Thanks to remarkable advances in modern health care attributable to science, engineering, and medicine, it is now possible to cure or manage illnesses that were long deemed untreatable. At the same time, however, the United States is facing the vexing challenge of a seemingly uncontrolled rise in the cost of health care. Total medical expenditures are rapidly approaching 20 percent of the gross domestic product and are crowding out other priorities of national importance. The use of increasingly expensive prescription drugs is a significant part of this problem, making the cost of biopharmaceuticals a serious national concern with broad political implications. Especially with the highly visible and very large price increases for prescription drugs that have occurred in recent years, finding a way to make prescription medicines—and health care at large—more affordable for everyone has become a socioeconomic imperative.
Availability relates to the existence of certain types of drugs in the market place, and is alone not sufficient to control costs. Affordability, however, is a complex function of factors, including not just the prices of the drugs themselves, but also the details of an individual’s insurance coverage and the number of medical conditions that an individual or family confronts. Therefore, any solution to the affordability issue will require considering all of these factors together. The current high and increasing costs of prescription drugs—coupled with the broader trends in overall health care costs—is unsustainable to society as a whole.
A COMPLEX SYSTEM OF SYSTEMS
The biopharmaceutical sector1 of the United States has a market structure that is more complex than any other sector in health care—and perhaps more complex than any other sector in the entire economy. Conventional markets involve relatively straightforward transactions with products and cash flows that can be readily traced. Producers make or import products which are then generally distributed to wholesalers who resell them to retailers who make final sales to consumers who in turn pay the bills.
Prescription drug markets are far more complex, beginning with the concept of a “prescription.” Both federal and state laws regulate consumer access to certain classes of drugs, requiring the approval of a clinician before the drug can be sold to the patient. Furthermore, a prescription drug may only be purchased under the supervision of a government-licensed pharmacist. While some drugs can be acquired “over the counter,” or without a prescription (which is how most other consumer goods are bought), the purchase of any medicine is considered to be potentially harmful and may warrant the approval of a clinician.
The U.S. government stringently regulates which prescription drugs are available for sale. Before a drug is approved for use, it must undergo an extensive review by the U.S. Food and Drug Administration (FDA) for safety and efficacy. If approved, its subsequent use is monitored in order to identify any adverse effects that were not detected in the original approval process. Both new branded drugs and their generic competitors (drugs usually made by companies other than the original patent holder after the patent has expired) are subjected to the FDA’s approval process.
This complexity is compounded by the structure of the health insurance market, which is more complicated for prescription drugs than for other aspects of health care. Medicines are sold by retail pharmacies or by mail-order providers who purchase the drugs from wholesalers, who in turn purchase them from manufacturers, much as in a regular consumer market. But in the case of prescription drugs, health insurance plans intervene to help pay for the drugs, and there are additional layers of financial intermediaries. The most prominent of these intermediaries are the pharmacy benefit managers (PBMs), who interact with prescription drug insurers—and sometimes directly with employers offering health insurance plans—to negotiate prices both with manufacturers and with retail pharmacies. Adding further to the complexity, drug manufacturers very commonly offer price rebates to PBMs, but no meaningful information exists to determine the size of those
1 The term “biopharmaceutical sector” used in this report encompasses a wide range of participants from researchers and physicians to industrial producers, from public and private payers to intermediaries such as pharmacy benefit managers, and from health care organizations and care providers who can prescribe medications to patient advocacy organizations.
rebates, what portion of the rebates eventually results in lower prices for patients, or the portion that the PBMs retain as profit.
Adding still another layer of complexity to the system, biopharmaceutical companies advertise their products directly to consumers via television, the Web, and other media. In some cases, the companies also offer patients copay coupons to offset the cost sharing of payments required by most prescription drug insurance plans. This commonly occurs when a branded (and relatively high priced) drug is placed in a high cost-sharing tier by insurance plans and a lower-cost (commonly generic) alternative drug is placed in a low cost-sharing tier by those same plans. The net effect of this cost-sharing model is to steer the consumer to choose the more expensive drug, with the additional cost being incurred by the insurer (thus raising premiums).
