I saw a FiercePharma story on ad spending and thought I’d post a little update.  According the story, AbbVie spent $500 million on advertising for Humira in 2020.  The U.S. is only one of two countries that permit direct-to-consumer advertising (New Zealand is the other), so this figure suggests AbbVie spent about 3% of domestic Humira sales on advertising.  Humira is a late-cycle product (it will be subject to follow on biologic competition in 2023), so this ad figure was down year-on-year, and probably represents a bit of an “under” investment as a result.  AbbVie has two other products it thinks will be blockbusters and is investing behind them aggressively.  These are Skyrizi and Rinvoq.  According to FiercePharma, AbbVie spent $202 million on Skyrizi ads and $176 million on Rinvoq ads in 2020.  These figures represent approximately 15% and 27% of domestic sales, respectively.

These three drugs no doubt account for the bulk of AbbVie’s advertising spend.  The company’s other drugs either simply don’t warrant the investment or involve a much different physician-patient dynamic.  For example, drugs in AbbVie’s oncology portfolio simply wouldn’t be expected to be as sensitive to DTC.  Thus, when I see AbbVie spending about 4.8% of sales, in aggregate, on these three drugs, I feel pretty good about the 5-8% figure I use in my “we could use more focus” piece, and suspect the true industry figure is closer to the lower end of this range in aggregate. 

On January 12, HCPF sponsored the 2021 Colorado Health Cabinet Health Policy Summit.  As a part of the program, Commissioner of Insurance, Mike Conway, moderated a panel on prescription drug affordability.  While informative, audience questions suggested that the discussion did not fully address factors affecting prescription drugs costs in the state of Colorado.  At the risk of oversimplifying, I will make an attempt to do so here. 

COSTS

In an attempt to persuade, various stakeholders describe the pharmaceutical industry model in ways that do not accurately portray how drug manufacturers make money.  Often, I will read about how companies spend twice as much on advertising as R&D, which is patently false.  To set the record straight, I’ll do my best here to speak to what it costs to bring a drug to market and to develop and maintain the product once it has been approved. 

Manufacturing.  Loosely speaking, there are two types of drugs – pills and biologically-based drugs.  Categorizing drugs this way is important, because pills are super-cheap to make and biologically-based drugs are not.  Pills are often more expensive to develop, which is why the industry is increasingly trying to develop biologically-based drugs.  When it comes to pills, there is a well-developed manufacturing model.  Companies – often via chemical manufacturing plants in China and India – produce active drug through synthesis (i.e. they take a base substance and modify it several times chemically until they have an active drug someone can eat).  They then make a pill out of it by blending it with inert ingredients and literally pounding it into a pill shape.  This process yields pills that often cost 10-20 cents a unit.  Let’s say you take two pills a day for a year; the math says your pills cost $73-146 for that year.  On the biologically-based side, the manufacturing process is quite different.  While technological improvements are impacting costs in a good way, the vast majority of biologically-based drugs are made by causing living cells to make the active substance in a giant steel vat.  Once the manufacturer makes enough of the active substance, they filter out the impurities and freeze the drug in a specialized container.  These drugs don’t work if simply swallowed, so manufacturers take the active substance and fill syringes with it for injection.  This process yields injection systems that vary widely in terms of cost, but which might run several hundred dollars per unit.  It is typical for manufacturers to pursue biologically-based drugs that can be administered once every month (or even less frequently), which suggests that a year’s worth of drug might cost several thousand dollars to produce.  In sum – pills typically cost low hundreds of dollars for a year’s worth, while biologically-based drugs can run to several thousand dollars.   

Sales, Advertising, Marketing, Administration.  If you look at a pharmaceutical company profit-and-loss statement, you will find a line called “Sales, General & Administrative” or the equivalent.  Different companies use different terms, but it’s all the same stuff.  This line includes several discrete costs associated with a company’s attempts to maximize sales of a product.  As a rule of thumb, roughly one-third of a company’s employees are associated with sales and marketing.  Thus, in order to come up with the costs of promoting a drug, you might estimate what a “fully-loaded” employee costs (e.g. $200,000/yr.) and multiply that by the number of employees dedicated to this function.  “Fully-loaded” refers to an employee’s salary and benefits load, plus travel expenses, information technology, etc.  It is not clear that the industry needs as many sales and marketing employees as it has (a different topic for a different day), but this is where the industry has landed.  On the advertising line, folks jawboning for affordability often get this figure wrong.  It is rare for a company to support a product with a several hundred million dollar direct-to-consumer advertising campaign.  More often, this figure is much smaller or non-existent, either owing to financial or operational considerations.  Companies do advertise to prescribers, so most products receive advertising support, even if the direct-to-consumer component is modest.  Overall, advertising spend is often a mid-to-high single digit percentage of sales.  Finally, administration includes costs associated with non-promotional support.  This can include human resources, finance, IT, etc.  Best-of-breed figures for administrative expense run 4-5% of sales in the pharmaceutical industry, and rarely hit double-digits.  Therefore, for a typical prescription drug company, total SG&A might reach 35% of sales, with G&A at 5-7%, advertising at 5–8%, and sales/marketing accounting for the remaining 20-25%.  If you want to look at this another way, pull up the slides of any major pharmaceutical industry merger.  You’ll see a cost savings figure that hovers around 7% of sales.  That 7% is the elimination of nearly all G&A redundancies, a modest amount of manufacturing rationalization, nearly no net R&D spend (any savings are usually reinvested) and a modest amount of improved vendor contracts. 

