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Drug supply chain, pricing system reforms will slash healthcare costs, says PRI

An interventionist approach from the government may not work as intended; market competition and systemic reform will be paramount.

Jeff Lagasse, Associate Editor

As the Trump administration pushes for price caps and government controls to address prescription drug prices, a new issue brief released by the Center for Medical Economics and Innovation at the Pacific Research Institute contends that reforming the complex drug supply chain and ending the current drug pricing system that overcharges patients – along with systemwide reforms – are what's needed to lower America's healthcare costs.

Many proposals have been made when it comes to lowering costs, both from the government and the private sector. Utilization of telehealth technology has been shown to reduce certain costs, for example, while population health initiatives have the potential to trim costs by encouraging, and enabling, healthier lifestyles among the U.S. population.

But the pharmaceutical and drug supply chain is a different beast. According to Dr. Wayne Winegarden, director of PRI's Center for Medical Economics and Innovation and author of the brief, an interventionist approach from the government is likely the wrong tack.

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"There's something wrong when you have prices in the market," he said. "The out-of-pocket costs are always predicated on the larger price, so systematically, pharmaceutical expenditures are growing slower than the national healthcare average. But from an out of pocket perspective … if you're a patient, there's a very large problem, because your costs are going up. More and more of the costs are being shifted onto the patient, and that's wrong."

Contrary to popular belief, he said, drug prices are not driving up healthcare costs thanks to generics, which save the system $293 billion annually. However, patients overpay for co-pays due to the complex drug supply chain – by as much as $2.1 billion.

Some states, such as California, have already taken measures to address this, but Winegarden believes these measures are misguided.

"Governor [Gavin] Newsome falls into this fiction," said Winegarden. "He thinks it's a good idea for the state of California to start contracting with generics. The problem is that generic medicines aren't the problem. Biologics are driving the spending. What's going to fix this problem is competition with biosimilar products."

Biosimilars have the same clinical effect as a generic but are only as similar to the original branded drug as validation technologies can confirm. Previous PRI research has shown that biosimilars currently save the healthcare system more than $240.4 million. Of these savings, 19.8% – or $47.5 million – is being realized by state Medicaid programs and 56.9% ($136.8 million) is being realized by the commercial market.

But greater use of biosimilars could create significantly more savings. If biosimilars obtained a 75% market share, less than the share of these medicines in many European Union nations, the resulting annual savings for the U.S. healthcare system could be nearly $7 billion, based on Winegarden's analysis. It's all about introducing greater market competition.

For this to happen, there need to be incentives for both doctors and patients. The reimbursement for the providers, as a percentage, should be higher, said Winegarden. With injectables in particular, providers get paid an average based on the list price.

"You're asking hospitals and practices to lose money by switching to a biosimilar," he said. "Many do it because it's the right thing, but when you see disincentives like that, it gets problematic. Getting rid of those systematic disincentives is a first step."


So how did healthcare get to the point at which there's so much complexity in the drug supply chain? Simply put, it evolved over time.

"When I was first learning about the issue, the whole concept of formularies seemed strange to me," said Winegarden. "A parallel would be if you had a travel agent who says, 'In order to make sure you have this airfare, we're going to restrict competition, but don't worry, we've negotiated the best price.' That's what we've done with pharmaceuticals. We have so many entities in between, and they inject their own processes into it.

"It should be viewed holistically," he said. "We have so many players in between it begets this whole bureaucracy. The incentives just aren't aligned. It's a legacy issue, where you keep appendaging things over time."

Ongoing problems with pharmacy benefit managers, originally created as middlemen to reduce administrative costs, also increase costs. The current system gives PBMs little incentive to pass negotiated rebates to patients at the pharmacy counter, allowing them in some instances to pocket large profits. The higher the list price and discount negotiated, the more money the PBM makes.

This is illustrated by biosimilars, or cheaper alternatives to originator biologic medicines, which are high-value, high-cost medicines driving patient affordability concerns. Like generics, greater biosimilar use will reduce drug costs. PBMs favor the original biologics over biosimilars due to their higher list price, thwarting potential savings.

"The problem is this formulary," said Winegarden. "PBMs have amassed an unwarranted amount of power through control of the formulary, so the manufacturer has to go through them to get to the patients. Patients rely on them to be the gatekeeper, so everything comes together at that one choke point. If you control that choke point, there's a lot of unwarranted power that comes from that."

Among the reforms suggested by Winegarden is ending the current system of PBMs negotiating rebates off the list price. Instead, he proposed a system based on the net price paid by the patient or insurer. Doing so, he said, would eliminate disincentives favoring medicines with more expensive list prices but higher rebates.

He also suggested requiring PBMs to publicly publish rebates, discounts and price concessions so patients and doctors can more easily recognize the costs of alternative medicines.

"All of this movement is interrelated because it's so complex," said Winegarden. "We know something is wrong. ... We need to fix it, or we'll end up with something we'll really regret."

Twitter: @JELagasse

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