Conference Summary—Pharmaceutical Pricing Practices, Utilization, and Costs

By Kerry Kemp,
Health Systems Research, Inc.

Table of Contents

Summary Overview

I. What's the Problem? A Synthesis of Research on Pharmaceutical Cost Pressures and Trends

II. Pricing Practices in the Pharmaceutical Market

III. Pharmaceutical Utilization Issues

IV. Strategies for Controlling Costs and Increasing Value From Pharmaceutical Expenditures

Overview

On August 8^th and 9^th, 2000, the Office of the Assistant Secretary for Planning and Evaluation (ASPE), U.S. Department of Health and Human Services (DHHS), sponsored a conference at the request of the White House to clarify what is known about pricing practices within the pharmaceutical industry and the distribution chain.

ASPE's hope was that the 2-day conference would (1) clarify what is known about prescription drug pricing, utilization, and costs; (2) bring together a wide range of people to share information, insights, and perspectives strategies for realizing the benefits of prescription drugs while controlling the growth in expenditures; and (3) identify questions that are critical to address so that policymakers can make more informed decisions regarding prescription drugs in the coming years.

The conference had four main sessions:

1. What's the Problem? A Synthesis of Research on Pharmaceutical Cost Pressures and Trends;
2. Pricing Practices in the Pharmaceutical Market;
3. Pharmaceutical Utilization Issues; and
4. Strategies for Controlling Costs and Increasing Value From Pharmaceutical Expenditures.

Each session included both formal presentations and discussion by a diverse panel of about 25 people representing a wide range of stakeholders--including drug manufacturers, pharmacy benefit managers (PBMs), purchasers, health care providers, consumer advocates--as well as prescription drug researchers and general health policy analysts. The idea was to use the formal presentations as a springboard for panel members and the general audience to share their insights and perspectives.

This report summarizes the discussion at the prescription drug conference, highlights the key points raised by conference participants, and identifies unanswered questions that participants suggested be addressed as part of a research agenda in this area.

I. What's the Problem? A Synthesis of Research on Pharmaceutical Cost Pressures and Trends

The first session was an overview session highlighting research on recent trends in U.S. prescription drug expenditures and the factors and forces driving these trends. To set the context, three people gave formal presentations:

• Mark Merlis, M.A., Institute for Health Policy Solutions, reviewed four research studies on the recent double-digit growth in U.S. prescription drug expenditures and factors contributing to that growth.
  
  
• Ernst Berndt, Ph.D., Sloan School of Management, Massachusetts Institute of Technology, hypothesized that four factors, including the expansion of third-party coverage for prescription drugs and aggressive marketing efforts, have contributed to the rapid escalation in U.S. prescription drug expenditures.
  
  
• Francis Palumbo, Ph.D., J.D., Center on Drugs and Public Policy, University of Maryland, presented estimates of the number of new brand-name prescription drugs and generic prescription drugs likely to come on the market by 2004.

The session also included a Panel Discussion and a discussion of Research Questions.

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1. Explaining the Growth in Prescription Drug Spending: A Review of Recent Studies--Mark Merlis, M.A.

Mr. Merlis, citing data from the U.S. Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)) (HCFA(now known as CMS)), reported that U.S. prescription drug spending grew at double the rate of total U.S. health spending between 1993 and 1998. Prescription drugs currently account for one-eighth of private insurance expenditures and one-tenth of Medicaid expenditures.

Mr. Merlis reviewed four recent studies of U.S. expenditures on prescription drugs to see whether there were any points of consensus in the studies and to explain why the studies differ in their conclusions. Three of the studies--one by Express Scripts, one by Merck-Medco, and one by Brandeis University and PCS Systems--relied on data on privately insured populations supplied by pharmacy benefit managers (PBMs). The fourth study, prepared by the Barents Group for the National Institute of Health Care Management, relied on data for the entire U.S. population.

All of the studies reviewed by Mr. Merlis suggest that the following factors account for the recent double-digit increases in U.S. prescription drug expenditures:

• A change in the mix of drugs utilized--i.e., a shift from older drugs to newer, more expensive drugs, and within the class of older drugs, a shift from less expensive drugs to more expensive ones.
  
  
• Unit price inflation--i.e., increases in the cost of a given pill over time (the price of a constant market basket of drugs has been going up about 4% per year).
  
