The Cost of Health

Zaritza Petrova • 2021 Issue


 

From The Editors:

Despite attempts at reform, the high cost of prescription drugs continues to plague Americans whose insurance does not cover the medicine they need. Even when a drug is approved by insurance, high deductibles and copays create severe financial burden. Pharmaceutical companies receive much of the blame for the rising cost of prescription drugs, but are these international companies really to blame for a uniquely American problem? In THE COST OF HEALTH, Petrova examines how government policy and the byzantine health insurance industry fail to protect the interest of patients, and provides her prescription for reigning in rising drug prices.

 

The United States spends more than any other nation on healthcare, yet Americans are suffering because they cannot afford their medications. This is the case for Kathy Segos, a choir teacher from Indiana and mother to a son with type I diabetes. Her son’s life practically depends on the Kathy’s ability to meet the financial bar of $1,700 per month [2, 3]. When her son, Hunter, discovered the cost of his insulin, he began rationing his medication and eating less than 1 meal a day, essentially starving himself to relieve his parents of financial strain. The Segos family is one of 7 million burdened by skyrocketing insulin costs. Even though the U.S. spends 16.9% of its GDP on healthcare in order to keep up with the increasing drug prices, its efforts in providing affordable medications fall short. In contrast, other developed nations such as Switzerland, Germany, and Canada spend 3 to 5% less of their GDP and are able to meet the medical needs of their citizens [4].


There is a pressing need to address drug price problems today to ensure that scientific innovation reaches the people it is meant to help. Insulin was discovered 100 years ago [5], yet it has seen an increase of more than 50% in cost in the past decade. In 2007, a person using the federal insurance program, Medicaid, paid $39 on average for his or her insulin prescription, whereas in 2017, the same prescription cost $57 [1]. The problem of high drug prices is not limited to insulin, however. Similar trends in price increases are emerging for drugs targeting a variety of other diseases. For example, a novel therapy for childhood leukemia achieved a record price of $475,000 per patient in 2017 [6]. While new and groundbreaking medicines may initially warrant a higher price owing to their novelty and costs for drug discovery and testing, there is hardly a defendable reason why a century-old medicine such as insulin should succumb to the same trends.


There is a pressing need to address drug price problems today to ensure that scientific innovation reaches the people it is meant to help.

While many primarily blame “Big Pharma” greed and profit chasing motives for the predicament of families like Hunter’s, the government’s role in allowing a $1,700 monthly medical expense cannot be overlooked. It must be noted that pharmaceutical companies operate internationally, yet other countries do not experience the same troubles as the U.S. In Canada, for example, the price per unit of insulin is only $12.00 compared to $98.70 in the U.S. [7]. In fact, healthcare tourism—traveling to a destination in order purchase medications—across the Canadian border is becoming standard practice for American families. Given that Canada and other developed nations spend less on healthcare but achieve better overall health of their citizens [4] using the same medicines and drug manufacturers, it becomes apparent that the chief problem in the U.S. is that of malfunctioning regulation and healthcare system structure. The government, which sets healthcare legislation, needs to do more for its people by bridling excessive drug costs and guiding, through legislative mechanisms, health insurers in providing effective and affordable medications.





United We Stand, Divided We Fall


Pharmaceutical companies invest millions of dollars to bring a single drug to market. A 2016 study estimated that it costs $1.3 billion to develop a drug from the preclinical stage, in which it shows promise only in animal models, to the end of clinical trials for humans, in which it is accepted and approved by the Federal Drug Administration as an effective therapeutic. The same study also calculated that only 11.83% of drug candidates successfully pass the drug development process [8]. Thus, a company’s revenues and profits must be raised by only a fraction of drugs that made it into the clinic, and they must offset the costs of compounds that failed at various stages of development. But the question is: How do the structure of the U.S. healthcare market and drug pricing mechanisms, in particular, allow for the cost of medications in the U.S. to be the highest among other developed nations?