The resulting complexity of the system makes it difficult to understand the contributions of the various factors that affect drug costs, a difficulty only magnified by the fact that there is very little publicly available information concerning the financial transactions among the various participants in the biopharmaceutical supply chain. The sort of meaningful data required for developing a clear understanding of even the most basic issues, such as the distribution of funds among participants in the production chain (manufacturers, wholesalers, and retailers) and the financing chain (manufacturers, PBMs, insurance plans, and retailers), simply do not exist or are not accessible. This lack of transparency frequently makes it impossible to pinpoint the root causes of increasing drug prices. Thus, the various participants in these processes can plausibly deny responsibility and blame others for price increases. Moreover, some of the participants in the supply chain vigorously assert that making these transactions transparent would harm consumers by further increasing costs, although the validity of this claim largely depends on the specific information that might be disclosed and to whom it is disclosed.
In sum, the biopharmaceutical sector is fraught with discordant viewpoints, divergent priorities, and conflicts of interest that can impede the provision of quality health care, especially to socioeconomically disadvantaged populations. Beyond all this complexity and uncertainty, with the vast and ever-increasing amount of material available on the Web, television, and other sources, patients frequently find themselves confronted with information regarding treatment options that may contradict the information they receive from their clinicians, even in the case of very specific health conditions. Other factors, including a patient’s personal financial circumstances and insurance coverage, compound the difficulties that clinicians, patients, and their families face when attempting to make sound health care decisions, often involving prescription drugs.
Against this background, policy makers—and the people they represent—face a crucial question: How can the desirable goals of making
medicines affordable and new products available best be balanced in a world where the market mechanisms that usually moderate product prices have been blunted or even eliminated? To answer this complex question, the National Academies of Sciences, Engineering, and Medicine undertook a study with the task shown in Box S-1.
The overarching conclusion of this resulting report, Making Medicines Affordable: A National Imperative, is that consumer access to effective and affordable medicines is an imperative for public health, social equity, and economic development; however, this imperative is not being adequately served by the biopharmaceutical sector today. This conclusion is supported by the report’s 32 findings on a variety of issues relating to the affordability of medicines, including the vital need to broaden the current understanding of the biopharmaceutical supply chain, the financial interactions among its participants, and the often contradictory and confusing nature of the information that is available.
The findings presented in this report are based in part on analyses of the effects of the entry of generics into the market, the bargaining power dynamics between the government and its suppliers in the biopharmaceutical supply chain, and the way in which current insurance benefit designs affect the affordability of medicines for patients. Other findings in this report relate to the effects of drug marketing practices, the implications of inefficiencies in price relief programs for vulnerable populations, the various challenges associated with the development of innovative drugs for rare diseases, and the ongoing debate surrounding “value” frameworks for drug pricing.
PROPOSED STRATEGIES TO IMPROVE THE AFFORDABILITY OF MEDICINES
To approach the proper balance between affordability and future availability of medicines in the interest of public health, this report offers a set of eight specific recommendations, with interlinked actions for their implementation.2 Many of the recommended actions can be implemented by the relevant federal agencies with existing legislative authority; some, however, will require new legislation. In a few cases it is unclear whether existing authority suffices. The recommendations in this report are therefore made with the presumption that in cases where new legislative authority is required, the U.S. Congress will create that authority. A summary of the recommendations follows, with the relevant actors and other details for those actions specified in Chapter 4.
Recommendation A: Accelerate the market entry and use of safe and effective generics as well as biosimilars, and foster competition to ensure the continued affordability and availability of these products.
Specific implementation actions are:
- Vigorously deter manufacturers from paying other producers for the delayed entry of generics and biosimilars into the market.
- Expand the enforcement of policies that preclude mergers and acquisitions among companies possessing significant competing generics and biosimilars—either by preventing the mergers or acquisitions or by requiring the divestiture of potentially competing drug products to independent entities.
