Why are Prescription Drugs so Darn Expensive?
Multi-source prescription drugs are those which are manufactured by multiple companies; upon expiration of a marketing exclusivity period. FDA approval of these companies is required, obviously. These approved companies generally manufacture only generic pharmaceuticals. Some examples include Dr. Reddy’s, Watson, Actavis, Teva Pharmaceuticals, and others.
Since there are multiple companies competing against one another, prices are much lower for multi-source prescription drugs compared to single source prescription drugs. This is not the case for single source prescription drugs.
Single source prescription drugs are those for which there is only one manufacturer. In other words, there is not a generic medication available in the market thus the brand drug is the only option for physicians, patients and payors. One exception to the single source methodology does exist.
An 180-day marketing exclusivity is offered by the Food and Drug Administration to the first company which successfully submits an application to manufacture a replica (a copy of the exact chemical ingredients] of a brand prescription drug after the initial patent has expired. For all intent and purposes, the medication manufactured by a company granted a 180-day marketing exclusivity is considered single source.
The application process for the 180-day marketing exclusivity is very complicated. If you like, read more about it here: 180-Day Generic Drug Exclusivity Under the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act. Prescription drug patents, for innovator drugs, typically expire after 17 years.
Generic Dispensing Rates continue to rise yet it defies logic that prescription drug sales revenue also continues to increase year after year. This begs the question, “why do prescription drug sales continue to increase?” The state of personal health and healthcare in our country notwithstanding there are two primary reasons: brand and specialty pharmaceuticals.
Let me explain. Drug manufacturers have an obligation first to their stakeholders and rightfully so. They’re keenly aware of the stiff competition from generic equivalents and the government’s (largest payor) desire to lower overall costs. In turn, they find ways to plug revenue gaps.
To protect brand product revenue streams manufacturers go to great lengths. They will fight to extend the patent expiration date, seek additional indications (often marketed under a different name), and even partner with competitors.
If you had a monopoly on a prescription drug or an entire disease state for 17 years what would you do to protect it? More importantly, how much would you charge for the right to use the medication? Keep in mind you’re operating as a for profit business. It’s not uncommon for a brand drug manufacturer to generate EBITDA margins of 70% or greater.
Almost every original manufacturer now has at least one specialty and/or biotech drug in its portfolio. It’s part of an overall strategy to help patients. Coincidentally specialty drugs are more difficult, from a financial and scientific standpoint, to duplicate. Nonetheless, biosimilars will play an increasingly important role in the near future.
Employers and other payors have a role, albeit small, in how the drug spend trend will play out. Here is one thing all individuals and organizations can do to slow the trend: don’t pay for any brand prescription drug when there is a generic equivalent in the pharmacies unless it is the last option.
THE FEDERAL GOVERNMENT HAS DELAYED THE EXCHANGE NOTIFICATION REQUIREMENT
The notice requirement was delayed for a couple of reasons. First, the notice should be coordinated with the educational efforts of the departments of Health and Human Services (HHS) and the Internal Revenue Service (IRS) guidance on minimum value.
Second, the departments are committed to a smooth implementation process including providing employers with sufficient time to comply and selecting an applicability date that ensures that employees receive the information at a meaningful time.
The Department of Labor is considering providing model, generic language that could be used to satisfy the notice requirement.
