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Why our prescription drugs are so expensive and what we can do about it

Why our prescription drugs are so expensive and what we can do about it

Picture of Michael Lujan
Our Drug Cost Debate - image by AARP

In the United States, prescription medications now account for an estimated 17 percent of our overall personal health care spending. According to a Mayo Clinic study, Nearly 70 percent of Americans take at least one prescription drug daily, more than half of us take two. A shocking 15 percent take five or more pills per day. Consuming more than 4 billion pills each year, we have become a pill-dependent society. As consumers, we have little to say about drug pricing. When we are sick, we are likely to heed the expert opinion of the physician, making the price elasticity of demand lower. In other words, price changes will have little effect on the purchasing decision of a sick patient. This inelastic demand for our health care, including pharmaceuticals, means when we are sick we'll pay whatever the price is until we can no longer afford it. As affordability is challenged, one in four Americans cannot afford to fill their prescriptions. It's a problem that is growing and warrants a closer look at some of the key drivers and possible solutions.

I was recently invited to speak about pharmacy costs at the Northern California Employee Benefits Council (NCEBC) in San Francisco. I was a last-minute substitute speaker helping out a friend who could not attend. I shared the stage with Dave Brown, who is a friend and respected employee benefits expert who now promotes an interesting new venture called CHEQS, a health care and pharmacy consultancy firm.

Here is a summary of my comments and observations about pharmacy spending:

Pharmcy benefit managers: Effective negotiators or costly middlemen? Eighty percent of our prescription drugs are obtained from a PBM (pharmacy benefit manager). Your health plan or employer likely made this arrangement on your behalf so you may not know who they are or what they do. In summary, PBMs act as buyers on behalf of health plans and employers (and government entities) to negotiate and purchase drugs directly from the drug makers. They often do so through arrangements with the manufacturers which include rebates the PBM keeps. When done effectively, the client saves money, health outcomes are improved and the PBM helps deliver a better consumer experience. This is a gross oversimplification. The short video link below from Bloomberg offers their take.

"PBMs are a uniquely American invention" in that most other countries negotiate pharmacy prices through their governments or ministries of health. As the US is still operating on a largely private system, PBMs are the buyers. I briefly worked for the largest PBM in the country, Express Scripts. A large PBM seemed like the right place to help drive out waste and help employers lower their health care costs. It was very gratifying although some critics believe PBMs are the problem and not the solution. PBMs actually do amazing work to reduce waste and improve health outcomes but most also operate with limited transparency with regard to their true acquisition costs and profit margins. For some clients, as long as they are saving money and meeting their objectives they may not care how much the PBM earns but others are demanding more transparency. I respect the industry leadership and innovation largely lead by the big three PBMs, Express ScriptsCVS/Caremark and OptumRx and often share their drug trend reports and updates. I also believe more transparency would be good for consumers and help reduce health care spending. So do these guys.

The greatest waste in prescription drug spending is marketing. Not the $6.4B spent on tv commercials aimed at consumers ("Ask your doctor about...") but the lesser known marketing dollars aimed at influencing doctors and hospitals to prescribe their drug or device over their competitors' (about $24B). Pharma actually spends more on marketing (and lobbying) than actual research and most of that is spent on wining and dining doctors and paying doctors to influence their peers to promote their drugs or devices through speaking fees and thought-leadership. We pay for this waste in higher drug costs and worse yet, competing drug companies may cancel each other out and not actually result in the best patient outcomes.

Another little-known fact is the volume of sample drugs that go to waste and into the dumpster. An estimated 250 million pounds of drugs worth $2B go unused and expire on the shelves of the doctor's office each year. A doctor's office may receive as many as one pharma rep visit per day, delivering lunch for the office staff and a bundle of product samples left behind for the doctor to dispense. When these samples are not used, they often get disposed. A new non-profit startup called "PharmaCares" collects and dispenses these non-expired samples to patients who cannot afford to fill their prescription drugs. It's like a food bank for prescription drugs. Express Scripts also launched InsideRx, a new subsidiary that provides lower cost prescription drugs for the uninsured.

Don't believe doctors get paid by pharma to influence their drug dispensing decisions? Keep reading.

The Sunshine Act is possibly one of the least known provisions of the Affordable Care Act (Obamacare). Section 6002 of the ACA requires most drug and device manufacturers to file annual disclosure reports detailing their financial relationships with physicians and teaching hospitals including all payments, gifts, meals and any remuneration to help identify conflicts of interests. This data is searchable now at the DollarsForDocs website compiled by ProPublica. You can search your own doctor or hospital by name and see exactly who paid them, how much and for what service (e.g. meals vs speaking engagements). The top payment went to an orthopedic surgeon in Kansas City was paid $54M from 2013 to 2015 for royalties, licenses, food, and beverage. Some pharma companies also pay handsome fees for speaking engagements to influence other doctors. So far, nearly $17 billion in payments from drug and device companies have been recorded in the database. If the ACA is repealed, this transparency and consumer protection would be lost.

