Many healthcare stakeholders are looking for creative solutions to offset steadily rising pharmaceutical costs. State governments are no exception. For example, attempts from Massachusetts and New York to gain leverage in negotiations with pharmaceutical companies to drive down drug costs in their Medicaid Plans have recently been in the news. Massachusetts applied for a Centers for Medicare and Medicaid (CMS) waiver – though a leaked report claims it will be denied – to create a closed Medicaid drug formulary. This would theoretically allow it to drive harder bargains with drug companies who might otherwise find themselves completely shut out of the Massachusetts Medicaid market. Current federal Medicaid rules do not allow this; state Medicaid plans are required to offer access to all of a given manufacturer’s drugs, if that manufacturer abides by a steep discount formula.
New York is taking a somewhat more complex route, setting caps on Medicaid drug spending and compelling manufacturers of particular high-cost drugs to negotiate higher rebates with threats of reduced access. According to the state, many manufacturers have been willing to come to the negotiation table. However, it is unclear whether this strategy will pass regulatory muster if New York ever does remove a drug from its formulary completely.
Combatting Pharmaceutical Costs No Easy Feat
There are pros and cons of these states’ actions. On the one hand, they address a real issue of inflating drug costs and remove an artificial barrier to negotiation, as increasing negotiation is likely to marginally push down drug costs.
On the other hand, limiting the drugs Medicaid beneficiaries have access to creates an additional burden for an already challenged population. Even if states provide access to at least one drug per therapeutic class, as Massachusetts has promised to do, there will inevitably be individuals who would have benefited from an unavailable drug. Unlike participants in the commercial health insurance market, Medicaid beneficiaries generally do not have the option to switch plans if they are unhappy with those drugs available to them.
In addition, these actions are arguably unfair from the pharmaceutical manufacturer perspective. Drug companies are still bound by rules requiring them to offer lower prices to Medicaid plans, but would lose the largely unfettered access to Medicaid beneficiaries they received in exchange for that concession.
Whether state-level attempts to increase negotiation leverage can appreciably reduce the cost of prescription drugs while avoiding, or at least minimizing, the potential downsides is ultimately an empirical question, which is perhaps the best argument for encouraging Massachusetts and New York to move forward with their experiments. As long as data is collected comprehensively and rigorously and reported without bias, the healthcare industry stands to learn from their attempts.
Source: EvaluatePharma®, 2016 and September 2017, ©Evaluate, www.evaluate.com; FiercePharma; and Oliver Wyman
The Pharma Cost Solution is Still Foggy, But Possible
That said, increasing negotiation leverage is no silver bullet. At the outset, they will likely fall far short of fully solving the problem. (It is doubtful New York or Massachusetts policymakers would claim otherwise). Private payers already have the power to restrict formularies, and drug costs also remain a significant issue in the commercial world.
Many factors drive up pharmaceutical prices, including the very real investment pharmaceutical companies need to make to develop lifesaving drugs, regulatory distortions of the market that artificially reduce competition, a market that decouples price from value, and a culture that has difficulty defining “value” at all.
A combination of public policy and market-based solutions is required to address the pharmaceutical cost problem. Most critically, until mechanisms are created to better align the price of drugs with their overall value, and to better define what the value of a given drug is, the problem will remain unsolved.
A collaborative approach is needed between payers, pharmaceutical manufacturers, providers, and other stakeholders to assess the overall value of specific drugs relative to other treatment options and tie that incremental value more closely to drug prices. These types of “value-based” arrangements are beginning to grow in popularity, including partnerships announced between Optum and Merck, and Anthem and Lilly, and a CMS agreement with Novartis.
Tying payments to outcomes is a good step, but as these and other agreements develop, it will be critical for them to better define a drug’s overall value beyond relatively restricted outcomes metrics. This will require large scale real-world data collection and analysis to accurately define a broad range of outcomes across different types of patients and different circumstances. Ideally, this will include an accounting of not just drug costs and drug-specific outcomes measures, but also overall health outcomes and total medical costs. An agreement that perversely increases overall medical costs and his minimal effects on overall health while reducing drug costs and achieving a few specific outcomes is all too conceivable otherwise.
The types of analyses that would support these ideal agreements have been done in some cases. For example, when the hepatitis drug Sovaldi came onto the market, its high cost – $1,000 a day for 12 weeks, or $84,000 – was justified by noting that it didn’t only cure hepatitis, but also eliminated the need for extremely costly liver replacements. The high cost of hemophilia drugs is also often justified by analyzing the high cost of treating the complications of uncontrolled hemophilia. However, these analyses have not been widely used to set drug prices or to create outcomes targets supporting value based agreements. Most value-based agreements start with a base price that does not necessarily take these factors into account and arranged for rebates if specific drug-related outcomes are not met, rather than starting with a price based on the overall value the drug will provide and then adjusting payments if that overall value is not delivered.
Ultimately better defining value and then connecting prices more closely to that value should reshape the calculus all the way to back to initial drug discovery and create a more efficient, effective healthcare system. Recent initiatives, like that of the CVS Pharmacy Rx Savings Finder, that lets retail pharmacists compare prescription prices, are the tip of the iceberg.
In a world in where the value and aligned prices of a drug are still undefined, the drug cost problem will continue. Let the states experiment. But the healthcare industry cannot pretend increased negotiation leverage will solve everything. Increased negotiation is merely the beginning.