- Identify specific means to reduce “evergreening” of drug exclusivity via new patents or extensions on existing drugs.
- Seek reciprocal drug approval arrangements for generics and biosimilars between the regulatory agencies of the United States and the European Union, and such countries as Australia, Canada, Japan, and New Zealand.
- Reduce barriers to generic market entry and promote the expeditious market entry of additional domestic and international providers of generics and biosimilars, particularly including those not marketed by the original patent holder.
- Develop policies to restrict the use of “dispense as written” practice by prescribers that may unnecessarily impede the use of generics and biosimilars.
Recommendation B: Consolidate and apply governmental purchasing power, strengthen formulary design, and improve drug valuation methods.
Specific implementation actions are:
- Allow federal negotiation of drug prices, including on behalf of state agencies that wish to be represented.
- Test and further refine methods for determining the “value” of drugs and identify approaches to support value-based payments, formulary design, and price negotiation.
- Expand flexibility in formulary design to allow the selective exclusion of drugs, such as when less costly drugs provide similar clinical benefit.
- Amend the Medicaid Drug Rebate Program to allow for exclusion of certain drugs from coverage under the rebate provisions.
- Expand demonstration projects that test alternative payment models for prescription drugs and assess the impact of such models on health care outcomes and costs.
Recommendation C: Assure greater transparency of financial flows and profit margins in the biopharmaceutical supply chain.
Specific implementation actions are:
- Require biopharmaceutical companies and insurance plans to disclose net prices received and paid, including all discounts and rebates, at a National Drug Code level on a quarterly basis. Obtain, curate, and publicly report this collected information. Conduct
analyses of these data and inform relevant congressional committees, and examine these data to identify and act on any anticompetitive practices in the market.
- Require biopharmaceutical companies to submit an annual public report stating list prices; rebates and discounts to payers, including changes thereto; and the average net price of each drug sold in the United States. All net drug price increases that exceed the growth in the consumer price index for the previous year should be reported to the relevant congressional committees.
- Expand the disclosure requirements on all sources of income by organizations in the biopharmaceutical sector that are exempt from income tax under the Internal Revenue Code.
Recommendation D: Promote the adoption of industry codes of conduct, and discourage direct-to-consumer advertising of prescription drugs as well as direct financial incentives for patients.
Specific implementation actions are:
- Terminate the tax deductibility of direct-to-consumer advertising expenses.
- Adopt industry codes of conduct that reduce or eliminate direct-to-consumer advertising of prescription drugs and support efforts to enhance public awareness of disease prevention and management.
- Prohibit patient coupon programs, in which pharmaceutical companies give payments or discounts to consumers who fill prescriptions for the company’s drug, except in cases where no competing drug is available in the market.
Recommendation E: Modify insurance benefits designs to mitigate prescription drug cost burdens for patients.
Specific implementation actions include:
- Establish limits on the total annual out-of-pocket costs paid by enrollees in Medicare Part D plans that cover prescription drugs by removing the cost-sharing requirement for patients who reach the catastrophic coverage limit.
- Modify the designs of plans offered through Medicare Part D and governmental health insurance exchanges to limit patients’ out-of-pocket payments for drugs when there is clear evidence that treatment adherence for a particular indication can reduce the total cost of care.
- When patient cost-sharing is calculated as a fraction of drug prices in insurance policies through Medicare Part D and governmental health insurance exchanges, this calculation should be based on net prices, not list prices. All state and private prescription drug plans should be encouraged to follow this approach.
- Specifically include the costs and clinical effectiveness of prescription drugs and available treatment alternatives when determining patient cost-sharing rates. This evaluation should address, where feasible, the total costs of care rather than simply the costs of the drugs themselves.
Recommendation F: Eliminate misapplication of funds and inefficiencies in federal discount programs that are intended to aid vulnerable populations.
Specific implementation action is:
- Increase oversight and regulation of the 340B program to assure that participation by covered entities, contract pharmacies, and drug manufacturers is consistent with the intent of the original legislation. Oversight should include systematic collection and assessment of data from qualified medical providers and participating drug manufacturers regarding the volume of drug purchases eligible for 340B discounts, revenues generated from 340B program participation, and safety-net services funded by these revenues.