The bad actors. We shouldn't know the names Martin Skreli or Heather Bresch. These are the pharma CEO's who gained regretable fame and attention for raising the price of their drugs by as much as 5,000%. They both increased the price of their life-saving drugs; Daraprim (HIV drug) and the EpiPen (for allergic reactions) not because their manufacturing costs required the increase - because they believed the market demand would bear this higher price. A standard two-pack of EpiPens now costs about $600. In 2009, the price was $100. More subtle price-gouging is tolerated from pharma but these two clearly crossed the line. You may also remember the hepatitis C medication Sovaldi created major criticism when its manufacturer, Gilead, set the price at $1,000 per pill, or $84,000 per year. These egregious examples have now made pharmacy price gouging a political issue and more than a dozen state and federal bills aimed to reform pharmacy drug policy and cost transparency.

The key ingredient for Daraprim is pyrimethamine. A few high school students from Sydney Australia were able to replicate the drug for $2 per dose, which Turing sells for up to $750. The same drug can be purchased in India for as little as $0.10.

The newest big-ticket drug to hit the headlines is Brineura, the first-ever drug approved for a form of Batten disease, a rare genetic disorder (adults and kids) that ravages the nervous system and causes seizures and vision loss. Treatment costs a whopping $700,000 per patient per year. And this isn't the most expensive drug out there. Ravicti, which rings in at $793,632 per year holds the title so far. Spinraza, a spinal muscular atrophy therapy costs $750,000 in the first year but then drops to $325,000 per year thereafter. The health plans, insurers and benefits managers pay most of these costs but these high-cost drugs ultimately get passed through to all consumers and policyholders through higher premiums. With a 20% copay, a four-month supply of Daraprim at two pills a day would cost a patient about $18,000 out of pocket.

The Orphan Drug Act was signed into law by President Reagan in 1983. This law was intended to help protect desperate patients with rare diseases by creating lucrative incentives for drugmakers to serve this smaller and otherwise unprofitable market niche. But over the years, studies show the program is being manipulated by drugmakers to maximize profits and to protect niche markets for medicines already being taken by millions. While not illegal, critics believe pharma is using the Orphan Drug Act to their advantage and profiting by classifying their most popular drugs as a rare disease drug. Orphan drugs now account for seven of the 10 top-selling drugs of any kind.

Humira is just one example. It's the best-selling drug in the world with annual sales exceeding $12 billion worldwide. Humira was approved by the FDA in late 2002 to treat millions of people who suffer from rheumatoid arthritis. Three years later, the company, AbbVie asked the FDA to designate it as an orphan to treat juvenile rheumatoid arthritis, which, they told the FDA, affects only 30,000 and 50,000 Americans. That pediatric use was approved in 2008, and Humira subsequently was approved for four more rare diseases, including Crohn's and uveitis, an inflammatory disease affecting the eyes. Humira, as well as a handful of other top drugs, receive less than 25 percent of their sales from orphan uses and manipulate the rules to keep exclusivity longer and keep pricing inflated for as long as possible, according to their critics and pharma whistleblowers.

The Opioid Epidemic killed more Americans in 2015 than any other year on record, more than 52,000 deaths. That’s more than the more than 38,000 who died in car crashes, more than 36,000 who died from gun violence, and more than the 43,000 who died due to AIDS and HIV during its peak in 1995. About one in three Americans suffer from chronic pain, and doctors started prescribing painkillers like OxyContin and Percocet in record numbers. In some parts of the country, like Montgomery County, Ohio, the county coroner's office ran out of space for the second time this year and had to rent space at a funeral home and refrigerated trailers to store the growing numbers of opioid overdose victims. Opioid addiction can happen to celebrities like Prince and regular working professionals alike. I mean no disrespect. The issue is serious and I sometimes link comedy videos for levity, although they are also chock full of good facts and information. Click here to learn more or get help with opioid addiction.

Amazon Pharmacy? CEO, Jeff Bezos has a reputation for disruption. He is now looking to shake things up in the pharmacy space. Amazon is already testing in Japan and already sells medical supplies and equipment in the U.S., so this could happen quickly. Experts estimate their pharmacy home-delivery model could be a $25 billion to $50 billion market opportunity for Amazon. The PBMs have taken note and should consider this a real competitive threat. The pharmacy industry is highly regulated and not easy to break into. Amazon has an excellent opportunity and knows how to deliver, literally. A massively disruptive competitor like Amazon could either help drive down drug prices or just join the fray. No word yet if our drugs will drop delivered by Amazon drones.

Final thoughts. Our health insurance and health care costs are expensive for a long list of reasons. It's antiquated and expensive insurance processes, inflated health care costs, fraud, waste, and abuse... it's greed or excessive profit margins, a flawed provider reimbursement system that rewards volume instead of health outcomes, and our poor lifestyles and unhealthy behaviors. It's cost-shifting to cover the unreimbursed health care of our uninsured, or underpayments for Medicare and Medicaid. It's over-prescribing and defensive medicine. The problem is not just one thing. It's a bunch of things. And it's time to dig into the details and get past the simple sound bites and rhetoric. If we truly want to fix our health care system and bend the cost trend, these are the issues we should be working on. While pharmacy is a relatively smaller slice of the pie, it could be the most urgent and most impactful area to start. Thoughts welcomed.


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