Article Archive
July/August 2020

Medication Monitor: The Key to Reducing Drug Prices — Increased Transparency and More Innovation
By Wayne Winegarden, PhD
Today’s Geriatric Medicine
Vol. 13 No. 4 P. 26

Concerns about drug affordability dominated the policy debate in 2019 and promise to do so again in 2020. But based on the premise that patient outcomes are best served when the pharmaceutical system incents innovation and promotes widespread affordability, the author explains how the policies currently under consideration will worsen patient outcomes in a new report for the Center for Medical Economics and Innovation at the Pacific Research Institute, “Improving Market Efficiencies Will Promote Greater Drug Affordability.”

There have been several policy variations proposed. But whether it’s allowing drug importation from overseas, President Trump’s proposal to cap drug prices in the United States at 126% of the average prices in 14 other countries, or Speaker Pelosi’s government negotiation resolution (H.R. 3, which passed the House of Representatives in December 2019), the current proposals all employ some form of drug price controls.

Drug price controls impose large, unintended costs on patients. Arguably, the largest costs are the lost innovations. In its evaluation of H.R. 3, the Council of Economic Advisors estimated that as many as 100 fewer drugs would be introduced into the market over the next decade due to the legislation’s price controls. Advanced medicines such as immunotherapies for cancer and gene therapies for rare diseases would see a major slowdown to the detriment of patients.

Price controls impose other costs as well. As the drug shortages in Canada exemplify, price controls create access issues for the medicines that are already approved, and could even increase overall health care expenditures if the number of patients who need more expensive hospitalizations and surgeries increases significantly.

In contrast to the costs associated with the price control policies, the study also presents evidence that eliminating the complexity and opaqueness of the current pharmaceutical supply chain is a more efficient policy approach for alleviating the drug affordability problem while avoiding the burdens drug price control policies create.

Defining the Affordability Problem: Small Numbers, High Costs
The author’s research found that while affordability problems exist, it’s important to recognize that prescription drug expenditures have been growing slower than have the other major health care expenditure categories over the past year and also over the last five and 10 years. Taking last year’s growth rates as the example, prescription drugs grew 2.5%, while total health expenditures, hospital care expenditures, and expenditures on professional services grew between 4.4% and 4.6%. The competitive generics market is an important reason why.

Nine out of 10 prescriptions filled in the United States are generic medicines, and 95% of these medicines cost $20 or less. According to the Association for Accessible Medicines, generic medicines save US patients $293 billion annually. The dominant market share of affordable generic drugs means that the majority of patients are taking affordable medicines. This demonstrates that robust competition can promote widespread affordability.

While most medicines are affordable by volume, a small minority of medicines are responsible for a disproportionate share of the total drug spending. Many of these high-cost medicines are biologics, which are cutting-edge treatments developed from biological processes. These medicines are invaluable for treating patients with serious illnesses such as cancer, arthritis, or an autoimmune disease. They are also expensive. Based on IQVIA data, innovative biologic medicines were responsible for nearly 75% of the increase in total net spending on medicines in 2018.

With respect to addressing the current affordability problem, these trends illustrate that competition is an effective means for controlling costs, and effective policies should target the source of the affordability problem—particularly the high-cost biologics.

The Pharmaceutical Pricing System Lacks Transparency and Is Overly Complex
Inefficiencies have crept into the drug supply chain because prices are not transparent. While the list prices manufacturers announce are transparent, these prices do not reflect the cost of the drugs for most payers. List prices are the opening bids in a complex negotiation between manufacturers and pharmacy benefit managers (PBMs). PBMs, leveraging their power over the formularies, negotiate discounts and rebates that lower the actual prices paid by insurers (the net price). Transparent net price data for individual drugs are scarce as the discounts are considered privileged information (aggregate data are available, however).

