The continued rise in health care spending continues to have a profound effect on the US economy and health care payers. The three complex drivers contributing to these increases include hospital, outpatient, and physician services; prescription drugs and medical goods; and administrative fees especially when compared to Organisation for Economic Co-operation and Development (OECD) countries. Reducing the costs of prescription drugs has become the major focus of these three drivers as a solution to reduce the total cost of care, with an emphasis on specialty drug costs which accounts for only 2.2% of the total prescription drug volume but accounts for nearly 50% of national drug spending. The spend on these specialty therapies is expected to increase as scientific advancements continue to come at a high cost with increasingly higher value and, in some cases, curative outcomes. Specialty drug trends and alternative prescription drug payment models are discussed in this article and are being thoroughly vetted, analyzed, and discussed, but what is not often addressed is the holistic view of the health care system and the additional opportunities to reduce costs. Moving the needle toward changing the drug cost paradigm must remain a critical focal point and an equal synergistic focus on the additional drivers of rising health care costs will help the United States bend the health care cost curve trend in earnest.
No matter the administration or political party, health care spending is a key issue with profound effects on the economy and those responsible for footing the bill. The problem becomes further magnified when we compare US health care expenditure to other countries. According to the OECD, the United States spends almost two times per person on average compared to other countries ($10,637 vs $5527 per person, respectively).1 And, based on the current trajectory, health care spending will continue to trend upward, as it is projected to account for 19.7% of US Gross Domestic Product (GDP) by 2028 (compared to 17.7% in 2019).2
This 30,000-foot view of health care spending can be broken down primarily into three complex drivers that contribute to costs: (1) spending on hospital, outpatient, and physician services (which account for over 60% of the total US health care costs per capita); (2) prescription drugs and medical goods (about 14%); and (3) administrative fees (about 10%), especially when compared to OECD countries.1 To begin addressing the cost of US health care and bend the cost curve moving forward, Centers for Medicare & Medicaid Services (CMS), health systems, and payers have focused on two key areas: transformation of our health system payment model, by moving from fee-for-service to value-based care, and reducing the costs of prescription drugs.
The focus on prescription drug spending has garnished considerable attention as a solution to reducing the total cost of care, especially over the last several years. While drug costs account for about 10% to 15% of total health care spending (higher in some diseases),3 factors such as drug price inflation, federal drug spending growth, and patient out-of-pocket (OOP) liabilities have elevated the drug cost issue as a key puzzle to solve for health care affordability. This issue is deep-rooted and has received significant legislative focus, with limited overall impact on patient OOP costs.
Moving forward, we propose that a multimodal approach take place, one that looks at opportunities across the total health care landscape, including drug pricing, in the quest to reduce the total cost of care or at least bend the cost curve moving forward.
Drivers of Prescription Costs
Overall prescription drug trend has been relatively flat the past few years, and more recently in 2019, Express Scripts reported overall drug trend at 2.3% across its commercial line of business.4 However, although trend has been steady, the primary culprit driving the drug cost issue lies within the specialty drug arena. Specialty drugs are commonly defined as high-cost oral or injectable medications used to treat complex chronic conditions with at least one of the following characteristics: high cost, typically priced at more than $1000 per 30-day supply, high complexity, such as biotechnology products, and/or high touch requiring special handling.5 On the surface, their contribution to drug trend remains consistent with their historical generalization; a small population of utilizing patients driving a large portion of drug spending. Referring to a 2018 IQVIA report, specialty medicines accounted for only 2.2% of prescription volume and were projected to account for nearly 50% of national drug spending following the close of 2020.6 Moving forward, CMS projects that retail and specialty prescription spending will continue to outpace growth in other types of health care spending through 2026.7
As one can see, it is no surprise why drug affordability is such a pressing concern and why specialty and high-cost drugs have been a key area of focus. However, to address these issues, legislative and payer actions must look more broadly and holistically at the following dynamics that drive
prescription drug costs:
The Price of Cures. New therapies such as gene, cell, and hepatitis C therapies represent significant scientific and medical advancements for patients suffering from serious conditions. These drugs can transform how a disease is treated, with potentially curative outcomes, but the cost of this cure can approach seven figures in some cases.