Research and Development.  Beyond advertising, R&D is the topic most debated by proponents and critics of the pharmaceutical industry.  It is also the topic where folks deliberately or inadvertently spread the most mis-information.  In most developed nations, there exists a regulatory body that determines whether a prescription drug can be sold and under what conditions.  In the United States, that body is the Food and Drug Administration (FDA).  The FDA requires that drugs are tested exhaustively before they are made available for commercial sale.  Companies have to test new drugs in mice and rats and dogs and monkeys; they then have to test new drugs in small handfuls of people for an initial look at safety, then larger groups of people for a look at both safety and efficacy.  There are two reasons why this is very, very expensive.  First, drugs fail.  For every ten drugs that get tested in a person, one makes it to market.  Second, running trials in people is (too) expensive.  Drug companies deal with specialized organizations that carry out the trial protocols.  They hire the doctors, run the tests and track the outcomes.  If the trial uses a comparator drug, they have to pay for that drug (at full price).  When thinking about the R&D cost of doing business as a drug company, these expenses are largely out of the industry’s control.  It is fruitless to complain about this expense on an individual project basis.  What is in the industry’s control is the number of projects to pursue.  Using comparative effectiveness data and accepted thresholds for what developed countries are willing to pay for improved health, the pharmaceutical industry overspends on R&D.  In other words, for the amount of sales and sales growth the industry generates, it delivers too many failures and too many approved drugs of questionable value.  On another day, I’ll walk through the numbers, but I believe that prescription drug companies ought to be able to spend about 12% of sales on R&D and achieve growth and returns in line with historical averages.  Instead, the average company spends about 20% of sales on R&D. 

OTHER TOPICS 

Generics.  Advocates for improved drug affordability often suggest we need to speed generics to market as a solution.  This is a heavy lift.  Without changes to patent law, specifically related to prescription drug regulation, widespread relief is tremendously unlikely.  Prescription drug companies do aggressively participate in patent “evergreening” activities in order to maximize the period generics are not available.  However, they do so legally.  The second way prescription drug companies maximize the period generics are not available is by settling litigation in a way that benefits the litigants to the detriment of consumers.  Say a drug isn’t supposed to come off patent until 2030, but the patent is questionable and might be invalidated.  The brand company might settle with the generic challenger and allow that company to introduce a generic product in 2028 in exchange for ceasing its attempts to invalidate the patent.  Supporters of the status quo would assert that the two-year earlier introduction benefits consumers, while detractors would assert that the patent was going to fall anyway, so the generic is “delayed”.  As a practical matter, each case is different, and it would be very difficult to have a broad and material impact on drug affordability by pursuing this matter outside of legislation.  Finally, it is worth noting that only a handful of generic companies have the ability to manufacture biologically-based drugs at scale.  With the industry increasingly marketing these types of drugs, it will take time for generics to impact affordability in this area.   

Importation and Reference Pricing.  For a long time, many have highlighted the fact that other countries pay less for drugs than does the United States.  In order to improve prescription drug affordability, advocates have pursued two models that rely on overseas prices – importation and reference pricing.  Importation involves the purchase and physical delivery of overseas drugs, while reference pricing simply involves capping prices or reimbursement at a level tied to overseas prices.  First, let’s get past the quality issue.  Drugs marketed in developed countries are every bit as safe as those marketed in the United States.  The plants are just as clean, the personnel are just as ethical, and the doses and schedules are typically comparable if not equivalent, thanks to the globalization of clinical development programs.  Drugs marketed in under-developed countries can be less safe than those marketed in the U.S., so it is important that any importation program involve a rigorous track and trace protocol.  The issue with importation rests with logistics and supply.  Countries like Canada and France negotiate directly with manufacturers over what price they pay for prescription drugs.  They then have laws in place that govern the degree to which prices decrease over time.  While manufacturers do make drugs available at these prices, they do so because they make enough money in the United States and selected other markets to more than compensate for the reduced profits they make in places like Canada and France.  If the United States attempted to engage in a widespread drug importation program, the industry would probably make some very difficult and unappealing decisions around restricting supply.  When it comes to reference pricing, there is less the pharmaceutical industry can do beyond lobbying and litigation.  Thus, this is a theoretically tractable solution in the same way that permitting the government to negotiate directly on behalf of the Medicare program is a tractable solution.  From the point of view of the state of Colorado, however, there are probably some other items to consider.   

Colorado has expressed interest in capping permitted reimbursement for prescription drugs as a way of improving affordability.  Pharmaceutical companies would still theoretically have the ability to set their own prices, but insurance companies and retail pharmacies, among others, would not be permitted to engage in commerce at levels that exceeded state-established thresholds.  Think of it this way.  It would be as if Mercedes Benz set the price of its E-Class at $60,000, but the local dealership wasn’t permitted to sell it to you for more than $30,000.  Something would have to give.  The state might use overseas pharmaceutical prices as a reference point for the thresholds, but exactly how is an important element in the impact such a stratagem might have on affordability and the industry’s response. 

Middle-Men.  I include both insurance companies and pharmacy benefits managers (PBMs) in my definition of middle–men.  I could include retail pharmacies and wholesalers, which are certainly actors in the pharmaceutical supply chain, but these entities don’t make much money and aren’t really the problem (beyond being complicit).  Manufacturers and consumers should hate PBMs (and their siblings, the insurance companies).  The PBMs business model is to “save” consumers money on the cost of prescription drugs, but their value proposition is tied inherently to higher prices and price increases.  Rather than focus on whether the net price a consumer pays for a drug is fair, PBMs focus on how much of a discount they are able to negotiate off an arguably inflated list price.  I have a friend in the investment world who calls this the $95 burrito coupon.  Would it make any sense if Chipotle charged $100 for a burrito, but you could get a $95-off coupon from a group purchasing cooperative you belonged to?  I bring this up because folks who talk about drug price inflation conflate a number of drug price definitions and confuse those who are trying to learn what’s really going on.  In short: 

1. List prices are meaningless to all but two groups —  

a. Those paying cash because they don’t have insurance and the discounts insurance provides.  GoodRx (you’ve seen the commercials) has built an entire business around this problem. 

b. Those who have a co-insurance obligation tied to the list price of a drug (often those on Medicare). 

2. There is a tremendous amount of disparity and cross subsidization inherent in our delivery system.  Some of this is due to our reliance on a fragmented and free market approach to negotiating best prices, while some is due to the complex nature of how our governments regulate prices and reimbursement on behalf of programs like Medicaid and Medicare.  For example, HCPF director Kim Bimestefer talks about how Colorado Medicaid realizes rebates that keep drug price inflation under control for the state — that’s simply the law.  Prescription drugs aren’t permitted to increase prices ahead of CPI-U (about 1-2%) without rebating the difference.  The Kaiser Family Foundation goes over the details here: https://www.kff.org/medicaid/issue-brief/understanding-the-medicaid-prescription-drug-rebate-program/.