Discounting the manufacturer price sounds as if it should be beneficial to the system; but, the incentives of the system are misaligned. For instance, PBMs earn more money when list prices are high but discounts are large. Manufacturers, wanting a good position for their drugs on the formularies, are incented to accommodate these incentives. The result is that list price growth is excessive and not reflective of the costs to the overall system. Illustrating this problem, invoice costs grew 5.7% annually over the past decade, which was faster than the 3.5% annual growth in net spending, enabling the value of discounts to grow even faster to 15.1% annually.

The study documents the adverse outcomes that result from these pricing trends.

Creating Inefficiencies and Harming Patients
First, since this system promotes opaque prices, many patients may not realize that paying for a medicine, especially a generic medicine outside of their insurance plans, could actually save them money. In fact, according to a 2018 USC Schaeffer Center for Health Policy & Economics report, patient copays for 23% of the filled prescriptions were higher than the average reimbursement to the pharmacy. Across the 200 million commercially insured Americans, these results could imply overpayments by as much as $2.1 billion by patients.

Second, the copays and coinsurance costs for many patients are tied to the fast-rising list prices, not the systemically relevant net prices. Thus, patients’ share of the high-cost drugs are growing faster than the overall costs of these drugs to the health care system. This quirk exposes patients to excessive costs even if systemically the payments are more reasonable.

Third, patients without insurance don’t have a PBM negotiating on their behalf. Therefore, the most vulnerable patients must pay the fast-growing list prices, not the lower net prices paid on behalf of patients with insurance. Thus, the current system is imposing excessive costs on patients without insurance.

Fourth, while the current system imposes excessive costs on patients who require medicines, the savings payers receive are used to lower the premiums for everyone. This outcome flips the insurance model on its head—extra costs are being imposed on the sick in order to lower the costs for everyone else.

Fifth, beyond these broad impacts, the current supply chain has erected barriers that are thwarting a more competitive biologics market. As stated above, innovative biologics are a major cost driver. Much like generic medicines, a vibrant biosimilars market can provide the needed competitive pressures to decrease prices for biologics by up to 40% once the originator products have had an exclusivity period granting them the opportunity to recoup their costs of capital.

Unfortunately, current formularies tend to favor the more expensive biologic medicines over biosimilars. In addition, the current purchasing system for biologics administered in clinical settings (known as buy-and-bill) creates a systemic incentive to purchase the more expensive originator products over the more affordable biosimilars. Thus, the current payment system has erected barriers that inhibit the use of drugs that are lower cost and just as efficacious.

The Solution: Transparency and Competition
To alleviate these costs and reduce the unaffordability burden for patients without disincentivizing innovation, the study calls for reforms that simplify the current drug pricing structure, create pricing transparency, and promote more competition (particularly for high-cost biologics).

Such reforms require replacing the current pricing model with a simple, transparent, net-price model that removes the current bias toward more expensive list prices for medicines. Patient copays and coinsurance rates will be tied to the actual cost of the medicine, consequently significantly reducing patient out-of-pocket costs.

Greater transparency also empowers doctors. With greater information, doctors are better able to prescribe the medicine that is both clinically efficacious and financially affordable for their patients. Doctors will also be better positioned to hold payers accountable if effective, lower-cost medicines are denied.

Further, more transparency improves the competitive environment and encourages PBMs to increase their efficiencies, improving the services they provide to insurers.

Reforms should also target biologic medicines, which are key drivers of the drug affordability problem. Taking a page from the generic playbook, the goal of these reforms should be to empower lower-cost biosimilars to be more formidable competitors once an originator biologic’s defined exclusivity period has expired. Specific reforms include eliminating the current formulary biases against biosimilars, and creating separate formulary tiers with preferential copays and coinsurance rates for lower-cost biosimilars.

The purpose of the study was to illustrate that addressing the inefficiencies that plague the pharmaceutical market will help alleviate the current affordability problem without stifling future innovation or creating drug shortages. The result will be medicines that are more affordable for patients today, while still encouraging the innovation necessary to improve patients’ welfare tomorrow.

— Wayne Winegarden, PhD, is the Pacific Research Institute’s (PRI) senior fellow in business and economics and director of the PRI Center for Medical Economics and Innovation. The study is available for download at