The Price of Inventions and Innovation. Both complex (eg, oncology) and primary care (eg, high cholesterol and migraine) diseases are experiencing drug innovation through biologic drug development. These drugs have the potential to reduce risk of disease progression and adverse outcomes while simultaneously contributing to patient survival and quality of life.
High Cost of Development. Innovation comes at a significant cost as it can take upward of $3 billion and about 12 years for a drug to move from preclinical testing to final approval. Funding for research and development comes primarily through the private sector, however, a considerable amount of public funding is provided through the National Institutes of Health, in essence giving the public a legitimate right to affordable drug access.8
Anticompetitive Practices. Rebate contracting, although intended to curtail drug costs, has resulted in roadblocks that prevent generic and biosimilar entrants from having
immediate impact when they come to market. When further complicated by other legal tactics, such as patent litigation and citizen petitions, lower cost alternatives often face a steep uphill climb.
Middleperson Entities. A number of middleperson entities along the drug supply chain have an influence on drug price and discounts. These entities include pharmacy benefit managers (PBMs), wholesalers, and pharmacy chains, among others. Each entity achieves some level of profit along the supply chain through discounts and markups. However, these price concessions are rarely passed down to the end-user (ie, the patient).
Health Care System Dynamics
Misaligned Incentives. The current US reimbursement system can sometimes unintentionally incentivize physicians and providers to choose a more expensive drug over cheaper alternatives, effectively perpetuating the use of higher cost drugs.8
Lack of Transparency. Despite its continued focus and the emergence of drug transparency laws, patients and providers are still challenged with obtaining clear OOP drug cost information at the point of prescribing. Moreover, drug transparency has maintained a singular focus on drugs and has yet to truly incorporate comparative cost-effectiveness into real-time prescribing decision-making.
Sites of Care Costs. Costs of drug therapy and reimbursement rates can be up to 50% higher in the hospital outpatient department vs the physician’s office. Despite efforts to shift drug administration into lower cost places of service and home settings, hospital outpatient drug
administration remains a key driver of drug expenditures.9
Consumer and Other Dynamics
OOP Costs. Patients pay higher OOP costs for drugs (copays or coinsurance) compared to other health care services. According to the 2019 Drug Channels Institute analysis, patient OOP costs as a share of total spending is five times higher for outpatient prescription drugs as it is for hospital care.10 With increased numbers of people on high deductible health care plans with high OOP costs, an increasing number of patients cannot afford their medications and are therefore not filling new prescriptions, not refilling current prescriptions, and/or if they are paying for their medications, they are struggling to do so. Manufacturers’ assistance programs are increasingly assisting patients with the coverage of their drugs (especially during this pandemic), however, these programs do not address the overarching costs of the drugs to payers and the health care system. Hence, these programs are seen as bandages rather than solutions and are being mitigated by payer maximizer and accumulator programs.
Drugs Are Inanimate Objects. With the focus on bending the health care cost curve, it is much easier for politicians and leaders to go after the costs of drugs than to consider cutting hospital, physician, and people costs, which currently account for over 60% of total health care spending.
Changing the Paradigm
To date, many of the interventions to address drug costs and patient affordability have centered upon manufacturer pricing practices. The prior legislative administration aimed to address affordability through four key tenets outlined in the American Patients First Blueprint.5 These tenets included increasing competition, improving negotiation, creating incentives to lower list prices, and reducing OOP spending.
The success of these actions can be debated, but ultimately, they only impacted one slice of the larger pie, namely Medicare and Medicaid. Few resulting actions from the Blueprint and the administration’s executive orders transcended into the private sector. As we move forward, the broader dynamics and drivers of drug costs must be addressed. One way to accomplish this involves a deeper adoption of novel reimbursement models aimed not only at paying for value or drug outcomes, but also at improving equal access. Enabling access to effective therapies, including the innovative and expensive ones, can allow for the realization of improved health outcomes to ultimately serve as the driver of cost reduction.
