Reducing Prescription Drug Costs in Colorado


An Evaluation of the Department of Health Care Policy and Financing Report, Reducing Prescription Drug Costs in Colorado

Last week, the Colorado Department of Health Care Policy and Financing (HCPF) published a report on prescription drug costs in Colorado and what might be done to bring them down. It’s an extensive report, so I thought I’d distill some of what was discussed, as well as provide an evaluation of some of the proposals contained within.

For those who are interested in a little background and rhetoric concerning trends in drug prices, costs and utilization, feel free to read pages 11-14 of the report. These pages are concise and informative.

The true conclusions HCPF draws begin on page 15, within a section entitled “Major Drivers of Prescription Drug Prices”. HCPF covers 11 drivers, to which I’ll add my two cents below:

  1. Patent Protections. HCPF faults the pharmaceutical industry’s habit of evergreening patents in order to extend the period under which companies enjoy high prices and exclusive marketing rights. A simple example of evergreening might be to reformulate a pill that’s taken three times a day in order to provide the convenience of once-a-day dosing. The manufacturer would then ask for a new patent on the improved formulation. While evergreening is definitely something the industry does, it is much less successful than it was years ago. Today, Pharmacy Benefits Managers (PBMs) and their clients (states, employers, etc.), simply won’t pay for these incremental improvements. Thus, in most cases, drug exclusivity and monopoly pricing usually expire at the time the composition-of-matter patent expires on a drug. What’s more, while evergreening does add to the cost of pharmaceuticals in the U.S., there isn’t an obvious fix to what we do already. Generic companies challenge patents all the time and now even use a new technique known as Inter Partes Review, which accepts a lower standard for defeating patents.
  2. Anticompetitive Practices and Price Fixing. In addition to evergreening patents, HCPF alleges that the industry engages in anti-competitive behavior in order to protect profits. Specifically, the report asserts that brand companies pay generic companies not to introduce low-priced alternatives. As a point of fact, this is a correct statement. However, the reverse payments brand companies make to generic companies aren’t terribly common, nor are they usually major drivers of pharmaceutical cost. The most important element is the fact that brand and generic companies “split the baby” by settling on a date upon which the generic company can launch. This is usually a date after the expiration of an early patent, but before the expiration of a later patent. By agreeing to a date certain launch, both sides take the risk of a total legal defeat out of the equation. In my experience, companies do abuse this stratagem, but not egregiously. What’s more, the issue has been challenged legally on numerous occasions, with the industry position being upheld virtually every time.
  3. Specialty Drugs. Look up the definition of a specialty drug online, and you’ll get 100 answers. In theory, a specialty drug is one that requires special handling, packaging, patient support, supply chain management, etc., but the practical answer you’ll get from pharmacists is that a specialty drug is just an expensive drug (usually for a small population). In its report, HCPF points out that the industry has focused its R&D efforts disproportionately on specialty drugs and that their introduction is contributing significantly to costs. This is all true. However, this is an artifact of a few factors. First, the industry is struggling to identify widespread diseases with addressable unmet needs. Certainly, this issue should be the industry’s to solve. However, because the industry hasn’t yet figured out a solution, it’s turned to charging very high and sometimes unjustified prices. Second, the Medicare Part D drug benefit splits the costs of catastrophic coverage 95% government and 5% patient. Thus, by charging extremely high prices, the industry knows it can put the onus on the Federal government disproportionately. There are some green shoots regarding new value-based models of drug pricing, as well as Part D reforms that might help blunt the specialty drug trend, but I don’t think we should expect any dramatic changes near-term.
