Iowa Ideas 2018
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Why drug prices continue to climb

Health care experts cite a lack of competition, regulation and transparency as reasons for increased costs

    Photo illustration for Iowa Ideas story on rising drug prices. (Cliff Jette/The Gazette)
    Health Care
    Mar 5, 2017 at 9:00 am

    When Dot Hinman went to the pharmacy this past December to pick up her husband’s prescription blood thinners, she was told the total cost for the medication, Xarelto, would be slightly more than $1,500.

    Insurance covered about two-thirds of the cost, but Dot still had to pay almost $490.

    “I just kind of gasped,” Dot recalled.


    Dot and Gene Hinman, both in their mid-80s, are on a Medicare Part D plan. The federally run program helps seniors pay for brand name and generic drugs, as well as medical devices.

    The couple was paying $35 a month for a 30-day prescription of Xarelto, which Gene was prescribed in May 2015. The generic blood thinners he previously took had diluted his blood to dangerous levels.

    Once Medicare and the consumer pay a combined $3,700 a year, the individual enters into the “doughnut hole” — a coverage gap. That means the consumer pays no more than 40 percent of each drug, plus a small dispensing fee, for the rest of that year.

    That December, Dot learned she and Gene had reached their coverage gap at the end of September 2016. They were paying almost $200 for a 30-day prescription in October and November. In December, Gene’s prescription also was switched to a 90-day supply without notice — and the cost tripled.

    The couple lives off a fixed income from savings, Social Security and a small pension from Cornell College, where Gene taught for 38 years. They have a cozy apartment at Cottage Grove Place, a retirement community in Cedar Rapids. The majority of their income goes toward their $4,300 monthly rent, which includes some meals and housekeeping costs. The environment is well-suited for Gene, who suffers from dementia and digestive issues.

    But the cost for Xarelto in December was a blow to the budget, Dot said.

    “It’s hard to come up with that money when you’re on a fixed income,” she said. “There’s no way we could cover it from our regular income. Without the drug plan, we would be using up our savings and probably wouldn’t be able to live in a place like this.”

    Dot also keeps copious notes on the couple’s medical expenses. Her records revealed that the total cost of Xarelto increased $126.34 between February and October 2016.

    “Because of the increase in price, we’ll probably go into the doughnut hole earlier ... which will mean spending down Gene’s savings,” Dot said.

    As the cost for generic and brand name drugs is expected to continue rising, insured and uninsured Iowans will feel the strain. Health care professionals say lack of competition, regulation and transparency are only some of the reasons costs are increasing.


    One famous example — the EpiPen.

    In summer 2016, consumers and lawmakers pushed back on a 500 percent cost increase to EpiPens, an auto-injector that supplies epinephrine to those experiencing severe allergic reactions. Though epinephrine is a generic drug, drugmaker Mylan holds a patent on the auto-injecting device used in EpiPens.

    Consumers were incensed that the price for a two-pack of EpiPens increased from $100 to $600 in out-of-pocket costs.

    About 50 Iowans wrote to U.S. Sen. Chuck Grassley, R-Iowa, who has been pushing for explanations from Mylan. Grassley asked how the Mylan and the Centers for Medicare and Medicaid Services could have misclassified the drug, causing the U.S. Department of Veterans Affairs, Department of Defense and American taxpayers to pay millions of dollars in unnecessary drug costs.

    “It’s both the bureaucracy not doing their job and Mylan taking advantage of having a monopoly,” Grassley said in a phone interview with The Gazette.

    It’s no illusion consumers feel they are paying more for drugs, said Jim Yocum, senior vice president of federal programs at Connecture, based in Brookfield, Wis. The company was seen as an expert on drug costs by the Centers for Medicare & Medicaid Services when Medicare Part D was implemented in 2006.

    “In the most recent four years, (drug prices) are increasing at a far faster pace than the (previous) eight years,” Yocum said.

