Decoding Health Care

Part 7a: The pharmaceutical industry (part one)

Most physicians have no idea how much the medical goods and services they prescribe cost, least of all drugs. Because of my roles at US Oncology and Aetna, I had a pretty good idea about the cost of cancer drugs. But except for my copays at the pharmacy for the medicines I take, I was as ignorant as my colleagues about the cost most people experience. All that changed about 18 months ago.

When I left medical practice and went to Aetna, Aetna would not allow me to continue to practice oncology (too high risk from a liability perspective). But I liked taking care of patients. So I started to volunteer as an internal medicine doctor at the medical clinic affiliated with a faith based homeless shelter in Albany, NY. This was OK with Aetna. And I really enjoyed it; in fact I enjoyed it so much that I continue to volunteer to this day (10 years later). The pandemic was really hard for the clinic, and our medical director stepped down. During the time that the Mission recruited a new director, I agreed to serve as interim medical director. One of the administrative tasks that came with that job was ordering drugs for our dispensing pharmacy. The clinic has a modest dispensing pharmacy for the patients we serve. The drugs are basic treatments for diabetes, hypertension, COPD, hypercholesterolemia and the like. They are virtually all generic. Over the many years that I practiced, many of these drugs were real breakthroughs. Metformin. Omeprazole. Atorvastatin. These drugs were game changers. And they literally cost a penny a dose. Unbelievable.

But our formulary was limited. We couldn’t afford Jardiance or Januvia. Inhaled beta agonists and steroids for asthma and COPD were expensive; Spiriva was crazy expensive. Novo provided samples of their insulin products and even Ozempic; but we couldn’t afford Lantus. None of our patients had insurance; many were undocumented and others were transients. Pharma sponsored patient assistance programs were, for the most part, not an option. Despite these limitations, I think we do a pretty good job of taking care of our patients. But it really brought into focus for me why regular people struggle with the cost of drugs. For example, if you are a Medicare beneficiary and have no part D coverage or have no insurance at all, heaven help you. And this is before we start talking about the really expensive drugs, like the ones used to treat cancer.

How did we get here? Why are generics so cheap and brand name drugs (like the ones that you see on the TV during the Super Bowl) so expensive? A good place to start this discussion is with the Hatch Waxman Act. Orrin Hatch was a conservative Republican US senator from Utah and Henry Waxman was a liberal Democrat from Southern California. In 1984 they cosponsored a bipartisan bill that established a path for the introduction of generic drugs to the American market. This is arguably the single most important piece of drug legislation ever. Prior to this law, fewer than 35% of all brand name drugs had a generic equivalent; today, more than 90% have a generic equivalent.

The Hatch Waxman Act did this by simplifying the Accelerated New Drug Application (ANDA) process. The ANDA is the process by which the FDA approves a generic. The simplified ANDA allowed generic manufacturers to prove therapeutic equivalence of their product rather doing a more exhaustive FDA submission like the reference product did (showing safety and efficacy). As long as the generic drug has the same active ingredient it is good to go. And the Hatch Waxman Act also allowed a lot of this work to be done prior to the expiration of the patent protection enjoyed by the reference product. In return, the manufacturers received concessions that allowed them to enjoy longer patent production. It was a win-win, the type of compromise we virtually never see in Washington anymore.

How big of a win was it? Huge. Before Hatch Waxman, fewer than 15% of all prescriptions were filled with generics. Today, it is more than 90%. Whenever the topic of drug prices comes up in Washington, the pharmaceutical industry brings up the fact that total drug spend in the US has hardly increased at all if you look at the last 10 years, and the cost of the average prescription has actually gone down (Prescription Drugs: Spending, Use, and Prices | Congressional Budget Office (cbo.gov)). And if you look at the price of individual drugs you can easily understand why. When a generic drug enters the market, the cost goes down. By the time 3-4 generic competitors for that drug have entered a market, the cost of the drug goes down by 90 percent. If you look at the totality of drug spend, as more generics enter the market, even as new expensive drugs are approved, the “average” looks pretty good.

