Drug Prices: A Dysfunctional Market Limits Patient Access

Episode Summary

A convoluted, confusing, and opaque system for pricing drugs has evolved that distorts the market and often limits patient access to the drugs they need to survive. In this episode, three experts explain how the system works—or doesn’t’—and the consequences of a dysfunctional pricing system.

Episode Notes

A convoluted, confusing, and opaque system for pricing drugs has evolved that distorts the market and often limits patient access to the drugs they need to survive. In this episode, three experts explain how the system works—or doesn’t’—and the consequences of a dysfunctional pricing system.


Episode Transcription

Audio 1 (00:05):

Most consumers have no idea there's a PBM, not an insurance company, managing their prescription drug plans. Last year while picking up a prescription at a major drug chain, Falkowitz happened to be complaining about high drug prices when the pharmacist gave him a tip.

Audio 2 (00:21):

The pharmacist sort of came around the counter and took me off to the side and says, "You might find that cheaper somewhere else." I just think there's something so terribly wrong with the system. It just defies rational sense.

Theresa Brady (00:37):

When we go to the store to buy a carton of milk, we understand that the price we pay is based on everything that went into producing that milk. The farmer who milks the cow, the refrigeration system that stores the milk, the pasteurization and packaging, and finally, its delivery to the grocery store. It's transparent and straightforward. These same market forces are nowhere to be found however when a patient pays for a prescription drug. A convoluted, confusing and opaque system has evolved that distorts the market and leaves most of us scratching our heads trying to understand.

Theresa Brady (01:15):

Today, we will attempt to explain this complex payment structure by talking with a few experts in the field. I'm Theresa Brady, executive producer, sitting in for Dr. Michelle McMurry-Heath, and you are listening to, I am BIO.

Anna Hyde (01:50):

My name is Anna Hyde. I'm the vice president of Advocacy and Access for the Arthritis Foundation.

Dan Durham (01:54):

I'm Dan Durham, senior health policy advisor at the Biotechnology Innovation Organization, BIO.

Vinay Rathi (02:02):

My name's Vinay Rathi. I'm a resident physician. I work at Massachusetts Eye and Ear and Mass General Brigham in Boston. My clinical field is otolaryngology-head and neck surgery.

Theresa Brady (02:13):

Our guest today, Anna, Dan, and Vinay, talk to us about who wins and loses in the complicated drug delivery system.

Theresa Brady (02:29):

In her role at the Arthritis Foundation, Anna advocates to improve access to care for patients. She explains what her constituents are up against.

Anna Hyde (02:39):

There is a lot of variability in the prices that patients will pay for drugs. Particularly arthritis patients who have autoimmune forms of the disease and take high cost biologic medications, there's variation because of different plan designs and cost sharing exposure. Some patients only have access to high deductible health plans for example. And so they must pay the full price of their drug until they reach their deductible. Others may have flat copays or co-insurance that can be as high as 40%. And when you're talking about a high cost biologic medication, a 40% copay on a list price of a drug is really out of reach for a lot of patients. But there's also a lot of variability in how patients access their drugs.

Theresa Brady (03:24):

But who decides all this? One important player is a pharmacy benefit manager or PBM. While many people have never heard of PBMs, they wield considerable power over the drugs that patients have access to. Anna describes their role.

Anna Hyde (03:42):

A PBM is a pharmacy benefit manager that is a company or entity that works between manufacturers and health plans and other clients like employers to negotiate drug prices and help craft protocols to help keep costs down. They work directly with health plans often, but oftentimes they work directly with employers. And the problem is, there's not a lot of transparency. That's one problem. There is not a lot of transparency in how the negotiations sort of net out.

Theresa Brady (04:18):

BIO's senior health policy advisor, Dan Durham, explains PBMs this way.

Dan Durham (04:24):

The PBMs, which is short for pharmaceutical benefit managers owned by the largest health plans in our nation, negotiate the price on prescription drugs for coverage on the health plan. The drug developer sets what's known as the list price of the drug based on what they feel the value of that drug is. But that's not what is actually paid to the manufacturer. What happens is health plans negotiate discounts. They average about 50%. And so you could take that list price, cut it in half. And that's the net that the drug developer receives on their drug. It's similar to hospitals and other providers. Hospitals have list prices as do doctors and the like. And the health plans say, "Well, if you want to be in our network and serve our enrollees, we want a discount."

