Pharmaceutical Pricing Practices, Utilization and Costs - Meeting Summary. 4. Panel Discussions: U.S. Pharmaceutical Cost Pressures and Trends


The panel discussions in this session addressed a range of different issues. Comments pertaining specifically to topics raised by the formal presenters in this session are summarized below. Additional comments by drug manufacturers, consumer representatives, health care providers, or other stakeholders or researchers on the panel are included, where appropriate, in the summaries of other conference sessions.

What Difference Does The Rapid Growth In U.S. Pharmaceutical Spending Make?

Several panel members offered their views on the question of what difference the rapid growth in U.S. expenditures on prescription drugs makes. They noted that if aggregate U.S. expenditures on prescription drugs go up 15-20% a year and nothing else changes, the fraction of people who are unable to avail themselves of the drugs will grow.

Double-digit growth in the utilization and costs of pharmaceuticals--unless that growth is perceived to have value--may lead both public and private sectors entities to cut back the health benefits they offer. Programs such as Medicaid already are struggling to pay for prescription drugs. Employers, especially small employers, are also very concerned about rising prescription drug costs and their ability to offer health insurance to their employees. Already, many elderly and uninsured people cannot afford prescription drugs. Currently, about 60 million people in the United States, or about 1 in 4 persons, have no insurance coverage for prescription drugs. One-third of Medicare beneficiaries have no prescription drug insurance, and many others have poor or unstable coverage.

Key questions facing U.S. policymakers are: How can we make drugs affordable to the people who need them? And who should pay for prescription drugs? Should pharmacy benefits be considered a privilege or an entitlement? If U.S. policymakers succeed in making drugs more affordable through a Medicare prescription drug benefit, the utilization of prescription drugs will increase--even if the drugs are used appropriately--and costs will rise accordingly. For that reason, the "billion dollar question," many panel members said, is whether society is getting adequate "value" (e.g., medical offsets or other benefits) from expenditures on prescription drugs.

Limitations of Studies Identifying Factors Contrubuting to Trends in U.S. Expenditures on Prescription Drugs

Panel members agreed that studies of factors contributing to the increases in aggregate U.S. prescription drug expenditures, such as those reviewed by Mr. Merlis, cannot answer the question of whether cost or utilization levels are appropriate. One researcher on the panel suggested that after policymakers ascertain what the trends in U.S. drug expenditures are, they should (1) decompose the factors contributing to the trends; (2) ask what forces lie behind these factors; (3) determine what difference it makes to people's health that we are seeing these trends; (4) ask what could be done to slow the growth in aggregate U.S. expenditures on prescription drugs; and (5) ask what should be done to slow aggregate spending.

Forces Contributing to Trends in U.S. Prescription Drug Expenditures

There was discussion by panel members of some of the forces contributing to increases in U.S. prescription drug expenditures.

Introduction of new prescription drugs
Much of the panel's discussion centered on the effects of new drugs on U.S. prescription drug expenditures. An important question for U.S. policymakers, some panel members said, is: How will the emergence of costly new prescription drugs affect U.S. expenditures on prescription drugs in the coming years?


A Wall Street analyst said that large molecule drugs (proteins) that have to be injected or administered intravenously and typically cost about $5,000-$15,000 per year (vs. small molecule drugs usually taken by pill, which cost $600-$900 per year) can be expected to proliferate in the market in the next 5 or 10 years. And in the next 20 years, the contribution that such drugs will make to total utilization and costs will increase dramatically.

Some panel members argued that it is important not to lose sight of how important new discoveries and new drugs are in terms of improving patients' health status. One panel member said that post-1992 drugs account for about 35% of current expenditures and 80% of the growth in expenditures--would we want to go back and shut off the valve in 1992? On the other hand, another panel member asked: What if we shut off the valve and used the savings to provide health insurance for uninsured children, elderly people, etc.? That, he said, is a choice that society is facing.