U.S. Pharmacy Distribution & Reimbursement System
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Agencies Offer Guidance on PPACA Taxes, Fees
- Regulations, a fact sheet, and a technical fact sheet on Premium Stabilization Programs for the individual and small group health insurance markets
- Regulations on Funding for the Patient-Centered Outcomes Research Institute (PCORI)
- Regulations and FAQs on the Additional Medicare Tax on high-income individuals
Premium Stabilization Programs
- Risk Adjustment Program
This permanent program provides increased payments to health insurers that enroll higher-risk individuals. The program applies state-by-state to health plans in both the individual and small group markets, with exceptions for plans that are grandfathered under ACA and certain types of benefit arrangements. The new regulations establish a process for approving a state risk-adjustment program and describe rules that HHS will follow to operate a program in the event that a state does not obtain federal approval or chooses not to operate its own program. The program is funded through a transfer of amounts from plans that enroll lower-risk individuals to plans with higher-risk enrollees. - Risk Corridors Program
This temporary, federally administered program limits the extent of an insurer’s gains and losses from 2014 through 2016. The program applies to qualified health plans offered through an exchange in the individual and small group markets. A cost target is set for each plan, and an acceptable risk corridor is established around that target. Plans with unexpectedly low costs (below the risk corridor) will pay amounts to HHS. Plans with unexpectedly high costs (above the corridor) will receive funds from HHS. The new regulations make adjustments to prior guidance on the program, such as accounting for certain taxes and profits in establishing the corridors. - Transitional Reinsurance Program
This temporary reinsurance program applies to commercial health insurance in the individual market. The program is funded through required contributions by insurers and self-funded group health plans. It will be in effect from 2014 through 2016.
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- The new regulations establish that HHS will operate the program, paying reinsurance amounts from the program and collecting contributions from insurers and self-funded plans to fund those reimbursements.
- Under current guidance, it is expected that insurers and self-funded group health plans will be required to contribute $63 per covered life for 2014. That contribution may be reduced if HHS determines that certain contributions (the assessment includes contributions that are specifically directed set aside to pay for the Early Retiree Reinsurance Program) may be postponed to 2016. Even if that postponement occurs, contributions are expected to be less than $63 per covered life for 2015 and 2016.
- Insurers and sponsors of self-funded plans (a third-party administrator may act on behalf of a plan sponsor) will need to report the number of covered lives (employees plus dependents) by Nov. 15 of each year. HHS will confirm the amount due by Dec.15, and payment will be due within 30 days of its confirmation notice. Employers and insurers will determine the number of covered lives in accordance with the approaches applicable to the PCORI fees (see below), but adjusted for the need to determine transitional reinsurance program fees before the end of the year.
- In separate guidance, the Internal Revenue Service has confirmed the deductibility of contributions under this program.
The new rules address various details about each of the programs. These details include certain transitional rules for 2014 and guidance on how the programs will coordinate with each other and with the medical loss ratio requirements for insurers. The new rules also address a number of matters relating specifically to the MLR requirements and to state and federally operated insurance exchanges.
Patient-Centered Outcomes Research Institute
PPACA establishes the Patient-Centered Outcomes Research Institute to collect and disseminate research findings on clinical effectiveness that will help patients, providers, and others make better-informed medical decisions. The program is funded by a fee to be paid by group health plans and insurers for seven years. The fee is $1 per covered life for the first plan/policy year that ends on or after October 1, 2012, and $2 (indexed for inflation) per covered life for the remaining years. Payment, and the accompanying report, will be due July 31 of the year following the assessment. This means many plans will need to pay the fee by July 31, 2013.
The IRS has issued proposed regulations and an expansive set of frequently asked questions and answers on the Additional Medicare Tax introduced by PPACA. These regulations and FAQs address a variety of situations that an employer may face in meeting its withholding obligations concerning this tax.
- Beginning in 2013, high wage earners will need to pay an Additional Medicare Tax on wages. The 0.9% tax will apply to all wages subject to the existing Medicare wage tax above a specified income level that depends on an individual’s filing status. For example, the tax will apply to wages above $200,000 for a single individual and above $250,000 for a married couple filing jointly. Because an employer will not necessarily know an individual’s filing status, an employer will be required to withhold on wages above $200,000.
- If an employee owes more than is withheld, the employee will be responsible for paying the tax. Guidance suggests that the employee make estimated tax payments or adjust his or her W-4 form to allow for additional withholding.
- The Additional Medicare Tax also applies to self-employment income above the applicable threshold.
What are Affordable Care Organizations (ACOs)?
ACOs require that providers and insurers share both financial and quality data – something that each side has been highly reluctant to do in the past. The reward will be that all will share in savings generated by the system. Personally, I’m not sure there will be any savings to share or if this is the primary point in the first place (see my earlier post on Defragmentation). While many healthcare theorists believe ACOs may be a major way for the nation to reduce its healthcare costs, it is not a simple fix.