Dan Durham (05:31):

So it works the same for prescription drugs. Except there's one big difference when it comes to what the patients pay out of their own pocket. I'll give you a simple example. If your health plan has an $8,000 deductible and you go into a hospital that is in your health plan's network and they've negotiated an $8,000 hospital price down to $4,000, while you're in that deductible, you then pay that negotiated price which is $4,000. However, when it comes to your prescription drugs, let's say you need to take an oral cancer therapy prescribed by your doctor which also has a cost of $8,000, instead of paying the negotiated price of 50% or 4,000 like you do for the hospital, you pay the full $8,000 out of your pocket. Meanwhile, your health plan pays nothing. So that's a big difference in terms of how this price negotiation works when it comes to prescription drugs.

Theresa Brady (06:41):

As Dan describes, the negotiated price for a hospital stay is passed on to the patient because that's what everybody has agreed will be the cost of the service. Drugs are treated very differently. Often, insurers and/or PBMs require patients to meet deductibles based on the list price, even though the PBM may have negotiated much lower price.

Dan Durham (07:04):

The PBMs are owned by the largest health plans in our nation, negotiate the price on prescription drugs for coverage on the health plan. Let's say there are four drug developers that have a cancer therapy that is similar in terms of its safety and effectiveness for the patient, then the PBM can say, "We're only going to cover one of these drugs in our health plan and we'll cover the one that gives us the largest discount or rebate."

Theresa Brady (07:36):

While the discount generated for the PBM may be used to hold down the overall cost for the insurance plan, the burden on the patient to meet their deductible first could be catastrophic. Here's Dan again.

Dan Durham (07:50):

What the health plans claim is that they use that revenue they receive from these rebates to reduce the premiums paid by employers or individuals that buy their health plan. The problem with that is, it's reverse insurance. So you have this cancer patient that needs this cancer therapy that their doctor has prescribed, but they're paying the highest list price to receive that therapy. So while the health plans may claim, "We're using this to reduce everyone's premium," the fact of the matter is, the sickest patients pay the list price and oftentimes they say, "I can't afford it" and so they don't take the treatment. And that drives up other healthcare expenses that could easily wind up back in the hospital. That's why this is penny-wise but pound-foolish.

Theresa Brady (08:53):

In January of this year, a report from the Berkeley Research Group found that more than half of total spending on brand name medicines in 2020 went to stakeholders other than drug developers. These stakeholders include PBMs, the government, pharmacies and hospitals. Our guest, Dr. Vinay Rathi, is the senior author of a study on the cost of hospital administered oncology drugs.

Vinay Rathi (09:20):

The study we recently published in JAMA Internal Medicine was titled Hospital Administered Cancer Therapy Prices for Patients with Private Health Insurance. The goal of the study was fourfold. One was to figure out how often hospitals were actually complying with the rule to publish their prices. There are reasons you could imagine that they may not be able to, or would not want to publish their prices. Second, we wanted to understand how much prices varied between hospitals for the same drug. Third, we wanted to figure out how much prices varied within the same hospital between different payers. So that's the same hospital administering the same drug to two different patients, to two different payers. And so those prices can actually differ depending on who the insurer is. And then fourth, we wanted to understand to what extent the prices that hospitals negotiate with insurers are marked up relative to their acquisition costs to purchase the drugs before they subsequently administer them to patients.

Theresa Brady (10:21):

Shockingly, the study showed that hospitals may earn more from the cancer therapies than the pharmaceutical companies that manufacture them.

Vinay Rathi (10:30):

What we found is, based on our estimates of hospital acquisition costs, the amount of markup on these drugs is fairly substantial. So we found anywhere depending on the drug an excess of 100% to 600% of what the hospital is estimated to pay to acquire the drug. And so I think that's a finding that peaked a lot of folks interest because it raises some interesting questions about the supply chain for these chemotherapeutics.

Theresa Brady (10:56):

Vinay stresses that this finding was made despite a very conservative methodology.

Vinay Rathi (11:01):

I would say first and foremost, we tried to take a pretty conservative approach whenever possible in estimating the degree of markups. As an example, if there was more than one formulation available for a single drug, we used the formulation that had the lowest per unit cost. Or we were calculating cost differences across the total course of treatment, we assumed that there was no waste from single dose files. Another possibility that we considered was sort of outlier prices. And so when we calculated markups, we used the medium price at each center because we wanted to find a representative price. So it's not like we focused our analysis of markup on prices that were particularly high or particularly low.

Vinay Rathi (11:43):

Another thing is when we estimated hospitals acquisition costs, we're really looking at the cream of the crop of cancer care hospitals. And so one presumes that these hospitals would have significant market power because of their reputation and facility and capacities to negotiate lower drug prices. But we took a pretty conservative assumption and assumed that they were very similar to all their hospitals with respect to their drug acquisition costs.

