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Blue Cross Blue Shield Report on Drug Spending

By May 10, 2017Commentary

Yesterday we reviewed an IMS report that emphasized the “moderation” of drug spending growth.  Uhhh, QuintilesIMS customers are who?  Today we see a report from the Blue Cross Blue Shield Association complaining about drug company pricing of brand-name drugs.   (BCBS Report)   Uhhh, the Association’s members are who?  I tend to be less sympathetic to the drug companies, but the large health plans have been quick to abuse their competitive position by raising premiums as well and don’t always take all the steps they could to control drug spending.  But this report is pretty alarming in regard to the drug company pricing tactics it reports.  The report covers seven years, from 2010 to 2016.  During that time drug spending increased 73% or about 10% annually, for Blue Cross plans.  During this time, generic drugs rose from 66% of prescriptions to 82%,  so brand-name drugs dropped in half, from 34% to 18%.  But brand-name drugs share of total spending actually rose slightly, from 77% in 2010 to 78% in 2016.  Brand-name drugs can be divided into two categories, those with some generic competition and those with patent protection and therefore no generic competition, known as single-source medications.  As you might imagine, it is the single-source drugs that really are driving spending, so much so that they were 63% of all drug spending in 2016, up from only 29% in 2010.  How does that happen?  Through the magic of dramatic, continuous unit price increases.

These single-source drugs had an average price increase of 17% per year over the study period.  Yeah, you read that right, 17%.  Brand-name drugs with generic competition had only a 3% average annual price increase and generics had zero.  Among single-source drugs, the category of drugs for skin conditions experienced an average 30% a year price increase, antivirals, 19%, lipid-lowering drugs, 18%, cancer agents, 17%, and bringing up the rear, asthma at only 8%, still three times general inflation.  The top 25 single-source medications almost all had annual price increases over 10% a year and collectively account for almost half of all single-source spend.  Twelve of these drugs are specialty medications and even when their patents expire it is likely to be a long time before they see biosimilar competition.  This allows extension of pricing misbehavior long after the patent expires.

I am a big free-market economy believer.  Brand-name drug pricing, however, does not reflect free-market pricing.  There is no excuse, none whatever, for a 10% to 15% increase in a brand-name drug’s price from one year to the next.  There is no cost of production or sale justification, in fact the price should be going down.  This is naked greed by the manufacturers.  They can only do this because of a government-granted monopoly.  And since the government created the circumstance that allows this pricing behavior, it is completely justified to take steps to limit it.  For every percent of increase in a brand-name drug price in a year, the remaining patent life decreases by a year.  That will stop price increases.  And for specialty drugs that are hard to make biosimilars for, the government may need to put in absolute price controls.  This nonsense has to end.

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