Novel Payment Models
The Annuity Model. Initially created to pay for cell and gene therapies that can approach seven figures in drug costs, this model leverages installment payments spread over a predetermined period (ie, monthly, annually) with certain agreed-upon accounting principles so that the benefits and potential cost savings are realized by both patients and payers alike.11
Pay for Performance or Value-based Payment
Arrangements. These arrangements and models tie the cost of therapy to clinical and economic performance as defined by primary outcomes measures noted in the drug’s package labeling, measures used in clinical trials, or other mutually agreed-upon measures. Within these arrangements, drug manufacturers assume some level of risk, ultimately ensuring the drug’s performance at an individual patient level or in aggregate across all utilizing patients. These models aim to lower overall costs by linking the drug component directly to the resulting patient health outcome, which is often directly related to total health care costs.
Population-based Payment Model/Modified Subscription Model. In this design, a drug manufacturer accepts a specified payment amount from a health care payer for its drug therapy to cover all of the drug costs over the payer’s population. This type of arrangement enables open access to the drug therapy based upon a fixed and predictable payment, which is not tied to the amount of the drug used.
Increased Adoption of Biosimilars. Biosimilars have had a relatively slow adoption in the United States, but that is now changing as physicians’ and providers’ experience and comfort levels with these therapies increases, exclusive and binding originator contracts end, awareness and education about the value of biosimilars increases, and with the significant adverse financial impact of the COVID pandemic. In the next 4 to 5 years, 76 patents of expensive therapies will be expiring, representing a $49 billion cost-savings opportunity.12
Leveraging Health Technology Assessment (HTA). Due to increased pressure on health care budgets, health systems, payers, PBMs, pricing and reimbursement agencies, and other stakeholders are increasingly using HTA recommendations on therapies and technologies from organizations like the Institute for Clinical and Economic Review and PRECISION Value and Health Advisors to determine reimbursement status, provide information on benefits and harms of new treatments compared to available treatment options, and support the price negotiation process.13
Innovative payment models and these other trends, by themselves, can only move the needle so far in opening up access to drug therapies. Where these models have not adequately ventured is linking payment and reimbursement to access as defined by social determinants of health (SDoH). The role of SDoH is becoming increasingly more important to payers and health systems as equal access to drug therapy is required for achieving optimal outcomes. In the absence of payment models and incentives tied to alleviating SDoH concerns, the access obstacles associated with SDoH will persist. From a drug cost perspective, failing to address SDoH can result in medication nonadherence, reduced quality of life, and increased progression of disease. Such outcomes can result in the need for more advanced and expensive therapy, which can further lead to affordability obstacles and ultimately contribute to a vicious cycle of higher health care costs and poorer patient outcomes.14
Bending the Total Cost Curve
The influence of specialty drug costs has pushed the need for a broader approach to drug cost management beyond the obvious issue of high price. This need, however, will persist as scientific advancements continue to come at a high cost with increasingly higher value and, in some cases, curative outcomes. Moreover, a glance ahead into the drug pipeline illustrates a continual infusion of high-cost therapies as there are more than 1000 oncology drugs and close to 400 cell and gene therapies in development and will dominate the focal points of drug discovery for the foreseeable future.
To change the paradigm and bend the total health care cost curve, payers, providers, and legislation will need to cast a wider net, addressing system-wide drivers of cost and undertake a number of actions, which include:
- Working with key stakeholders to address drug costs based on value and improved patient outcomes, which in turn can reduce resource use
- Modifying payment and care delivery models to focus on value, better patient care, smarter health care spending, and improved population and community health
- Incorporating SDoH into incentives and reimbursement to optimize clinical and therapy interventions
- Reducing unwarranted variation in processes and practices to minimize waste and system errors
- Leveraging technology and data to augment clinical decision-making processes to ensure consistent care for all
- Supporting legislative action focused on health care and treatment access
Much of what we have proposed and shared is not groundbreaking in its individuality. Topics such as specialty drug trend and alternate payment models have been thoroughly vetted, analyzed, and discussed. Yet, what is not often addressed is the holistic view of the health care system and where there are opportunities to reduce costs.