Vinay Rathi (12:06):

So before we talk about the extent of markup that we found, I'll just say that we tried to be pretty conservative when we were calculating markup. In terms of the extent of markup, the lowest median percent of markup we found was over 100% in excess of drug acquisition costs. The logical implication from that, and what we wrote in the paper is that, it's possible that a hospital could earn more revenue per unit for a drug than the pharmaceutical manufacturer that developed the drug. That raises a lot of interesting questions about how the price of these drugs may inflate through the supply chain. And then from my perspective, as a physician and health policy researcher, what that means for patients at the end of the line.

Theresa Brady (13:03):

When we come back from a break, we talk to our guests about the most important stakeholder in this convoluted pricing system for drugs, patients.

Theresa Brady (13:25):

BIO has just announced an exciting keynote speaker for our upcoming international convention. Venus Williams will speak about her experience as a patient advocate and her stunning tennis career. Join us June 13th through the 17th in San Diego for four exciting days of networking, programming, and partnering that will shape the future of the biotech industry and our society. Visit bio.org/convention.

Theresa Brady (13:57):

Welcome back. Now we turn to our guests for their take on how the business of paying for drugs has real life consequences for the patients who need them. Anna from the Arthritis Foundation spoke about a requirement called Step Therapy or Fail First.

Anna Hyde (14:23):

We've done a lot of survey work in the last few years to better understand the impact that health coverage is having on our patients and particularly how the relationship between their out of pocket costs and their ability to access their medications, but also other kind of hoops that they may have to go through in order to access their medication. There are a couple of more common protocols that patients often have to go through. One that we talk about a lot because our patients tell us about it a lot is step therapy, which is also oftentimes known as fail first. And essentially what that means is a provider may prescribe a particular medication that they think is going to be best for that patient. When the patient goes to fill that prescription, they find out that their payer or their health plan is going to require them to try a different medication before they can get the one that their provider prescribed.

Anna Hyde (15:09):

In some cases, that's okay. The Arthritis Foundation is not against the use of step therapy. What we care about are appropriate guardrails to make sure that step therapy protocols don't cause adverse reactions in patients. A couple of examples are we have stories of patients who have been required to fail on a drug that they've already failed on before. So that is a guardrail that we think should be in place through legislation. Or otherwise to ensure that if a patient has already tried and failed on a drug, that they do not ever have to try that drug again and they can go straight to getting the drug that their provider prescribed for them in the first place.

Theresa Brady (15:46):

Anna shared a heartbreaking story about an entire family that suffered negative consequences from the fail first requirement.

Anna Hyde (15:53):

One example comes to mind is a mother who not only has arthritis herself, but all of her children also have arthritis. So she's managing healthcare for herself and her children. She had to go through a step therapy process for herself that took so long to resolve that she actually developed a comorbidity that led to more costs over time. And eventually when she was granted the medication and the dosage that her provider had first prescribed, it was only going to last for a few months. So she knew she was going to have to go through the process all over again. On top of that, she had a similar situation with several of her children. So this is hours and hours and hours of work to try to triangulate between all the different stakeholders. And in the meantime, both her health worsened and unfortunately, one of her children also had some worsening health as well, as a result. So that's one story, but unfortunately we have many more like that.


Theresa Brady (16:46):

Our discussion with BIO's Dan Durham illuminated another consequence of the way health coverage is designed. It ends up discriminating against the sickest patients.

Dan Durham (16:57):

What I really view this as is a way to discriminate against sick patients. When the Affordable Care Act passed, they could no longer do that. So a health plan couldn't say, "Well, you have a pre-existing cancer so we're not going to cover that." So instead, since they can discriminate based on health status, they look at high cost prescriptions and discriminate on that basis. So again, going back to this cancer example, they know that if a patient with a cancer has to pay the full list price, $8,000 for their cancer therapy, then they might not want to enroll in that health plan and go elsewhere. So it's really a way since the change in the law that no longer allows for discrimination based on health status. I view this as plans doing it through prescription drug coverage. So the sick patient that needs the therapy to stay alive is being discriminated against. And if they can't afford to pay that co-insurance, then they don't take their medicine and their health deteriorates rapidly.

Dan Durham (18:02):

And so that's the problem we're dealing with, with this discriminatory benefit design where health plans negotiate for their beneficiaries, which they should do. For hospitals, for providers like doctors and the like, the difference is when it comes to prescription drugs, they don't pass on those negotiated savings to the patient because they do that as one way of keeping sick patients out of their health plan. That's the issue here and it's tragic for the patient that can't afford their prescription drugs.

Dan Durham (18:42):

I think the Affordable Care Act was very beneficial to those that are sick because they used to be discriminated against based on their health status. If you had a preexisting condition, you either couldn't buy health insurance at any price – Or if you did have the fortune of getting health insurance, they could exclude any coverage for your preexisting condition whether it be cancer or some other type of chronic disease. They can't do that anymore. So instead they look at other ways to discriminate. And clearly, wiring patients to pay the full list price for drugs as opposed to other providers that they negotiate with is one way of keeping sick patients off the health plan enrollment list.