Recommendation G: Ensure that financial incentives for the prevention and treatment of rare diseases are not extended to widely sold drugs.
Specific implementation actions are:
- Promote agreements that enable concessions on launch price, annual price changes, or assistance in satisfying important public health goals.
- Ensure that drugs with orphan designation receive program benefits under the act only for the target rare disease, not for ancillary non-orphan indications.
- Eliminate unnecessary sub-classifications of disease categories that create artificial eligibility for orphan drug status, and limit eligibility to only one orphan condition per drug.
- Limit the market exclusivity awarded to orphan drugs to one 7-year extension.
Recommendation H: Increase available information and implement reimbursement incentives to more closely align prescribing practices of clinicians with treatment value.
Specific implementation actions are:
- Establish payment policies for drugs administered by clinicians in medical practices and hospitals that do not differentiate for the site of care (site neutral payment).
- Ensure that clinicians have readily accessible and routinely updated information regarding drug cost and efficacy to support sound prescribing decisions at the point of care. This information should include the relative clinical benefits of alternative treatment regimens and the relative financial costs of treatment settings to both patients and payers.
- Eliminate the practice of reimbursing clinicians and standalone and hospital-based clinics on the basis of list prices for drugs covered under the Medicare medical benefit. Replace the current reimbursement model with fixed fees supporting clinical care and the costs of storing and administering these drugs.
- Substantially tighten restrictions on pharmaceutical detailing visits, the acceptance and use of free drug samples, special payments, and other inducements paid by biopharmaceutical companies to clinicians, medical practices, and hospitals.
STEPS TOWARD AN IMPROVED BIOPHARMACEUTICAL SECTOR
Economic incentives created by laws that protect intellectual property have served the United States and other countries well in terms of increasing the availability of prescription drugs. However, for a number of reasons, including the widespread adoption of health insurance that covers prescription drugs, in the United States the normal market forces that would be expected to control prices on these drugs have been dissipated.
Most other developed countries have patent-based economic systems similar to the one used in the United States. These systems are generally interrelated through international treaties and in many cases appear to provide prescription drugs at lower costs than in the United States. A primary difference is that many other nations have regulatory systems that do not exist in the United States to control, directly or indirectly, the cost of prescription medications. As a consequence, people living in the United States often pay substantially more for prescription drugs than people in other high-income nations.
The actions recommended for implementation in this report—even if wholly adopted—would likely be insufficient to bring the cost and availability of drugs to the point apparently sought by much of the public. A number of additional alternatives remain, none of which are, at this point, presented as recommendations in this report because of the significant disruption they could evoke in the biopharmaceutical sector. These options range from taxation on excess profits and federal appropriation of intellectual property to the further centralization of government price negotiation or price control, and implementing pricing models similar to those used in public utilities or defense.
While legitimate arguments can be made that the package of actions recommended in this report could themselves produce unintended changes in some parts of the biopharmaceutical sector, the alternative is to preserve and propagate the status quo—which, along with the benefits it has offered, would continue to produce damaging consequences on the health and welfare of the public. Simply stated, the biopharmaceutical sector needs repair.
Some attributes that an ideal biopharmaceutical system would possess include focusing on prevention as well as treatments and cures; stimulating robust research and development on drugs that enable fundamental improvements to human health; rapidly adapting to new discoveries; adopting technologies, systems, and practices that improve health care; providing effective drugs that are affordable to all patients, including the disadvantaged; being affordable to society as a whole; sustaining itself financially over time; and ultimately, improving the health of the nation.
Unfortunately, no known biopharmaceutical system possesses all these attributes; some attributes might even be mutually exclusive. The recommendations of this report are therefore oriented toward reducing the cost of prescription drugs while still enabling the continuing development of new drugs—always keeping in mind that the foremost responsibility of the biopharmaceutical sector is to serve the patient.