Moving the needle toward changing the drug cost paradigm remains a critical focal point but so is an equal and synergistic focus on system dynamics and access. Thus, until we are ready to address these other factors that could have an even higher return on investment, we will just be nibbling around the edges of addressing health care costs trends instead of bending the cost curve trend in earnest.
1. Kurani N, Cox C. What drives health spending in the U.S. compared to other countries. Health System Tracker. September 25, 2020. Accessed March 19, 2021. https://www.healthsystemtracker.org/brief/what-drives-health-spending-in-the-u-s-compared-to-other-countries/
2. Centers for Medicare & Medicaid Services. NHE Fact Sheet. Updated December 16, 2020. Accessed March 19, 2021. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet
3. Kamal R, McDermott D, Ramirez G, Cox C. How has U.S. spending on healthcare changed over time? Health System Tracker. December 23, 2020. Accessed March 19, 2021. https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/#item-usspendingovertime_7
4. 2019 drug trend report. Express Scripts. Accessed March 19, 2021. https://www.express-scripts.com/corporate/drug-trend-report
5. Specialty pharmacy drug list. Magellan Rx Management. 2016. Accessed March 19, 2021. https://magellanrx.com/member/external/commercial/common/doc/en-us/MRx_Formulary_Specialty.pdf
6. Medicine use and spending in the U.S. IQVIA. May 9, 2019. Accessed March 19, 2021. https://www.iqvia.com/en/insights/the-iqvia-institute/reports/medicine-use-and-spending-in-the-us-a-review-of-2018-and-outlook-to-2023
7. Urahn SK, Coukell A, Reynolds I, Chester A. The prescription drug landscape, explored. The Pew Charitable Trusts. March 2019. Accessed March 19, 2021. https://www.pewtrusts.org/-/media/assets/2019/03/the_prescription_drug_landscape-explored.pdf
8. Rajkumar SV. The high cost of prescription drugs: causes and solutions. Blood Cancer J. 2020;10(6):71. doi:10.1038/s41408-020-0338-x
9. Jain RH, Bach PB. Hospital outpatient versus physician office cost for physician administered cancer drugs. Drug Pricing Lab Policy Paper. January 4, 2017. Accessed March 19, 2021. https://drugpricinglab.org/wp-content/uploads/2017/01/Hospital-outpatient-versus-doctor-office-cost-for-physician-administered-cancer-drugs.pdf
10. Fein AJ. Latest CMS data: Drug spending is not skyrocketing; hospitals and physicians dominate healthcare costs. Drug Channels. December 10, 2019. Accessed March 19, 2021. https://www.drugchannels.net/2019/12/latest-cms-data-drug-spending-is-not.html
11. Slocomb T, Werner M, Haack T, Valluri S, Rader B. New payment and financing models for curative regenerative medicines. Regenerative Med. July/August 2017. Accessed March 19, 2021. https://www.hklaw.com/files/Uploads/Documents/Articles/ARM_Curative_Regenerative_IV1707_LRS.pdf
12. Mattina C. Areas to watch in specialty drug pipeline include cancer, orphan drugs. Am J Managed Care. October 23, 2020. Accessed March 19, 2021. https://www.ajmc.com/view/areas-to-watch-in-specialty-drug-pipeline-include-cancer-orphan-drugs
13. Health technology assessment bodies. European Medicines Agency. Accessed March 19, 2021. https://www.ema.europa.eu/en/partners-networks/health-technology-assessment-bodies
14. Hennessey M. Pharma’s role in addressing social determinants of health. Managed Healthcare Executive. November 20, 2019. Accessed March 19, 2021. https://www.managedhealthcareexecutive.com/view/pharmas-role-addressing-social-determinants-health