3. There isn’t just one culprit behind lack of drug affordability in the U.S., but two stand out from the crowd: 

a. Consumers are asked to pay too much of the bill.  Free market theorists love to talk about “skin in the game” and “moral hazard” when it comes to health insurance, but it is pretty short–sighted to ask a Type I diabetic to make a co-payment for a drug he/she can’t live without.  Affordability reforms should center on applying a little more sophistication here. 

b. Drug companies are free to set price and determine price increases.  This is a stickier wicket from a policy point of view.  In countries like Canada and France, drug companies are also “free” to determine prices, but whether they’ll be reimbursed is highly centralized and not assured: hence, the air quotes.  This is not the case in the U.S.  PBMs do have exclusionary lists tied to their formularies, but this is a relatively recent trend and there’s almost always a strong alternative available.  Again, because drug companies can cross subsidize lower overseas prices with higher U.S. prices, they usually agree to a lower price in Canada, France, etc.  In 2011, Eli Lilly and partner Boehringer Ingelheim did refrain from launching the diabetes drug Tradjenta in Germany because the authorized price was too low.  This represents a rare exception.

WHAT DOES THIS IMPLY? 

1. Drug companies do make too much money, but reformers are chasing too many ghosts. 

a. Most pharmaceutical companies’ profit and loss statements are “legit”, if not slightly wasteful.  The model of pursuing high-priced, specialty pharmaceutical markets has left the industry earning margins above 40%! 

b. The Colorado debate focuses on pharmaceutical pricing and costs quite broadly, but mostly misses the real issues.  Most people in Colorado have drug coverage through their employer and these are the people 1) most likely to be happy with their insurance, 2) most able to afford their medications and 3) out of reach of the state in terms of regulations (they are more likely than not to be covered by ERISA plans).  Putting out 200-page reports and citing statistics selectively distracts from what problems really need to be addressed (benefit designs, inefficiencies) and what can be accomplished at the state level. 

2. Direct-to-Consumer advertising is not the problem.  Stop griping about it. 

3. Generic substitution is not the solution.  Focus elsewhere. 

4. Slashing sales and marketing while boosting R&D won’t get us anywhere. 

5. Similarly, calling for transparency around costs is pointless; there is no scope to regulate this, and costs are largely unrelated to price, but for short-term budgetary challenges. 

6. Getting tough on price can help, but just how matters. 

a. The Medicaid inflation-linked rebate has been immensely helpful.  Establishing such a mechanism for other populations (e.g. commercial risk and managed Medicare) could be helpful if it were to survive legal challenges. 

b. Rudimentary approaches to price-setting invite unanticipated knock-on effects.  For example, using another country’s price, where circumstances are much different, is much more likely to invite a legal challenge or non-compliance than is a price determined through a rigorous and informed return-on-investment approach.  It is also more likely to pressure ancillary industry participants in unanticipated and undesirable ways.

c. There may be simpler ways to improve affordability without attacking the industry’s pricing structure, which is considered sacrosanct.  One possibility would be to impose a luxury tax used to fund patient assistance programs.  Products subject to taxation could be determined by a pharmaceutical affordability board.

 

The Case for Low-Occupancy Elevators 

I was listening to the Washington Post Reports on podcasts while running this morning.  At the end, the podcast had a little blurb on elevators that I found interesting, but unsatisfying.  In it, the reporter, Ben Guarino, talked about elevators being unique, enclosed, etc., then made reference to a few things that “we” should do (e.g. use high efficiency air filters, maintain spacing), primarily based on his opinions.  That was it.  If felt like the piece lacked a bit of what’s referred to as “solutions journalism”, which essentially means you report the information, but you also offer some specific (even evidence-based) advice.  Here’s just a bit more on the subject of elevators, if you are returning to work in the time of COVID: 

Case 1.  Touching. 

I’ll take the most liberties v/v science here, just based on personal experience.  Most people don’t touch one another in an elevator, unless it is packed.  In the era of COVID, I’m guessing people will try to avoid packing elevators.  Don’t touch other people if you can help it. 

Case 2.  Respiration and Synchronous Occupancy. 

Say you’ve been working from home and staying healthy.  You wake up Monday and get to the office first.  You ride the elevator alone up to your floor and begin work at your desk.  That elevator ride sure seems low-risk.  The chance of you giving yourself a new coronavirus infection is, um, zero.  Say, instead, you arrive at the same time as another eager beaver and ride the elevator together.  Now, the chance of one of you sneezing, coughing, breathing and giving the other coronavirus is non-zero.  However, it’s still low, because the chance of one of you having COVID is based on two persons, conditional probabilities and the prevalence rate for your population.  Say, instead, there are three of you.  Not only do the risks and consequences of transmission increase because there are now three people who might pass on the virus, but because there are twice as many potential recipients as in the two-person case.  The bottom line here is that you want as few people on the elevator as possible at any given time. 

Case 3.  Respiration and Asynchronous Occupancy. 

You might also be worried about riding an elevator after an infected person rode it.  If that person coughed or sneezed, are there droplets on the surfaces of the elevator?  Are there still smaller droplets floating around the elevator compartment?  Based on a review of some literature on the subject, I would assert that small droplets are the bigger concern.  According to an article by Justin Morgenstern, found here: https://first10em.com/aerosols-droplets-and-airborne-spread/, droplets are often “divided into small droplets…and large droplets. Large droplets drop to the ground before they evaporate, causing local contamination. Disease transmission through these large droplets is what we often refer to as “droplet/contact spread”, where disease transmission occurs because you touch a surface contaminated by these droplets, or get caught within the spray zone when the patient is coughing. Aerosols are so small that buoyant forces overcome gravity, allowing them to stay suspended in the air for long periods, or they evaporate before they hit the floor, leaving the solid particulate (“droplet nuclei”) free to float very long distances, causing what we often refer to as “airborne” transmission. (Nicas 2005; Judson 2019).”  Just as with other surfaces, you can wash your hands or use antiseptic after touching the surfaces of elevators (buttons, handrails, etc.).  Thus, large droplets are a risk you can manage.  Aerosols remain in enclosed spaces for several minutes after someone sneezes or coughs.  Just how much and for how long is determined by air exchange (e.g. elevator doors opening and closing, ventilation systems, etc.).  In a situation in which you enter an elevator and don’t know who was in it before you, it is hard to judge or control your aerosol risk. 