In today’s competitive environment it is impractical, at best, to get hospitals, doctors and insurers to work together. Unless of course these entities decide to become vertically integrated, which we’re already seeing. Behemoth hospital networks around the country have been purchasing physician practices then hiring the staff as a prelude to setting up ACOs, and insurers, too, are starting to get involved.
Earlier this month Aetna announced a new partnership with Baycare in Tampa, Florida. Another example, Florida Blue has set up a bundled payment system with the Mayo Clinic — paying for an episode of care rather than for each individual service. More widespread is its move that has put more than 700,000 patients in medical homes — generally with a primary care physician coordinating their care, offering extended hour and other benefits — so that basic care is easily available, reducing the need for expensive emergency room trips.
Unlike the old HMO model, the new medical home involves the insurer paying PCPs more so they spend more time with patients. The limited data available thus far offers encouraging results. Physicians make more money, but overall costs go down. The idea is too invest more money upfront to get better outcomes in the long-run. Medical homes and ACOs are now separate concepts, but they’re likely to dovetail in the near future. Both concepts are emphasized in the Affordable Care Act.
The healthcare cost trend was unsustainable…now employers must weigh the impact of future trends and plan accordingly.
An Uncertain Future: Healthcare Reform Moves Forward
In 2014, two big changes happen. First, community rating begins; carriers will no longer underwrite policies as they do now. There will be little or no rate differentiation for the risk associated with your group compared to others. In 2014, industry, sex and health conditions will have nothing to do with the specific rates charged.
EXCHANGES ARE A STUMBLING BLOCK
The availability of healthcare exchanges will mean the biggest changes yet. Businesses will have decisions to make. Do they stick with the old tried and true group model of providing benefits to their employees or do they drop existing health plans, give employees some cash, and send them to the health care exchange to buy coverage? Will they do some combination of the two?
Some employees may get $1000’s in subsidy and others may pay $1000’s in tax because of reform. This is all very complicated. The decisions made will affect every employee in your company. Some may like the new way and some may be devastated. Calculators available online allows you to check your cost: http://laborcenter.berkeley.edu/healthpolicy/calculator/.
Unfortunately, the results are hypothetical. The actual implementation of exchanges is up in the air. The law places this responsibility in the hands of the state governments. Many states have pushed back and decided not to implement a healthcare exchange. When states choose not to participate, the federal government is supposed to provide that state’s exchange. A federal exchange isn’t close to being developed.
More importantly, the huge federal subsidies are only available if employees buy coverage from state exchanges. Federal exchanges do not qualify. Unless this changes, it will be difficult for businesses that had planned to off load their benefit plan to do so.
Businesses may find the cost for employees is just too great without those federal dollars to offset the initial sticker shock as employees pay the real cost of health coverage. Without a qualified exchange, healthcare reform will grind to a tortuously slow pace if not be halted altogether.
UNCERTAIN FUTURE OF HCR
So, the future of group health insurance is not clear. Will the private market for group health insurance be dismantled? If so when…3, 5, 10 years? What will that mean for your employees? How do you, as a decision maker, capitalize on any opportunities that exist?
How do you prepare and explain to employees all the changes that will occur as the implementation begins to affect their paycheck? This is all very complicated.
Of course, there have been anxious moments at TransparentRx as this has unfolded. The debate, the drama in congress, the signing by President Obama, the Supreme Court decision and now the decision by governors that many states will not have exchanges. It has been interesting.
What will the future hold….I’m not sure. But it is crystal clear that employers will need help deciding what to do. There are decisions to make and your employees’ moral and productivity will suffer if not done properly. Moral and productivity affect profit.
9 Key Questions to Ask Your Potential (new) PBM
1. Are all network pricing and pharmaceutical manufacturer rebate and financial benefit improvements immediately passed through to us over the contract term?