  
• Four volume-related factors: (1) more people are getting more prescriptions; (2) those who do get prescriptions get more prescriptions a year; (3) each prescription is for a longer period on average; and (4) within each day's supply of a prescription drug, the strength and dosage are increasing.

The studies' conclusions about the relative importance of these factors differ, because studies group some of these factors together in different ways. Nonetheless, all of the studies suggest that a large portion of the prescription drug spending and spending growth in recent years is due to drugs already on the market. According to Mr. Merlis, spending increases among the privately insured populations in the Express-Scripts and Brandeis studies break down into the following components: cost increases for existing drugs, 40%; more prescriptions for existing drugs, 20%; prescriptions for new(1) drugs, 20%; higher cost of new drugs, 20%. These two studies suggest that there has been dramatic growth in the utilization of drugs in a few therapeutic categories--cardiovascular, gastrointestinal, psychotherapeutic, anti-infective, and antidiabetic medications--plus fairly uniform cost increases in every therapeutic category.

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2. Factors Driving Pharmaceutical Expenditures: An Overview--Ernst Berndt, Ph.D.

Dr. Berndt said that, according to data from IMS Health, U.S. sales of prescription drugs have grown about 13% a year since 1987. Dr. Berndt hypothesized that there are four reasons behind this growth:

• The importance of being unimportant. Prescription drugs have enjoyed an era of benign neglect because they have accounted for a relatively small proportion of U.S. health expenditures in comparison with hospital care and physician fees. That share has been increasing rapidly, though, and the era of benign neglect is probably over.
  
  
• Growth in third-party insurance coverage for prescription drugs, leading to increased demand. In 1965, less than 10% of all prescription drug payments were paid by third-party insurers; by 1998, the figure had grown to 75%.
  
  
• Introduction of new pharmaceutical products. According to IMS Health, about 43% of the growth in the U.S. pharmaceutical expenditures since 1995 is due to the introduction of new products.
  
  
• Aggressive pharmaceutical technology transfer and marketing efforts. Marketing-to-sales ratios for pharmaceuticals are fairly high (10-20%), in part because pharmaceuticals are "experience goods" (i.e., goods that consumers have to try to see if they like them). In the past, pharmaceutical marketing efforts broke down as follows: detailing and sampling (75-80%), advertising in medical journals (10%), direct-to-consumer (DTC) ads (5%), and sponsorship of continuing education (10%). DTC marketing of prescription drugs, especially drugs that treat widely prevalent, non-life-threatening chronic conditions, has increased dramatically in recent years and now probably represents 10-20% of marketing efforts.

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3. Projections of Drug Approvals, Patent Expirations, and Generic Entry from 2000 to 2004--Francis Palumbo, Ph.D., J.D.

According to Dr. Palumbo, 643 new prescription drugs are now in Phase II or Phase III clinical trials or are awaiting the Food and Drug Administration's (FDA) approval and potentially could enter the U.S. market by 2004. Many of these 643 products will probably not make it to the market, though, because later human trials will demonstrate lower than anticipated efficacy or unfavorable side effect profiles. Dr. Palumbo and his colleagues estimated that the patents will expire on about 45 brand-name prescription drugs each year from 2000 through 2004, potentially opening the market to generic competition. He noted, however, that brand-name drug manufacturers have several defensive strategies that they can use to block the market entry of generic products or discourage the utilization of generic products.

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4. Panel Discussions: U.S. Pharmaceutical Cost Pressures and Trends

The panel discussions in this session addressed a range of different issues. Comments pertaining specifically to topics raised by the formal presenters in this session are summarized below. Additional comments by drug manufacturers, consumer representatives, health care providers, or other stakeholders or researchers on the panel are included, where appropriate, in the summaries of other conference sessions.

What Difference Does The Rapid Growth In U.S. Pharmaceutical Spending Make?

Several panel members offered their views on the question of what difference the rapid growth in U.S. expenditures on prescription drugs makes. They noted that if aggregate U.S. expenditures on prescription drugs go up 15-20% a year and nothing else changes, the fraction of people who are unable to avail themselves of the drugs will grow.