Case 4.  Combined Synchronous and Asynchronous Risk. 

Xiaoping et al., conducted a study in which the authors simulated respiratory droplet distribution that can be found here:  https://www-tandfonline-com.du.idm.oclc.org/doi/full/10.1080/10789669.2011.578699 

In the study, the authors found that there were two risks to a room co-occupant – direct and indirect. The greater risk, as modeled, was direct exposure to droplets.  This is when someone sneezes or coughs in your direction.  The lesser risk was indirect droplets (small droplets that aerosolized and filled the room).   

The following table comes from the Morgenstern article, although it’s adapted from a 2006 study by Morawska: 

Note the numbers and distribution of small aerosols.  While it’s highly unscientific, I draw the following conclusions from these data and my readings on this subject: 

1. Wear a face covering.  Most people reflexively tell you to do so to protect others (which is true), but I also think it protects you in this case.  Check out the simulated cough data from the Xiaoping study: 

Ask yourself — would you rather have a barrier between you and the person doing the coughing?  Sneezes and coughs travel, so “social distancing” in an elevator isn’t sufficient.

1. Exit the elevator if someone does cough or sneeze (maybe even hold your breath?).  As you can see from the time measurements above, it takes seconds for a room to fill with aerosolized particles (or carbon dioxide, as is modeled in this case), once someone coughs.  Indirect exposure is inevitable, but you can minimize the time you are exposed. 

1. Don’t talk (or sing) in the elevator as a courtesy.  You may be infected and asymptomatic, and everybody should do their part.  Plus, who knows if you can carry a tune. 

1. Encourage your company or building manager to take steps to reduce risk.  A simple rule might be to limit elevator occupancy to four people at once (if it’s an ordinary office-building sized elevator).  The building manager could also conduct cleanings more frequently, take elevators out of service periodically if there’s a concern around asynchronous transmission, etc.  Your employer might offer added flexibility around work hours in order to reduce peak elevator utilization. 

1. Pay attention and adapt.  If you are worried about riding the elevator, use it at off-peak times or take the stairs.  Maybe even learn a bit about the elevator’s ventilation system and whether it helps with airborne viruses. 

The following two articles are interesting reads that provide some added information on the topic: 

https://www.nytimes.com/2020/05/13/well/live/can-i-get-coronavirus-from-riding-an-elevator.html?auth=login-email&login=email 

https://www.govtech.com/em/emergency-blogs/disaster-zone/covid-19-transmission-scenarios-explained.html   

Why Governor Polis won’t sign a Public Option into law this year. 

First.  Sentence.  I am not here either to support or express opposition to the Colorado State Option for Health Care Coverage (the new name for the Public Option).  I am here to analyze the situation... 

It was January 14th, and state lawmakers descended on the University of Denver campus to kick off the legislative year with their “Big Ideas”.  (With the temperature hovering right around freezing, and with snow beginning to fall, I decided to take in the event via a live stream.)  Governor Polis kicked off the session by talking about a “Public Option” for Colorado citizens, and why it would both reduce health care costs and the ranks of the uninsured.  He has since advocated vociferously on its behalf.  However, by January 19th, the CEO of Centura Health posted an editorial to the Colorado Sun explaining how adopting the Public Option was unsustainable and would potentially cause employers to drop coverage, thereby reducing access.  At various times, hospital and health plan industry groups have expressed their opposition to the proposal. 

As I see it, there are at least two major reasons the Public Option will not be passed into law this time around.  One is a policy reason, and the other is a marketing reason.   

Background: 

For those who still struggle with what the Public Option is, here is a concise version.  Some people buy health insurance the way they buy car insurance.  They shop for and buy an individual policy that covers them or them plus their family.  If there is a Public Option, the government would artificially set the price for hospital care below the price the hospitals would otherwise charge and pass that savings on to people who buy individual health insurance.  According to Connect for Health Colorado, about 170,000 Coloradoans have private medical insurance purchased through the exchange (roughly 3% of the state’s population).  https://connectforhealthco.com/metric-and-reports/

Policy: 

From a policy point of view, I believe the proposed legislation (HB20-1349 for those who want to look it up here: https://leg.colorado.gov/bill-search?search_api_views_fulltext=HB20-1349) lacks one key ingredient – carrots for Colorado hospitals and health plans.  As a consequence, it is not surprising to see those industry participants oppose the legislation.  Here are their respective statements: 

Colorado Hospital Association: 

https://cha.com/colorado-hospital-association-opposes-colorado-state-option-legislation/ 

Colorado Association of Health Plans: 

https://colohealthplans.org/proposal-for-government-insurance-plan-falls-short-for-most-coloradans/ 

In order to help the hospitals partner to reduce health care costs, the Public Option needs to help hospitals become more efficient.  For background, here is an example of what a hospital’s financials might look like: 

By reducing the hospital’s revenue without helping reduce its cost, you are driving it from break-even to loss-making.  (Yes, there are many Colorado hospitals operating well above break-even, but there are also many who are not; explaining the bill’s varied intended effects offers a high degree of difficulty).  Politically, it is difficult to get after labor costs (50%), because those are salaried doctors, nurses and so forth.  It is also difficult to get after “other” expenses, b/c those are items like rent, repairs and maintenance, insurance, etc.  What might work is getting after supplies expense.  Just as with prescription drugs, many supplies are highly priced and quite profitable for those that manufacture them.  Hospitals pay very different prices for these supplies, and there is very little transparency around contracts.  Colorado might explore the creation of a purchasing pool for high-priced, high value supplies and let hospitals and other appropriate entities in the state participate.  If, by doing so, hospitals could reduce their supply costs by 15-20%, this would create room for the State Health Option.   

For the insurers, the main complaint, beyond the fact that you are creating a bad precedent, is that the Public Option proposal puts an awful lot of power in the hands of the Commissioner of the Department of Insurance.  Among other elements, which can be found in the Bill, the Commissioner would be required to ensure that there are at least two health insurance carriers offering the Public Option in every county in the state.  Currently, Anthem Blue Cross/Blue Shield is the only carrier in 22 counties.  Thus, if the Bill is not amended, the Commissioner would be authorized and compelled to make at least one other carrier compete in those counties.  This is the equivalent of telling Burger King – “folks in Summit County only have a McDonald’s in town, so you have to open a store”. 