  4. Hospital Pricing Mark-up and Site of Care Pricing Differentials. This is probably the first issue on HCPF’s list that both can and should be addressed. At issue is the fact that providers direct where a patient receives outpatient injectable drugs. Since health insurers and governments typically pay more in a hospital outpatient setting when compared to a clinic or doctor’s office, providers direct patients to get their infusions at the hospital. Drug companies certainly help sustain this practice when it is in their interest. Johnson & Johnson, for example, made it very difficult for physicians to prescribe Pfizer’s Remicade biosimilar, Inflectra, by contracting aggressively with hospitals and physician groups. Unfortunately, industry lobbying and litigation works, and both hospital and pharmaceutical trade associations have fought hard against “site neutral payment policies”, which is the term of art for this issue. In fact, the Trump administration is currently appealing an adverse ruling relating to its own site-neutral payment policy governing evaluation and management services. While I consider this to be a tractable problem under the umbrella of runaway drug costs, injected and infused drugs administered by medical professionals are a smallish part of the overall drug bill. For reference, the Kaiser Family Foundation estimates that Medicare Part D (patient-administered) drug spend runs nearly 4x that of Medicare Part B (drugs administered incident to medical professional services).
  5. Medicare’s Inability to Negotiate Prices. When the Medicare Part D drug benefit was created, legislators included what’s known as the “non-interference clause”, which prevents the Federal government from negotiating prices with manufacturers directly. HCPF would like to see this change, because it would no-doubt lead to lower drug prices. I agree. Perhaps we’ll see movement on this issue once the next election cycle has been concluded.
  6. Prescription Drug Rebates. The report covers a few of the elements of why rebates are ground zero in the debate over drug pricing. Conceptually, a rebate is a reduction in price offered after the achievement of some performance goal (for example, a certain level of market share), where a discount is a price reduction offered up front. What makes drug rebates so problematic is that PBMs and their counterparties keep all their rebate contracts secret. Thus, buyers don’t really know if they are getting the best deal, and patients don’t know what to expect from year to year in terms of out of pocket expenses. Because the rebates aren’t part of the net price known at the outset of a plan year, patients end up paying co-insurance on an inflated price.
  7. Pharmacy Benefit Managers (PBMs): Pricing, Profits and Consolidation. HCPF asserts that industry consolidation has helped engender an acceleration in PBM industry profits. This is probably true to some degree, but large customers (states, large employers) have never enjoyed many options when it comes to PBM services. Often there are only a few PBMs involved in a price check or Request For Proposal (RFP), and survey after survey suggests that price is only one component of a client’s ultimate decision. As with intellectual property reform and the pay-to-play debate, I doubt we’ll get relief regarding antitrust issues any time soon.
  8. Prescription Drug Promotional Marketing. Number eight on the list has to do with the fact that the U.S. is one of the only countries in the world that permits prescription drug companies to advertise directly to consumers (DTC). While I don’t have empirical evidence beyond the anecdotal here, I think that HCPF may have a decent argument. It’s not uncommon for a consumer to hear of a new drug and ask for a trial from his or her doctor. A doctor isn’t in the business of denying care, so he or she may comply so long as the drug is perceived to be safe and well-tolerated. Earlier this year, the Trump administration tried to take a small bite out of drug companies’ DTC advertising efforts by mandating that companies disclose their prices in DTC ads; however, industry challenged Trump’s rule and a judge subsequently ruled in industry’s favor.
  9. Marketing to Physicians. Drug companies still market aggressively to physicians. However, where efforts used to include lavish trips and gifts, the industry and physician groups have self-policed to a significant degree. There’s little question offering speaker bureau appointments and conducting continuing education symposia lead to higher levels of prescribing (if they didn’t, industry wouldn’t bother), but the impact of these activities is probably much reduced from years past.
  10. Lobbying Contributions to Drive Industry Policy. HCPF rightly raises lobbying efforts as a major driver of drug costs. As with clandestine rebate contracts, I put this one high on the list of culprits. Drug companies spend like no one else, and they defeat nearly every initiative designed to uproot their outsized levels of profitability (HCPF could easily write another 50-page report on the various wins industry has racked up over the past decade). I’m repasting a graph from the report for effect. For context, remember that drugs are only a small part of our health bill; however, the industry is immensely profitable and very well organized, which is why we rarely see Congress take action.
  11. Rising Prescription Drug Manufacturer Profits. Number eleven is simply a corollary to number ten. A typical prescription drug gross margin is better than 90%. Operating margins, before R&D expense, typically approach 50-60%.

