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War on Drugs - we all pay for it!
Drug utilization management and its collateral damage
The "war on drugs" costs the US $93bn every year! I am not talking about the $51bn dollar the US spends on activities to curb the production and distribution of illegal substances, but about the costly war that is raging between health care payers and drug companies. Pharma companies are launching more and more innovative drugs, but they often come at a very high price point. To protect themselves from exploding costs for prescription drugs, payers are employing several tactics to steer patients away from these costly drugs. Encountering a mix of incentives and restrictions - called utilization management, patients are having to navigate the growing bureaucracy or, as about 20% of people do, give up and never pick up their prescriptions. Obviously this is not in the interest of the drug manufacturers, as they are missing out of potential sales. So they are not sleeping and are responding with their own tactics: Let's have a look at which strategies payers & drug manufactures use to go at each other...
Utilization management tactics
Let's first have a look at common utilization management tactics: While health plans have to provide comprehensive prescription drug coverage, they don't have to cover any drug available in the market. To restrict the drugs covered, health plans design a formulary, which is a list of prescription drugs that your health plan will reimburse. Over the last few years one can observe some interesting trends how formularies have evolved:
Fewer drugs are being covered: An analysis by GoodRx researchers shows, that the number of drugs covered by Medicare Part D (the pharmacy benefit of Medicare) has fallen by 18 percentage points.
Formularies are more restrictive: Even if a drug is included in the formulary, the health plan can apply certain restrictions, such as prior authorizations (PAs) or step therapy. Prior authorization means that the patient first needs to get approval from their insurance before the insurance will reimburse the prescription. This often involves quite some paperwork from the patient and physician, so often they have to think twice about whether this drug cannot be replaced with an alternative medication. Step therapy is a similar measure, but in this case an alternative drug has to be tried first before the drug with this restriction can be covered. On average the number of drugs with restrictions has increased from 27% to 47%!
Cost sharing is increasing - a lot: As I mentioned in my previous article the share of people covered under a high deductible health plan is on the rise. The deductible usually also applies for pharmacy benefits and some plans even have dedicated pharmacy benefit deductibles - in fact the number of plans with pharmacy has have increased from 14% in 2014 to 44% in 2020. In addition to deductibles, health plans are applying stricter tiers to their drugs. Drug tiers are a way for plans to apply different co-pays for different types of drugs. Low cost generics can often be found in the lower tier with a smaller co-pay, but more and more drugs are pushed to higher tiers with a higher co-pay or with coinsurance. The number of drugs in the higher 4+ tiers have increased from 20% in 2012 to about 50% in 2020! Finally, the absolute cost share of drugs has also gone up: this might be a bit more subtle, but cost shares are often calculated using the list price of a drug, not the price the health plan actually pays. List prices have gone up around 34% since 2014. Much faster than inflation...
All these utilization management tactics should set incentives to utilize lower costs drugs. But drug manufacturers have come up with their own strategies to counter!
Pharma's response to utilization management
But pharma companies are not sleeping, they are reacting to these trends:
Copay cards: To help patients with the increased out of pocket costs for certain speciality drugs, pharma companies are providing "copay cards". These are basically vouchers that a patient can use to get back their copay for a certain drug from the pharmacy. This obviously reduces the financial incentive to choose a lower tier drug from the patients perspective. In 2018 manufacturers estimated to spend $13-15bn on copay financial support.
Direct-to-Consumer Advertisements: The US is only one of two countries in the world that allows advertisements for prescription drugs. And they seem to work: there are several studies how prescription advertisements can nudge patients to ask their doctors for a certain prescription drugs. Advertisements also aim to educate about certain diseases that someone might not even know is a condition (thanks pharma for all the "premature ejaculation" ads) and they also want to inform patients with chronic conditions about potential alternative treatments. Here is a great article digging deeper into this topic!
Administrative support: Pharma companies are investing in administrative support programs - often called hub services - to help patients and physicians navigate prior authorizations and other restrictions. These hubs include call centers and paperwork automation. An interesting service here is CoverMyMeds which was bought for $1.1bn by McKesson. This electronic prior authorization tool connects with different payers and lets physicians digitally submit prior authorizations. The service is free for the physicians and makes a large part of its revenue form drug manufacturers.
And so we go back and forth - more restrictions, responded with creative ways to get around it and only to be faced with tighter restrictions... But as any war, this one also causes collateral damage.
Who bears the costs?
In the end patients & doctors a burdened the consequences of utilization management. Patients delaying or abandoning their treatment because of the financial costs or the complex paperwork. Approximately 20 percent of prescriptions in the US are never filled. This is a tragedy and will only result in more costs and bad health outcomes further down the road. There are plenty of studies confirming the economic burden on the health care system of delayed pharmaceutical treatment such as for hepatitis C, diabetes or coronary heart disease.
But also physicians are getting inundated with the paperwork from utilization management. In the end its on them helping their patients to obtain prior authorization. On average a physician spends 15h a week on prior authorizations! This is time diverted from actually helping patients.
If you want to dive deeper into the overall costs, I can really recommend the study from Health Affairs.
What could be done?
But does this war have to escalate? What are alternatives to this model? I think there are two interesting approaches I would like to explore a bit further:
Value based/ outcome based reimbursements for drug treatments - similar to value based care that gets reimbursed by capitation, arrangements could be made to define outcome benchmarks for certain drugs.
Direct to consumer channels - because of the restrictions and high co-pays many people are opting to paying cash for their drugs. Coupons like GoodRx provide patients access to lower prices than the list prices and it can make financial sense to pay outside insurance. However, GoodRx and other coupons still rely on pharmacy benefit managers, who take a rather large cut in the drug supply chain. I would think there are opportunities to further cut out the middlemen and establish more direct relationships between drug manufacturers and patients.
Maybe both approaches could even be combined and provide a better pharmacy benefit for employers than the traditional benefits offered by health plans... Let me know your thoughts!
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