Top four approaches to reduce pharmaceutical costs

As rising pharmaceutical costs continue to challenge healthcare leaders, Managed Healthcare Executive conducted its second annual managed care pharmacy survey during the first quarter of 2017. More than 200 executives at benefit management organizations, community/retail pharmacies, hospitals, health plans, specialty pharmacies, and more, weighed in.

Overall, survey respondents agreed that the top challenge facing managed care pharmacy is rising pharmaceutical costs, particularly when it comes to specialty drugs. However, they were split on what drives specialty drug costs, with 36% stating that the biggest driver is growing demand due to an aging or increased population; 21% saying it is manufacturer pricing for new products; 16% choosing new specialty drugs; 12% blaming broadened labeled indications and off-label use of existing products; and 11% citing inflation rates for specialty drugs already on market.

RademacherKellie Rademacher, PharmD, senior director, specialty solutions, at Precision for Value, a pharmaceutical consulting firm, says growth rate is a huge factor indeed, as the number of specialty agents and demand for specialty drugs is projected to be 15% to 20% annually for years to come, according to the Alliance of Community Health Plans. In fact, the alliance reports that specialty drugs have been projected to comprise 50% of all drug sales and reach approximately $402 billion in spend by 2020. Manufacturer pricing of new products is also a significant driver of specialty drug costs. For example, since 1990, the cost of newly approved oncology agents has risen tenfold.

Constance Wilkinson, of Epstein Becker & Green, a law firm with a focus on federal healthcare contracting, also believes that the survey’s responses reflect aspects of the current landscape, specifically the higher prices manufacturers typically assign to specialty products when launching them.

WilkinsonShe agrees with survey respondents that a major factor in rising specialty drug costs is increased demand due to more people being at an age where they are likely to experience a condition requiring them. “This is the case for some treatments such as those for rheumatoid arthritis, but not necessarily for others such as oncology drugs or those for rare diseases,” Wilkinson says. For the latter drugs, the price may be driven more by a condition’s criticality or the smaller population for which the drug is indicated (i.e., a more limited market). 

Regardless of the reasons for rising costs, the current model is unsustainable. For patients to have access to the medications they need, MCOs must identify ways to address the rising costs.  

Here are four more key findings from the managed care pharmacy survey that reveal how your peers believe this issue can be addressed.

Next: Finding #1

Finding #1: Collaboration is critical  

In the survey, more than half of respondents, 54%, said increased collaboration to identify the most effective and cost-effective treatments is the most effective way to reduce pharmacy costs, for both specialty and nonspecialty drugs.

Other responses included adopting more stringent, evidence-based clinical pathways (14%); more aggressive and expanded utilization management strategies (14%); and narrower and/or exclusionary formularies (7%).

Hinde“Collaboration could indeed have a positive effect on drug prices in the both the near and long term,” says Will Hinde, managing director, West Monroe Partners, a business and technology consulting firm with a focus that includes healthcare. “Collaboration in the near term between the payer, provider, and patient would seem to offer hope for near-term price relief to consumers through better payer/provider coordination. However, significant barriers exist to this collaboration as each of these constituent groups jockey to ‘own’ patient and health data from various sources. Sharing all relevant data and information to truly identify cost and efficacy is a laborious and costly effort, and will take a long time.”

Opportunities for collaboration to reduce pharmacy costs include biomarker-based diagnostics and prior authorization standards, Hinde continues. These depend on laboratory results to identify whether a patient is an appropriate candidate for a specialty treatment, prior to authorization or reimbursement.

For example, providers, payers, and drug companies could collaborate to develop and validate genomics-based assays that identify patients with specific genetic and biomarker profiles to understand the efficacy profile before applying expensive biologic or oncology treatments, says Hinde.

Rademacher also believes that when stakeholders, including providers, payers, manufacturers, and health systems, collaborate and share data-from efficacy to provider quality metrics-they can identify the greatest value with the best outcomes to reduce waste and variation. “The industry is already beginning to see these types of collaborations,” she says.