Marketing: 

Governor Polis and other proponents of the Public Option have primarily argued that “it’s the right thing to do”.  Colorado hospital prices rank among the nation’s highest, and Colorado hospital profitability is second only to Alaska.  However, one of the main arguments against the Public Option is that it will hurt smaller hospitals and, potentially, force those to reduce services lines or, worse yet, close.  Indeed, in January, Memorial Regional Health in Craig closed its labor and delivery department.  According to the Colorado Rural Health Center, 18 rural hospitals in Colorado are loss making and, according to a report produced by FTI consulting in concert with the Partnership for America’s Health Care Future (an industry lobbying organization), 23 rural Colorado hospitals would be at risk of closing should the Public Option pass. 

Paradoxically, part of the intended effects of passing the Public Option into law is to redistribute wealth amongst the state’s hospitals.  Many rural hospitals would actually fare better financially with the Public Option in place, compared to the status quo.  However, the Bill’s proponents and sponsors have not latched on to this message.  The title of the Bill ought to be “Defending Access to Quality Health Care in Rural Colorado”.  Proponents could then speak to the fact that many rural hospitals need help, many rural communities do not have enough practicing physicians, and many rural residents have access to only one health insurance carrier. 

Summary: 

Before the Bill text came out and the world fell victim to COVID-19, it was not clear whether HR20-1349 would pass.  Now that 1) the proposal is in print, including not only the issues I present above, but the enumerated expansion of the Public Option to the small employer market, 2) stakeholders have developed their positions fully, 3) COVID-19 has ripped through hospital financials like a tornado, and 4) the legislature is not set to reopen until May 18 (reminder: the fiscal year begins July 1), I think we’ll be revisiting this in 2021. 

 

Drug Prices:  Is Ceding Political Victory No Longer a Showstopper? 

Tuesday, the Congressional Budget Office (CBO) scored the Elijah Cummings Lower Drug Costs Now Act (H.R. 3).  This is the U.S. House of Representatives’ current best effort to provide drug cost relief.  The Senate has its own drug cost bill known as the Prescription Drug Pricing Reduction Act of 2019 (S. 2543); it too has received a preliminary CBO score.  While many are skeptical we will witness the passage of drug pricing legislation in an election year and in light of the vituperative discourse between Democrats and Republicans, I am struck by two observations.  First, it appears legislation can get done, if both sides can claim victory.  On the day that Democrats in the House introduced articles of impeachment, they also announced an agreement with the White House on a revised U.S.-Mexico-Canada Agreement on trade.  Second, the guts of drug price reform don’t appear to be radically different from the House to the Senate to the White House.  Below, I describe some of the key elements of the two lead bills, as well as what the White House has proposed: 

According to the CBO, the Elijah Cummings Act: 

• Would require the Secretary of Health and Human Services to negotiate prices of selected drugs such that these prices didn’t exceed 120% those paid in a reference group of developed countries.  These prices would be required to be used for Medicare Part D plans, and available to commercial plans.  Manufacturers that failed to comply would be subject to an excise tax that would not be deductible for income tax purposes. 

• • Medicare would spend about $448bn less from 2023 through 2029 as a result.  This is a huge amount of money relative to what is spent today.  For reference, CMS estimates that the Medicare Part D program spent about $155bn on drugs (gross) in 2017.  In 2027 alone, the CBO projects the program would spend $94bn less than if we kept the status quo.  

• Would limit annual price increases to the rate of inflation in the Consumer Price Index – Urban (CPI-U), with manufacturers rebating back any increases in excess of this rate. 

• • As a result of this change, Medicare would save $37bn over the planning period, according to the CBO. 

• Would upgrade the benefit Part D beneficiaries receive.  Specifically, the Act would eliminate the coverage gap commonly known as the doughnut hole, introduce an out of pocket maximum at the point at which catastrophic coverage kicks in today, and modify other elements of the benefit. 

• • These changes would increase direct spending by $9bn over the planning period, according to the CBO. 

• Would require higher levels of cost and price transparency from manufacturers, increase the number of seniors eligible for low-income subsidies, add dental, vision and hearing care benefits to Medicare, and increase government funded research. 

At this time, the CBO has not yet issued an updated cost estimate for S. 2543, which the Senate Finance Committee (SFC) introduced on September 25.  However, the CBO has provided a preliminary estimate for the bill, based on the Description of the Chairman’s Mark provided to the CBO on July 25.   

According to the CBO, S. 2543: 

• Would require that manufacturers include coupons in their estimate of Average Selling Price for their drugs. 

• Would modify Medicare Part B reimbursement with a goal of increasing the adoption of biosimilars. 

• Would require that Part B drug price increases above CPI-U be rebated back to Medicare. 

• Would upgrade the benefit Part D beneficiaries receive.  Primarily, the Act would introduce an out of pocket maximum at the point at which catastrophic coverage kicks in today. 

• Would require that manufacturers provide drug payment information to Medicare and Medicaid advisory groups, including certain rebate information.  The Act would also require that HHS publish less sensitive information on pricing and discounts on its website. 

• Would require that Part D drug price increases above CPI-U be rebated back to Medicare. 

• Would make modifications to Medicaid requirements, including the use of Pharmacy and Therapeutics committees and Drug Use Review boards, rebate oversight and price calculations. 

The White House: 

While it doesn’t appear that Alex Azar and Seema Verma are likely to sip hot cocoa by the fire together this holiday season, the one thing they have in common is a desire to impress the President with their loyalty.  Thus, I think it’s reasonable to expect that HHS and CMS will tout the President’s initiatives publicly, while working cooperatively with those working to reduce prescription drug prices.   

Specifically, I would remind readers that the President’s Blueprint to Lower Drug Prices: 

• Was the first to introduce the notion of a reference pricing mechanism. 

• Promotes the idea of improving transparency through the Medicare pricing dashboard. 

• Contemplates measures to limit drug price increases, including inflation caps. 