    Connecture tracks a list of 180 brand name drug prices that have increased at least 500 percent since 2010. Daraprim, a medicine that treats parasitic infection mostly for AIDS and cancer patients, topped the list with a 9,577 percent increase by the end of 2016.

    But Dan Shane, a health economist and assistant professor at the University of Iowa, said he expects costs to continue rising as there is a lack of competing big drugmakers and no laws regulating price hikes.

    “It’s just a perfect storm,” Shane said.


    Consequences of a lack of competition are being passed to pharmacies and consumers, Yocum said.

    In 2007, Yocum said the top 10 generic drugmakers accounted for about 28.5 percent of the global market. By 2014, after years of company consolidations, the top 10 generic makers accounted for more than 64 percent, Yocum said.

    “There used to be 40 or 50 major generic manufacturers,” he said. “Now you have behemoth manufacturers.”

    Since 2012, more branded drugs entered the market because of a lack of generic competition, Shane continued.

    One reason is that generic drug companies sell themselves to a larger, more-experienced brand name manufacturer. Generic manufacturers or a new drugmaker seeking to patent a drug have less skill getting through clinical trials, Yocum said, and may have less sway with the U.S. Food and Drug Administration.

    “New competitors, they’re hampered by a lack of distribution channels and the long-term nature of product development,” Yocum said.

    But big, brand-name pharmaceutical companies point to the high cost of research to develop safe drugs.

    And brand name drugmakers have their own techniques to deter competition.

    Shane said drug manufacturers extend drug patents to protect exclusivity of a molecular compound or a device, primarily to discourage competitors.

    Or, he said, manufacturers will make infinitesimal changes to drugs to prolong their patents — keeping their product from being manufactured by over-the-counter drug companies. This strategy was used by makers of insulin, though the drug has been on the market for decades and has available generics. Connecture found that the compound annual growth rate for types of insulins increased almost 12 percent since 2012, though only minuscule updates were made to the drug.


    Part of the problem, Shane said, is that no law dictates drug companies’ ability to extend patents.

    There also are no laws detailing to what extent drug companies can hike prices. That loophole is exacerbated by a lack of negotiating power for some drug buyers.


    “As a country, we don’t put a lot of restrictions … on the prices and using the volume of a national health system to drive down prices,” Shane said. “We’re probably the best game in town if you’re a drug manufacturer.”

    Though there are more than 40 million Americans on Medicare Part D plans, according to CMS, the federal agency is prohibited from negotiating prices for drugs covered on Part D plans.

    Meanwhile, pharmaceutical-benefit managers, or PBMs, are allowed to negotiate drug prices based on the large volume of clients they represent.

    PBMs are a little-known but widely used middleman in the health care system. Their primary role is to secure discounts or rebates from drugmakers on behalf of their clients. PBMs’ clients are large employers or insurance companies who buy drugs for employees or beneficiaries.

    Companies are not required to use a PBM, but Mark Merritt, president and CEO of Pharmaceutical Care Management Association, which represents PBMs across the country, said most do because the PBM has more bargaining power and possibly can save buyers an average 30 percent of costs.

    “They (PBMs) will use that collective buying power to say, ‘You owe us a bigger rebate or a bigger discount ... and you should give bigger discounts to make up for that if you want access to these markets,’” Merritt said. “Even the largest employers would have nowhere near the purchasing scale.”

    However, PBMs have expanded their reach and may be controlling more of the health care market than is good for costs, Connecture’s Yocum said. He said little transparency exists between the public and PBMs.

    Because of this, PBMs over the past few years have garnered scrutiny from members of Congress as well as national and statewide pharmacy associations, said Kate Gainer, CEO at Iowa Pharmacy Association.

    “In the pharmacy supply chain, there are a lot of unknown entities that touch the health care dollar,” she said.


    PBMs take a portion of the sale between insurer or employer and the drug manufacturer. But Yocum said PBMs aren’t always clear about what that cost is.

    Insurance companies might not know how much the pharmacy is paid to dispense a medication, and pharmacies don’t know what the insurer paid for the drug. Both parties don’t know the actual discount.

