The Road Ahead For Prescription Drug Prices

Staff portrait of Kathy Hempstead

Katherine Hempstead, PhD, MA, director and senior program officer, leads RWJF's work on health insurance coverage.

Current indications are that slow growth in health care spending will continue at least in the short term. The Altarum Institute’s most recent monthly trend report estimates that health care spending grew at a fairly modest 5.1 percent during the first five months of the year. The Centers for Medicare & Medicaid Services (CMS) projects an even lower 4.8 percent for the year as a whole, lower than the 5.5 percent growth in 2015. Yet this lull may be relatively short lived, as National Health Expenditures (NHE) are projected to grow by 5.7 percent in 2019 and 6.0 percent in 2025.

The Altarum report provides some clues about how different components of health care spending may be contributing to the current period of low growth. One interesting development is the near convergence of growth rates in spending on services and non-services. In particular, prescription drug spending—which has been growing significantly above trend for several years now—grew by an estimated 5.2 percent in May 2016. This is a far cry from just about a year ago, when drug spending was growing close to 12 percent. In fact, the current growth rate is the slowest since December 2013, which was just prior to the introduction of costly Hepatitis C therapies.

One factor behind this decline in prescription drug spending growth relates to the trajectory of sales of Hepatitis C medications. As shown by Altarum, there has been a marked decline in national sales of Hepatitis C therapies, with sales leveling off at about $2.4 billion for the first two quarters of 2016—approximately the volume seen in the first quarter of 2014.

Graph showing reported United States sales of Hepatitis C drugs

The decline in sales revenue likely reflects changes in utilization, since many in the cohort of Hepatitis C patients have already received treatment. Yet this decline also reflects downward pressure on prices as well as competition and public pressure resulting in significant discounts.

One source of downward pressure that might have implications going forward are the formularies negotiated by the major pharmacy benefit managers (PBMs). Express Scripts (ESI) and CVS—in their recent release of their 2017 lists—continued their exclusion of Hepatitis C therapies.

In their 2016 lists, ESI famously excluded both Gilead products, Harvoni and Sovaldi. In 2017, they continued their exclusion of Harvoni. (Sovaldi, although on the national formulary, is still not preferred.) ESI also excluded Merck’s new entrant, Zepatier, despite a lower wholesale acquisition cost. CVS went with the Gilead products and excluded the major therapies by AbbVie— Daklinza, Olysio, Technivie and Viekira Pak.

Clearly the exclusions give PBMs leverage in negotiations, but the actual effect on drug price trends is difficult to measure. ESI claims their formulary exclusions save their customers an estimated $1.8 billion, but the accuracy of this claim is difficult to assess. Additionally, PBMs have their own complicated motives, and are not strict fiduciaries by any means. One example is that differences in refund amounts may have led to the exclusion of Merck’s Hepatitis C product, despite the lower wholesale acquisition cost.

While leverage exercised by PBMs may represent one way to contain growth in prescription drug prices, another potential source of downward pressure comes from the nascent movement toward value-based pricing. This is seen in the growing importance of the cost effectiveness analyses performed by the Institute for Clinical and Economic Review, and in the examples of value-based contracts between payers and pharmaceutical manufacturers. The movement toward value-based pricing is also seen in parts of the Medicare Part B demonstration, although this proposed pilot is currently facing widespread attack from a host of opponents in the provider community. The threat of various other types of price regulation at the state and federal level may also be fostering a bit of restraint in the industry, although this is hard to ascertain.

Looking ahead, the CMS projections convey a glimmer of optimism. Prescription drug spending is projected to grow by 6.3 percent, 7.0 percent, and 6.6 percent for the years 2016, 2019 and 2025, respectively. This, of course, is high, but only moderately above the projected NHE growth of 4.8 percent, 5.7 percent and 6.0 percent for these years. Drug spending is always difficult to predict, due to unanticipated developments in both medications and disease, in addition to a complicated supply chain. But there are some signs that, at least in the short run, we are finding ways to avoid a return to 12 percent spending growth.

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