• Promotes the idea of introducing an out-of-pocket maximum for seniors. 

The President is also in favor of drug importation from countries like Canada and HHS is currently working with several states to establish guidelines for how this might be accomplished more broadly. 

With these various facts in place, I think it’s natural to ask — can legislation be passed, what will it look like, and what are the implications? 

As far as I can tell, reducing the cost of drugs is a bi-partisan issue.  The Republicans certainly view it as a winner for the upcoming elections, and the initial spark for reform actually came from Hillary Clinton in the fall of 2015.  According to a recent Kaiser Family Foundation poll, lowering prescription drug costs is the top health care priority amongst voters.  Obviously, we now have a Democrat-led bill in the House and a bi-partisan bill in the Senate that 1) don’t look to be at odds with one another, and 2) incorporate many of the changes the President would like to see implemented.  The trick, as is customary, is to keep fringe elements from blowing up the final bill while positioning the passage of such a bill as a victory for both political parties and the president. 

Kaiser Family Foundation Tracking Poll (September 12):

I believe that the Senate’s bill will form the corpus of anything that’s likely to get done.  First, it focuses more narrowly on the drug benefit and delivery system.  Second, it contemplates reforms that are limited to government programs, rather than both government and private plans.  Third, it focuses on pragmatic solutions with moderate financial impact and modest operational impact.  Fourth, it arises from the legislative body where consensus matters to a greater degree (i.e., notwithstanding the occasional fringe caucus revolt, the Speaker can usually get her way in the House). 

I think that it should be relatively easy both to implement a price inflation cap and establish an out-of-pocket maximum for Part D beneficiaries (seniors).  Both sides of the aisle generally agree that these wouldn’t be disruptive operationally and would like to see industry pay for a greater percentage of the benefit.  However, both worry that insurers will raise premiums if the government shifts to much of the bill onto their collective backs.  Thus, I envision the government picking on the drug manufacturers when it comes to determining how much of the doughnut hole and catastrophic benefit reforms each entity picks up.  I also think that we should expect the government to demand greater levels of price transparency from insurers, pharmacy benefits managers and manufacturers. 

On the other hand, I don’t think we’ll witness the passage of anything that includes a reference pricing mechanism, direct negotiations between CMS and industry, or the addition of new entitlements (e.g. dental benefits).  These are very disruptive from an operational point of view and are likely to invite much more vociferous and widespread opposition. 

According an article by The Hill1, Mitch McConnell and selected republicans aren’t in favor of certain elements of the Senate bill, including the inflation cap.  While the article goes on to say that opponents equate such a cap to price setting, I think it’s important to note that such a cap already exists under Medicaid.  Thus, this argument represents little more than a straw man, in my opinion.  For now, it doesn’t appear that President Trump is twisting any arms in front of the election cycle (perhaps he’s sensitive to the fact that the impeachment trial is about to begin?).  However, I expect that as the groundswell of support grows amongst voters, we’ll see more jawboning and increasing Congressional support for a simplified proposal, and that we may truly be talking about passage in the Spring. 

If we do get a new drug price reduction act, I don’t think we’ll see a big impact on productivity and access, broadly speaking.  Nor do I think we’ll see a big impact on access one way or another.  However, there could be pockets of pharmaceutical business that become less attractive as a result.  If a bill were to pass along the lines I’ve described above, high priced medicines for the elderly population become less attractive, all else equal.  Let’s take a simple example – a person being treated with a cancer medication beginning January 1st under the standard Part D benefit design.  Here’s the current construct: 

If this medicine costs $10,000 per month and is used for 10 months, the drug company receives $95,680.46 — $3,820 up to the doughnut hole (from the enrollee and plan), 30% of the gross costs up to $8,139.54 (split 25% enrollee and 5% plan), and 100% of everything thereafter (via enrollee, plan and Medicare). 

Under the Senate proposal, which still may change, this same medicine would provide the drug manufacturer only $80,620 – 100% of payments up to $3,100, then 80% of any payments made above this threshold.   

A lot obviously still depends on the final agreed-to split between manufacturers, plans and Medicare above the catastrophic threshold, as does the practical matter of whether a beneficiary is on other medications that count towards the out-of-pocket max.  Still, I think that the companies most affected by these changes would be those already selling oral cancer medications (pills), since those companies would be unable to change prices meaningfully in order to respond.  Injected/infused cancer medications are typically covered under Part B, which is a separate benefit.  Amongst multi-national branded biopharma companies, Pfizer probably has the most to lose, although there are some biotechnology companies that sell only oral cancer medicines.  In addition, any other drugs disproportionately used amongst the elderly would theoretically be affected, subject to pricing and the catastrophic threshold (e.g. certain antiviral medications and anticoagulants).  

Yesterday evening, the Colorado Department of Health Care Policy and Financing (HCPF) and the Colorado Department of Insurance (DOI) submitted a final report to Colorado Legislature regarding the development of a public health insurance option (the Public Option). In short, the final report’s recommendations closely resemble the draft recommendations issued in early October. However, after holding a number of stakeholder meetings, the HCPF and DOI leadership has elected not to move forward with a standard fee schedule but instead with a formula-based fee schedule that takes into account the inherent variability in hospital operations across the state. In addition, the final report provides added detail on proposed future activities, such as the development of an Advisory Board, use of shared savings under a Medicaid 1332 waiver, and the development of a more robust small group market.

Background. Pursuant to the passage of HB19-1004 earlier this year, HCPF and DOI have been working together to make available a Public Option in the Colorado individual health care insurance marketplace. This Public Option would resemble those individual plans offered by various carriers in the State, but would mandate adherence to a fee schedule instead of charges negotiated off a hospital’s chargemaster (an itemized list of gross charges developed by each hospital for various products and services offered by that hospital). Ideally, the Public Option would be anchored to reduced net hospital charges compared to current alternatives, and would therefore be more affordable.

Keys to the Final Report. While yesterday’s final report closely resembles the draft report issued over a month ago, there are some changes and added details worth considering.