Next: Finding #2

Finding #2: Outcomes-based contracting has potential

Regarding specialty pharmacy costs, 41% of respondents said performance-based (outcomes-based) pricing is the most effective strategy to reduce costs, while 22% said more aggressive and expansive utilization is key. Few respondents opted for exclusive specialty pharmacy contracting (15%); increased government regulation (10%); or formulary exclusions (5%).

While outcomes-based pricing is an attractive concept conceptually, there are many operational impediments to it, says Mark Ginestro, who works with life sciences clients as a principal at KPMG, an audit, tax, and advisory firm:

It is difficult to draw a definitive cause-and-effect link in many instances of healthcare where there are many variables and many treatments working in concert.

It requires sharing information and data-which has proven problematic for providers and payers with antiquated systems that often have challenges communicating within their own organizations.

It doesn’t always rein in costs. There have been instances where the value has been clear, but the resulting cost has been too high-so discussions have reverted to price and utilization.

GinestroPresently, outcomes-based pricing models are in their infancy and will develop and mature over time. Some models are being tested for specific drugs in which both sides have been willing to take some risk to see if it can work. Ultimately, Ginestro says, “Movement to outcomes-based models will not be a quick fix, but I think everyone involved is hopeful that solutions can be found.”

Regarding utilization management, techniques such as prior authorization, step therapy, and quantity limits have long shown the ability to reduce costs by making sure expensive drugs are used for the right patient at the right time, Rademacher says. Though this approach is not new in the specialty space, especially on the pharmacy benefit side, expanding more aggressive utilization management controls to the medical benefit is still a work in progress among payers, she says.  

As far as the best coverage strategy for new, innovative therapeutics and biologics, more than half of respondents, 53%, again opted for value-based contracting or outcomes-based contracting with manufacturers. In addition, 22% said using manufacturer net pricing (wholesale acquisition) is best while 19% thought adjusting the premium costs across the broader pool is the way to go.

Value-based contracting is similar to performance-based contracting in that the financial risk is shared between the payer and the drug manufacturer “As the entire healthcare system moves from volume to value, all stakeholders (i.e., providers, patients, payers, and manufacturers) will need to share in the risk,” Rademacher says. “When all stakeholders have something to gain or lose, the system is more balanced.”  

Wilkinson believes value-based contracting is most attractive to payers because it spreads some of the risk of the drug's performance to the manufacturer. “If the outcomes selected for measurement are not achieved by patients taking the drug, the manufacturer provides price concessions to the payer or other healthcare therapies or services to the patient that effectively reduce the drug’s cost,” she says.

Specifically, Ginestro believes value-based contracting might work with certain therapies in which a new product is trying to gain inroads in a crowded drug category. “Pharma companies will want to take a product with a clear clinical benefit and try to use an alternative payment model that ties pricing or rebates to the performance of certain medications,” he says. “The difficulty is related to measuring patient outcomes and drawing the connection between the use of medications, because many patients may have other health factors that complicate matters.”

Next: Finding #3

Finding #3: Biosimilars could result in big changes

Among survey participants, 66% believe that biosimilars will reduce specialty drug costs over the next few years, leaving 34% as naysayers. One quarter of survey respondents foresee cost reductions due to biosimilars happening in 2018, 14% expect a reduction in 2019, 12% in 2020, and 15% after 2020.

Ginestro agrees with the majority, stating that when biosimilars hit the market, they will reduce specialty drug costs. “Generally, a competitive market will lead to lower specialty drug costs both in terms of switching to biosimilars and the originators reducing pricing to retain market share,” he explains. “But if the original product is still holding substantial market share, those changes may be slow. Health plans and pharmacy benefit managers may be big drivers in that adoption through plan design, but many physicians will opt to keep their patients on treatments that are showing benefit and will be reluctant to change them. Once interchangeability (a designation that a biosimilar is regarded as an equivalent to the original product) is established, payers will have many more options to negotiate prices and manage utilization.”