2. Is the PMPM (per member per month) administrative fee your only revenue stream?
3. How will our implementation begin?
4. Who will be on our team and will we be provided with an Executive Sponsor who can escalate issues?
5. Do you limit the percentage of time committed to servicing your clients?
6. Will you provide some key references and testimonials?
7. Are you URAC-accredited? If so, what does this mean to me, as a client?
8. Based on our claims data, what types of clinical programs do you recommend at the outset?
9. Which clinical programs and initiatives do you recommend in the short and long-term? Tell us how we can collaborate to create a long-term strategy.
The bottom line is that you must choose a PBM that validates the big picture up-front, shares your pharmacy benefit philosophy, exudes the passion and commitment required to do the job, and presents a plan for dealing with potential issues and the future.
Generic Prescription Drugs by Mail can be a Bad Deal
Some simple comparison shopping shows that despite formidable bargaining clout, many employers are paying far higher prices for some drugs than ordinary individuals can get walking into retail pharmacies. Consider the price for Ranitidine 75 mg, the generic form of the popular anti-ulcer medication Zantac.
One of my clients paid Express Scripts $36.22 for 90 pills mailed to a worker, who pays an additional $5 co-pay, bringing the total cost to $41.22, according to a re-pricing we completed. If this same employee had simply walked into their local pharmacy and bought the same Ranitidine prescription it would’ve cost as little as $10.00 for the same 90 pills. This is a 400% difference in cost!
That this employer pays ESI higher prices for many generic drugs than regular pharmacies charge customers without insurance illustrates the complexities, and potential pitfalls, of prescription drug coverage. It’s also a rare glimpse into how such plans work.
Traditional pharmacy benefit managers, such as ESI and CVS/Caremark, administer the drug benefits of large employers, acting as the middlemen between the employers and the pharmacies. Such PBMs create large networks of participating pharmacies and use their size to drive down prescription drug prices.
Source: managedcaremag.com |
Some, including ESI and CVS/Caremark, also own their own mail-order pharmacies, and guilt employers to move more of their workers’ prescriptions into the mail business. Traditional PBMs promise to realize savings for their corporate customers by keeping the overall cost of prescription medications down. But, they also preserve large profit margins for themselves, as the above prices clearly indicate.
Some companies say they are satisfied with the overall savings Medco is providing. But others simply aren’t aware of the vast price discrepancies on generic drugs. How can a company say it is satisfied with the overall savings when they don’t even know the actual costs?
Too many companies are spending tens of thousands of dollars on products for which they were never given a price list! These assumed savings are based upon colorful PowerPoint presentations, delivered by PBM account managers, designed to tell you exactly what you want to hear.
Because generic drugs are so cheap to begin with, PBMs and retail pharmacies alike typically make big margins on generic drugs, which account for about half of prescriptions filled in the U.S. That’s why pharmacies have a big incentive to switch prescriptions for branded drugs to their generic versions. Aggressively switching of branded prescriptions to generics does help reduce employers’ drug costs.
Employers also believe they are getting better prices on branded drugs through PBMs, which is why they are willing to pay bigger markups on generic medications. Mail-order pharmacies generally fill a three-month’s supply of medication at once.
Traditional PBMs, like ESI and CVS/Caremark, benefit greatly from its mail-order pricing system. When a patient fills a prescription through the mail pharmacy, the full profit belongs to the PBM, rather than having to split it or get very little when the transaction happens at the retail store.
Some traditional PBMs derive more than half of its corporate profits just from selling generic drugs from its own mail order unit. For example, Ranitidine 75 mg x 30 pills usually cost pharmacies about $2. At retail, customers can pay $10. I’ve seen mail-order prices as high as $181.00! ESI can show its customers a great savings because the list price, called the average wholesale price, quotes Ranitidine at about $214 for 90 pills.
The complex system of drug pricing makes it difficult for employers to know whether they are getting the best prices. Generic drug prices in mail programs are based on average wholesale price, or AWP. AWP is considered an inflated price among those in the drug industry. For example, the average wholesale price for Fluoxetine 20 mg x 100, the generic drug for Prozac, is $240.12 but pharmacies can pay less than $2.00!
