The Pharmaceutical Industry Labor Management Association (or PILMA) is proud to offer this assessment of the current drivers inherent in the drug supply chain which contribute to the overall costs of getting our country’s prescription drugs to the consumer.
The U.S. spends more on prescription drugs than any other country. It is also the leading source of the industry’s research and innovation. Advances in the treatment of both acute and chronic conditions and the general demographic shifts, in part as a result of these advances, means that a greater number of us will survive to advanced ages when more people need the products this industry provides. These advances have come at an increasing cost. The discovery of new cures for diseases such as hepatitis C, advances in the treatment of immune system diseases and the evolution of entirely new categories of extremely effective, but more narrowly targeted drugs to treat cancer and other life-threatening diseases based on patients’ own genetic makeup (biologics and biosimilars) have all contributed to these costs.
Much, if not the majority, of the focus of the media, legislators and regulators has been on the manufacturers; however this is an industry with a host of other players in the “drug supply chain,” each of which has a distinct role and many of whom play an outsized role in the cost drivers relative to their additive value in getting these life-saving medicines from the manufacturers to the ultimate consumer. To the extent possible, this study will focus on their relative roles and estimated influence on such costs. It is important to note, however, that because of the lack of transparency in their contracting policies and language, it is virtually impossible to precisely quantify the full impact of each of these players at this time.
Over the past several generations, spending for prescription drugs has moved away from a direct purchase by the end consumer to one covered by other third-party payers primarily through plans sponsored by employers and government programs for the indigent, elderly and disabled. As such, the true costs to the consumer have become less transparent.
These trends have resulted in the need for plan sponsors to better control the costs of such coverage. Entire industries have sprung up to meet these market needs. With a growing list of possible drugs, the local pharmacies needed a way to meet the demands of their customers without having to maintain excessive inventories of drugs that may not be requested very often. As payers grew concerned over increasing costs, another new industry was born of consultants known as pharmacy benefit managers (or “PBMs) who would negotiate with the manufacturers for volume discounts and by providing an opportunity for reduced competition or exclusivity on evolving drug formularies. The same approach of negotiating discounts through control of markets applied to the development of mail order distribution systems for chronic medications and limited participating lists of pharmacies where these and drugs to treat acute conditions could be purchased.
As these relationships became more mature, many of the details of the financial arrangements became more obscure. Instead of simply negotiating a price based on a discounted percentage off Average Wholesale Price (AWP), the addition of rebates, both drug specific and more general, based on meeting volume targets and even more impervious contracting formulae, made it increasingly difficult for payers to understand what they are paying for these goods. For many, simply knowing that these third-party intermediaries were negotiating discounts below what they would have to pay without them was sufficient for some payers and was encouraged by the PBMs. Without very clear oversight, contracting models such as “spread pricing” (the difference between what the PBM pays the dispensing pharmacy and what is billed to the payer) have created new incentives for the way PBM agreements are structured which do not always align with the best interests of either the patient or the ultimate payer, but yield massive profits for the PBM industry. While reported earnings by the dominant firms are quite modest, an independent analysis conducted by Bernstein Research has estimated the EBITDA profitability (earnings before interest, taxes, depreciation and amortization) of the PBMs at 85%. Governments have also complicated this system by imposing mandatory discounts and rebates on many of the drugs purchased under their programs. Pricing by other providers based on the level of clinical supervision necessary for the administration of drugs has also opened new opportunities for price mark-ups.
As the cumulative prices continue to rise for the research and development, manufacture and distribution of drugs and all of the intermediary services described above, payers at all levels have become increasingly aware of the need to better control costs in this aspect of health care.
In the pages which follow, the magnitude of these changes, the respective roles of the various parties who participate in the drug supply chain, and the recent efforts, especially by the federal government to attempt to reduce the costs of prescription drugs for both the federal budget and for those individuals whose out-of-pocket costs, including premiums also continue to rise, will be examined.
Among the items to be covered are:
• An overview of PILMA, its members and the strategic relationship between the industry and the labor organizations which comprise its membership.
• The various “links” that comprise the drug supply chain and their respective roles.
• The current public policy concerns as expressed by the Trump administration over the costs and inflationary trends of prescription drugs primarily with respect to their impact on Federal Medicare and Medicaid programs.
• An examination of the historical rise and current level of spending in the U.S., in terms of gross spending, as a percentage of total health care costs and GDP and on a comparative level with other developed nations.
• A discussion of the evolution of health benefit designs for prescription drugs,
• An assessment of how the various links’ participation affects the pricing of the drugs to be acquired and how the numerous definitions of price affects the reimbursement levels paid to the various links in the supply chain and, ultimately, the cost to the consumer.
• Finally, several examples of pricing variability by specific links in the drug supply chain, some of which have been characterized as clearly abusive and which have resulted in legislative and/or regulatory intervention.
These elements lead to several key findings:
• Retail drug expenditures that have gone from $2.2 billion to an estimate of approximately $360.2 billion from 1960 to 2018, largely as a result of:
o the types of new drugs and the way they are produced
o the way plans are designed
o the way products are purchased
o the intervention of third-party payers and
o the proliferation of players in the drug supply chain.
• Certain abusive practices, as well as the lack of transparency and full disclosure of the terms and conditions of payments by and to certain links in the drug supply chain (especially PBMs), have drawn the attention of the government and other entities demanding greater transparency in contracting and, at the state level, imposition of changes in prescription drug pricing.
• Wide variation in pricing, especially for generic drugs, has resulted in more direct intervention by some state Medicaid programs including replacement of “spread pricing” practices with pricing based on the National Average Drug Acquisition Cost price plus an administration fee.
• The magnitude of such variations is breathtaking, reflected in numerous studies,
including one in which a “basket” of five commonly prescribed drugs were priced in a variety of areas with the resulting variation of pricing ranging from a low on-line of $66 to a high of nearly $900 for the same five drugs when purchased at two of the largest chain pharmacies.
• The use of spread pricing in state Medicaid programs continues to invite abusive practices as demonstrated by a case study of the evolution of Gleevec from brand to generic which showed that, despite a decline of 89% from brand pricing, many Medicaid plans continue to pay prices for generic equivalents that almost equal the brand cost, prompting investigation and intervention by several state enforcement agencies.
• Alternative pricing models can yield significant savings as demonstrated by New Jersey by legislating and implementing a state-of-the-art “on-line auction” of access by qualified PBMs to provide prescription drug coverage to the 750,000 current and retired state employees and their dependents which is projected to save the state an estimated $1.6 billion or 18% of the state’s prescription drug costs through 2020 without reducing benefits or increasing out-of-pocket costs to participants.
In the end, the recurring theme is one of a need for greater transparency in contracting and pricing in this industry. With federal and state governments either legislating or mandating through executive order wholesale changes in the way prescription drugs are priced and paid, it is apparent that change is forthcoming. As with any such change, it will be far better for the supply chain vendors whose business model is most at risk to devise new pricing schemes which better reflect the added value of the services provided to address these concerns, than to wait until more draconian structures are imposed.