(Pages 28 and 29 of the report highlight other states’ initiatives, in part to inform some of the recommendations for Colorado that HCPF covers in the ensuing pages.) 


What does HCPF recommend for Colorado, and does it make sense? 

Beginning on page 30, HCPF outlines its “Solutions for Colorado”.  The Department offers a long list of specific proposals and potential areas of exploration.  Thus, for the sake of brevity, I’ve classified these proposals into three broad areas – transparency, value-based pricing and drug benefit best practices.  I’ve also quickly included a fourth area – the notion of importation. 


HCPF offers several remedies intended to help customers 1) better understand how drugs are priced, 2) get the best deal, and 3) protect themselves from arbitrary price increases.  These initiatives make sense, and many should be enacted/promulgated immediately.  Here are some examples: 

  • Mandate that manufacturers provide ample notice when they plan to take a price increase of greater than some percentage (10% seems like a good #).  Moreover, demand that manufacturers provide an explanation for the price increase.  Sometimes, it might be justified:  for example, if they have to source from a different active ingredient supplier, leading to increased input costs.  Other times, it may have to do with nothing more than a desire to “hit numbers” or take advantage of a competitor’s supply issues. 
  • Mandate that PBMs disclose and pass on 100% of any remuneration received from manufacturers for market share, formulary access, etc.  This includes, but is not limited to, rebates.  For Colorado in particular, this kind of initiative could be very impactful.  The state’s Medicaid receives 100% of rebates from its PBM partner, resulting in the trend we see below (from the report): 

Notice not only the absolute dollars at stake ($557mm in 2018!) but the year-on-year trend in rebates paid (26% compounded over four years!).  Without 100% pass-through, Colorado’s pharmacy expenditures would have grown 14.7% instead of 5.7%, on a compounded basis.  As the report notes, Colorado is a small business state.  These are exactly the kinds of organizations that don’t have the negotiating power or sophisticated human resources consultants at the ready in order to obtain comprehensive pass through arrangements with PBMs.  Thus, it’s great to see the state supporting full transparency and pass through arrangements.  

  • In a section that bridges transparency and best practices, HCPF encourages the adoption of utilization best practices (implementation of tools like prior authorization and step therapy), as well as PBM negotiation best practices (e.g. working to avoid common PBM tactics like offsetting lower rebates with higher administrative fees, disadvantageous terms on mail order fulfillment, etc.).  HCPF suggests that there’s room to provide employers with information and support in this regard. 

Value-Based Pricing: 

Under the value-based pricing umbrella, HCPF riffs on ways to avoid unjustified price increases and paying for overpriced therapies.  The report does not specifically cover what I’ll call Intelligent Pharmacy Benefit Design (iPBD) — customized financial constructs that incentivize consumer and vendor behavior in a more bespoke manner – although this could, in theory, be a part of the solution. 

  • HCPF suggests that the cost of new treatments be compared to that of current treatments.  This is what’s known as comparative effectiveness, and really ought to be employed for all health care products and services.  Health Technology Assessment (HTA) organizations do this kind of work and already reside both within health insurers and independent entities.  
  • HCPF recommends evaluating patents for evergreening, and this too could be handled by HTAs.  If a new product only offers incremental value, it’s perfectly reasonable to incentivize the use of a currently available alternative. 

iPBD, a Term I Just Coined

For better or worse, health care coverage usually spans a year, at which time you choose to renew or change plans.  Obviously, you can stop paying premiums at any time, at which your coverage will lapse.  Drug benefits mirror this construct.   While today’s pharmacy management systems permit creative plan designs, most plans incorporate only a few blunt, and sometimes counterproductive tools (clinically speaking).  For example, each time a patient picks up a supply of medication, he or she pays a co-pay or co-insurance.  Insurers call this “skin in the game”.  However, co-payments don’t really make a ton of sense for most prescription drugs.  A patient can only receive supply enough for one individual (to go beyond this, the doctor would be committing fraud), and benefits and side effects are specific to that drug and disease.  If the patient ought to be getting the therapy (they’ve paid for access through their premiums and the physician thinks it’s appropriate), why provide them a financial disincentive to do so?  One obvious stopgap would be to have the patient pay a co-pay for the first script in a plan year, then nothing more so long as the patient continues to pay his or her premiums.  If this approach were to be adopted, significant consideration would need to be paid to two issues, 1) front loading any financial incentives to choose one therapy over another and 2) the comparative effectiveness of various alternatives.