Strategies used by brand-name drug companies to encourage the utilization of brand-name rather than generic products
Several panel members suggested that brand-name prescription drug manufacturers use many strategies to encourage the utilization of brand-name rather than generic products:

  • Intellectual property rights. Representatives of the generic drug industry, consumer representatives, and researchers noted that brand-name drug manufacturers often use patent rights (including trivial patents) and nonpatent forms of providing market exclusivity rights (sui generis rights, exclusivity rights, orphan drug exclusivity, pediatric drug exclusivity) to block the market entry of generics. A generic manufacturer with 52 pending generic products reported that 6-month exclusivity arrangements are blocking the market entry of at least 35 of its products. Several panel members suggested that it is important for U.S. policymakers to examine the tradeoffs in using patent extensions and exclusivity arrangements as the incentive for innovation on pediatric medications, etc., and policy makers must consider how changes in the system would affect incentives for research and development.
  • Aggressive marketing of brand-name prescription drugs. Manufacturers aggressively market brand-name prescription drugs to physicians (e.g., through detailing and sampling) and are increasingly marketing them directly to consumers.
  • Rebates for brand-name prescription drugs. Brand-name drug manufacturers frequently offer rebates to PBMs and other volume purchasers of prescription drugs to drive market share toward specific brand-name products.

Growth in third-party insurance coverage for prescription drugs and insured patients' insensitivity to price
Several panelists emphasized that is not simply growth in third-party coverage that has contributed to the increased utilization of prescription drugs, but also the fact that patients' sensitivity to price has been reduced by the change in patient cost-sharing arrangements from coinsurance to small copayments under managed care. People who are required to pay only a small copayment ($5 per prescription) are insensitive to the price, so the price of a prescription drug does not constrain their utilization. An important question facing U.S. policymakers, panelists noted, is: What effect will the enactment of a Medicare prescription drug benefit have on Medicare and U.S. prescription drug expenditures? Another important question is: What effect will the enactment of a Medicare prescription drug benefit have on Medicare and U.S. expenditures for health services other than prescription drugs? Additional comments about the effects of insurance coverage were made in the session on Pharmaceutical Utilization Issues (see discussion on page 16).

Fragmentation of information, financial incentives, and decisions about drugs
It was generally agreed that there is a disconnect between the parties that are responsible for making decisions about the use of prescription drugs and the information and incentives they have and the parties that are responsible for paying the bills for prescription drugs and the information and incentives they have. Physicians have information on adverse effects, safety, and efficacy, but they seldom know the costs of drugs they are prescribing or think costs should be a factor in their decisions about which drugs to prescribe. Drug manufacturers, PBMs, and some health plans have information on costs, but they lack information about which drugs are best for individual patients. In some cases, physicians who contract with a managed care organization do not feel any responsibility for the costs of prescription drugs because the drug benefit is a carveout benefit managed by a PBM. In other cases, physicians are asked by a health maintenance organization (HMO) to assume financial risk for their HMO patients' drug utilization, but the physicians have insufficient information or power to manage this risk successfully. Patients in managed care plans are insensitive to the costs of prescription drugs and generally rely on their doctors for information about which drugs are appropriate for them. There are few reliable sources of information for consumers on which prescription drugs are most appropriate for them and represent the best value for the money. All of this fragmentation needs to be reduced, so that consumers, physicians, and others making decisions about utilization have access to and are able to act upon information about the risks, benefits, and costs of pharmaceutical products.

Looking Into the Crystal Ball: What Will the Future Look Like?

What will the future look like? Panel members suggested that U.S. policymakers should consider that there will be enormous growth in the size of the U.S. elderly population in the next 10, 15, or 20 years. The introduction of yet to be discovered, probably very costly, human genomics pharmaceutical products is likely to have huge effects on patients' health, as well as on health care costs and utilization. The Internet and other technologies will transform the way people obtain information and health care products through the growth of online pharmacies virtual medicine sites that help patients manage their disease, etc. And finally, the enactment of a Medicare prescription drug benefit is likely to transform the U.S. health care system in ways that we can only begin to imagine.