It’s Generics Not PBMs That Keep Pharmaceuticals Affordable

It’s Generics Not PBMs That Keep Pharmaceuticals Affordable

Expenditures on prescription drugs grew 12.4 percent in 2014 and 8.9 percent in 2015. These eye-popping data are not representative of the long-term expenditure trend, however.

Not only did the growth in prescription drugs expenditures slow to 1.3 percent in 2016, longer-term (between 2009 and 2016), the average annual growth in pharmaceutical expenditures was 3.8 percent while the average annual growth in health care expenditure was a faster 4.2 percent.

Obviously, if the growth in pharmaceutical expenditures is less than the growth in overall health care expenditures, expenditures on pharmaceuticals cannot be driving the overall health care affordability problem.

These data raise important questions, however. Why was the average growth in pharmaceutical expenditures less than the overall growth in health care expenditures? And, why did pharmaceutical expenditures spike in 2014 and 2015?

Pharmacy benefit managers (or PBMs) claim that they play a central role controlling drug prices. PBMs are the middlemen who create and manage the drug formularies (the list of preferred drugs that determine which medicines patients can use). Leveraging the power of these formularies, PBMs negotiate prices with retail pharmacies and rebates on branded medicines with manufacturers.

It is by negotiating these discounts that PBMs assert that they are controlling prices. Relative to the total gross expenditures, these rebates and discounts are sizable. According to a Berkeley Research Group (BRG) study, retrospective rebates and discounts accounted for 31 percent of gross expenditures on branded pharmaceuticals, or $106.4 billion, in 2015.

At first glance, these large discounts appear to support the PBMs claims that they are reducing pharmaceutical prices. Looking deeper, these large discounts simply reflect the unwarranted influence PBMs have gained through their control of the drug formularies. Effectively, PBMs have become the medication gatekeepers between doctors and patients.

Manufacturers know that without proper formulary placement, patients will not have access to their drugs, and formulary placement depends, primarily, on the size of the discount the PBMs negotiate because PBMs earn more money when they “negotiate” larger discounts. Consequently, manufacturers are incented to charge high list prices in order to enable large discounts. On net, these games create a great deal of complexity and confusion, but are not controlling pharmaceutical expenditures.

If PBMs are not controlling the growth in pharmaceutical expenditures, then what is?

The answer is the growing market share of lower cost generic medicines. Generic medicines now represent nearly 90 percent of all prescriptions filled and cost, on average, 85 percent less than branded medicines. Therefore, the exceptionally high-market share of these lower-cost generic medicines should be dampening overall pharmaceutical expenditures.

A report just released by Dobson DaVanzo & Associates (DDA) evaluated the primary drivers of pharmaceutical expenditures using the National Health Expenditure Accounts data since 2009 finding that it is, in fact, the greater use of generic medicines that is generating these systemic savings.

But, what of the significant price spikes that occurred in 2014 and 2015? DDA’s analysis illustrates that these price spikes were due to the introduction of new, and innovative, specialty drugs such as the new drugs for hepatitis C, which were high-value, high-cost medicines.

Such innovations are, by their nature, unique events. Therefore, the price surges of 2014 and 2015 were temporary blips in the broader trend of slower pharmaceutical expenditure growth relative to overall health care expenditures.

Perhaps just as important, an effective pharmaceutical market encourages these temporary expenditure blips as they are associated with new and better cures for patients. The combination of periodic innovations coupled with a robust generics market indicates that the U.S. pharmaceutical market is striking the right balance between innovation and costs.

As for PBMs, while there is scant evidence they are controlling overall pharmaceutical costs, they do impose many adverse outcomes on the health care system.

PBMs unnecessarily constrain patients’ access to drugs; cause patients without insurance to pay too much for their medicines, since they do not have a PBM negotiating discounts on their behalf; cause patient co-pays to be higher than necessary, because co-pays are based on the list prices not the actual transaction prices; and, charge pharmacies “phantom fees” that create particularly large burdens on smaller family-owned pharmacies.

The policy implications from these trends are straightforward. Since PBMs are not controlling overall expenditure growth, but impose unnecessary burdens on the health care system, comprehensive PBM reform is warranted.

Alternatively, recognizing the effective balance that the pharmaceutical market has struck between innovation and a robust generics market illustrates that both innovation and affordability can be simultaneously promoted throughout the health care system.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.