Drug Price Increases: Here We Go Again?

Pharmaceutical price increases and the overall costs of drugs have made headlines frequently in recent years and are a political football that gets thrown around, with no meaningful solutions to date.

Although in 2018 we had a reprieve from the usual annual increases, for which the Trump administration took credit, it was short-lived, with most manufacturers announcing a new round of price increases to start 2019 that exceed the overall inflation rate for goods in the United States. Most of the media interest has focused on the cost of outpatient drugs at the prescription counter, without much attention paid to the impact on health care systems and hospitals.

The usual targets are epinephrine injectors, insulin, and isolated products with exorbitant price increases, such as Turing Pharmaceutical’s pyrimethamine (Daraprim) pricing debacle. The industry seems to have quickly learned that if it can insulate patients from big out-of-pocket expenses through copay cards and other patient assistance programs, Congress and the public seem to lose interest. Of course, the costs are still going up, and we are all paying for it indirectly, but as long as it does not create a big number on the cash register display at the pharmacy, we seem content. We also seem to forget that industry-sponsored patient-assistance programs are not charity, that they are incorporated into the overall pricing of pharmaceuticals.

Health care systems and hospitals bear a financial burden when prescription drug prices rise. A report from the National Opinion Research Center at the University of Chicago, developed with the American Hospital Association, American Society of Health-System Pharmacists, and Federation of American Hospitals, “Recent Trends in Hospital Spending and Manufacturer Shortages,” includes an analysis of drug spending trends for hospitals and the factors that affect that overall spend.

A few of the key findings in this report are as follows¹:

• Adjustments in prospective payments typically lag significantly behind an increase in drug costs. The growth in expenditures for inpatient drugs increased at a rate 5-fold the Medicare reimbursement updates for fiscal years 2015 to 2017.
• Almost two-thirds of hospitals responding to a survey indicated that changes in drug prices had a moderate to severe impact on their overall hospital budget, and more than 15% indicated that drug price increases affected their budgets “to a large extent.”
• Measures reported by hospitals to reduce the budget impact included use of alternative therapies (90%), more in-sourced compounding (69%), delayed capital investments (28%), reductions in staff (25%), and reduction of services (17%).
• Outpatient drug spending per encounter, using a total adjusted admission methodology, increased 28.7% per year for fiscal years 2015 to 2017.
• Spending on inpatient drugs per admission rose 9.6% for fiscal years 2015 to 2017, following a 2-year period (fiscal years 2013-2015) when spending increased 38.7%.
• Total drug spending per hospital admission increased 18.5% annually for fiscal years 2015 to 2017. By comparison, the overall rate of medical inflation for the same time period was 6.4%.

Changes in drug spending are a combination of new entries to the market and price inflation. Hernandez et al recently reported on the interplay of these factors on the rising costs of drugs in the outpatient setting between 2008 and 2016.² The major findings from this study are:

• Brand name drugs accounted for 44% of total drug spending during that time period. However, this fraction is declining as the industry has shifted its attention to high-cost specialty drug development.
• From 2008 to 2016, the average cost of injectable drugs increased by 15.1% annually, while the cost of oral brand name drugs increased 9.2% per year. These changes were largely driven by price increases of existing drugs.
• New drugs entering the market drove a 20.6% annual increase for oral specialty drug costs and a 12.5% annual increase for injectable specialty drug costs.

Drug costs in the United States began steeply climbing in 1997, tripling between 1997 and 2007. Spending leveled off for a time, and then a second spike started in 2013. By 2015, US spending on prescription drugs reached about $1000 per person, the highest of any developed nation. Americans do not use more prescription drugs per capita than other developed nations, and the spending is not driven by more use of brand name drugs, as the overall use of generic drugs accounts for about 84% of this spend. In the 1990s, we began paying more for new drugs; the number of drugs with $1 billion or more in annual sales increased to 52 by 2006, from 6 in 1997. The lack of cost control policies in the United States clearly linking effectiveness with price is considered a major contributor to this spike in drug costs. We end up paying high prices for some drugs of high value but also for drugs of low value.

