Viewpoint

New Solutions for Curbing Runaway Drug Costs

Payers and providers need to collaborate to manage costs. Encouraging use of generics and biosimilars is one way they can slow down the soaring drug spend.

Zachary Hafner
Advisory Board

The proliferation of specialty drugs in recent years has given rise to a host of new high-profile treatments for complex health conditions such as hepatitis and certain forms of cancer. These drugs, which often carry price tags in the five- and six-figure range, accounted for nearly 40% of the approximately $400 billion in U.S. drug spend last year and represent about half of the drugs in the development pipeline. With cost figures like those and a future that looks like it will bring much more of the same, it is understandable why there has been much concern about out-of-control drug costs.

Multiple parties have a hand in driving the drug-related health care spend, including pharmaceutical companies, health plans, providers, pharmacy benefit managers (PBMs), and, of course, consumers.

In the past, drug costs would typically pass from one party to the next. Ultimately, the portion of total health care spend attributable to drugs was not large enough to raise much of a fuss. This is no longer the case. With dramatically rising unit costs, expanded utilization, increasingly complex benefit plans, enhanced requirements for justification (for example, pre-authorizations), and skyrocketing out-of-pocket costs for patients, the drug spend is on everyone’s radar.

Zachary Hafner

Volume is still the principal goal for pharmaceutical companies. The more product they sell, the greater the benefit in revenues and profit. However, pharma is under increasing competitive pressure. In this new era of specialty drugs, many products involve proprietary biologicals, giving rise to the concept of biosimilars, a new frontier for pharmaceutical competition. Assuming the rules of economics remain intact, the introduction of biosimilars into the pharmaceutical marketplace should result in expanded choice, increased competition, and lower prices.

For payers and providers, who essentially function as gatekeepers between the production and consumption of health care, the situation is very different. Long at odds, their interests are now becoming more compatible and aligned. In today’s value-based, outcomes-driven environment, both are motivated to deliver on quality and control costs.

The challenges associated with specialty pharmacy, biologics, and biosimilars require a whole new playbook, one with collaboration as the organizing principle. Payers and providers can work together in several areas to rein in the galloping drug spend:

Clinical management. Given the rapid evolution of the pharmaceutical market, the question is no longer whether a treatment exists for a condition, but how effective it is. The pace of innovation and approvals puts a premium on keeping up with the incoming waves of new research, driving adherence to evidence-based protocols, and engaging with patients so they follow treatment as prescribed.

Cost containment. When it comes to pharmaceutical cost and trend, misaligned incentives can get in the way of optimal solutions. Payers and providers must streamline their processes, especially as they pertain to medications, and wring out unnecessary expenditures whenever possible. Reducing costs can involve many levers, including standardizing therapies and negotiating prices accordingly, expanding the use of generics, exploring biosimilar alternatives, and optimizing use of the 340b program.

Appropriate sites of care. When it comes to specialty drugs, the driver of total cost is not just in the unit pricing but also in how and where those drugs are administered. Costs can vary widely depending on whether a drug is administered in the physician office, at a specialty pharmacy, or at home. Working jointly to steer patients to the most effective sites will boost total effectiveness and help control costs.

None of this will be easy. Even if drug-cost legislation is enacted, there is no guarantee such controls will be effective absent providers and payers working together. But, if we can get it right, we can hold specialty pharmaceuticals to the same standards of value that are reshaping the rest of health care.

Zachary Hafner leads the Advisory Board’s strategy consulting practice.

Now available

Precision medicine, big data, Alzheimer’s Disease, migraine, and RNA therapeutics.
Learnings from the April 2018 meeting.
Edited by Jill Condello, PhD, ICON Access, Commercialisation & Communications