This is why things are pretty good in our volunteer clinic. Many of these generic drugs, although they have been around for quite a while, still work pretty good. But we should not pretend things are perfect. There are several issues in the generic space we should discuss.

The first issue is the lengths to which pharma companies will go to extend their patents. A great example is drugs used to treat asthma (N Engl J Med 2022; 387:1153-1156
DOI: 10.1056/NEJMp2208613). Beta agonists, like albuterol, have been used to treat asthma seemingly forever. And inhalation is a very effective way to deliver the agents. Initially, the propellents were chlorofluorocarbons (CFCs) which were outlawed due to their impacts on climate. Eliminating CFCs forced the delivery device to change: presto, new patents. Subsequently, manufacturers have taken advantage of further modifications of the delivery device to extend patents and prop up prices. It is true that there have been some modifications in the “active ingredients” but those patent extensions have largely been driven by changes in the delivery system.

The second issue is the impact of middle men. You probably have wondered how your out of pocket costs are determined at the pharmacy counter. If you have insurance, it’s likely determined by a pharmacy benefits manager (PBM). These organizations, part of the health insurance complex, manage contracts with manufacturers. And these contracts are complicated. The drugs may have a sticker price but nobody pays sticker price. PBMs attempt to get a discount from the manufacturer on behalf of the health insurance company (and theoretically by extension on behalf of the employer who is paying the bill and you, the consumer). This discount, in the form of a rebate off the list price, lowers the net cost to the payer and you would think the employer. But life isn’t that simple. PBMs live in the shadows. They keep a piece of that rebate for themselves and so do the insurance companies. The exact numbers are shrouded in secrecy, but employers are starting to realize they aren’t getting as good a deal as the PBMs would have you believe. Because the manufacturers are giving all these discounts they are increasing the list price so their net profitability is not affected. And if you don’t have that particular insurance you are likely paying a higher price.

All this cloak and dagger nonsense is a big deal in the generic world. How much of the high cost of drugs is related to these middle man add-ons is unclear. But if you want to get an idea, google the Good Rx price of your medicine. Good Rx was founded in 2011 by a couple of Facebook guys to lower the cost of prescription drugs. They offer consumers “coupons” that allow you to save a few bucks independent of a PBM, and they do this by contracting with manufacturers directly. How do they make money? Unfortunately there is no such thing as a free lunch in health care and at least part of their business model (at least initially) was to sell your health care data.

More recently, Mark Cuban and his Cost Plus model have received a lot of press. Cost Plus offers drugs direct to consumer with a small fixed administrative fee added on. They claim this administrative fee is enough for the company to be profitable. Cost Plus doesn’t offer every drug, and the drugs they have are virtually all generics. But the process is TRANSPARENT. A recent study of oral generic cancer drugs provided some insight into how much better a deal Cost Plus offers: for the seven drugs studied, Cost Plus saved 78% (https://ascopubs.org/doi/10.1200/JCO.23.00079). Wow. This approach is shaming many payers into offering this kind of deal to their employer groups, but it is still early days. And others are starting to mimic this model; can anyone say Amazon (see RxPass)? And don’t forget, this doesn’t really apply to the drugs still under patent, the so-called single source drugs.

The third issue is drug shortages. Generics are so cheap that the margins generic manufacturers enjoy are small. To make matters worse, the PBMs (as well as the drug wholesalers like McKesson and Cardinal which sell to the practices) all negotiate hard to get the lowest possible price. So to make real money, production costs need to be kept low and scale needs to be big. As a result, there has been tremendous consolidation in the generic manufacturing space, and much of it has moved to India, China, and Mexico. If the medicine is simple to make, not so big a problem. However, if manufacturing is complex, there is a constant threat to supply. This has become a major issue lately, particularly in the chemotherapy space. Some raw materials needed for manufacturing unexpectedly became scarce. Some generic manufacturers were at risk of being shut down by the FDA for quality and safety issues. Result: a shortage of cisplatin and carboplatin, two critical drugs in the treatment of cancer. Note that this is NOT a problem for single source drugs where the profit margins are huge (Ozempic is an exception, but that is because of the dramatic increase in consumer demand). There have been many proposed solutions, including a federal stockpile. Perhaps the easiest is to set a floor on the price for these important drugs. There is such a thing as too cheap.