One problem arises directly from the organization of the U.S. healthcare system. In the U.S., healthcare is paid for in a mixed model, with both public and private health insurers. Medicaid and Medicare, which are public, government-issued health plans, are available to individuals over 65, low-income households, or people with disabilities. The majority of citizens, however, obtain private healthcare insurance through their employers or purchase it themselves. Other nations, such as Switzerland and Germany, also have a mixed system. Canada, on the other hand, provides only public healthcare to all of its citizens. Despite the variety of their healthcare structures, Switzerland, Germany, and Canada all have a centralized, government level of decision-making regarding prescription drug pricing and reimbursements, which the U.S. does not [9]. Their national health authorities negotiate prices directly with drug manufacturers and decide which drugs will be included in formularies (lists of covered medications) and paid for by insurances.


How do the structure of the U.S. healthcare market and drug pricing mechanisms, in particular, allow for the cost of medications in the U.S. to be the highest among other developed nations?

To set an appropriate introductory price, most governments use some form of a reference pricing mechanism [8]. In external referencing, a drug is appraised based on its average market price in neighboring nations of equal socioeconomic standing while internal referencing considers the cost of products already approved to treat the same condition. A 2019 report by the Ways and Means Committee, the main tax-writing body of the U.S. House of Representatives, evaluated U.S. versus international drug price differentials and concluded that reference price controls can be effective in restraining the huge cost increases of medications in the U.S. and would result in an average reduction in drug costs of 15 percent over 10 years [9]. For example, if the U.S. sets the price of HumaLOG, one of the most popular insulin products, using Swiss prices as one of its external reference standards, the manufacturer’s list price per insulin unit would fall from $27 to $8 [9]. This means that costs will be lower even before insurance, and Kathy Segos could pay less than $500 a month for her son’s medication. Thus, even though drug manufacturers may set an initially high price on medications, government regulatory agencies have the ability to protect citizens by curtailing drug costs through pricing controls and regulations.


While in most developed nations drug prices are negotiated by the government, price negotiations in the U.S. happen in a decentralized manner and with limited transparency. The Secretary of Department of Health and Human Services (HHS), which administers Medicare to 59 million Americans, has been “explicitly forbidden” by U.S. law to negotiate with drug manufacturers [9]. Instead, these bargaining powers rest with prescription drug plans as part of health maintenance organizations (HMOs), pharmacy benefit managers (PBMs), hospitals, and wholesalers—in other words, a variety of middlemen. PBMs, in particular, are good targets to consider if one seeks to reduce drug costs. They create drug formularies for clients, such as pharmacies and insurance companies, and obtain rebates directly from the manufacturers in exchange for placement of their medications on the formulary. The service comes with a fee, so that a percentage of any rebate issued is retained by the PBMs. Ideally, they would serve to create competition between manufacturers of similar products vying for their drug to be placed on the formularies managed by PBM. To illustrate, Eli Lilly and Novo Nordisk both produce insulins with similar activity—HumaLOG and Novolin. If Eli Lilly can offer a 70% rebate for its HumaLOG listed at $27 per unit to a PBM hired by an insurer that covers 1 million patients and Novo Nordisk offers 60% for Novolin listed similarly at $27, Eli Lilly can outcompete Novo Nordisk in issuing the best discount on its product. As a result, it will receive placement on the PBM-managed formulary and gain exposure to 1 million more patients than the competitor company.


The common theme which emerges from other countries’ examples is that transparency of the negotiated fees at different levels of the drug supply chain, pricing controls, and coordination between a central government regulatory agency and insurance providers can keep drug costs low, even if manufacturers set a high price.

In practice, however, PBMs may be pocketing billions of dollars from the issued rebates for brand, expensive, drugs in exchange for the higher market exposure [10]. After the 70% rebate in the example above, HumaLOG would cost $8 per unit if the PBM takes nothing for itself and passes the full rebate down to its clients. If the PBM retains 10% ($2.7) of the negotiated rebate, then the price to insurers for HumaLOG would be $10.80. The trouble is that there is no clarity to this process: neither the patient, nor the HHS, nor the doctor, nor anyone—besides pharmaceutical companies and the PBMs—know the negotiated fees and services. Is the fee 10% or is it 20% or more? Furthermore, manufacturers have no insight into the agreements that occur between PBMs and their insurance clients and have no influence on the manner in which their discounts and rebates are distributed to the insured beneficiaries. As a result, manufacturers blame the PBMs for cutting into the discounts of consumers while PBMs blame the manufacturers for purposefully inflating their drug prices.


