ABSTRACT: Generic-drug prices have increased over the last decade, and this has been a topic of concern in our healthcare system. Given the complexity of the drug market, it can be difficult to pinpoint individual factors that may be contributing to increased drug prices. Drug manufacture consolidations, drug shortages, limited generic competition, and pharmacy benefit managers have all recently been discussed as contributing factors to the rise in medication prices. Given this recent attention, lawmakers at both state and federal levels are attempting to make medications more affordable through new legislation.Drug costs are a topic of concern for patients, payers, and providers. Over the last 10 years, annual increases in drug costs have exceeded the general inflation rates.1 Based on the Centers for Medicare & Medicaid Services National Health Expenditure Fact Sheet, the United States spent $333 billion on drug costs in 2017, which accounts for a more than 40% increase over those of 2007.2 Increasing out-of-pocket drug costs can become a barrier between patients and lifesaving medications needed for overall health. In a recent study from the Kaiser Family Foundation, it was reported that one in four individuals has a difficult time paying for their medications.3
In 2016, generic drugs accounted for 89% of all drugs dispensed in the U.S.4 From 2012 to 2013, there was a substantial increase in some generic-drug prices that impacted national prescription-drug spending.5 As a result, the rising cost of generic drugs has gained much attention from the media, policy makers, patients, and providers. Several factors have been linked to price increases, which include, but are not limited to, manufacture consolidation, shortages in the manufacturing supply chain, and reimbursement models of pharmacy benefit managers (PBMs).6
Manufacturing Consolidation and Drug Shortages
In recent years, pharmaceutical companies have been able to expand their generic-drug operations through mergers and acquisitions.7 Drug manufacture consolidations have resulted in large price increases for generic drugs such as albendazole, dextroamphetamine, pyrimethamine, nitroprusside, and isoprotenerol.8-10 Reviews examining factors contributing to increasing drug prices found that mergers and acquisitions between pharmaceutical companies have played a role in increasing generic-drug pricing.7
In addition to contributing to higher prices, these mergers have also influenced drug shortages and supply distribution, and have led to reduced market competition.7 In a retrospective review published in Annals of Internal Medicine, drugs with fewer suppliers were associated with price increases.6 These price increases ranged from 29% to 116% and were dependent on how many other manufacturers were producing the same product.6 Market researchers have found that in 2015 and 2016, there were a record number of mergers in the generic-drug industry.7 Generic industry dynamics researchers have estimated that a generic market with seven or more manufacturers results in lower prices.6 Additionally, in a study that analyzed 1,200 generic drugs, the authors found that generic-drug prices in the U.S. are related to market competition levels.10
Additionally, it has been suggested that some companies have developed business models based on noncompetitive markets for older drugs and have cornered the niche generic-drug market with the intent to increase drug prices.10 Manufacturer mergers and acquisitions are just one factor exacerbating the rising cost of generic drugs, and a single factor should not be considered the sole contributor to price increases.
Role of Pharmacy Benefit Managers
PBMs have become increasingly important over the past decade and have a significant role in the prescription-drug supply chain.11 PBMs were created to help decrease administrative costs for insurers, negotiate costs between health plans and pharmacies, and validate patient eligibility.11 However, their role in the drug market is being questioned as the price for generic medications continues to increase. In their current capacity, PBMs serve as an intermediary between patients, pharmacies, insurers, and pharmaceutical manufacturers.11 They accomplish this by negotiating contracts with pharmacies and drug manufacturers, process prescription-drug claims, and develop and maintain formularies.12 For prescription drug plans (PDPs) serviced by a PBM, the PBM decides plan coverage of medications, how much individual medications will cost, and how much a pharmacy will be reimbursed for dispensing a prescription.12
PBMs generate revenue through spread pricing and rebates. Spread pricing refers to the difference between what the PBM reimburses the pharmacy for a drug and what the PBM charges the patient’s health plan for the drug.12 For example, a pharmacy will buy a prescription drug for $10. A patient will then use employer-provided insurance to fill a prescription for that drug. After this transaction, the PBM will reimburse the pharmacy $15, allowing it to make a profit of $5. The PBM will then bill the patient’s insurance $25 for this prescription, and the PBM will thus profit $10.
Rebates serve as another stream of revenue for PBMs.11 Rebates are negotiated dollar amounts that drug manufacturers pay PBMs for placing a medication on their formulary.12 The manufacturer provides a rebate amount for each prescription filled.12 The PBM will then share a portion of this rebate with the health insurer.12 These rebates are used mostly for expensive brand-name prescription drugs in competitive drug classes for which there are similar products that are significantly cheaper.12 As a result, rebates incentivize both health insurers and PBMs to include the drug manufacturer’s product on their formularies.11 Rebate negotiations may even lead to placing the drug on a preferred tier status.12 There is concern that rebate negotiations may not be in the best interest of patients, as more expensive medications are likely to be placed on their formularies when in fact there may be cheaper alternatives.11 In the end, patients may actually pay the list price for the medication rather than the discounted price.
