, out-of-state compounding pharmacies, often in the form of topical creams for pain. Costs to Connecticut taxpayers for those medicines had exploded from $800,000 in 2012 to an estimated $24 million this year, with charges as much as $18,000 per patient for a 30-day supply.

Those medicines, not approved by the U.S. Food and Drug Administration, also were straining the prescription drug budgets of many states as well as the U.S. military and Department of Veterans Affairs as the compounding pharmacies exploited the lack of regulation.

In mid-May, Lembo imposed a “prior authorization” requirement for compounded medicines under which a prescribing doctor must demonstrate “medical necessity” before payment is approved by CVS/Caremark, the state’s health benefits manager. A patient may appeal a denial.

Costs dropped from a peak of $3.1 million in April to $36,229 in July — and the average monthly savings on compounded drugs has been $2.2 million, according to a report to the comptroller by CVS/Caremark for the period from May 15 to Oct. 31.

The State Employees Bargaining Agent Coalition notified the state months ago that it was challenging the new policy on the grounds that it creates “too much interference in medical choices between a doctor and patient.” But a Sept. 23 binding arbitration hearing has been postponed indefinitely while union representatives watch how the new procedure is working.

There have been only a handful of patient appeals so far, and the high-cost, out-of-state compounding pharmacies have been pretty much supplanted by local, low-cost pharmacies, which have been mixing most of the compounded drugs still being used, Lembo said.

An investigation by the office of state Attorney General George Jepsen is “active and ongoing” into the recent spike in costs for compounded medicines, an office spokeswoman said Friday.

It’s hard to trumpet the cost-savings for those compounded medicines — not in the context of a $53 million increase in the prescription costs for which state employees, retirees and their dependents are responsible for only minimal co-payments.

Prescription co-payments for a 30-day supply of medicine range from $5 to a maximum of $35. That top co-payment of $35 is for a “non-preferred brand-name drug” that hasn’t been certified as medically necessary by a doctor; it drops to $20 with a physician’s certification.

Lembo said in his congressional testimony that prices for name-brand medications, as well as for long-established generic drugs, are rising at an alarming rate.

He gave as an example a recent huge increase in the price of Daraprim, a medicine that has been used for 62 years to treat a potentially fatal parasitic infection. Turing Pharmaceuticals, a startup company headed by the former manager of a hedge fund, acquired the drug recently and raised the price from $13.50 per tablet to $750.

“We applaud the profit motive in our free market society as a mechanism to efficiently distribute resources and drive innovation, but excessive profits can cause significant harm when applied unbridled to essential and lifesaving medicines in an uncompetitive marketplace,” Lembo said in his testimony. “High costs are pushing certain treatments out of reach for some.”

He asked that Congress strengthen anti-trust laws “to limit consolidation in the pharmaceutical industry and ensure that adequate competition remains to drive competitive pricing,” and to reduce a backlog in FDA approvals of generic drugs. He said the state employees’ health plan spent $8 million in the past year for the name-brand drug Nexium “as a result of a significant delay in the release of a generic version of the drug.”

by Jon Lender

Step #1:  Obtain a price list for generic prescription drugs from your broker, TPA, ASO or PBM every month.

Step #2:  In addition, request an electronic copy of all your prescription transactions (claims) for the billing cycle which coincides with the date of your price list.

Step #3:  Compare approximately 10 to 20 prescription claims against the price list to confirm contract agreement.  It’s impractical to verify all claims, but 10 is a sample size large enough to extract some good assumptions.

Step #4:  Now take it one step further. Check what your organization has paid, for prescription drugs, against our pharmacy cost then determine if a problem exists. When there is a 5% or more price differential (paid versus actual cost) we consider this a problem.

Multiple price differential discoveries means that your organization or client is likely overpaying. REPEAT these steps once per month.

— Tip —

Always include a semi-annual market check in your PBM contract language. Market checks provide each payer the ability, during the contract, to determine if better pricing is available in the marketplace compared to what the client is currently receiving.

When better pricing is discovered the contract language should stipulate the client be indemnified. Do not allow the PBM to limit the market check language to a similar size client, benefit design and/or drug utilization. In this case, the market check language is effectually meaningless.

During the session, held on October 27, Tharaldson identified several specialty medications that are likely to be approved in 2016, and she spoke about how those medications could affect the managed care pharmacy industry.

[Click to Enlarge]

Here’s a closer look at four diseases and conditions that Tharaldson says are likely to be heavily impacted by newly approved specialty medications in late 2015 and 2016.

1. Non-Small Cell Lung Cancer (NSLC)

Genentech’s alectinib is an oral ALK inhibitor that is expected to be approved by March 4, 2016, for the treatment of ALK+ NSCLC who have progressed on, or are intolerant to, crizotinib (I would use generic name here). It will compete with Novartis’ Zykadia in this patient population.

AstraZeneca’s osimertinib and Clovis Oncology’s rociletinib are oral epidermal growth factor receptor (EGFR) inhibitors that are expected to be approved by February 2016 and March 30, 2016, respectively. They are pending approval for the treatment of EGFR and T790M mutation-positive NSCLC.

2. Multiple Myeloma

Bristol-Myers Squibb and AbbVie’s Empliciti (elotuzumab) is a biologic drug that may be approved by March 1, 2016, for use in combination with Revlimid (lenalidomide) and dexamethasone to treat relapsed or refractory multiple myeloma.

Janssen’s daratumumab is another biologic drug that could be initially approved by March 9, 2016, as monotherapy to treat patients with relapsed or refractory multiple myeloma.

Takeda’s ixazomib citrate is the first oral proteasome inhibitor that may be approved by March 10, 2016, to treat relapsed or refractory multiple myeloma in combination with Revlimid and dexamethasone (all-oral regimen).

3. Severe Asthma

GlaxoSmithKline’s Nucala (mepolizumab) is an interleukin-5 inhibitor that expected to be approved by November 4, 2015, for the treatment of patients with severe eosinophilic asthma.

Teva’s reslizumab is another interleukin-5 inhibitor that is expected to be approved by March 30, 2016, for severe eosinophilic asthma.

4. Duchenne Muscular Dystrophy (DMD)

BioMarin’s drisapersen is expected to be approved by December 27, 2015, for the treatment of DMD amenable to exon 51 skipping. Sarepta Therapeutic’s eteplirsen is expected to be approved by February 26, 2016, for the treatment of DMD amenable to exon 51 skipping. Both drugs treat the underlying cause of DMD by allowing the production of a functional dystrophin protein.

There are approximately 20,000 boys in the U.S. with DMD. This rare disease is caused by mutations in the dystrophin gene, resulting in the absence or defect of the dystrophin protein. Patients experience progressive loss of muscle function, often making them wheelchair bound before the age of 12.

Respiratory and cardiac muscle can also be affected by the disease. Few patients survived past the age of 30. Up to 13% of boys with DMD have dystrophin gene mutations/deletions amendable to an exon 51 skip. Approximately 2,600 boys in the U.S. have DMD with exon 51 skip. These drugs may cost approximately $300,000 per year.

by Aubrey Westgate