Restrictive formularies: The path to more affordable drug prices

At the end of June the New York Times examined how pharmacy benefit managers (PBMs), hope to force price competition among pharmaceutical companies.  PBMs act as agents for payers — private insurers and employers — to negotiate drug purchasing contracts and manage formularies.  The plan calls for substantially restricting the drug formularies, i.e., the lists of drugs they will cover.  In cases with three, four or five competing brands in a therapeutic class, the PBMs would alter the current practice in which most of them are covered.  Instead the PBMs and their insurance company clients would cover only one or, at most, two brands.  The idea is that intense competition among pharmas to obtain one of these preferred coverage positions would oblige them to abandon their smug, cartel-like approach in which the prices of various brands differ only marginally.

Pharmas will immediately fight these more restrictive formularies by designing prospective clinical studies in an effort to differentiate their brands and, thereby, make the case that insurers should cover all competing brands in every therapeutic category.

Payers can stymie this pharma effort to keep drug prices high if the insurers use their own coverage data to create and pay for retrospective outcomes studies and then insist that those results form the basis of formulary inclusion/exclusion decisions.  By using that approach, payers in most cases can treat the brands competing for first-line use among the majority of patients as commodity products.  That would allow insurers to select the low-priced brand as the preferred medication.

Pharmas with excluded brands will doubtlessly combat that effort by putting forth their own outcomes data to justify the use of those products, but the PBMs can restrict the non-preferred brands to small, niched segments of patients.  Certain brands are more appropriate for outlier patient groups and payers can approve the more expensive products for such use without substantially increasing total drug costs.

If payers succeed in this effort, it means that market share distributions of branded drugs in the various therapeutic categories will change from the classic 50%-25%-12½%-6¼%-3⅛% to something more closely resembling an 80%-5%-3%-1% split.  Pharma companies know if this practice takes hold, most products at most companies will obtain market shares in that 1-5% range.  That explains their rush to create product lines of expensive specialty products, thereby making more money despite selling fewer pills and injections.

The approach of managing prescription drug use with outcomes analysis is far more rational than the exorbitant pricing that currently exists in the U.S. under the fiction of a free market.  In fact the economics of health care resources would come closer to an actual market if payers took some initiative by aggressively creating and using their own in-house data to stratify the patients they cover.  That would allow them to reserve the expensive brands for the limited segment of patients, in defined circumstances, who need those medications instead of less costly treatments.  Payers to this point have not made this effort, preferring instead to rely on their traditionally passive, live-on-the-float methods.

To take a current example, payers that use data aggressively would develop a solid basis for denying coverage of an exorbitantly priced hepatitis C (HCV) medication such as Sovaldi, because 80%-90% of people carrying the HCV virus do not face serious consequences from the infection within the next couple of years.  Sovaldi would benefit only those infected patients facing a $500,000 liver transplant in the near future.  This sort of analytical work, applied to all insured people, would identify those that fit into higher risk categories where the more costly drugs really do make sense.

So far the private payers have not developed this approach for stratifying patients and using drugs cost-effectively.  Most remain content with their old approaches involving insurance sales, detachment from therapeutic management, and shuffling large dollar amounts in and out every day to make money on the float.  They feel they can continue doing business that way, despite the fact that it costs them more in drug benefits, because they can pass along those costs in the form of higher premiums.

Yet if payers face obstacles to good, affordable health care because of their commitment to an old way of doing business, it is still more likely that the necessary initiatives to make quality care available and affordable will come from the payers and/or the providers that are developing payer capabilities.  Their hidebound ways mean they will probably need to outsource these necessary, innovative projects to pharmacy benefits managers (PBMs) and other vendors such as IT-database companies.

Pharma remains the intransigent problem.  While payers are not wiser or more public-spirited than pharmas, they are under greater pressure to recognize that their continuing survival demands developing a more rational health care system.  Payers may not know how to do that and they also possess too many organizational impediments to achieve the goal.  Those facts notwithstanding, there is a fair chance that they'll outsource the effort because enough payers know they can't keep passing along higher costs to employers and consumers in the form of higher premiums.  If the current trend of rising health care costs continues, some payers believe the U.S. will default to a single-payer system that completely eliminates them from the picture.

By contrast, the pharmas know they can still sell into a single-payer or any other health care system, although not at the outrageous prices they prefer.  Yet without the sort of survival pressure that payers face, pharma finds it preferable to resist the development of a cost-effective health care system.

Pharma's continuing emphasis on specialty drugs will even increase drug costs.  In fact, some observers suggest that unconscionable drug pricing is really a good thing because it will help collapse the U.S.'s currently dysfunctional system and move the country to single-payer.

Although that is possible, it seems more likely that if and when the time of system-wide change approaches, pharma will fall back on its political connections and mass advertising to scuttle any reform efforts.  Reform that truly advances the three-part goal of health care -- access, quality, cost control -- must necessarily jeopardize pharma's profiteering and the industry will exert every means it can to oppose real reform.

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