The common theme which emerges from other countries’ examples is that transparency of the negotiated fees at different levels of the drug supply chain, pricing controls, and coordination between a central government regulatory agency and insurance providers can keep drug costs low, even if manufacturers set a high price.





P is for People, Patients and Power


Thankfully, as of 2019, shy steps by the government toward some form of external reference pricing have been made, although only for medications through Medicare Part B, which covers drugs received in doctor offices. Those form a small fraction of all Medicare purchased drugs. The majority of medications, such as those purchased at a local pharmacy, are covered under the Medicare Part D plan. Thus, the cost of insulin, which is under Medicare Part D, will hardly be affected by this measure. An expansion of pricing regulations to Medicare Part D and private insurance plans will capture the maximal cost-cutting impact of this policy.


Another immediate cost relief will be felt if the Department of Health and Human Services is granted a seat at the negotiating table with pharma and PBMs. Its function should be to negotiate maximal drug prices for public and private insurance plans and to streamline the drug supply process from manufacturer to patient by: 1) obligating PBMs and other middlemen, by law, to disclose their fees and 2) mandating insurers to pass down discounts received for a particular drug, such as an insulin product, directly to the patients that will benefit from it.


Finally, patient advocacy groups and government entities can and should work together to address the pressing needs of U.S. citizens. The key ingredients to this partnership are more transparency and more information to the ultimate beneficiaries, the American people.


 

References


1. Cubanski J, Neuman T, True S, Damico A. Insulin Costs and Coverage in Medicare Part D – Issue Brief – 9479.; 2020. https://www.kff.org/report-section/insulin-costs-and-coverage-in-medicare-part-d-issue-brief/

2. Kirkwood M. Written Testimony of Kathy Sego American Diabetes Association Volunteer Drug Pricing in America : A Prescription for Change Part I United States Senate Finance Committee. American Diabetes Association, 1-5 (2019).

3. Kuchler H. Why prescription drugs cost so much more in America. Financial Times. https://www.ft.com/content/e92dbf94-d9a2-11e9-8f9b-77216ebe1f17. Published September 19, 2019.

4. Tikkanen R, Abrams M. U.S. Health Care from a Global Perspective, 2019: Higher Spending, Worse Outcomes? Commonw Fund Fund Reports. 2020;(January):1-10. https://www.commonwealthfund.org/publications/issue-briefs/2020/jan/us-health-care-global-perspective-2019

5. Kim AP, Bindler RJ. The future of biosimilar insulins. Diabetes Spectr. 2016;29(3):161-166. doi:10.2337/diaspect.29.3.161

6. Dolgin E. Cancer’s cost conundrum. Nature. 2018;555:S26-S29.

7. Mulcahy AW, Schwam D, Edenfield N. Comparing Insulin Prices in the U.S . to Other Countries.; 2020. https://aspe.hhs.gov/system/files/pdf/264056/Comparing-Insulin-Prices.pdf

8. DiMasi JA, Grabowski HG, Hansen RW. Innovation in the pharmaceutical industry: New estimates of R&D costs. J Health Econ. 2016;47:20-33. doi:10.1016/j.jhealeco.2016.01.012

9. Ways and Means Committee Staff. A Painful Pill to Swallow : US vs . International Prescription Drug Prices Committee on Ways and Means. 2019;(September).

10. D. Schulthess. (2020, March 18). Insulin prices AND PBM rebates: Pin the tail on the patient.Retrieved April 20, 2021, from https://www.statnews.com/2020/03/19/insulin-prices-pbm-rebates/


 

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