Hospitals, middlemen inflating healthcare costs

Written by Marc Samuels, Lindsay Bealor Greenleaf

Inflation in U.S. healthcare spending slowed dramatically in 2016, according to government national healthcare expenditures (NHE) figures released in January, but out-of-pocket costs rose at the fastest rate in 10 years, leaving many Americans with empty pockets.

While there is ample opportunity for payers, providers, manufacturers and suppliers to lay blame, the NHE survey may provide a better sense of where the issues actually lie.

To start, the NHE data shows spending on hospital care continues to grow faster than overall healthcare spending. This is especially notable considering hospitals enjoy perks that other stakeholders do not have access to, like $25 billion in annual tax breaks, and large prescription drug discounts ($16 billion in 2016 alone). The “340B Drug Discount Program” was enacted by Congress to help uninsured patients by providing eligible hospitals with steep discounts on prescription drugs. But the statute neglected to explicitly require that these discounts be passed on to patients, which has allowed 340B hospitals to profit from patients buying medicines at full cost even though the hospitals received enormous discounts for the drugs.

Perhaps surprising given the recent negative media blitz, prescription drugs experienced significantly reduced spending growth. The NHE data shows spending on retail prescription drugs increased by only 1.3% in 2016. Officials at the Centers for Medicare & Medicaid Services (CMS) attribute this slow growth to “fewer new drug approvals, slower growth in brand-name drug spending as spending for hepatitis C drugs declined, and a decline in spending for generic drugs as price growth slowed.”

That second point is particularly important. Hepatitis C drugs like Sovaldi and Harvoni, both from Gilead Sciences, arrived on the market with near-six-figure price tags that attracted plenty of attention from consumer advocates and government officials. And yet the promise of both treatments was an actual cure for a disease that over the long term leads to bigger problems, like cancer, diabetes and increased risk of stroke.

Even at their original price—before the pressure of new competitors spurred significant discounts—these miracle drugs represented an overall cost savings for the U.S. healthcare system. The ability for innovative therapies to reduce costs throughout healthcare over time is something we’re going to start seeing the benefits of in future NHE reports.

The NHE data make it clear that policymakers need to focus their attention on one area in particular: out-of-pocket spending. For prescription drugs, Congress and the Trump administration have the power to provide real relief to patients’ pocketbooks by cutting out the middlemen who are extracting profits while not injecting value.

Out-of-pocket spending on medications has been on the rise as pharmacy benefit managers (PBMs) exploit flaws in prescription drug plans’ benefit design. PBMs, who are the brokers between payers and pharmaceutical companies, negotiate and receive significant reductions in drug prices, yet the amount a patient pays at the pharmacy counter is based on the prediscounted original list price.

Compounding the problem, list prices have been artificially inflated in recent years as PBMs threaten to exclude drugs from their preferred drug lists, referred to as “formularies,” unless the manufacturer agrees to provide higher rebates. Exclusion from a formulary would mean patients lose access to the drug, which means the threat of formulary exclusion incentivizes higher list prices to allow room for the steep discounts and rebates enjoyed by PBMs. This interaction with middlemen explains why a study (PDF) by the Berkley Research Group found that manufacturers retained less than half of total U.S. spending on prescription drugs.

For the 44 million seniors enrolled in Medicare Part D prescription drug plans, CMS found that the growth in rebates paid by manufacturers to PBMs is driving higher out-of-pocket costs. Between 2010 and 2015, the amount of all forms of price concessions received by Part D plans and their PBMs increased nearly 24% per year, which is twice as fast as total Part D gross drug costs.

To reduce patients’ out-of-pocket costs on prescription drugs, the first step is to address the PBM middlemen who distort the supply chain at patients’ expense. The good news is that CMS has already begun its official process to learn how to close the gap with a recently published Request for Information (PDF).

Leaving Americans with empty pockets is unconscionable. Payers and providers should take their cues from manufacturers and suppliers like the pharmaceutical industry: listen to patients, heed government signals and understand that a shifting marketplace will continue to shine a light on total cost of care and bad actors.

Marc Samuels is the CEO of ADVI, a healthcare consulting firm representing life science companies and healthcare provider organizations. Lindsay Bealor Greenleaf is ADVI’s Director of Public Policy.
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