In Upward Trajectory of Drug Costs, we discussed the rising costs of prescription drugs and some of the forces driving those increases. This article delves into the market realities impacting the pharmaceutical industry, from drug utilization and costs to financial and operational trends.
Drug Utilization and Costs
First, of course, is the upward trend in drug utilization and costs, especially in the specialty drug area. According to UnitedHealth Center for Health Reform & Modernization, the U.S. spent approximately $87 billion on specialty drugs, or about 3.1% of national health spend, in 2012. Specialty drug spend is expected to reach a staggering $400 billion, or about 9.1% of national health spend, by 2020—just five years from now. Analysts also predict that in terms of sales, seven of the top ten drugs will be specialty drugs.
We should note that specialty drugs affect Medicare beneficiaries more than subscribers to commercial health plans, because the former spend about double for these drugs on a per-person basis than the latter. UnitedHealthcare goes so far as to recommend that the industry pursue “targeted strategies that focus on treatment for those conditions [that currently command the greatest specialty drug spend] and their related medical care.”
Another factor to consider is the imminent increase in generics. With many of the big blockbuster drugs patents expiring in the coming years, it’s expected that more companies will be able to offer generic drugs, which will dial up the pressure of competition. The manufacturers of the original drugs will need to create new revenue streams as well as marketing and cost efficiency strategies. Some experts believe these manufacturers will move increasingly into specialty drugs and biosimilars in order to grow or even just maintain their market share.
What this means is that the specialty drug sector will exercise an increasingly strong impact in terms of both cost and utilization patterns on patients, physicians, pharmacies, and health plans–and by default, employers who offer health benefits to their employees.
General vs Specialized Care
This move toward specialty drugs parallels trends among doctors and physicians, who are increasingly opting to practice specialist care rather than general care, and in fact are selling their general care practices to hospitals. Increasing numbers of physicians are leaving private practice for full-time employment, typically in hospitals. The reasons, according to an April 2015 survey conducted by Jackson Healthcare are:
- The high overhead and cost of maintaining a medical practice
- A desire to focus on the practice of medicine and patient care, rather than administrative hassles
- Reimbursement cuts
Greater numbers of doctors practicing specialty care necessarily translates into a higher rate of prescription for, or at the very least focus on, the kind of medical conditions that specialty drugs treat.
Operational Considerations
With the healthcare markets in so much upheaval right now, one can easily get lost in the nuances of financial and operational data and trends pertaining specifically to the pharmaceutical industry. However, good lessons can be learned from some of the challenges facing the specialty pharmacy market. Certain factors should be noted as areas ripe for improvement and innovation for pharma in general:
- Challenges to integrated clinical management: approximately half of the specialty drug spend is funded as a pharmacy benefit, while the other half is funded as a medical benefit.
- Misaligned payment incentives: specialty drugs administered in high-cost care settings like outpatient hospital environments carry much higher per member per month costs than the same drugs administered in physician’s offices.
- Coordination and adherence programs: synchronizing specialty pharmacy and pharmacy/medical services can yield cost savings in the double digits.
- Big data: big data from pharma’s supply chains can provide greater insights into and more intelligent forecasting for areas of risk as well as growth.
- New business models: profit in the pharmaceutical sector no longer depends on who owns which molecules, but who can develop and implement the most effective strategies to market the right products in the right markets—especially emerging markets. Other strategic approaches include new payment models, clinical pathways, and new forms of collaboration between patients and providers.
- Flexible supply chains: pharma companies might want to start peeking over the shoulders of retailers, who have had to respond to fragmented markets with widely varying needs and low profit margins with innovative and efficient models and strategies.
Bottom line, pharmaceutical companies must look for ways to lower risk, rev up discovery of new opportunities, and increase efficiency and transparency across all of their operations.
Consumers Play a Role Too
While an opinion does not a market make, public perception can be strong enough to move it. This June, the Henry J. Kaiser Family Foundation conducted a survey to assess public opinion about the costs of prescription drugs. Almost 75 percent of those surveyed (1,200 adults throughout the U.S.) felt that medications cost too much, and placed responsibility for that high cost on the drug manufacturers, citing corporate profits as a major factor. Approximately half of the respondents reported taking a prescription medicine and a similar percentage said the government should do more to regulate prescription drug prices for consumers. Finally, about 70 percent said health insurance plans should cover high drug costs if no lower-cost alternative exists, even if that means higher premiums for other patients.
PwC’s Health Research Institute found similar trends. Of those with employer-based insurance, the percentages of those who skipped or took less medication than prescribed, delayed or skipped a procedure or treatment, opted not to see a specialist or doctor of any kind, and asked for a generic drug rather than a brand, ran in the double digits (ranging from 16 to 28 percent).
Consumers are also expected to utilize more virtual care, or telehealth services, which will help reduce costs on all sides.
How Are Employers Reacting?
Faced with increasing health care costs, employers are responding by shifting some of them onto employees. The percentage of employers offering only high-deductible plans for employees has nearly doubled since 2012: it went from 13% in 2012 to 25% in 2015.
But as cost-sharing increases, people forgo care and medications. This seems to fly in the face of the market trends we just discussed: drug costs are higher, manufacturers and physicians are focusing more and more on specialty medical conditions, and yet the general public is choosing less specialty care and asking for less costly drug prescriptions.
If employers want to avoid paying a higher price in the long run for transferring costs onto their employees, PwC’s Health Research Institute posits, they need to enable their workers to make informed health care decisions. In fact, this is what has begun to take place: employers and health plans are creating new tools and programs to meet the needs of the cost-conscious consumer, from remote care delivery to comparison shopping. Health advisory companies like Fallon Health, Honeywell International and Spendwell Health offer online tools that provide information and resources for employers and employees alike, and reward them with financial and other incentives.
Employers also need to work more closely with their insurance carriers to provide greater care management when it comes to specialty medications. In some instances, a $100,000 specialty drug can be more effective and less costly than invasive surgery. Other situations will call for cost controls and cost sharing. There is no one formula that provides all the answers—but the best solutions always respond to the unique circumstances of the parties involved.
Whether or not the institutional players in the health care story—the drug manufacturers, health insurance companies, pharmacies and employers—will fully respond to the desires and concerns of consumers remains to be seen. One thing, however, is certain: there is a growing disparity between the focus and actions of individual consumers and employees on the one hand, and the organizational players on the other. Just as physicians and drug manufacturers move into the specialty drug markets, and as employers offer high-deductible plans as the only option, so consumers are becoming more conscientious and demanding about their healthcare and lifestyle choices. Rather than widen this gap, it would behoove the institutional stakeholders to align their financial and operations goals with the volatilities of a market that is ultimately driven by the consumer, and enjoy a robust health care environment that delivers benefits to all.
Alan Wang is the President of UBF and serves as the lead consultant. He has delivered the UBF solution set throughout the world and is highly regarded for his areas of expertise. You can follow him on Twitter @UBFconsulting.