One of the leading causes of rising prescription drug prices in recent years is the increase in so-called “specialty drugs,” something that is caused, at least in part, by the benefit design of the Medicare Part D program. Democrats are hoping to tackle this problem by letting the federal government negotiate with drug manufacturers.
While there seems to be no set definition of a specialty drug, one aspect that most definitions agree on is that it is a drug with a high price. Medicare, for instance, deems a drug to be specialty if a one-month supply costs $670 or more.
One reason manufacturers are often able to charge high prices for these drugs is that they seldom have much competition. A specialty drug is often one that is the only drug treating a specific condition. Furthermore, these drugs are usually still under patent, which means there is no competition from generics.
For example, the drugs Sovaldi and Harvoni, both made by Gilead Sciences, were until 2017 the only drugs that cured hepatitis C. That gave Gilead considerable negotiating power, and in 2015, a one-month supply of either drug came at the cost of over $30,000.
Insurance companies that offer plans under Medicare Part D are supposed to negotiate lower prices for these drugs, but the catastrophic coverage portion of Part D reduces their incentive to do so. Under Part D, catastrophic coverage is reached when the insurer and the beneficiary incur annual drug costs of $9,700. For every dollar of drug costs incurred thereafter, 5% is paid by the consumer, 15% is paid by the insurance company, and 80% is paid by the federal government.
“What this section of Part D does is it changes who holds the risk for drug spending,” said Richard Frank, the Margaret T. Morris professor of health economics in the Department of Health Care Policy at Harvard Medical School. “In parts of Part D, most of the risk is held by the prescription drug plans and the consumers. Once you hit the [catastrophic] section … the federal government picks up most of the tab. What that does is weaken the negotiating incentives for the prescription drug plans.”
In a research paper examining the effect of Part D on drug prices, Frank wrote, “Imagine the price consequences if the purchase of iPhones were 80% subsidized by the government so that retailers paid 15% of the price and consumers paid 5%.”
Drug manufacturers also offer rebates and discounts to insurers for including their drugs on their plans. That further weakens the incentives of insurers to negotiate.
“There has been a very clear drilling by drugmakers at trying to get drugs into that catastrophic level so that they can make a lot of money,” said Frederick Isasi, the executive director at Families USA, a national, nonpartisan consumer healthcare advocacy organization.
The numbers suggest that drug companies are putting more resources into higher-cost specialty drugs. Express Scripts claimed that about 75% of new drugs on the market were specialty drugs, while CVS claimed it was 80%.
The Office of Inspector General at the Department of Health and Human Services found that federal spending for the catastrophic coverage portion of Part D had more than tripled in five years, from almost $11 billion in 2010 to over $33 billion by 2015. Over 65% of catastrophic spending in 2015 was accounted for by high-price drugs, which the OIG defined as any drug costing $1,000 or more per month. In 2010, high-price drugs accounted for only 32% of catastrophic spending.
Data from the Centers for Medicare and Medicaid Services shows that there were 158 drugs in 2019 covered by Part D that cost $1,000 or more per dosage unit. Seventeen of those drugs cost $10,000 or more for one dose, which would put a beneficiary in the catastrophic coverage portion of Part D almost immediately.
Democrats have proposed H.R. 3, a bill that would require the federal government to negotiate prices with drug manufacturers for up to 125 drugs that account for the largest portion of Medicare spending. The negotiated price of a drug could not exceed 120% of the average price of that drug in countries where costs are lower, including Australia, Canada, France, Germany, Japan, and the United Kingdom.
Frank thought that H.R. 3 would begin to get at the problem.
“You would expect some of those drugs that are among the top 50 highest spending drugs in Part D to be represented heavily in the [catastrophic] portion of Part D,” Frank said.
He also argued that the H.R. 3 approach might have the added benefit of including the cost-effectiveness of drugs into the price.
“A lot of those countries use cost-effectiveness studies to evaluate the price of drugs. The U.K., Canada, Germany, Australia all do that,” he said.
But Chris Pope, a senior fellow at the conservative Manhattan Institute, said drug manufacturers would likely game that type of system as well by offering the drugs to those countries at high list prices and then lowering the prices later by giving rebates and discounts. The list prices in those countries would likely be the ones used by the federal government in negotiations with drug companies.
“Drugmakers are good at structuring payments so that prices are where they want to be. I don’t think H.R. 3 would have the intended effect,” Pope said.
Pope also said that a lot of the high prices will work themselves out over time.
“Over time, the drugs in these specialty categories, once they are developed, they start moving toward patent expiry. Further, the first drug in a category will have a lot of pricing power, but over time, that becomes less of a problem because you’ll have more drug development,” Pope said.
Indeed, Sovaldi and Harvoni, which each cost more than $80,000 for a 12-week treatment, now face competition from other drugs, including Mavyret, which costs just under $40,000. Gilead Sciences has since been losing market share for its hepatitis C drugs and announced in 2018 that it would be authorizing the manufacture of generic versions of those drugs.
But Isasi argued that drug companies can find other ways to reduce competition, especially by extending the patents on their drugs.
“They can do things like patent thickets, which allows them to keep the exclusivity on a drug for far longer. … We’re talking decades and decades, not eight or nine years,” Isasi said.
