Health care reform is all the rage, or perhaps better said, the rage is all over health care reform. There is no question that we cannot allow so many people to be uninsured and have so much of our care be emergent, haphazard, and bureaucratic, but fixing it is a challenge and Congress will be battling this one all year. Although the reform could theoretically save some money in some places if done really well, the reality is that sudden availability of care for so many more people could cause costs skyrocket, and low quality care and waste by marginal providers may be increased rather than controlled. There is plenty of waste in the system, but the harder problem of improving quality of care through medically sound management, is rarely discussed.
The challenge for the Obama administration is to locate and cut enough controllable waste to help compensate for the increased spending that the reform might cause. So they search in all the usual places. But there are some other places that easy fixes could be applied that would help reduce costs.
The EveryLife Foundation is focused on reducing the costs associated with the front end of health care development by providing scientifically sound solutions to transform rare disease drug development to reduce the investment needed to reach the patients. We have already made progress with a number of ongoing initiatives that you can review at www.CureTheProcess.org. If these changes get implemented, the pressure toward higher pricing could be reduced allowing the costs of the next generation of rare disease drugs to be rethought. Rare disease drugs will never get cheap because the numbers don’t work with too few patients and still relatively expensive development, but perhaps they could be less costly than they are. However, these savings are many years out and Obama needs the money quickly.
So I would like to offer up another major cost savings area and that is the cost of generic drugs.
YES, you heard right, the cost of generic drugs. Everyone has given a pass to the generic industry and the big pharmacy chains in this whole discussion but I know firsthand that there are still big rip-offs going on in the pricing of generic drugs to health plans by the big chain pharmacies. A recent IMS promotional report paid for by the generic industry used some suspect and unverified cost information to claim that generics saved $734 billion in health care. But the way the pricing is determined is failing to realize that the generic companies and the pharmacy chains are making far more money than they should, given how little they have invested and risked in this process.
So Obama administration, if you are listening, here is the situation on generic drugs that is going on that could be easily fixed and I conservatively guesstimate you could get another $10 billion a year in totally wasted, excess profit, spending on drugs.
My direct experiences come from a drug we made in my former job that went generic. The first generic company launched their product and our sales volume dropped perhaps 85% in 3 months. But costs to patients did not go down because the generic company set their price at a level of around 90% of the Brand price, so only a small discount. This was the average wholesale price (AWP) that a large retail pharmacy or distributor would supposedly pay.
Now for the game, the generic company then does backroom deals with the big chain pharmacies to lock up their business by giving the big chains with most of the prescriptions a huge discount off the published AWP. At that time, we were solicited by a large pharmacy to match generic pricing that was in fact 80-90% less than the price listed as AWP, and put the real cost of acquisition just a little above our cost of goods. However, this greatly reduced pricing was not passed on to the health care system as the retail price of the prescription to the health plans, because health plans get their drug prices from artificially high AWP numbers. We found out by calling pharmacies, that the price of filling a prescription with the generic was decreased only 50 cents to a couple dollars on the original average brand price of $25 dollars -- or in fact only a 10 % decrease even though the pharmacy was getting a much bigger discount when they bought the drug. The patients now had co-pays lowered to perhaps $5 and so it seemed cheaper to the patient, but the health plans were being given a price based on the AWP having no idea that in fact the pharmacy had bought the stuff for much less.
The big chains control so much of the drug business that they can do these deals with the generic houses and cash in during the launch period. Then the next step happens: as more generics come out, the price should go down further but the wholesale price barely goes down and what happens is that each new generic ekes out a deal with smaller and smaller distributors and chains. One year later, there is nice staggered ladder of market share for the generic companies based the sequence of generic product launches, but the AWP does not come down much if at all. The odd thing here is that the generic market share rarely changes for months and months on end. Now one would assume in a real market place, someone would win and market share would change, unless there are other forces causing the deals with pharmacies to stay unchanged. What forces might those be?
To give you an example of how the game works today, I called a bunch of pharmacies in my area to ask how much 30 capsules of 500 mg of amoxicillin would cost, a drug that is in the top 5 prescriptions in the US. The truth is that this drug should be dirt cheap having been generic from the beginning, and is only a few dollars over the counter (OTC) in some countries. I checked COSTCO, who I know has not been charging excessive prices on generics based on my own experience (that is where I go now) and their site quoted $5.90, which is pretty good. Then I called Rite Aid $14.99, Safeway $13.99, Walgreens $16.99, CVS $16.69, and last but not least, an online Natural Pharmacy (amoxicillin without any chemicals apparently), $53.00. So that is about $10 extra per script between the big retail chains and Costco -- not much savings here you say? But wait, there’s more.
In fact, there were 60 million amoxicillin prescriptions in 2006 in the US, which means perhaps $600 million in actual end user excessive charges. Not too shabby for savings from just one popular generic drug.
When I talk with people in the generic business, they privately acknowledge that this game exists and that in fact we are paying way more for commodity drugs than we should. Given that 69% of all scripts are generic, we should not overlook the fact that we are spending way too much on drugs that should be much cheaper and that people who risked nothing and invented nothing are making far too much money off the system. Now you might be saying that they are still saving us money over the Brand pricing, but nowhere near as much as we should be saving, and why should we pay extra to people who risked nothing? Generic drugs certainly aren’t the answer to all our healthcare cost overruns but they could help.
Others have also noted this problem as well so we are not the first to comment on it. In a recent presentation to the Academy of Managed Care Pharmacy, and published in the Journal of Managed Care Pharmacy (http://www.amcp.org/data/jmcp/1002.pdf), Howard Tag and Elan Rubinstein outlined the struggle to curing this waste. To fix this problem with generic drug pricing, First Data Bank (FDB) has tried adding new methods of price calculation including wholesale acquisition cost (WAC), average selling price (ASP), alternative benchmark price (ABP) and average manufacturer price (AMP). All had flaws that missed rebates, bonus payments or other forms of hidden price reduction. Even when WAC was a mandated report of actual contract pricing to pharmacies and ASP was the actual manufacturer sales to all US purchasers, (net of all price concessions and non-Medicaid rebates, volume weighted and calculated quarterly) – the fix was still in.
In fact FDB recently settled a lawsuit (without admitting any wrongdoing) that claimed they had cost consumers and third-party payers and extra $7 billion between August 2001 and March 2005. Some estimates of the changes forced on FDB are nearing $4 billion annual savings for the system. (For a full description of the FDB case, please click on the link below.) http://www.hewittassociates.com/_MetaBasicCMAssetCache_/Assets/Articles/2008/FirstDataBank.pdf
Today a full 45% of all private insurance payments are still based on inaccurate AWP’s. And the game continues.
In reality all you have to do is change the rules around discounting off the published price and costs will decrease. If the generic companies are limited in the volume price discounts they can legally provide to the big chains, then they will be forced to publish the real lower prices to compete legally, and then the health plans will have more realistic wholesale cost numbers to work from, the big chain pharmacies will stop making a windfall they don’t deserve, and a real above-board marketplace will be born.
Mr. Obama, save some money here, we are going to need it.
Good luck to all.