Double-digit growth in the utilization and costs of pharmaceuticals--unless that growth is perceived to have value--may lead both public and private sectors entities to cut back the health benefits they offer. Programs such as Medicaid already are struggling to pay for prescription drugs. Employers, especially small employers, are also very concerned about rising prescription drug costs and their ability to offer health insurance to their employees. Already, many elderly and uninsured people cannot afford prescription drugs. Currently, about 60 million people in the United States, or about 1 in 4 persons, have no insurance coverage for prescription drugs. One-third of Medicare beneficiaries have no prescription drug insurance, and many others have poor or unstable coverage.

Key questions facing U.S. policymakers are: How can we make drugs affordable to the people who need them? And who should pay for prescription drugs? Should pharmacy benefits be considered a privilege or an entitlement? If U.S. policymakers succeed in making drugs more affordable through a Medicare prescription drug benefit, the utilization of prescription drugs will increase--even if the drugs are used appropriately--and costs will rise accordingly. For that reason, the "billion dollar question," many panel members said, is whether society is getting adequate "value" (e.g., medical offsets or other benefits) from expenditures on prescription drugs.

Limitations of Studies Identifying Factors Contrubuting to Trends in U.S. Expenditures on Prescription Drugs

Panel members agreed that studies of factors contributing to the increases in aggregate U.S. prescription drug expenditures, such as those reviewed by Mr. Merlis, cannot answer the question of whether cost or utilization levels are appropriate. One researcher on the panel suggested that after policymakers ascertain what the trends in U.S. drug expenditures are, they should (1) decompose the factors contributing to the trends; (2) ask what forces lie behind these factors; (3) determine what difference it makes to people's health that we are seeing these trends; (4) ask what could be done to slow the growth in aggregate U.S. expenditures on prescription drugs; and (5) ask what should be done to slow aggregate spending.

Forces Contributing to Trends in U.S. Prescription Drug Expenditures

There was discussion by panel members of some of the forces contributing to increases in U.S. prescription drug expenditures.

Introduction of new prescription drugs
Much of the panel's discussion centered on the effects of new drugs on U.S. prescription drug expenditures. An important question for U.S. policymakers, some panel members said, is: How will the emergence of costly new prescription drugs affect U.S. expenditures on prescription drugs in the coming years?

A Wall Street analyst said that large molecule drugs (proteins) that have to be injected or administered intravenously and typically cost about $5,000-$15,000 per year (vs. small molecule drugs usually taken by pill, which cost $600-$900 per year) can be expected to proliferate in the market in the next 5 or 10 years. And in the next 20 years, the contribution that such drugs will make to total utilization and costs will increase dramatically.

Some panel members argued that it is important not to lose sight of how important new discoveries and new drugs are in terms of improving patients' health status. One panel member said that post-1992 drugs account for about 35% of current expenditures and 80% of the growth in expenditures--would we want to go back and shut off the valve in 1992? On the other hand, another panel member asked: What if we shut off the valve and used the savings to provide health insurance for uninsured children, elderly people, etc.? That, he said, is a choice that society is facing.

Strategies used by brand-name drug companies to encourage the utilization of brand-name rather than generic products
Several panel members suggested that brand-name prescription drug manufacturers use many strategies to encourage the utilization of brand-name rather than generic products:

• Intellectual property rights. Representatives of the generic drug industry, consumer representatives, and researchers noted that brand-name drug manufacturers often use patent rights (including trivial patents) and nonpatent forms of providing market exclusivity rights (sui generis rights, exclusivity rights, orphan drug exclusivity, pediatric drug exclusivity) to block the market entry of generics. A generic manufacturer with 52 pending generic products reported that 6-month exclusivity arrangements are blocking the market entry of at least 35 of its products. Several panel members suggested that it is important for U.S. policymakers to examine the tradeoffs in using patent extensions and exclusivity arrangements as the incentive for innovation on pediatric medications, etc., and policy makers must consider how changes in the system would affect incentives for research and development.
  
  
• Aggressive marketing of brand-name prescription drugs. Manufacturers aggressively market brand-name prescription drugs to physicians (e.g., through detailing and sampling) and are increasingly marketing them directly to consumers.
  
  
• Rebates for brand-name prescription drugs. Brand-name drug manufacturers frequently offer rebates to PBMs and other volume purchasers of prescription drugs to drive market share toward specific brand-name products.
  

