At the Senate Special Committee on Aging Hearing last week, Senators focused on “Seniors Feeling the Squeeze: Rising Drug Prices and the Part D Program.” Mostly as an attempt to put health care onto a different stage. The Committee first heard opening remarks from Senator Herb Kohl(D-WI), Chairman, Senator Bob Corker(R-TN), Ranking Member, and Senator Bill Nelson(D-FL), Committee Member, who chaired the hearing.
Senator Kohl noted that this hearing was important because “prices for brand name drugs are higher in this country than anywhere else in the world,” and because this affects seniors severely.” Specifically, he noted how it affects them “both because they tend to need more medications, and because of the doughnut hole in Medicare Part D, which can cost individuals up to $4400 out of pocket every year.”
Other Senators cited a Kaiser Family Foundation report confirming increases in drug prices, and claiming that Medicare Part D beneficiaries are responsible for paying $4,550 in drug costs out-of-pocket before they reach catastrophic coverage. After their opening remarks, the panel then heard testimony from the following people (click for testimony):
Gerard Anderson, MD, Director, Center for Hospital Finance and Management, Johns Hopkins Bloomerg School of Public Health, Baltimore, MD
John Dicken, Director, Health Care, Government Accountability Office, Washington, DC
Gregory Hamilton, MBA, Consultant, Algonquin, IL
Willafay McKenna, Medicare Part D Participant, Williamsburg, VA
Jack Calfee, Ph.D., Resident Scholor, The Ameircan Enterprise Institute, Washington, DC
John Dicken
GAO’s Director of Health Care focused his testimony on the January 2010 report entitled Medicare Part D: Spending, Beneficiary Cost Sharing, and Cost-Containment Efforts for High-Cost Drugs Eligible for a Specialty Tier. This report focused on 1) Part D spending on specialty drugs; 2) how different cost-sharing structures could be expected to affect beneficiary out-of-pocket costs; 3) how negotiated drug prices could be expected to affect beneficiary out-of-pocket costs; and 4) information Part D plan sponsors reported on their ability to negotiate price concessions.
Greg Hamilton
Greg Hamilton, a consultant in the healthcare industry, who works with Qui Tam attorneys, the DOJ and the States to recover monies lost through fraud, focused his testimony on Pharmacy Benefit Managers (PBMs) as a way to lower prescription costs. He noted how PBMs negotiate reimbursement rates for prescription drugs at some discount off of Average Wholesale Price (AWP).
As a result of this arrangement, he asserted that “price increases, to both Patients and Payors, can theoretically be offset through rebates. He added that PBM’s can combine AWP’s with rebates to determine the total cost of a drug to the payor. Through this process, lower cost drugs are sometimes placed in a lower co pay category to encourage patient selection and thus reduce their cost and the cost to the payor. Citing an NYT article and a 2007 Congressional study, he identified that these rebates often accrue to the middlemen and not to consumers, causing prescription drug prices to rise.
Willafay H. McKenna
Mr. McKenna, a Medicare Part D beneficiary told the Committee his experience using prescription drugs to manage his insulin for diabetes. From his experience he makes the following recommendations to achieve reductions in prescription costs for seniors:
- Allow Medicare to negotiate with the drug companies for lower costs to Medicare recipients;
- Permit Medicare to contract with private insurance companies to process prescription drug claims for Medicare D participants or arrange for Medicare to assume these processes itself;
- If private insurance plans continue to offer these plans, encourage them to provide their negotiated drug costs to their subscribers and to those who are choosing between plans;
- Encourage the FDA to issue rules for development of generic biologics like insulin;
- Consider a modest increase in the tax withholding for Medicare; and
- Consider “grading” Part D programs in a manner similar to the A-F groupings used years ago for Medi-Gap policies.
Gerald Anderson and Jack Calfee
Dr. Anderson’s testimony highlighted the perceived problems with drug pricing in America, citing how the prices for brand name drugs in the US were often double the prices in Australia, Canada, France, Germany, Netherlands, New Zealand, Switzerland, and United Kingdom. He also noted however, that the US pays significantly lower prices for generic drugs compared to other countries, with many of them paying two to three times what the US pays for generic drugs.
He identified a problem with prices being caused by the US not utilizing more drugs, and thus spending considerably more per capita on brand name drugs than generic drugs. Consequently, he claimed that if the US paid the same prices for drugs as these other countries it would be possible to completely close the “doughnut hole” in Medicare Part D.
His testimony then goes on to discuss the 26.7 million Medicare beneficiaries enrolled in Part D. He asked Congress to pay special attention to the costs of these beneficiaries because they are “very expensive for the Medicare program and because many of them have poor health status.” Despite this claim, 63% or 7 million of these enrollees never reached the doughnut hole, and only 3 million (27%), entered the doughnut hole and never left, and over 1 million (10%), entered and exited from the doughnut hole.
Such numbers Dr. Anderson stated should not be “surprising” because those who exited the doughnut hole are often the individuals with the poorest health, who see the most doctors, are most likely to be hospitalized and fill the most prescriptions. They are also the beneficiaries with the most chronic conditions, which makes it highly likely that these beneficiaries will enter the doughnut hole each and every year, not because of the cost of their drugs, but because of how much treatment they need.
Moreover, the fact that beneficiaries who entered and exited the doughnut hole were more likely to use more brand name drugs than beneficiaries who never entered the doughnut hole does not suggest a problem with drug pricing. Physicians choose brands and types of drugs based on their clinical experience, and a patient’s history. Often, because brand name drugs have more research and data available for a physician to use, they choose them over generics because of their effectiveness, not price.