In a speech, the Health and Human Services secretary reported that rebates in the Medicare PDP generated more than $29 billion.13 In spite of what has been reported about the business models of PBMs, President and CEO of the Pharmaceutical Care Management Association, J.C. Scott, rebutted in a statement that PBMs are part of the solution to high drug costs and that drug manufacturers are responsible for setting prices.14 Additionally, the spokesperson for one of the largest PBMs, CVS Caremark, has pointed out that this company passes on 98% of negotiated rebates to its clients and that 100% of the savings is passed on to Medicare D plans.14 While PBMs have earned the hot seat in the house, they have argued that they are not the only ones to blame when it comes to increased drug prices.
Current Legislation to Combat Drug Costs
As mentioned previously, PBMs have figured significantly when discussing drug costs. The overall feeling is transparency is lacking among PBMs, insurers, pharmacies, and patients. The continual rise in prescription-drug costs is not only a concern for patients; it has also caught the attention of legislators. Current efforts are being made at both state and federal levels to combat escalating drug costs. In March of 2017, a House bill was introduced to Congress to help address the drug-price transparency issue.15 Bill H.R. 1316 was introduced with the intent of focusing on improving transparency of PBMs contracted under Medicare, Medicare Advantage, TRICARE, and the Federal Employees Health Benefits Program.15 In the end, bill H.R. 1316 was not enacted but was rewritten as bill H.R. 1035 and reintroduced in February 2019.15,16
H.R. 1035 differs from the original legislation and now excludes TRICARE.15,16 The new bill would require PBMs to meet specific criteria in order to contract with a PDP under the aforementioned entities.16 For example, PBMs would be prohibited from transmitting such data as personally identifiable information, protected health information, or claims data to a pharmacy owned by a PBM, unless the patient has volunteered to fill prescriptions at that location.16 If patients wish to fill prescriptions at these pharmacies, they must provide consent via written documentation or via a secure electronic venue.16 Under this bill, PBMs would also be prohibited from providing incentives or requiring patients to fill prescriptions at pharmacies in which the PBM has an ownership interest.16
The House bill would also require PDPs that use a standardized reimbursement system to provide rationale for the method used to determine drug prices anytime there is an update.16 If utilized, PDPs must update the pricing standard at least every 7 days, beginning January 1 of the respective year. PDPs are required to provide pharmacies under the PDP contract with the source of the standard change.16 In addition, if the source of the information for the standard update is not publicly available, then the PDPs are responsible for notifying the pharmacies of the individual drug costs prior to the use of the new prices in reimbursement claims.16 However, the time frame that is considered to be “prior to use of the new prices” is not defined.16 Drug pricing must be provided to pharmacies in an Excel spreadsheet for ease of accessibility.16 Finally, PDPs would be required to establish a process in which pharmacies can appeal and investigate disputes in drug pricing.16 H.R. 1035 promotes transparency and accuracy of drug pricing for Medicare, Medicare Advantage, and the Federal Employees Health Benefits Program.
Individual states have also created legislation to combat high drug pricing. States such as Connecticut and Oregon have been successful in passing legislation in the 2018 session.17 In Oregon, H.B. 4005 requires that both insurers and drug companies make information regarding drug pricing transparent.17 Insurers must provide information on the cost of drugs and its effect on premiums to the state’s insurance department.17 Additionally, this information must be published on the insurer’s website.17 Manufacturers of high-cost drugs are required to report a range of cost, which may include research and development costs, as well as profits.17 Under Connecticut’s bill H.B. 5384, insurers are required to report drug costs to the state’s insurance department.17 H.B. 5384 also requires PBMs to be more transparent.17 Unfortunately, states such as Maryland and Illinois were not successful in passing similar legislation in 2018.17
Promoting Price Transparency
In addition to the aforementioned legislation, there is legislation to combat the “gag clause.” PBMs have a gag clause in their contracts that prohibits the pharmacy and/or pharmacist from disclosing information regarding lower drug-cost options to the patient.18 This includes such options as generics or brands that would be comparable but less expensive, as well as the option of paying the cash price if it is lower than their copay.18 As of December 1, 2018, there were 30 states in which the gag clause in PBM contracts is prohibited (see each state legislation for specifics).18 Additionally, there are several other states that have filed and/or are awaiting approval to prohibit gag clauses.18
Legislators at both state and federal levels are working to combat high drug costs, and current legislation focuses on the role that PBMs play. Both antigag-clause legislation and bill H.R. 1035 address PBM transparency issues. Antigag-clause legislation could help decrease drug costs by allowing pharmacists to inform patients of equivalent or less costly medications. Additionally, if bill H.R. 1035 passes, it would not only require PBMs to be transparent with drug costs, but would also require them to defend the cost by providing pharmacies with the source of information for updated pricing. Pharmacies would also have the power to appeal and investigate disputes in drug pricing, which could potentially help lower the cost of medications. Transparency could also put the brake on PBM rebates, as this bill would require the PBM to provide information regarding pricing changes.
Increased drug prices have been a topic of debate over the last several years, and the discussion surrounding pharmaceutical pricing has gained momentum in the last few months. Increases in drug prices can be barriers to patients and can negatively affect their overall health, leading to an increase in healthcare costs. There are several factors that are thought to contribute to high drug costs, such as pharmaceutical manufacturer consolidations, drug shortages, and the lack of transparency among PBMs. Legislators at both state and federal levels are working to create legislation to address these challenges. Given the complexity of the pharmaceutical market, it is important to understand that multiple factors are contributing to overall price increases
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