Guest Blog Post: Linda Davis – Reaction to the Campaign for Sustainable Rx Pricing (CSRxP) Policy White Paper
Tired of Hearing about Specialty Drug Prices Yet?
Almost every day there is an article in the media criticizing pharmaceutical manufacturers for their high prices. And, just about every stakeholder complains about these rising prices including pharmacy benefits managers (PBMs), health plans, physicians, hospitals, legislators, regulators, presidential candidates, and consumer advocates. It seems there are always new groups forming to address drug prices.
CSRxP Reacts to Manufacturers’ Drug Prices
The Campaign for Sustainable Rx Pricing (CSRxP), a multi-stakeholder group, founded by the National Coalition on Health Care, is the latest organization trying to address drug prices. They published their “Proposals for Change,” a three- pronged approach, with a single focus on drug prices in May of 2016. While focusing on price addresses a key driver of unsustainable and unaffordable health care costs, it misses the bigger picture; every player in the drug supply chain benefits from high drug prices. These groups also contribute to high prices, confusing financial arrangements, and frequently changing and opaque prices at every point along the chain. The singular focus by CSRxP on price may be, in part, because its members include supply chain players such as health plans, hospitals, physician organizations, and PBMs.
All Players Along the Supply Chain Contribute to the Problem of High Prices
Drugs are distributed along a complex and convoluted supply chain of wholesalers, retail pharmacies, mail order pharmacies, specialty pharmacies, hospitals, infusion centers, physicians, hubs, and specialty pharmacies.
Along the way, there are myriad organizations managing financial transactions and influencing patient and physician behavior. The higher the price of the drugs, the more organizations can charge for their services in the form of “spread,” rebates, and administrative fees, often in the form of percentages. As a percentage of drugs costs, almost any amount can look small.
Health Plan Role
Health plans have not traditionally managed pharmacy costs aggressively. With the increase in prices over the last several years, they have begun to invest in developing new capabilities. The Action Group’s Specialty Pharmacy Learning and Action Network participants have found half of their specialty pharmacy costs are drugs administered by clinicians and paid for by health plans.
They also found that health plans’ ability and management of specialty drug costs is highly variable including:
- Knowledge and experience in developing formularies, preferred drug lists, and in negotiating with manufacturers on drug price, value and rebates.
- Willingness to require physicians to adhere to prior authorization processes for certain drugs.
- Ability to manage patient adherence and utilization.
- Whether providers are required to administer drugs in the lowest cost site of care.
- Whether manufacturer rebates are shared with their customers.
- Whether providers are required to submit NDC codes on drugs they administer to better identify the specific brand, dosage, and number of units administered.
- Claims systems’ ability to collect, aggregate and store data related to drugs and drug administration.
- Staff knowledge and ability to analyze, manipulate and utilize data to identify variation, trends, costs, and prices.
- Knowledge of the complexities of the pharmaceutical supply chain.
- Leverage with provider systems that have market power negotiating how and what they are paid for the drugs they administer to patients.
- Ability to anticipate the next new development by the ever-expanding number and type of players in the supply chain.
Further, health plans may decide it’s not worth the cost to hire the talent, implement the systems, and administer the programs necessary to manage these drugs if they aren’t directly benefiting from managing these costs, especially if customers aren’t demanding them. They also may benefit from higher rebates on higher priced drugs through manufacturer negotiations. In today’s environment, higher claim costs or medical loss ratio (MLR) results in higher administrative costs.
PBMs Benefit from High Prices
PBMs have become highly consolidated, with the three largest holding tremendous market power in negotiating with clients. They almost always refuse to be the “fiduciary” for their clients, meaning they won’t be legally responsible to protect the financial interests of their clients. The PBM role is to manage and reduce prices and utilization for clients; however, they negotiate drug prices with manufacturers who pay rebates, typically higher rebates on higher-priced drugs.
Pharmacies, including Specialty Pharmacies, Benefit from High Prices
Almost all PBMs own at least two distribution channels including mail order pharmacies, specialty pharmacies, and retail pharmacies. Revenue from these channels is based primarily on “spread,” which is the difference between acquisition cost and what they get paid for these drugs by their customers, including employers. The higher the price of drugs, the bigger the spread can be. They also realize increased revenue from increased utilization. This incentive is in direct conflict with their role as a manager of overall pharmacy costs. Non-PBM-owned specialty pharmacies also realize increased revenue through increased prices and utilization.
Hospitals Benefit from High Prices
Hospitals that own physician practices also benefit from higher drug prices. They mark-up drug acquisition costs and bundle it into pricing to medical carriers without identifying the specific drug, dosage, or number of units, making it impossible for health plans and employers to know what is being administered. Hospitals with 340B status can purchase discounted drugs and charge greatly higher prices to commercial payers and employers.
Many hospitals have shifted care that formerly was provided in physician offices to outpatient hospital departments, billing health plans on using hospital claims and billing standards that aren’t as easily managed because of the lack of specificity related to drugs. Physicians who administer drugs in their offices also benefit from marking up prices.
A Single Focus on Drug Price Misses the Bigger Picture
The CSRxP’s White Paper includes three prongs to address prices include increasing transparency, promoting competition and innovation. Within each of these prongs, several specific actions are recommended that target manufacturers, the FDA, and federal agencies. While their proposal is well thought out and includes an extensive list of goals and actions, it misses some key points related to other stakeholders along the supply chain including:
- The lack of transparency of pricing and profits of PBMs, specialty pharmacies, hospitals, physicians, health plans, and a growing list of players participating in delivering and managing these drugs.
- Cost variation of clinician-administered drugs, depending on the providers’ market power and site of care, e.g., hospital outpatient vs. physician office.The role and amount of rebates paid to health plans and PBMs.
- The impact of manufacturers’ patient financial support programs that cover patient costs but are applied to patient deductibles and bypass incentives built into employers’ benefit plan designs.
- The impact of 340B discount programs on the profits of qualified hospitals.
What Does this Mean for Employers?
While the high prices charged for drugs are the root cause of many of the problems in the specialty pharmacy world, employers have little influence on them in the short term. In the meantime, they should support the goals and actions of the CSRxP, and learn about relationships within the drug distribution and payment supply chains by asking vendors questions about revenue sources, how they make their margins, and inherent incentives in their financial relationships with other stakeholders.