It was not long ago that the economy’s rising tide was supporting state budgets across the country. As the Pew Charitable Trusts noted, widespread economic prosperity was supporting tax revenue growth and creating budget surpluses.
When times are good, saving money is not always a priority in state capitols. But, times are no longer good, and saving money is now a top policy priority. The carnage is not contained to state budgets either. Businesses large and small are losing money, families are struggling to get by, and the economy is in a free-fall (Morgan Stanley forecasts a potential 38% drop in the economy during the second quarter).
In such difficult times, states must look for savings opportunities wherever possible. North Carolina is a useful example of the unexpected challenges states are now facing. Like the rest of the country, North Carolina’s finances were stable prior to the deep economic recession. Now, expenses are accelerating and the state expects revenues to dramatically fall between $1.5 billion and $2.5 billion.
Overcoming these losses requires reforms, large and small.
A savings opportunity that many states should have seized long ago is the removal of obstacles discouraging the use of biosimilars. In fact, this opportunity would not only save money for states, but also the commercial sector because biosimilars can help businesses manage their costs more effectively.
As I have previously written here and here, biosimilars are lower-cost alternatives that compete with originator biologics (akin to generics, but for biologic medicines). Biosimilars have the potential to reduce the cost of high cost biologic medicines by up to 40%.
Biologics differ from the small molecule medicines that are typically sold over the pharmacy counter because they are manufactured in, or synthesized from, biological sources. These drugs are more complicated (and more expensive) to produce but provide innovative treatments for diseases like cancer, arthritis, and auto-immune diseases.
When people worry about the cost of medicines, they are, either knowingly or unknowingly, worrying about biologic medicines. In fact, most prescriptions are affordable. Consider that the vast majority of drugs (90%) are generics, and the vast majority of these medicines (95%) cost patients $20 or less.
Therefore, it is a small number of medicines (mostly biologics) that account for a disproportionate amount of total drug spending. Consider that 75% of the increase in net spending on all medicines was due to biologics. It stands to reason that controlling the spending for these medicines is the key to controlling the drug affordability problem. Controlling drug costs is a beneficial policy reform that would help most states better manage the current economic recession.
But, how spending is controlled matters.
As the race for a COVID-19 vaccine and treatment exemplifies, innovation matters too. Without the incentives to innovate, future discoveries will be lost. Proposals to impose price controls (either directly or indirectly) negatively impact incentives and are the wrong way to control spending.
The vibrant generics market for small molecule medicines demonstrates that creating the right competitive environment is an effective way to promote affordability and maintain the incentives for innovation. The same is true in the biologics market.
In my analyses of the savings potential, biosimilars could reduce costs by up to $7.0 billion annually – and that is just in the 9 biologic drug areas where biosimilars have already been approved. Annually, state Medicaid programs could save $1.2 billion and the commercial market could save $3.3 billion. Increased biosimilar use will also reduce patients out of pocket costs – by up to 17 percent on average.
At the state level, wider adoption of biosimilars could help address budget shortfalls. In the case of North Carolina, its Medicaid program could save $31.5 million and the commercial market could save $95.8 million.
Realizing these savings requires policy reforms that remove the administrative obstacles discouraging widespread biosimilar use. As an example, many health care plans require patients to fail on an originator biologic before they can be prescribed a biosimilar. Such policies protect the originator biologic’s market share to the detriment of a more robust competitive environment.
Unfortunately, this is only one of many policies that discourage a competitive biologics market. Policy reforms that remove these disincentives could foster greater competition and reduce costs by up to 40% or more.
Biosimilars have offered valuable savings to government and commercial payers for many years now. Forgoing these savings has been a lost opportunity. While it may have been easier to overlook these lost opportunities when times were good, this is no longer the case. Given the financial stresses that states and private businesses are experiencing, it is fiscally irresponsible to ignore these potential budget savings any longer.