Why Prescription Drug Costs Keep Rising

The majority of prescriptions filled are for inexpensive generic drugs, but other forces are driving total drug spending higher.

Millions of Americans rely on prescription drugs to manage health conditions, but efforts to make medications more affordable are up against complex forces in the drug industry.

A new analysis shows strong growth in the use of inexpensive generic drugs by commercially insured members of Blue Cross and Blue Shield plans.

However, high-priced branded drugs continue to drive total drug spending higher, year after year. Drug costs now account for more than 20% of where health insurers spend premium dollars paid by members and employers.

These trends mean health insurers have to find new ways to make sure members have access to effective, affordable drugs. The persistent rise in drug costs is also igniting a public debate about how pharmaceutical companies price their products.

Blue Cross and Blue Shield Plans in Illinois, Montana, New Mexico, Oklahoma and Texas are focused on integrating pharmacy needs into a whole-person approach to care management. That requires a complete view of a member’s medical history and ongoing treatments.

Dr. Matt Fontana

Dr. Matthew Fontana says a whole-person approach to care management requires considering pharmacy needs across all of a member’s medical and behavioral health conditions.

“We’re trying improve the health outcome of the member and maximize the value of that care,” said Dr. Matthew Fontana, divisional senior vice president and chief medical officer of pharmacy for the five Blues Plans. “You need to have a clear view of the member’s clinical situation and help them navigate our fragmented health care system.”

In the Blue Cross and Blue Shield Association’s analysis,­­­­­­­­ branded drugs accounted for just 17% of total prescriptions filled in 2017 but generated 79% of the drug spending.

That’s because drug companies deploy a variety of strategies to maximize profits from drugs protected from generic competition by patents.

Spending on patented branded drugs, according to the Blue Cross and Blue Shield Association, increased 5% from 2016 to 2017, to $52.2 billion.

The role of specialty drugs

Another important piece of the puzzle is the role of specialty drugs, which treat complex conditions like cancer and rheumatoid arthritis. The association’s analysis showed spending on branded specialty drugs surged 10% from 2016 to 2017, to $27.1 billion.

Patients typically get these drugs in a medical setting, such as a doctor’s office or a hospital outpatient department. In the health care business, that sets them apart in a couple of ways.

For most drugs, insurers and employers — through pharmacy benefit managers — negotiate for discounts and rebates on the products on a health plan’s drug list. These are the drugs people typically pick up at their neighborhood pharmacy.

[Related: Why Pharmacy Benefit Managers Matter]

Many specialty drugs are different. Hospitals and doctors buy specialty drugs and bill insurers with a markup. Plus, many of them are extremely expensive. Many cost more than $100,000 a year for a single patient.

Where patients go to get these treatments may have a dramatic effect on the price, without any difference in the product or care they’re getting. The cost in a hospital outpatient department is likely to cost several times as much as the same drug given in a doctor’s office.

“A lot of people benefit substantially from these high-cost drugs,” Fontana said. “Our intent as a company is to ensure that people are getting the therapy that makes sense for them and is evidence-based — and that the way they’re getting it is both convenient as well as cost-effective.”

[Related: The Cost of Care: One Woman’s Journey]

What goes into drug prices?

However, the problem with any strategy to put pressure on costs of branded drugs is that the starting point is so high.

“While we’re using all the levers at our disposal to achieve affordability, we also have to engage in a public dialogue about how prices are set,” Fontana said.

Facing criticism about drug prices, the pharmaceutical industry has responded that the overall growth has slowed in recent years.

“That still doesn’t answer the question of whether you’re paying the right amount for a drug,” Fontana said.

Note: The Blue Cross and Blue Shield Association’s analysis is based on claims from 40 million commercially insured Blues members across the United States. The results are extrapolated to all of the 88 million commercially insured Blues members in 2017 and adjusted for year-over-year membership growth.

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