• The Final Report maintains a focus on hospital pricing (and pricing in general) as a lynchpin to the lack of health care affordability in the State. Considering where Colorado ranks in terms of hospital prices and profitability (#12 for the former, according to a John’s Hopkins University report: [https://wusfnews.wusf.usf.edu/sites/wusf/files/201910/hospital_prices_in_the_u.s._report.pdf] and #2 for the latter, according to Medicare cost report analyses conducted by HCPF and DOI), this seems appropriate. Items such as pharmaceutical pricing, physician reimbursement and waste received less attention, but could in theory be addressed in the future. Policy initiatives contained in the report omit those that would specifically enable hospitals to address administrative bloat and medical supply expense, instead leaving that to the hospitals to address on their own.
• The Final Report maintains the draft recommendations of partnering with health care insurers to launch the Public Option. This also makes sense and will probably work. In an indirect way, the Public Option is essentially a coverage expansion, making health care more affordable for those that can’t or won’t purchase health care insurance for financial reasons. But for a proposed increase in the Medical Loss Ratio (MLR), insurance companies ought to be O.K. with the idea of underwriting more policies while avoiding the threat of wholesale disruption. From the State’s perspective, leadership gets to avoid budgetary expense and risk, as well as potential operational disruption (developing and managing a provider network, ensuring eligibility and claims administration is smooth year-to-year, etc.).
• Instead of insisting that health care insurers build a network off of a fee schedule that averages between 175% and 225% of Medicare prices (yes, twice what Medicare currently pays hospitals for various services), HCPF and DOI recommend that hospitals be paid according to a formula that takes into key variables, such as 1) payer mix (e.g. does the hospital disproportionately serve the poor and indigent), 2) hospital designation (e.g. is the hospital a critical access hospital that needs to stay in business in the interest of Coloradoans), 3) margins, and 4) administrative expenses. This, in my opinion, is a better approach than “one size fits all”. There are inherent differences in hospital operations that tie to Colorado’s diversity statewide, and driving a universal fee schedule whose prevalence likely increases in the future puts vulnerable hospitals at risk of closure. Of note, the Final Report included an updated actuarial analysis of anticipated savings based on the new inputs highlighted above. Where the Draft Report pegged savings at 9-18%, the Final Report has the Public Option saving about 10% vs. current alternatives.
• The Final Report speaks more specifically to the use of a Medicaid 1332 waiver to channel public option savings into greater affordability in the future. Under federal law, a state can apply for a waiver to direct savings it creates versus projected federal spending, rather than simply abide by the statutory formula. In this case, the State is contemplating using Public Option savings to improve subsidies for individuals between 200% and 250% of the Federal Poverty level (income of about $24-30K), as well as a create a subsidy for individuals between 250% and 400% of the Federal Poverty Level. As noted in both the Draft- and Final Report, these are the individuals who find it the most difficult to afford health care insurance and access the system, even if they have coverage. According the Final Report, the Public Option will create about $89mm in savings in 2022, the first year of availability.
• Finally, the Final Report tantalizingly hints at the future of the Public Option. Specifically, the Report speaks to the development of options for employers with up to 100 employees. Today, many small employers do not offer coverage to their employees and there are issues that impede coverage for employees and families of those that do. Over the short-term, the Final Report recommends that small business employees be allowed to avail themselves of the individual Public Option. Further, it recommends that this access be extended to small business owners that choose to self-fund with stop-loss insurance. Over the longer-term, the Final Report speaks to the notion of developing a dedicated Public Option for the small group market with the help of health insurers that are participating in the individual market. While it will take time, the implication here is that the fee-schedule based, transparent model of shopping for health care will grow, and that health insurers will be called upon to act as agents of improved affordability for the State.

Broader Implications. As we head into a presidential election in which several Democratic candidates are recommending dramatic changes to the way in which Americans access health care coverage, it’s probably worth noting that Colorado could serve as a model for where we are headed. Colorado is one of the first states in the country to pursue a public option and, in my mind, one of the states with both a tractable plan and the mandate to get it done. Without question, what happens depends substantially on who is elected and why. However, it’s worth noting that the Trump administration is already moving to increase transparency around hospital operations and the contracts hospitals and doctors have with health insurers. Thus, whether we are negotiating Medicare for all, Medicare for all who want it, or a Trump-driven alternative, I think it’s reasonable to expect change in the coming years. In my mind, there are limits to what can be done about labor-driven savings, considering the availability and compensation of physicians and nurses, as well as structural constraints that govern the training thereof. As a consequence, we will likely focus our reform efforts on hospital pricing and efficiency, pharmaceutical pricing and unnecessary utilization. In that context, especially in light of how much of our health care bill is dedicated to hospital inpatient and outpatient spending, we will not be able to enact stochastic reform, but rather incremental reform; we can’t take a dramatic or one-size-fits-all approach without inadvertently affecting access or quality. In that context, an “opt-in” model underpinned by greater regulatory oversight (i.e. a public option, whether it’s called Medicare or not) is the most likely route forward. Colorado’s plan could certainly serve as a blueprint in this regard.

The full report can be found here:

https://www.colorado.gov/hcpf/proposal-affordable-health-coverage-option

 

Today, the department of Health and Human Services (HHS) announced that the Centers for Medicare and Medicaid Services (CMS) had issued two rules governing price transparency in our health care system. The first is a final rule governing outpatient and ambulatory surgery center price transparency, while the other is a proposed transparency-in-coverage rule. Proposed rules are typically opened to a comment period after which a final rule is issued.

The Hospital Outpatient Prospective Payment System (OPPS) transparency rule impacts hospitals directly. In order to comply, hospitals will have to post standard charge information, including list prices (the rule says “charges”, but these are the same thing), discounted cash prices, payer-specific negotiated prices and minimum- and maximum-negotiated prices. For up to 300 “shoppable” services, hospitals will be required to display the price information in a way consumers can use it to shop for services. In my way of thinking, this is only a mildly helpful rule.

