The Upward Trajectory of Drug Costs

It’s no secret that drug costs in the U.S. are soaring. We are already the nation that pays the most for prescription drugs in the world, more than other wealthy countries such as Japan, Canada, or Germany. According to Express Scripts, U.S. spending on specialty drugs is projected to increase 67% by the end of 2015 alone.

It’s painfully clear what this means for employers and employees alike: the high costs of drugs creates difficult decisions for plan sponsors as to which medicines to cover and which medicines the patient will have to pay for out of pocket. But ignoring the reality of drug costs or hoping market forces will stabilize the current upward trajectory is sticking one’s head in the sand. Employers must work together with health plans, insurers and pharmacy benefit managers and make informed decisions to enable them to offer affordable pharmacy benefits for their employees—and they need to start taking action now.

Let us first define the four classes of drugs being affected by rising costs, with the caveat that you will likely find variations in these definitions depending on the source or organization.

Brand name drugs:

These are drugs that are protected by a patent and are marketed under a proprietary, trademark-protected name. Their bioequivalents are generic drugs.

Generic drugs:

Generic drugs are manufactured without a license from the original innovator company after the expiration of the patent and marketed under a non-proprietary or approved name. They have the same active ingredients, quality, dosage strength and form, performance, usage directions, and intended use as their brand name equivalents. They are typically as effective as brand-name drugs but carry a much lower cost, and for that reason are often the drug of choice for lower income patients.

Specialty drugs:

Also called specialty pharmaceuticals, these drugs are typically used to treat serious, chronic, or life-threatening diseases and often carry a much higher cost than traditional drugs. They also require special handling, administration, and distribution. Examples of conditions treated by specialty drugs include cancer, multiple sclerosis, rheumatoid arthritis, and growth hormone deficiency.

Biosimilar drugs:

Biosimilars are one of two new biological product classes, manufactured via biotechnology, derived from natural sources including humans, animals and microorganisms or, in some cases, produced synthetically. While conventional drugs are made of chemical substances, biological drug products have larger molecules and are more complex in structure. Biosimilars, in particular, are approved by the FDA because they are highly similar to an already FDA-approved biological product.

Express Scripts estimates that three out of the four costliest prescription therapy classes will be specialty conditions. For example, they expect that the cost of treatment for Hepatitis C will quadruple over the next three years. Cancer, multiple sclerosis, and inflammatory conditions are expected to command higher prices than any other specialty class, with the possible exception of diabetes, which has been the costliest specialty therapy class since 2011. Specialty pharmaceuticals represent a rapidly growing share of public and private health plans’ total drug expenditures. Costs easily run in the thousands of dollars per month and can exceed $100,000 a year for some drugs. Below are the 3 of the most expensive drugs.

Why are the costs of drugs, especially the specialty drugs, spinning out of control? Drug manufacturers typically point to the complexity of R&D in biological fields, government regulations, and, of course, shareholder expectations for strong ROI.

Companies are taking advantage of a mix of laws that force insurers to include essentially all expensive drugs in their policies, and a philosophy that demands that every new health care product be available to everyone, no matter how little it helps or how much it costs.

-Peter Bach, a physician and director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center

Mr. Bach notes that drug manufacturers are buying up the rights to inexpensive generic drugs that have been on the market for a long time in order to lock out their competitors, and raise prices. To make matters still worse, the exorbitant costs of these specialty drugs get passed down to all of us, from employer to employee to insurance plans.

In Europe, governments routinely reject those drugs that are very costly and no more effective than their less expensive competition. As a result, prescription drug costs are 50 percent lower in Europe than they are in the United States, according to a 2008 McKinsey study. In other words, rejection of the system is possible and proven.

Bach believes that the U.S. has two primary options:

Option A: We release insurers and government programs from the requirement to include all expensive drugs in their plans. This will almost certainly cause manufacturers to lower their prices so that they can continue to sell their products.

Option B: We demand that U.S. policymakers set drug prices equal to those of Western Europe.

Express Scripts, one of the pharmacy benefit managers that has successfully pushed back against drug manufacturers, says that health plan sponsors can achieve significant savings by working with pharmacies to take control of the pharmacy benefit plans. For example, plan sponsors who implemented Express Scripts’ cost management and patient care programs saw higher medication adherence rates and 50% lower increases in specialty drug spending than sponsors who did not. Using specialty pharmacies can also help optimize adherence levels and increase the number of concurrent therapy days, which results in savings when the patient is treated and/or cured in a shorter period of time.

Additionally, some sources say a better, more efficient research and production pathway for biosimilars could alleviate the rising costs of specialty medications, since biosimilars are safe and effective, and much less costly. (Express Scripts recently projected that the U.S. would save $250 billion between 2014 and 2024 if the eleven most likely biosimilar candidates are launched domestically.)

There is, however, some good news: according to Express Scripts’ forecast, eight of the top ten traditional therapy classes—drugs that treat common conditions such as high cholesterol and depression—will see lower costs. These costs are expected to decline 4% by the end of 2015, largely because of the availability of generic medications.

As with any great challenge, there are also great opportunities. By working together, the various stakeholders from employers to insurers to pharmacy benefit managers can achieve significant improvements and optimization in both prices and medication adherence. Supporting efforts such as employee wellness programs and other preventive activities can help cut the costs of drugs by lowering individual workers’ need to take medications in the first place.

Alan Wang
Alan Wang is the President of UBF and serves as the lead consultant. He has delivered the UBF solution set throughout the world and is highly regarded for his areas of expertise. You can follow him on Twitter @UBFconsulting.