State Prescription Drug Purchases. Pricing Standards. Initiative Statute.

Jeffrey S. Hoch, PhD Professor, Department of Public Health Sciences

Associate Director, Center for Healthcare Policy and Research

University of California, Davis

Dominique Ritley, MPH Senior Health Policy Analyst, Center for Healthcare Policy and Research

University of California, Davis

JOINT INFORMATIONAL HEARING SENATE HEALTH AND ASSEMBLY HEALTH COMMITTEES SENATOR HERNANDEZ AND ASSEMBLY MEMBER WOOD, Chairs 1:30 p.m. - Room 4202 May 10, 2016

The opinions expressed here are not necessarily representative of the official positions of UC Davis or our research partners. 1

Drug costs are of concern…

There’s reason to believe the state is feeling the cost pressure of new Hepatitis C drugs like Sovaldi, drugs which California says cost $85,000 per course of treatment. “It’s a very serious problem,” said California Health and Human Services Secretary Diana Dooley about the high cost of prescription drugs. Dooley says drug prices are a problem for many health care payers; CalPERS, Medi-Cal and private insurers, too. The state is addressing the issue “in every way (it) can.”

http://www.reuters.com/article/us-health-cancer-costs-idUSKCN0XX21H

http://www.nytimes.com/2015/12/20/opinion/sunday/no-justification-for-high-drug-prices.html?_r=0

http://tinyurl.com/jtuawmf

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Prescription drug costs

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(Price x Quantity) – (Rebate + Discounts) = Total Cost

In 2011, the US spent 17.7 percent of its GDP on health care; no other OECD country reported > 11.9%.

4

US Health Care Spending More Than 2x the Average for Developed Countries

http://tinyurl.com/zkh7qv6 5

http://tinyurl.com/kl38vt4 6

Peterson-Kaiser Health System Tracker

Source: Kaiser Family Foundation analysis of National Health Expenditure (NHE) Historical (1960-2014) and Projected (2014-2024) data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group (Accessed on December 7, 2015) Note: 2014 to 2015 percent changes are calculated using 2014 and 2015 projected amounts.

Growth in prescription spending had slowed, but increased rapidly in 2014 and 2015

Average annual growth rate of prescription drug spending per capita for 1970’s – 1990’s; Annual change in actual prescription drug spending per capita 2000 – 2014 and projected prescription drug spending per capita 2015 - 2024

7.1%

11.8%

10.4%

14.7%

13.7%

12.6%

10.9%

8.1%

5.4%

8.2%

4.2%

1.5%

3.8%

-0.7%

1.5%

-0.6%

1.6%

11.4%

6.8%

3.6%

5.2% 4.7%

5.1% 5.5% 5.6% 5.8% 5.8% 5.9%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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70

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80

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19

90

s

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Prescription (Actual) Prescription (Projected)

Total Health (Actual) Total Health (Projected)

http://tinyurl.com/zg256ug

Peterson-Kaiser Health System Tracker

Source: Express Scripts 2014 Drug Trend Report and Year in Review. Available at http://lab.express-scripts.com/drug-trend-report/ and http://lab.express-scripts.com/drug-trend-report/introduction/year-in-review

Costly new specialty drugs are a major driver of increased health spending

Express Scripts drug spending growth trend by therapy class, 2006 -2014

14.1%

30.9%

2.4%

6.4%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Specialty Drug Trend Traditional Drug Trend Overall Drug Trend

http://tinyurl.com/go8hwhb

Recent spending on specialty medicines increased 21.5% to $150.8Bn on an invoice price basis (2015)

http://tinyurl.com/z9vbw6z 9

http://tinyurl.com/hqdxgwl 10

How are prices determined?

• Pharmaceutical manufacturers set “List Price”

• Patents and exclusivity rights affect price setting

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• Laws and regulations alter all the marketplace

• Medicaid and VA wield the most power to negotiate lowest prices (federal laws and regulations)

• Medicare and private sector are limited in negotiations via formularies

Power sources and distribution of power among purchasers/payers

An explanation of cost uncertainty

Ginsburg, Ritley, Durbin, Perez and Hoch, (2016) 12

Pharmaceutical manufacturer sets price

Low

er

H

igh

er p

rice

s A Representation of Differences in Purchasing Power Among Public and Private Entities

Medicaid Best Price* (~63%)

Medicaid Net Manufacturer Price*

(~51%)

VA Average Price* (~42%)

Average Manufacturer Price*

(AMP) (~79%)

List Price* (100%) Private Purchasers Use formularies to

negotiate discounts and rebates, but are

prevented from receiving prices

lower than Medicaid

Medicaid

Federal law requires that the Medicaid program receive

manufacturer rebates (calculated using lowest (best) net price paid by

private sector). State Medicaid programs may

receive supplemental rebates for drugs on their contract

drug list

Medicare CMS cannot

negotiate prices or establish a Medicare

formulary. Plan D drug plans negotiate similar to commercial

plans

Veterans

Administration The only purchaser

permitted to receive a price lower than

Medicaid.

*Price definitions may be found in Prices for Band-name Drugs Under Selected Federal Programs. Congressional Budget Office, June 2005.

?

Medicaid Supplemental

Rebate* (?)

Concluding thoughts…

• U.S. pharmaceutical prices are among the highest worldwide.

• Of particular concern are specialty drugs, which are expensive and increasing in use.

• No one (except the manufacturer) knows both what the VA pays and what Medi-Cal pays.

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State Prescription Drug Purchases. Pricing Standards. Initiative Statute.

Jeffrey S. Hoch, PhD Professor, Department of Public Health Sciences

Associate Director, Center for Healthcare Policy and Research

University of California, Davis

Dominique Ritley, MPH Senior Health Policy Analyst, Center for Healthcare Policy and Research

University of California, Davis

JOINT INFORMATIONAL HEARING SENATE HEALTH AND ASSEMBLY HEALTH SENATOR HERNANDEZ AND ASSEMBLY MEMBER WOOD, Chairs 1:30 p.m. - Room 4202

The opinions expressed here are not necessarily representative of the official positions of UC Davis or our research partners. 14