  • Today, many plan designs include a deductible that must be met before benefits kick in.  Thus, for persons in high-deductible designs, the notion of a front-loaded year is already well understood.  HCPF, the DOI or others directing health policy in Colorado could take into consideration desired vs. current consumer behaviors in crafting a one-time financial obligation (deductible + co-payment) that must be met for therapies of various clinical values.  In my opinion, the state should have PBMs and payors do-away with straight co-insurance designs.  If a plan design incorporated enough granularity, it could do an adequate job of discriminating between a variety of net price points and product profiles without the need for percentages.  These dollar amounts could then be posted at the beginning of the year so that consumers wouldn’t be surprised at the pharmacy. 
  • Today, PBMs and manufacturers negotiate formulary status between tiers (generic, preferred brand, non-preferred brand, specialty), and the level of exclusivity that prevails within various therapy categories.  They could still do this, just with the new financial construct, and patients wouldn’t be put in a position of having to switch therapies or ration therapies throughout the year (this happens). 
  • Finally, PBMs and payors could keep in place prior authorization requirements (maybe even refine these) but might be able to forego step therapy (the idea of having to try a cheaper drug and fail it before being granted access to a more expensive therapy).  Frankly, this latter tool isn’t terribly well aligned with best practices anyway and is often gamed.   

Drug Benefit Best Practices: 

  • HCPF is negotiating with bidders to develop and distribute a prescriber tool for physicians.  Such a tool would be implemented in two phases, with the first phase providing a prescriber patient-specific copayment information, as well as his/her plan’s financial obligations for a given drug.  Phase 2 would provide the prescriber plan-specific health improvement program information to be considered and/or recommended.  HCPF believes making this tool available will help change prescribing behavior and improve clinical and financial outcomes for the state and its residents.   
  • HCPF suggests that the state explore options relating to manufacturer coupon programs.  This is a good idea, if implemented carefully.  To my prior point, the state shouldn’t dissuade consumers from remaining compliant with their medications.  However, manufacturers don’t coupon old, low-margin drugs; they coupon new, expensive drugs.  Thus, the state should consider comprehensive programs that blunt unjustified efforts to promote low-value-added prescription drugs. 
  • Two new boards?  HCPF suggests that Colorado could benefit from the establishment of a Prescribing Best Practices Board, and a Prescription Drug Affordability Board.  Arguably, these boards would sit at the intersection of best practices and value-based pricing/reimbursement.  Experts would make recommendations that would feed into prescribing tools and electronic medical records, and the affordability experts might be called upon to recommend upper limits to what the state and other customers pay for certain drugs. 


  • HCPF recommends that SB 19-005, which already permits drug importation from Canada, to be amended to include other countries.  I guess this can’t hurt should the notion of importation take hold.  Developed territories like Australia and western Europe might offer opportunities to augment affordable supply.  However, I just hope that the state of Colorado appreciates how different the environment can be from country to country, even in areas falling under a single regulatory body like the European Union.  I’d also stress that compliance and inspection conditions vary from country to country even if facilities are FDA approved. 

(Pages 42-45 cover solutions for “All Americans”, which I don’t cover in this evaluation.) 


My Summary in Brief: 

Our drug delivery system is a Frankenstein monster built over many years and with many perverse incentives incorporated for non-clinical reasons.  We should consider starting from a clean slate where doing so provides the biggest benefit with the least disruption.  What HCPF concludes then proposes in its Reducing Prescription Drug Costs in Colorado report makes a lot of sense.  However, the two areas, in my opinion, that best fit the bill from the point of view of the state are 1) mandating rebate reform and 2) drawing a hard line on value-based pricing.  We should also develop a scorecard for our state representatives and hold them accountable for their willingness to accept support from prescription drug lobbying groups. 

Here’s a link to the full report:

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