The biggest question, Ginestro says, is how quickly biosimilars can get to market and when and how quickly interchangeability will be established. Biosimilars have taken a slow path to market in the United States due to patent litigation, and now biosimilar sponsors are seeking interchangeability as part of an initial approval. “Once on the market, there are many competitive dynamics between original products and biosimilars,” he says. The adoption of biosimilars in certain categories will dictate the speed and amount of savings; adoption and uptake will differ by therapeutic area. Without interchangeability, patients with chronic conditions may be reluctant to switch. Over time, new patients with the right incentives in place may be more willing to try them.”

Rademacher also believes that biosimilars will reduce drug costs in the long term. “Adoption of biosimilars in both the European market and the U.S. market has been modest initially, but it can be rapid when discounts are strong and incentives are aligned-as was seen in some Scandinavian and Eastern European countries,” she says. “High drug prices are an incentive for the market to speed adoption, however the lack of interchangeability is slowing uptake. As additional regulatory clarity is provided around interchangeability and both patients and providers become more experienced with biosimilars, their utilization will likely rapidly increase.”  

TaurmanBut Lee Taurman, principal and national life sciences advisory leader for Grant Thornton LLP’s healthcare industry practice, says proceed cautiously. “Biosimilars will likely lower specialty drug costs, but not to the extent that some expect,” he says. “The generic market for traditional small molecule pharmaceutical products has led to more than a trillion dollars in savings for the American public over the last decade.”

Two key elements of the generic market that enable these savings are missing, at least to date, in the emerging biosimilar market, he says:

Most generics are considered equivalent or interchangeable with their branded counterparts; therefore, a pharmacist can “substitute” a generic when filling the prescription. Biosimilars, by their name, are considered similar, but are not the same and are not substitutable in many states.

Generics do not carry proprietary names, but are referred to by their scientific names. All generic manufacturers use the same name for the same drug. Brands, on the other hand, are required to have proprietary names that are specific to the manufacturer. While the rules for biosimilars are still evolving, early entrants have launched with proprietary names. Without substitution and with brand names, the biosimilar market will function more like the existing branded market than the traditional generic market, limiting the potential savings.

Next: Finding #4

Finding #4: An integrated approach for rare disease treatment is key

According to survey respondents, the best long-term approaches to address the high cost of rare disease treatment are more integrated approaches by benefit managers (43%) and deploying more expansive strategies to access risk (21%). Lagging behind in the survey were using benefit incentives to drive consumer engagement and higher-value care (18%) and employing government guidelines or regulations (16%).

More drugs exist to treat orphan diseases than ever, Rademacher says. Agents that treat rare diseases have various routes of administration (e.g., self-injectable, oral, intravenous) and therefore are reimbursed by both medical and pharmacy benefits. “It is essential to integrate the pharmacy and medical benefit to more closely manage these costly diseases across benefits and reduce the total cost of care,” she says. “Management of rare disease drugs is common, but given the lack of competition in many of the rare disease categories, contracting strategies are not generally employed. Expanding the risk-sharing deployed in other specialty disease states by employing value or performance-based contracts could lower costs as seen in other disease states.”  

With the most fragile patient populations, healthcare costs are significantly increased by issues with persistence and adherence due to the difficulty of the drug regimen and the other challenges a patient may face (e.g., scheduling, time, coordination of care), Wilkinson says.

“Stronger patient support regarding drugs and assistance with care coordination can improve outcomes,” she says. “Improved outcomes may make payers less likely to establish conditions of coverage that restrict access and lead to prescriptions that are written but never filled. This will enable manufacturers to consider basing pricing on effectiveness, because patient support will increase effectiveness and the market will become more stable.”

Karen Appold is a medical writer in Lehigh Valley, Pennsylvania.