The final issue in the generic space is one of relevance. Many of the most important drugs in our armamentarium are not small simple molecules. Rather, they are “biologics”: hormones (like insulin or erythropoietin) or antibodies (like Humira or Herceptin). These drugs will never be “generic.” Their manufacturing is much too complicated. But biologically similar analogues can be synthesized; these biosimilars have the same effect, they just aren’t the same compound. The Hatch Waxman Act didn’t consider these molecules, but another piece of legislation passed in 2010, the Biosimilars Price Competition and Innovation Act, established a path for commercialization of these complex molecules after their patents expired. The law established a set of rules regarding the evidence the FDA needed to approve a biosimilar (both in terms of efficacy as well as safety). It took a while for this law to significantly impact the biologics market, but it is safe to say it is now having a big impact. The price benefits that we enjoy from generics are not the same as those in the biosimilar market. The biologic drugs are just way too complicated to make. Nonetheless, for many of these drugs the price has dropped in half. But just as with generics, nothing is perfect.

The first problem with biosimilars can be summarized by one word: insulin. Insulin has been around for 100 years. Initially it was a product isolated from porcine pancreas (as a by product in slaughterhouses, no less). Insulin was cloned in 1978, produced in E.Coli in 1979, and a recombinant product (also made in E. Coli) was made commercially available in 1982 by Eli Lilly. Although I do not mean to minimize this feat, insulin is a relatively small, uncomplicated polypeptide. But this insulin was very short acting and so the pharmaceutical firms got to work. Over the last 50 years, lots of new insulins have become commercially available. These have largely impacted how quickly the body experiences the peak effect and how long it lasts. The most impactful were the long-acting insulins that could be taken once a day, providing a “basal” level of insulin in the body. It prevented high peaks and rarely produced hypoglycemia. Amazing. But expensive. Every new insulin modification resulted in a new patent and a subsequent price increase. For example, until recently, the average cost of a vial of Lantus (a popular long acting insulin) was $300, and most diabetics need 2-3 vials per month.

This introduces us to the second problem: our old friends the PBMs. There are only a couple of insulin manufacturers, which provided a great opportunity for PBMs to play one off against the other. PBM behavior in the insulin market is an example of capitalism running amok. PBMs demanded insulin rebates in exchange for favorable coverage. They then pocketed a big chunk of that change. Then they started all over again. Patients became insulin ping pong balls.  And the insulin formulations were not strictly interchangeable. So blood sugars might be too high or too low every time a switch was made. And as noted before, list price was increased to neutralize the rebates.

Amazingly, Congress acted to end this nonsense. As part of the Inflation Reduction Act (passed in 2023), all diabetics irrespective of insurance pay a maximum of $35 out of pocket per month for insulin. Amen. But lest we rest on our laurels, this PBM nonsense is not confined to insulin. Another battleground is the anti-inflammatories used to treat rheumatoid arthritis. Humira and Enbrel, two breakthrough drugs. First we saw lots of patent extensions to maintain exclusivity.  In addition, these have been the subject of lots of PBM price negotiation. And now there are biosimilar competitors. We have already seen crazy rebating to try to maintain market share by these reference products. Just to level set: Humira has globally generated over $200 BILLION in profits.

I started with generics because they are relatively easy. Next we will talk about really expensive drugs, and I’ll get to discuss a subject I know something about: cancer drugs.