Tuesday, January 29, 2019

Drug Prices Are NOT Skyrocketing—They’re Barely Growing at All

The IQVIA Institute for Human Data Science today released a new report that reveals important realities about U.S. drug pricing trends.

Too many politicians and journalists remain committed to the false narrative of “skyrocketing” and “soaring” drug prices.

By contrast, IQVIA data reveal that list prices for brand-name drugs grew by less than 6% in 2018. What’s more, net prices (after rebates and discounts) increased by only 1.5%. The 2018 figures mark the fourth consecutive year that net drug prices have grown by low-single-digit amounts.

I recognize that relying on “facts” and “data” has become unfashionable. But I simply don’t understand how we can build sound public policies based upon inaccurate perceptions. As the late senator Daniel Patrick Moynihan said: "Everyone is entitled to his own opinion, but not his own facts." I doubt this principle will guide today's congressional hearings.

DATA DISAMBIGUATION

IQVIA is an independent organization that collects and reports data on pharmaceuticals. Its valuable new report—The Global Use of Medicine in 2019 and Outlook to 2023—is full of fact-based insights about global pharmaceutical use and spending.

Here’s a quick refresher on relevant terminology from the report:
  • The manufacturer establishes a drug’s list (gross) price, which is called the Wholesale Acquisition Cost (WAC).
  • A drug’s net price equals its list price minus rebates as well as such other reductions as distribution fees, product returns, chargeback discounts to hospitals, price reductions from the 340B Drug Pricing Program, and other purchase discounts. Negotiated and statutory rebates, however, are the largest and most significant components of gross-to-net differences between a drug’s list and net prices.
  • The gross-to-net difference means that brand-name manufacturers earn substantially less revenue than drug list prices imply.

IQVIA reports changes in invoice prices, the amounts that pharmacies and hospitals pay to drug distributors. These invoice figures include prompt-payment and volume discounts, but exclude off-invoice discounts and rebates separately paid to insurers and price concessions paid to patients or other health system participants. Therefore, changes in invoice and list prices for brand-name drugs are very highly correlated.

DRUG PRICING REALITIES

The chart below shows invoice and net price changes for established brand-name products—those that are more than two years old and have not yet faced generic competition.

[Click to Enlarge]

These data show significant gaps between list and net price changes. Three things to note:
  • List prices are now growing much more slowly. Prior to 2015, growth in list/invoice prices had been increasing by 10% to 15%. Growth has slowed sharply over the past five years, from 13.5% in 2014 to 5.7% in 2018.
  • The compounding effect of gross-to-net pricing differences creates the gross-to-net bubble. I coined the term gross-to-net bubble to describe the speed and size of growth in the total value of manufacturers’ gross-to-net reductions. It is enabled by the gaps shown above.

    Consider the price changes shown in the chart above. Imagine a product has a 2012 list price of $100. If this product had no discounts and rebates in 2012, then its net price would also have been $100. Using the average industry growth figures, this product’s list price would have been $174 by 2018, but its net price would have been only $119. The difference of $55 (-31%) reflects the rebates and discounts that the manufacturer paid. These figures represent a lower bound, because newly launched brands always have some level of rebates and discount.
A big consequence: Drug spending has been growing slowly. That’s because (1) rebates and discounts have offset much of the list price increases, (2) net brand-name drug prices have grown slowly, and (3) generic utilization is increasing.

For 2017, drug spending grew by a mere 0.4%—a rate significantly below spending growth on hospitals, physician services, and overall national healthcare costs. See CMS Confirms It (Again): Minimal Drug Spending Growth, While Hospital and Physician Spending Keep Going.

As I note in Drug Prices After the Midterms: Five Crucial Implications of Pharmacy Benefit Design, more and more patients taking prescription drugs aren’t benefiting from ever-growing rebates and the slow growth in list prices. Many Americans now pay a coinsurance percentage of a prescription’s list price, or when they are within a deductible, even the entire list price.

UNREALITY

Later today, we’ll have the spectacle of two Congressional hearings:
Here’s a fun game. Take a shot of tequila every time a politician (falsely) refers to drug prices as “skyrocketing” or “soaring.” You’ll be drunk before the first witness finishes testifying.

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