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Drug Prices Are Too Damn High. Here’s How to Fix Them

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

Tyrone Squires, MBA, CPBS

I am the proud founder and managing director of TransparentRx, a fiduciary-model PBM based in Las Vegas, Nevada. We help health plan sponsors reduce pharmacy spend, by as much as 50%, without cutting benefits or shifting costs to employees.

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