With many new high-cost biologic drugs entering the market and a lowering of FDA approval standards allowing agents to make it to market more quickly, we should expect things to get worse before they get better.³

Beyond a lack of price controls, another factor that seemed to change drug pricing in the 1990s was a move away from a traditional business model for pricing to more of a financial market model. In the past, drug pricing was based on development costs, operating costs, and the need to return a reasonable margin over the lifecycle of the drug. Current pricing models are a mix of projected value of the therapy based on quality or longevity of life combined with maximizing return for the investor of publicly held companies and often based on no or poor comparative effectiveness data. It often feels like pricing is based more on the maximum with which the industry can get away, rather than what is a fair value for the drug.

The chief executive officer of Nostrum Pharmaceuticals, Nirmal Mulye, PhD, recently told The Financial Times after raising the price of oral nitrofurantoin by 400%, that he had a “moral requirement to sell the product at the highest price.” Nitrofurantoin is an old urinary antibiotic for which Nostrum Laboratories made no additional investment in innovation or research and was adding no additional value to justify the price increase.

FDA Commissioner Scott Gottleib, MD, who has announced his resignation, tweeted in response, “There’s no moral imperative to price gouge and take advantage of patients.”⁴

To what moral requirement was Mulye referring? I suspect he was speaking to what is referred to as the financialization of the US economy. For about 200 years of US history, the financial industry existed to serve businesses by funneling capital into productive enterprises to create jobs and wealth. Since the 1970s, there has been increasing financialization of our economy, with Main Street becoming subservient to Wall Street. Diverted payments, short-term shareholder returns, and stock buybacks have taken resources away from long-term industry development and growth.⁵ Mulye was likely referring to his moral obligation to shareholders. Ironically, most of us who are appalled by this behavior also expect significant returns on our retirement investments, and we therefore contribute significantly to the problem. The other irony is that the financialization of the economy is largely the product of public policy decisions over the past 30 to 40 years, and now the same public policy apparatus is expected to “fix” the drug pricing crisis on a much shorter timeline.

Solutions to this crisis will not be easy. Proposed changes at the federal and state levels to date are likely to have minimal impact, and some are poorly thought out. Some states propose that importing drugs from Canada make sense. Does this really sound like a good solution? Why not import from a country with much more effective price control policies? The recent federal proposal to index prices with European prices focuses primarily on what Centers for Medicare and Medicaid

Services would agree to pay for drugs and will mostly hurt health care providers, including health systems. Price transparency proposals are unlikely to curb the rate of price increases, as long as patients are isolated from out-of-pocket costs, and are likely to be confusing, because communicating pricing information succinctly is difficult. As much as it theoretically goes against American ideals, governmental price controls based on reliable comparative effectiveness data are probably the only effective approach, not just policies to reimburse providers at prices derived from other countries’ price control policies. After all, governmental price controls exist throughoutour economy already.

References

• NORC at the University of Chicago. Final Report. Recent trends in hospital drug spending and manufacturer shortages. January 15, 2019. Available at: https://www.aha.org/system/files/2019-01/aha-drug-pricing-study-report-01152019_pdf accessed on January 26, 2019.
• Hernandez I, Good CB, Cutler DM, et al. The contribution of new product entry versus existing product inflation in the rising costs of drugs. Health Affairs 2019;38:76-83.
• Frakt A. Something happened to U.S. drug costs in the 1990s. The Upshot. The New York Times. November 12, 2018. Available at: https://www.nytimes.com/2018/11/12/upshot/why-prescription-drug-spending-higher-in-the-us.html accessed on January 27, 2019.
• Blank C. Pharma exec defends 400% price hike — FDA commissioner issues a stern reply. Managed Healthcare Executive. October 2018; p 40.
• Faroohar R. American capitalism’s great crisis. Time. May 12, 2016. Available at: http://time.com/4327419/american-capitalisms-great-crisis/?iid=sr-link1 accessed on January 27, 2019.