Centers for Medicaid and Medicare Services (CMS) is cracking down on drug costs again. Pharmacy Benefit Managers (PBMs) engage in a practice called spread pricing, where they pay a lower cost for drugs than the charge to the benefit plans and healthcare consumers. Spread pricing doesn’t mean unfair pricing – it is just less transparent than I believe is ideal. This pricing is used predominately for generic drugs; however, generics make up 90% of total drugs dispensed. CMS believes that this hidden profit should be a visible and transparent part of reimbursement rather than the pricing benchmarks which have previously been used. They also want spread pricing profits to be transparently reflected in calculating the health plan’s profits. CMS asserts that some plans may be using the inflated drug prices in calculating medical costs. Inflating the 85% of plan revenue increases the potential 15% plan expense component.
I am very much in favor of transparency and also favor eliminating rebates. But PBMs are only a part of the problem. The bigger issue is the way drugs are priced. Recently, Novartis introduced a new gene therapy for infants with spinal muscular atrophy at a charge of $2.1 million for the one-time injection.
Development of this drug, which treats a rare condition, is highly profitable for the drug company. No one would argue that our healthcare system is complex – and with complexity comes unintended consequences. A recent Bloomberg article asserts that this level of pricing was facilitated by the 1983 Orphan Drug Act which created incentives for drug manufacturers to innovate with respect to rare conditions: benefits such as tax breaks, rapid FDA review with a lower approval standard and longer patent protection, and prices that can rise to the level the market will allow. I have argued in past blogs that there is no ceiling for life-saving medicines – since it’s the health plan that bears the cost and not the consumer. Who wouldn’t spend an unlimited amount of someone else’s money for a cure?
The next step in controlling drug costs is in amending pricing protocols such as the one established under the Orphan Drug Act. I have favored drug price controls and using government-funded innovator awards. The trick is in finding the balance to encourage continued pharmacy R&D yet not bankrupting the consumer who ultimately funds innovation through rising cost sharing and rising premiums.