The convergence of the continued rise in healthcare costs and an election year is laying the groundwork for some interesting battles among pharmaceutical manufacturers, pharmacy benefits managers and insurers.
While it’s too early to determine who will win the hearts and minds of our elected officials, consumers have been caught in the middle, and medical device and biotech companies need to follow these developments closely.
By way of background, according to an analysis by the Kaiser Family Foundation, total health expenditures as a percent of GDP have been rising fairly consistently since the 1970s and reached at 17.9% of GDP in 2016 (the green line in the chart). In contrast, health expenditures have been rising more slowly, particularly since the 1980s, in comparable OECD countries. Regardless, this trend is will not be sustainable.
CMS projects that national U.S. health expenditures will increase at an average rate of 5.5% per year from 2017 – 2016, higher than the average rate of increase of 4.2% per year during the period 2008 – 2016. The projection is modeled on changes in projected income growth, increases in medical goods and services prices, and insurance enrollment migrating from private health insurance to Medicare due to demographics.
Government scrutiny will likely increase because the proportion of national health spend borne by federal, state and local governments will go up (from 45% in 2016, to 47% of total spend by 2026), while that sponsored by private businesses, consumers and other private sources is expected to decline (from 55%, to 53%).
Insurers have been shifting costs to consumers through higher premiums, deductibles and co-pays. Likewise, employers are passing along increased insurance costs to their employees. The elimination of the individual mandate to purchase health insurance, part of the Act “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”, passed by Congress on December 19, 2017, will push premium costs even higher as healthier individuals may opt for “skinnier”, less expensive plans or forego health insurance entirely.
As we make our way through the first half of 2018, health insurers, pharmacy benefits manufacturers and pharmaceutical manufacturers are each trying to shape the conversation.
For example, Express Scripts, a pharmacy benefits manager (PBM), is trying to get Amgen to rethink its pricing model before it launches its new migraine treatment Aimovig®, currently expected to be priced at up to $10,000 per year. At issue is the industry practice of setting a higher list price and subsequently reducing it through rebates and coupons. Express Scripts says that many patients are forced to pay the list price each year until their annual deductible is met.
In response to the rise of manufacturer rebates/coupons, insurers and PBMs have increased the use of co-pay accumulators in new health insurance plans. Plans with this type of stipulation do not allow drug purchases made with coupons to apply to the beneficiary’s annual deductible (or out-of-pocket maximums). When the manufacturer's coupon limit has been reached, the patient may have to pay list price (note that Medicare does not allow couponing).
Pharmaceutical manufacturers say that PBMs need to share more of the negotiated discount downstream. To this end, PhRMA has launched a public relations campaign, "Let's Talk About Cost" [sic]. One statistic from the website, based on an industry-funded study: “More than half of commercially insured patients’ out-of-pocket spending for brand medicines is based on the full list price”.
Academia has also weighed in. A study on health care spending in the U.S. and other high-income countries, published in March 2018 in JAMA, concluded that “prices of labor and goods, including pharmaceuticals, and administrative costs appeared to be the major drivers of the difference in overall cost between the United States and other high-income countries.”
With CVS’s proposed acquisition of Aetna and Cigna’s proposed acquisition of Express Scripts, vertical integration will increase the negotiating power of the combined entities. Of course, it remains to be seen if these deals will pass muster with the U.S. Justice Department.