The share of health care spending on prescription pharmaceuticals has remained stable in recent years at 10% of health care expenditures. But, medication spending has risen with the rest of health care—the amount spent has risen from $271.1 billion in 2013, to $333.4 billion last year (see National Health Expenditures 2017 Highlights ). In part, this increase reflects many great new scientific developments, new options for consumers, and lower hospitalization rates for many conditions.
Medication pricing have been largely insulated from traditional market forces. Medications are complicated and have efficacy and side effects unique to individuals. Pharmaceutical purchases have happened in the context of a complex rebate system. Third-party payment for medications happens through Medicare Advantage plans and in specialty Medicare Part D plans. The details of coverage of medications by Medicaid plans is determined by each state…enough said.
We’re seeing some movement to change that pricing and reimbursement orthodoxy. Last month, the U.S. Department of Health and Human Services (HHS) proposed a new rule that will eliminate prescription drug rebates between pharmaceutical companies and Medicare Advantage and Medicaid health plans (and/or their pharmacy benefit managers). Instead, those rebates would have to be passed directly to the consumer at point-of sale, who often pays out-of-pocket costs based on the list rate and not the price with the rebate applied (see Fact Sheet: Trump Administration Proposes to Lower Drug Costs by Targeting Backdoor Rebates and Encouraging Direct Discounts to Patients ). In November, there was also the proposal to allow Medicare and Medicare health plans to negotiate pharmaceutical prices. This proposal would amend the Medicare Advantage (MA) program (Part C) regulations and Prescription Drug Benefit program (Part D) regulations to support health and drug plans’ negotiation for lower drug prices and reduce out-of-pocket costs for Part C and D enrollees (see Modernizing Part D and Medicare Advantage To Lower Drug Prices and Reduce Out-of-Pocket Expenses ).
And, breaking with tradition, Medicare has recently granted coverage to some very expensive drugs only if they are effective. Last year, Novartis struck an agreement with the Centers for Medicare and Medicaid Services (CMS) to offer an outcomes-based pricing model for its new leukemia drug Kymriah (see Novartis, CMS Collaborate On Outcomes-Based Pricing For $475k Leukemia Drug ). The drug costs $475,000 per treatment and Novartis will only receive reimbursements for the drug from CMS if consumers respond to the medication by the end of the first month of treatment.
There are also surprising new Medicaid RFPs for medications to treat hepatitis. The Washington State Heath Care Authority (HCA) released a request for proposals seeking a contractor to provide direct acting antiviral medications for hepatitis C virus (HCV). The cost controls? If the volume of state medication orders in a year at the unit price reaches the maximum annual threshold, the contractor will provide additional medication units at minimal to no cost (see Washington Issues RFP For Hepatitis C Medications With An Annual Spending Ceiling ). And, the Louisiana Department of Health (DOH) issued a solicitation for a subscription-like alternative payment model (APM) for hepatitis C medications for the state Medicaid plan and for the state corrections system. The cost controls? The state seeks offers from pharmaceutical manufacturers to deliver an unrestricted supply of hepatitis C medications and complementary services for five years, in exchange for a population-based monthly payment (see Louisiana To Test Subscription Model For Hepatitis C Drugs ).
The Centers for Medicare and Medicaid Services (CMS) also just approved a waiver requested by the State of Colorado to use value-based purchasing (VBP) for medications, meaning the state can enter into contracts with manufacturers voluntarily for VBP supplemental rebate agreements (see CMS OKs Colorado’s Waiver For Medicaid Value-Based Purchasing ). This comes on the heels of recent news in Oklahoma, where Janssen Pharmaceuticals, Inc. announced that it had entered into a results-based contract for its long-acting injectable antipsychotics (LAIs) with the Oklahoma Health Care Authority (OHCA). Oklahoma is the first state Medicaid program to receive federal approval to adopt value-based pharmacy contracts (see Oklahoma Medicaid & Janssen Enter Into Results-Based Contract For LAI Antipsychotic Medication ). In August, OHCA also entered into a value-based purchasing agreement with Alkermes for a long-acting injectable antipsychotic (see Oklahoma Medicaid Enters Value-Based Contract With Alkermes For Injectable ARISTADA )?
Beyond public payers, private health plans and private employers are changing their reimbursement arrangements models for pharmaceutical agents. For example, last September, UPMC Health Plan announced it started a value-based contract with Boehringer Ingelheim for Jardiance, an oral medication to reduce the risk of cardiovascular death in adults with type 2 diabetes and established cardiovascular disease. The contract links reimbursement of the drug to costs associated with clinical outcomes and reimbursement for the medication will be linked to total costs of care for all people with diabetes treated (see UPMC Announces Value-Based Care Contract With Boehringer Ingelheim For Jardiance ). And, earlier this year, manufacturer Spark Therapeutics negotiated an agreement with Harvard Pilgrim health plan for its new gene therapy to treat progressive blindness, requiring it to refund money if consumers’ vision does not improve.
For consumers, clinical professionals, and provider organization executives, these changes in medication reimbursement raise some important strategic issues. First and foremost, where does consumer choice fit into this new “reimbursement” math? Secondly, like value-based reimbursement in general, how “value” of pharmaceuticals is defined is a key question. Finally, I think these new reimbursement arrangements are going to usher in a new era of partnerships with pharmaceutical companies and provider organizations. It’s going to be an interesting ride!
For more on these developments in the health care system, check out these resources from the OPEN MINDS Industry Library :
For even more, join us at The 2019 OPEN MINDS Strategy & Innovation Institute in New Orleans on June 5 for the session, “What Does It Take To Outlast The Disruptors? Building A New Strategy For A New Market,” featuring Monica E. Oss, Chief Executive Officer, OPEN MINDS.
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