Theresa Brady (19:27):

Vinay Rathi also talked about insurance plans and their impact on patients.

Vinay Rathi (19:32):

The costs that we're showing are the all in cost that are negotiated by hospitals and insurers. So between the insurer and the patient, they're on the hook for the prices that we're showing. Now, the extent to which patients are obligated to pay a portion of that depends on the design of their plans. For some patients, absolute differences in price may not make a huge difference because they may have spending caps on their plans. And so, if their drug is $10,000 or $20,000 for a year, it may make no difference to what they ultimately pay out of pocket.

Vinay Rathi (20:07):

But for a lot of other patients who may have high deductibles or who may have no spending caps or who have higher co-insurance rates, incremental increases in the price can have a significant impact on the bottom line for them. And there is a lot of good evidence to show, not from our study but from prior work, that the high costs of cancer care definitely cause a lot of strain on patients in terms of compliance or taking on medical debt and psychosocial stress. The extent to which patients are on the hook depends on the design of their insurance plan that they're on at the time of care. But overall, we know that these prices do cause significant issues for patients

Theresa Brady (20:47):

Recognizing the financial hardship faced by so many patients, some drug manufacturers offer copay assistance.

Anna Hyde (20:55):

Copay assistance often comes from the manufacturer of the drug and is a lifeline for many patients. Imagine that you have a drug that costs $2,000 a month, and you're a patient with a plan that has a 20% co-insurance. Well, that adds up to hundreds of dollars a month that you're going to be on the hook for to stay on your drug. And we're not talking about one episode of care. We're talking about a chronic condition and a patient who's going to need to access that drug over and over and over again. So in order to afford that co-insurance, they need some backstop. And so a lot of patients go to the manufacturer and get copay assistance directly from their drug manufacturer that helps them pay for their out of pocket costs.

Theresa Brady (21:42):

This help from drug companies is undermined by a tactic that has grown in recent years called copay accumulator adjustment as Anna explains.

Anna Hyde (21:51):

The practice called accumulator adjustment programs – that is an increasing word that people are becoming more and more familiar with as it grows as a practice – is something that a lot of PBMs are putting into place now that prevent copay assistance from counting towards a patient's out of pocket costs. So they're still on the hook for the full cost of that drug. There is a big question about where that money goes. And there's an argument that's been made by many folks in the patient community that the insurance companies are both extracting that copay assistance from the manufacturers, but also extracting the full out of pocket directly from the patient.

Anna Hyde (22:32):

Before, the manufacturer assistance would count towards the patients out of pocket, cap. So let's say $8,000 a year is the cap. In accumulator program, what happens is the payer is taking that $8,000 from the copay assistance, but then extracting an additional $8,000 from the patient directly because that copay assistance all this time is not counted towards that patient's out of pocket costs. And for a high cost drug, you may go through that copay assistance of $8,000 or whatever it may be in the first 2, 3, 4 months of the plan year. And so you go to the pharmacy counter in April or May not knowing necessarily that your copay assistance all this time has not been counting towards your cost sharing obligations. And the pharmacist says that you need to pay the full cost of the drug. Well, a lot of patients aren't aware that they're in these programs because there's a sort of a fine print situation.

Theresa Brady (23:46):

Navigating through the maze of rules, practices, and programs that dictate what patients pay for drugs can take hours and hours, a luxury many of us don't have. To understand all of the system's complexities requires expertise beyond most patients' capacity. Today we only touched on the surface. Perhaps shedding more light on the myriad of supply chain intermediaries and nebulous relationships among these groups will drive a movement towards a more transparent and equitable system, one that helps more patients get the care they need.

Vinay Rathi (24:24):

The only thing I would add is that, as researchers and physicians, we're really coming at this from the angle of what can we do to better serve our patients. The intent of research like this is to open up and look under the hood of what's driving high drug prices for our patients with cancer and ask ourselves what can we do to make the situation better for them. I really hope that readers who are interested in the study or think about the findings, approach it with that perspective.

Theresa Brady (24:49):

Thank you to all our guests today who helped inform this important discussion. Make sure to subscribe, rate and/or review this podcast and follow us on Twitter, Facebook and LinkedIn at I am Biotech. And subscribe to Good Day BIO at bio.org/goodday. This episode was developed by me, the executive producer, Theresa Brady, and producers Connor McCoy and Marilyn Sawyer. It was engineered and mixed by Jay Goodman, theme music created by Luke Smith and Sam Brady.