Dr. Anderson acknowledges that one reason that brand name pharmaceutical companies need to charge high prices is in order to conduct research and development. He believes however that once these expenditures occur there are no additional research and development costs for that drug. Another reason he cites for high prices is so that companies have the resources to develop other drugs. He discounts this extremely valid and true principle based on the fact that research and development by the overall pharmaceutical industry is less than 15 percent, while marketing represents 30 percent. Dr. Anderson discounts the fact that companies need to spend money to bring drugs to doctors and patients after they have been researched and developed. How else does he expect companies to sell their products?
He also associates the drug price increases as a way for companies to adjust for a declining number of blockbuster drugs that generate over $1 billion dollars in annual sales.
Jack Calfee
Dr. Calfee gave a precise explanation as to why drug prices seem to be rising by focusing on three topics: (1) Price trends for the most-used drugs among the elderly; (2) The influence of the Medicaid drug price rebate; and (3) International patterns in drug prices.
He first acknowledged that an AARP report, which concluded that during 2002-2008, annual price increases ranged from 5.3% to 8.7%, was misleading. Specifically, he said the conclusion was misguided because recent years have seen an extraordinary and unprecedented surge of patent expirations and subsequent generic entry among the most popular drugs including many that are heavily used by the elderly.
As a result of this trend, he noted that fifteen of AARP’s top 25 drugs are now available as generics, which means that most are now far less expensive than they were in 2005, often qualifying for Wal-Mart’s special $4 price for a 30-day prescription. He even added that AARP’s top-25 list of branded drugs for the year 2007 had 12 of the 25 listed drug items available as generics, usually at very low prices. Accordingly, Dr. Calfee explained that the tables AARP uses are flawed because they track prices of only the branded versions of those drugs, which are prescribed far less often than generics. As a result, AARP’s tables provide rather little information about the most relevant changes in drug prices, and their reports simply fail to track prices as drugs go off patent and become available at generic prices. Such a mistake Dr. Calfee calls “a serious omission.”
The remaining brand name drugs Dr. Anderson explains are relatively new and that most were created through biotechnology methods. Since these specialty drugs typically address previously untreatable or poorly treated conditions, their regulatory pathway toward generic substitutes is different, causing prices to be different as well. But how can anyone complain about such prices when these have revolutionized the treatment of rheumatoid arthritis, multiple sclerosis, and certain types of cancer?
Specialty Drugs
Although specialty drugs account for only about 10% of Medicare Part D expenses, Dr. Calfee went on to explain that proposals to create “biosimilars” or “follow-on biologics” are unlikely to affect drug prices in the near future because of three factors.
First, drug development is very expensive and tends to be targeted at previously unsolved medical problems, so that the few drugs that make it through the lengthy and uncertain development process are of great value. Second, R&D continues long after initial drug approval. And third, these drugs often prove effective against illnesses that are quite different from the ones they originally addressed, so that “cross-over” competition occurs among drugs that started out treating completely different conditions. As a result of these factors, specialty drugs differ from traditional drugs in their costs, their benefits, their research agendas and the nature of competition.
Medicaid Drug Rebate
Dr. Calfee also noted that applying the 15.1% rebate for the lowest price paid in the private sector to Medicare Part D purchases by dual eligibles “would discourage discounting and therefore induce higher prices in the private sector.” Essentially, “the effect of expanding the Medicaid drug rebate would mainly be to shift expenses to the private sector rather than reduce drug costs.” He also disagreed with the option of exercising more stringent control over drug pricing generally because it would tend to weaken incentives to develop useful new drugs and new uses for existing drugs.
International Drug Prices
In clarifying the testimony of other witnesses, Dr. Calfee explained three causes for international disparities in drug prices among advanced nations. One is that manufacturers naturally tend to charge more in wealthier nations, and the United States is the richest nation. Another is that some drugs save on costs elsewhere in the health care system and those costs are typically much higher in the U.S., making cost-saving drugs more valuable here. And lastly, national price controls.
The study he conducted revealed almost no international differences for unique biotech drugs (most of them so-called “specialty drugs”) but very large differences for drugs in competitive therapeutic classes. Consequently, the brand name drugs that did have differences had few competitors and usually suffer the largest discounts because price controllers can play the manufacturers against each other. As a result, the net effect is lower profits abroad, sometimes cutting out half or more of profits, leaving the United States as the prime source of profits and therefore of R&D funds.
Conclusion
Since the general trend in recent years has been toward far less expensive versions of the most popular drugs and more generics, pricing problems for drugs need to be examined more closely, with all pertinent information. This is especially important because the benefits of such trends have let other nations “essentially free-ride on our drug development disproportionately supported by profits in the American market. Something former FDA Commissioner Mark McClellan pointed out in 2003.
Regardless of how much drugs cost, the breakthroughs in medicine and research stand as examples of advances in medical technology that are expensive but bring even greater value. For example, when a new brand in a therapeutic class (a “follow-on” drug) is created, the drug tends to generate a new wave of research. In the case of the statins, for example, it was research on Lipitor and other follow-ons, most recently Crestor, that greatly expanded the patient population known to benefit from statin therapy, while also transforming scientific understanding of heart attacks. We need to follow Dr. Calfee’s call to encourage more research into specialty drugs as well as other medicines because without such work, patients will suffer regardless of how much money they have.