    "There’s never going to be a free lunch. You’re either going to be paying a higher (health insurance) premium up front — if that’s more predictable than ... out-of-pocket costs at the time you get your prescription, that might be something that families or individuals should check into.”"

    - Dan Shane

    Health economist and assistant professor at the University of Iowa

    The PBMs also create the maximum allowable cost — MAC — lists, which tell pharmacies and manufacturers the maximum cost they will pay for a drug. To do this, PBMs research and average what pharmacies already are paying.

    But prices on MAC lists could vary greatly, Yocum said.

    “The fragmented buyers are further disadvantaged by the lack of viable pricing information,” he said. “Many of these bilateral agreements between buyers and sellers have a secrecy clause. (They) know what people are willing to pay among all buyers, but none of them know what others are buying them for. If you talk to somebody and mention an average wholesale price, they’ll say, ‘Nobody actually pays that.’

    “ ‘Well, tell me what people pay,’ ” Yocum said. “ ‘Well, that’s a trade secret.’ ”

    Shane said it also often isn’t clear how much of the discounts or rebates PBMs negotiate are passed on to insurers, pharmacies and consumers.

    But Merritt said the time for their clients to detail what kind of transparency they want is when they sign a contract with the PBM.

    “Transparency is important, but there’s already a lot of it, and there are different definitions of it from every client,” Merritt said. “When competing drug companies we’re trying to pit against each other to offer different discounts can see what their competitors are offering, that tends to raise costs for consumers.”

    Yocum doesn’t buy the argument.

    “More transparency generally ends up in lower prices for the end purchasers,” he said. “If I’m a real estate investor, and I’m trying to build a building but I can’t find out what buildings will go for in this neighborhood, how do I price my rent? Everyone as a purchaser still is flying blind.”

    And because drug manufacturers continue to increase prices, PBMs aren’t always paying off, Yocum said. Instead, they might continue to negotiate the same percentage off the drug, but the overall cost — or average wholesale price of a drug — continues to increase.

    “When you start looking at some of the drugs, the negotiated rate is only 17 percent less than” the average wholesale price, Yocum said. “That (average wholesale price) keeps going up 10 percent a year, so where’s my savings at for two years? And where’s your incentive, PBM, to fight that increase when you keep telling me every year that you negotiated 17 percent savings?”

    Business isn’t hurt for PBMs when prices increase, Yocum said. PBMs still get the a cut of the overall deal, and that cut is higher when prices are higher.


    Experts said consumers still have the power to ask doctors about generic drug alternatives. It’s also possible to switch to 90-day prescriptions that save money in dispensing fees, Shane said.


    Though she said she still perceives the health care industry as a tangled knot of buyers and purchasers, Dot Hinman keeps meticulous records on her and Gene’s drug costs.

    Mathew Hosford, chief pharmacy officer for Wellmark Blue Cross and Blue Shield, the Des Moines-based health insurer, said this is exactly what consumers should do. Wellmark uses CVS Health as its PBM, he said. In Wellmark’s contract with CVS, Hosford said the company asked for full transparency and pass-through of discounts and rebates.

    Wellmark customers also can log on to their online Wellmark accounts to search for other pharmacies, generic equivalents and to see information about negotiations CVS Health makes.

    But there always is going to be a trade-off as costs are predicted to continue to climb, Shane said.

    “There’s never going to be a free lunch,” he said. “You’re either going to be paying a higher (health insurance) premium up front — if that’s more predictable than ... out-of-pocket costs at the time you get your prescription, that might be something that families or individuals should check into.”

    Yocum said more transparency on pricing is in order.

    “Without this, no other step works,” he said. “People talk about paying for value, for outcome. Unless you know what you paid or will pay, you can’t calculate value.”

    As for Grassley, he said he commends the Iowans who wrote to him when they noticed the EpiPen costs.

    “We’re not done with this,” he said.

    l Comments: (319) 368-8516;

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