Growth in third-party insurance coverage for prescription drugs and insured patients' insensitivity to price
Several panelists emphasized that is not simply growth in third-party coverage that has contributed to the increased utilization of prescription drugs, but also the fact that patients' sensitivity to price has been reduced by the change in patient cost-sharing arrangements from coinsurance to small copayments under managed care. People who are required to pay only a small copayment ($5 per prescription) are insensitive to the price, so the price of a prescription drug does not constrain their utilization. An important question facing U.S. policymakers, panelists noted, is: What effect will the enactment of a Medicare prescription drug benefit have on Medicare and U.S. prescription drug expenditures? Another important question is: What effect will the enactment of a Medicare prescription drug benefit have on Medicare and U.S. expenditures for health services other than prescription drugs? Additional comments about the effects of insurance coverage were made in the session on Pharmaceutical Utilization Issues (see discussion on page 16).

Fragmentation of information, financial incentives, and decisions about drugs
It was generally agreed that there is a disconnect between the parties that are responsible for making decisions about the use of prescription drugs and the information and incentives they have and the parties that are responsible for paying the bills for prescription drugs and the information and incentives they have. Physicians have information on adverse effects, safety, and efficacy, but they seldom know the costs of drugs they are prescribing or think costs should be a factor in their decisions about which drugs to prescribe. Drug manufacturers, PBMs, and some health plans have information on costs, but they lack information about which drugs are best for individual patients. In some cases, physicians who contract with a managed care organization do not feel any responsibility for the costs of prescription drugs because the drug benefit is a carveout benefit managed by a PBM. In other cases, physicians are asked by a health maintenance organization (HMO) to assume financial risk for their HMO patients' drug utilization, but the physicians have insufficient information or power to manage this risk successfully. Patients in managed care plans are insensitive to the costs of prescription drugs and generally rely on their doctors for information about which drugs are appropriate for them. There are few reliable sources of information for consumers on which prescription drugs are most appropriate for them and represent the best value for the money. All of this fragmentation needs to be reduced, so that consumers, physicians, and others making decisions about utilization have access to and are able to act upon information about the risks, benefits, and costs of pharmaceutical products.

Looking Into the Crystal Ball: What Will the Future Look Like?

What will the future look like? Panel members suggested that U.S. policymakers should consider that there will be enormous growth in the size of the U.S. elderly population in the next 10, 15, or 20 years. The introduction of yet to be discovered, probably very costly, human genomics pharmaceutical products is likely to have huge effects on patients' health, as well as on health care costs and utilization. The Internet and other technologies will transform the way people obtain information and health care products through the growth of online pharmacies virtual medicine sites that help patients manage their disease, etc. And finally, the enactment of a Medicare prescription drug benefit is likely to transform the U.S. health care system in ways that we can only begin to imagine.

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5. Research Questions: U.S. Pharmaceutical Cost Pressures and Trends

Conference participants suggested that the following questions might be addressed as part of a research agenda in the area of pharmaceutical cost pressures and trends:

• What are the components of the recent double-digit growth in U.S. expenditures on prescription drugs? What policy implications flow from the finding that one factor or another--e.g., change in the mix of drugs, unit price inflation, or increased utilization of prescription--has contributed to this growth?
  
  
• What could policymakers do to slow total U.S. spending on prescription drugs? What intended and unintended effects would various strategies for slowing aggregate spending have?
  
  
• What should policymakers do to slow total U.S. spending on prescription drugs?
  
  
• What is the value of U.S. expenditures on prescription drugs from a societal perspective? In particular, how does society value these expenditures in the context of the health care system, social welfare objectives, and economic growth?
  
  
• What might be done to improve the functioning and competitiveness of the U.S. pharmaceutical market? In particular, what might be done to improve the information available to decisionmakers and align the economic incentives of various parties--Federal Government agencies, drug manufacturers, physicians, patients, PBMs, health plans--to achieve the maximum safety, value, and innovation of prescription drugs?
  
  
• What effects would the establishment of a Medicare prescription drug benefit have on the utilization and costs of prescription drugs in the United States? What effects would it have on the utilization and costs of other health services?

1 - "New" drugs are defined by the Brandeis Study as any drug introduced in 1995 or later, and by the Express-Scripts Study as any drug introduced in 1996 or later.

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