Not all mail-order pharmacies are deceptive. A truly transparent mail-order pharmacy, one willing to contractually accept the role of fiduciary, will deliver a significant savings for employers compared to retail. Don’t hire a PBM because of its long history, big offices, or colorful presentations. Hire a PBM because of the value it is contractually willing to deliver its clients. It is really quite simple; if the PBM isn’t willing to sign on as a fiduciary then walk away.
Healthcare Reform: “A Peek at the Cost”
Most have heard that the new Healthcare Reform bill was projected to cost $850 billion. Many of us have heard the revised estimate of $1.2 trillion. Not many of us can explain $1.2 trillion in layman’s terms. The government hasn’t shared specifics about the cost in any meaningful way. So for many, the “cost of healthcare reform” becomes a point of conversation without much reality connected to it.
We know the reform will level the playing field in terms of cost. Generally, rating will be based on broad geographical areas with little ability to modify the rates to account for differences in risk. This rating strategy is called “community rating”. Let’s compare community rating to the way groups are currently rated in Ohio (our primary warehouse location).
There is general scuttlebutt that the Blue Cross plans will fare the best and gain the most in the healthcare reform implementations. It may or may not be a coincidence that Blue Cross of Michigan also “community rates” their coverage. In Ohio, many groups fall under a formula of rating that takes employee and dependent health into the formula to calculate rates for insurance coverage. In Ohio there are 36 rating tiers. Tier 1 is reserved for the healthiest risk. Tier 36 is the maximum rate applied to the worst risk.
Let’s compare the same company as if it were located in Toledo, Ohio, on Alexis Road (1/2 mile south of the Ohio/Michigan border) and then re-rate the same group, except assume the company is located in Lambertville, Michigan, on Smith Road (1/2 mile north of the Ohio/Michigan border). In Ohio they could have a range of rates, from Tier 1 to Tier 36, depending on the health risks present. In Michigan … just one mile north, all companies would pay the same rate because of the community rating system.
Here is a rate comparison for a $3000 deductible HSA plan:
Ohio Tiered Rate Michigan
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Best Risk Worst Risk Community Rating
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Employee Only:
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$245
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$343
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$303
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Employee/Spouse:
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$486
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$681
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$727
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Employee/Child:
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$339
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$474
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$727
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Employee/Children:
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$485
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$678
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$878
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Family/Child:
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$580
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$812
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$878
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Family/Children:
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$726
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$1017
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$878
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Calculate the total premiums of your group to see the cost comparison between tiered and community rating. Most find that community rating is about 50% more expensive than the Tier 1 (best risk) rate and almost 7% higher than the Tier 36 (worst risk) rates in Ohio. Of course, the employer’s dependent status will vary by employer. It is difficult to understand how costs will be less under the new healthcare reform program. This comparison is a casual look at what employers may expect in term of costs.
Poor procedures cost thousands…
The price of health insurance is important during this era of tight labor and customer demands to reduce cost. Companies spend many hours and much effort competitively bidding their health insurance each year in order to have the best cost available to them.
After all the effort to reduce cost, some companies give back much of the savings because of poor administration and accounting procedures. Poor internal practices for handling employee terminations from benefit plans are the main culprit.
For example, without good communication between the “plant” and “accounts payable” with regard to employees quitting or being removed from the benefit plans, extra premiums can be paid and never recovered. With just one late or “non-communicated employee termination” per month, a company could easily pay $8,000 to $10,000 more per year for medical insurance than they need to pay. Most insurers will only give credit for 30 to 60 days of back premiums, making recovery of funds almost impossible.
Another area that is difficult for some employers to monitor is the “accounts payable” function. Most insurers require that their invoice be paid in full each month. This means that you’ll pay for all employees listed on the invoice even if they are terminated from employment. The insurer will then give credit in future months for terminated employees. Without good procedures to track the credits that are owed to your company, it is easy to forget or overlook them.
TransparentRx recommends that employers develop written procedures and checklists for termination of employees. The procedure should outline all steps to be taken from the moment an employee is terminated to the time credit is received from your insurance company. A little extra supervision of your employees that are new to the positions responsible for employee terminations and insurance bills is also a really good idea.