• Hospitals are being compelled to provide high-level pricing information, not granular information. Thus, the rule is helpful in that it will allow competing hospitals and health insurers in a local market to learn a bit about what one another are paying and being paid. This, over time, will probably drive more competitive behavior, especially if further reforms are assumed to be forthcoming.
• Individual customers (patients) don’t get a lot out of this, in my opinion. While they will be able to “shop” for up to 300 common services, there appears to be a lot of latitude governing what’s a consumer-friendly tool in the world of health care. Will a consumer needing a partial knee replacement really know to shop for this specific procedure correctly at each hospital and whether the offering is what their doctor has recommended (e.g. the Oxford unicompartmental prosthetic from Zimmer Biomet)? Even if they did, will they know whether the most affordable hospital is in network, and what their out-of-pocket obligation might be? I doubt consumers will easily go from hospital website to hospital website comparing gross, cash-pay and negotiated rates for a procedure their physician has recommended they undergo.

The “Transparency in Coverage” proposed rule requires health plans to give consumers real-time, personalized access to cost-sharing information, through an online tool that most group health plans and health insurance issuers would be required to make available. In principle, that’s a fairly important statement. Theoretically, persons scheduling a procedure would be able to shop for the best location at which to have a procedure done. Best, in my way of thinking, means the most affordable to the patient, while maintaining high quality. Because cost-sharing often ties to a percentage of the overall cost of the procedure, persons would, as a side-consequence, learn something about the contractual rates agreed to between their health insurer and the hospitals at which the procedure is offered. While CMS doesn’t make clear exactly what will be required, today’s announcement goes on to say that health insurance issuers will be required to disclose negotiated rates for in-network providers (i.e. hospitals, clinics, etc.), and allowable rates of reimbursement for out-of-network providers. Depending on the level of granularity demanded by the government, this will also help shed light on the actual (not list) prices hospitals charge their various customers. In today’s health care environment, list prices bear very little resemblance to negotiated prices, with the former often reaching multiples of the latter. Finally, CMS proposes in the rule that health insurance issuers be allowed to take credit for “shared savings” payments in their loss ratio calculations. This is important because it removes a potential dis-incentive amongst health insurers tied to the calculation of loss ratios and statutory minimums. Put simply, if insurers were to offer lower cost plans and their customers were to choose lower-cost providers under the new transparency rules, loss ratios could improve to the point where insurers were dis-incentivized financially.

While these rules are certainly good news for health care consumers, there are a few wrinkles that may impede the rate and magnitude of impact of these rules.

• First, only beneficiaries of a particular plan will have immediate access to the cost-sharing information. Certainly, there could be organizations interested in aggregating the data for the purposes of publishing broader analyses, but we don’t know what the results of these efforts might be. A lot will probably depend on whether CMS is able to demand plan-by-provider level pricing, including how cost-sharing is calculated on the various constituents’ websites.
• Second, there’s the issue of the caregivers, including the doctor. Health care is a fairly clubby industry. Doctors have admitting privileges to certain hospitals, and these often tie to soft relationships the doctors and hospitals have with one another. In addition, doctors are most comfortable with the other doctors and caregivers with whom they’ve developed a relationship (e.g. O.R. nurses, anesthesiologists). Thus, if a patient wants to use a particular hospital, especially one a bit out-of-the-way geographically, he or she might have to choose a different doctor – one with whom he or she has little familiarity.
• Third, there’s a question of what plans will be covered. Given the exemptions the Employee Retirement and Income Security Act (ERISA) affords self-funded plans, I would expect this rule to impact only risk-based individual and group plans. Thus, we are talking about less than half of the covered workers in this country having access to an estimate of cost-sharing at the inception of this rule. Here’s the Kaiser Family Foundation chart on that subject:

 

• Fourth, there’s the question of implementation. According to today’s press release, the Outpatient Prospective Payment transparency rule will go into effect January 1, 2021, while the Transparency in Coverage rule will go into effect one year after finalization. That’s actually quite fast in the world of health care, although this schedule means we probably won’t witness dramatic effects on the system until 2022 and beyond. On the one hand, hospitals will be required to develop and publish information under the OPPS transparency rule within the coming year; this is the easier of the two rules with which to comply. On the other hand, proposed rules carry with them a 60-day comment period. Thus, the Transparency in Coverage final rule won’t be issued until 2020, which means that health insurers will likely have until open enrollment in the fall of 2021 to come up with 1) the information, 2) the consumer friendly shopping tool and the high-level negotiated rate website, and 3) any plan design changes they deem desirable or necessary. If the Transparency in Coverage final rule is implemented on such a schedule, it will then take added time for stakeholders to adapt to the new environment.

 

ANALYSIS

Although it’s frustrating to see just how slowly and incrementally health care moves, I do feel as though we are finally poised to follow through with some pretty material changes to our health care system. For what feels like the first time, there are persons with both intent and deep understanding in positions of influence both at the Federal and State level. Persons such as Seema Verma and Alex Azar do appear to understand how our sausage is made and are moving ahead with reform that will ultimately have teeth. The same can be said for persons influencing reform in states like Colorado and North Carolina, among others.  At the same time, health care is routinely cited as the number one issue amongst voters, and we are heading into what’s arguably a very contentious election year.  I’m fairly certain the nature and scope of policy proposals in health care will receive significant attention in 2020, and that these will be compared with what’s been the experience under Obamacare and initiatives spearheaded under the Trump administration.  Over time, changes – whether driven first at the federal or state level – will likely lead patients to shop more aggressively for care, and high fixed cost entities like hospitals will have to respond by competing more aggressively for volumes. I would hope and expect that quality information improves in lock step with the financial information such that consumers can incorporate this into their thinking when it truly matters, and emphasize the financial information instead when providers are considered to be largely interchangeable. It’s a bit early to be making predictions about the future role of health insurers, since their fate likely hangs in the balance of whether a true public option becomes available at the federal level and whether a plurality of our population is compelled to take advantage thereof.

BLOG TOPIC #1:  HEALTH CARE

 

To test things out, I’m posting a map and link I think persons following health care reform may find of increasing interest over time.  It is the map published by All-Payer Claims Database (APCD) council, and it is interactive on that organization’s website.

APCD’s are at this point state-based databases of health care claims information sourced from many different payors and providers.  While they do not contain claims from all sources, they are typically diversified enough to provide a good cross section of activity and a reliable sense of what services are being provided at a reliably estimable cost.

The APCD council was originally a regional organization charged with helping states develop APCD’s and standardize rules, formatting, etc.  With APCD’s expanding nationwide, the organization changed its name and its objectives in 2010.

 https://www.apcdcouncil.org/state/map