Whilst decrying rapid increases in drug spending and prices, elected officials have actually made it increasingly difficult for insurers to do anything about it. As payers, insurers are the only parties in the health care system who have both the means and the incentive to counter drug firms' pricing power. For example, insurers have aggressively steered patients from branded to generic drugs, saving billions in the process. However, much of the growth in drug spending is attributable to new drugs that do not yet face generic competition.
In normal markets, monopolies face constraints on their pricing power. The higher they set the price, the less they sell. Insurers want to present drug companies with the same trade off, but as I describe here, numerous policies enacted in the name of facilitating patient access limit insurers' ability to do so.
Prior authorization requirements are unpopular but effective. Seven insurers in New York state recently dropped their prior authorization requirements for hepatitis drugs after the Attorney General Eric Schneiderman threatened to sue them for deceptive advertising. The drugs are highly effective but cost almost $100,000 per patient. Schneiderman argued that prior authorization for hepatitis drugs is inconsistent with insurers' promise to cover all "medically necessary" treatments.
Insurers wield the ability to impose prior authorization requirements as an implicit threat during negotiations with drug companies over prices. According to internal documents from the drug maker Gilead that were released as part of a Senate Finance Committee report, concerns about prior authorization requirements figured prominently in Gilead's internal deliberations over the prices of its hepatitis drugs. If Gilead did not have to worry about prior authorization requirements, it might have set prices even higher. The Attorney General's action will make insurers reluctant to impose prior authorization requirements for high profile drugs and threatens to shift negotiations between insurers and drug makers to the political realm.
Protected class policies hamper Part D insurers' ability to negotiate lower prices. Both Donald Trump and Hillary Clinton want the government to negotiate with drug companies for lower prices on the prescription drugs covered under Medicare's Part D benefit, but none have acknowledged how current policies hamstring private insurers' ability to obtain lower prices. Medicare regulations require Part D insurers to cover all drugs in six "protected classes," which include drugs to treat mental illnesses and cancer. Insurers cannot use prior authorization requirements or step therapy protocols, where patients are encouraged to try a less expensive drug before moving on to a more expensive one. Attempts to roll back this regulation have been met by fierce resistance from patient advocacy groups and legislators. Payers cannot negotiate over prices for drugs they must cover unconditionally.
Capping out-of-pocket payments makes drug demand less responsive to prices. Formulary tiering is another tool payers use to lower drug spending. For example, if a drug maker grants a discount to a health plan, the plan could reduce patients' copayments to $10 per prescription instead of $25 or even $50. Unfortunately, state laws that cap patients' out-of-pocket spending threaten to undermine this tool. However well intentioned, these laws make the demand for drugs less responsive to price. When deciding what price to set, drug firms know that they can increase the price beyond the level of the cap without reducing demand among insured consumers.
Part B payment encourages companies to set higher prices. Under Medicare's current reimbursement scheme for chemotherapy drugs and other drugs that physicians administer in their offices, physicians make more money when they use more expensive drugs. The system makes little sense: physicians' administration costs for an inexpensive drug are the same as for a costly product. The reimbursement policy encourages drug companies to set higher prices. CMS has proposed a test of an alternative model that would pay physicians in some regions a mark-up of 3 percent of the drug's price instead of the customary 6 percent. Although the proposal has the backing of many health policy experts, CMS has met with a bipartisan wave of opposition from Congress.
Conflicting Goals
Patients are justifiably concerned about both the cost of drugs and insurers' attempts to limit access to them. Responding to these concerns, many elected officials view the aims of lowering prices and ensuring unlimited patient access as complementary. But there is an inherent conflict between them. Insurers' negotiating power—and thus their ability to lower drug prices—hinges on their ability to restrict access. Yet in many ways, policymakers have stripped that ability away from insurers.
Author's Note
Dr. Howard has received grant support from Pfizer, Inc.
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