Pharma's specialty drug pricing can torpedo US health care

by Daniel R. Hoffman, Ph.D.

Published Jul. 2, 2015, 3:39 p.m. ET

This past February CVS/Caremark issued a report that forecast a new class of cholesterol drugs, the PCSK-9's, will cost the U.S. health care system as much as $150 billion a year. Some observers dispute the size of that projected cost, but at the same time the pharma companies are also preparing to launch other therapeutic classes whose combined cost can easily fracture the entire U.S. health care system.

Immuno-oncology products are the prime example of one such budget-busting class. Most analysts see the worldwide I-O class as amounting to $35-40 billion annually, but others see its cost as closer to $100 billion a year.

All the while, organized pharma's lobby, the Pharmaceutical Research and Manufacturers Association, fervently clings to its classic but irrelevant claim that these exploding prices are a "value" because they preempt higher health care costs down the line. In other words, the industry has no intention of moderating its prices for new specialty products.

Major payers (i.e., employers and insurers) and their agents, pharmacy benefit managers (PBMs), are sounding the alarm that these and other new drug classes can disrupt employee coverage and explode premiums within the next two or three years.

The PBMs have told their payer clients and others that if they are unable to substantially force down prices for I-O and PCSK-9 products by inducing price competition among pharmas, they will advise payers to "carve out" pharmacy benefits and work to get coverage of those particular therapeutic classes reclassified by the federal government's Center for Medicare and Medicaid Services (CMS).

These two processes can each prove wildly disruptive.

A carve-out means that a self-funded employer or an insurer, instead of covering a certain benefit class such as prescription drugs, on its own, designates a specialized insurer to collect those premiums from covered members and provide the benefit. Right now, for example, most coverage plans carve out dental and vision care benefits.

Carve-outs will significantly increase the total costs of pharmacy benefit premiums for employers and consumers. They could also create what's known as a "death spiral" segmentation because many young/healthy people will forgo taking I-O coverage and the increasingly unaffordable premiums to older/sicker people would create a public demand for government changes, such as giving price negotiating rights to Medicare. Some PBMS, instead of just carving out particular drug classes, will advise their clients to carve out all pharmacy benefits.

The plain fact is that carve-outs are just another way of slicing and dicing plan design to separate out premium costs and make coverage of physician and hospital services seem lower, even though total premium costs are actually higher. Carve-outs also help employers pass along those extra costs to their workers. The more a payer disaggregates or unbundles a health plan, the more it can juggle the components to offer additional price points, thereby obscuring the real costs and coverage for consumers and employees.

Most employees won't know the difference until someone in the office runs into a coverage problem. Few people understand health plans now and they keep getting more complicated all the time.

Even now, health plans are starting to carve out cancer. For example, United Health, the nation's largest health insurer, offers such plans. Some of its plans enable people to purchase a "cancer rider" as an up-sell option. United Health also offers a health plan specifically for diabetics.

Then there is the matter of how CMS classifies immuno-oncology therapies. Pharma and the equity analysts that see I-O as the industry's big, rock-candy mountain, pin their rosy forecast on the idea that PBMs will be unable to contain prices in that class because they constitute infusion therapies, administered to patients in the hospital or at infusion centers. As such, they are classified as medical benefits rather than pharmacy benefits. That means Medicare, Medicaid and the private insurers that follow CMS's designation, just pay the prices as charged without an opportunity to demand rebates or otherwise negotiate.

Integral to that process is the so-called "buy and bill" system in which oncologists buy the medications from pharma companies at a negotiated discount and then bill the payers for reimbursement at a full, list price. The profit made by cancer specialists in this rigged system represents, in many cases, a majority of their incomes.

The PBMs are now working furiously to get infusion therapies such as I-O's designated as pharmacy rather than medical benefits and it's conceivable that such a move could gain some acceptance, even among a segment of Republicans in Congress. That's because, before Obama made the Affordable Care Act (ACA) his signature issue, the idea was developed by the market-worshipping Cato Institute and introduced by the Republicans in 1993 as an alternative to Hillarycare, the Rube Goldberg plan introduced by the Clinton administration.

The essence of the ACA is that it was modeled after the health care systems of Switzerland and the Netherlands and it is based on the blind faith that private insurers can do a better job of managing health care than a government-run, single-payer system. Such an approach was embraced by Republicans until Obama adopted it because it justifies private profits (in this case, those of insurance companies that pay off Republicans), as well as the insurers' 30% costs for administration, marketing and selling (versus Medicare's 3%).

Faced with a potential breakdown of a for-profit, health care system in private hands, even Republicans may go along with switching infusion therapies to pharmacy benefit status. That would forestall the need to give Medicare price-negotiating rights and it would give PBMs the ability to manage a for-profit system, rather than admitting the inevitable by enacting a single-payer approach.

Pharma's political contributions and the profit-retaining interests of oncologists oppose reclassifying immuno-oncology products as a pharmacy benefit. Public outrage at unaffordable insurance costs are one of the few things that can derail their influence.

All of this is relevant in a very practical sense because the cost consequences of I-O's and PCSK-9's will appear within the next two or three years, so it won't take a decade or more to see if any crackups actually occur.

While prices for cancer and cholesterol meds will bring things to a head sooner, at the same time there will also be more high-deductible plans because of the scheduled "Cadillac tax," even as company HR departments that are supposed to advise employees keep getting smaller. Meanwhile, the insurance brokerages that sell plans to small businesses and some individuals are consolidating, leaving those clients with less guidance while the plans grow more complicated.

So a crunch time will come where public anger condemns unaffordable health insurance costs and inadequate service for selecting optimal coverage. It will be coming sooner rather than later and pharma is doing its part to make a smashup more likely.