State Drug Purchasing
in a New World:
The New World
Stephen W. Schondelmeyer, Pharm.D., Ph.D.
Professor and Director, PRIME Institute, University of Minnesota
Invitational Summit for State Policymakers
October 8, 2004
Philadelphia, Pennsylvania
Overview
What will be covered?
• Dynamic Market
• Dollars (Drug Prices)
• Discounts (and Rebates)
• Drug Purchasing
• Disruptions
• Directions
D’s precipitated by Part D
Dynamic Market
• Change at All Levels
• Manufacturer (rebates under new rules & new competition)
• Wholesaler (↓ chargebacks & discount contracts, ↑ rebates by-pass)
• Pharmacies (further loss of cash pay customers)
• Patients (↑ cost-sharing, complex programs, more price sensitive)
• Payers (↑ cost shifting, drop spouses & retirees, direct from mfg discounts)
• PBMs & PDPs (↑ need for transparency, assumption of risk)
• Many Moving Parts
• New Business Models
• Transparency & Intense Scrutiny
Are Drug Prices
Still an Issue?
Wholesale Price per Day of Therapy for
Wholesale
Price $/Day
Norvasc 5 mg tab (Pfizer): 1997 to 2004
$2.00
$1.80
AWP / Day
$1.60
$1.40
$1.20
$1.00
WAC / Day
$0.80
$0.60
$0.40
$0.00
Jan-97
Apr-97
Jul-97
Oct-97
Jan-98
Apr-98
Jul-98
Oct-98
Jan-99
Apr-99
Jul-99
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
$0.20
Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC (Feb 4, 2004) and AARP Prescription Drug Program.
% Change in
Wholesale Price per Day of Therapy for
Percent Change
in Price ($/Day)
Norvasc 5 mg tab (Pfizer): 1997 to 2004
8%
Average
Annual
Percent
Change
7%
6%
5%
Percent
Change
vs.
Previous
Month
4%
3%
2%
CPI All Items
Less Energy
0%
Jan-97
Apr-97
Jul-97
Oct-97
Jan-98
Apr-98
Jul-98
Oct-98
Jan-99
Apr-99
Jul-99
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
1%
Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC (Feb 4, 2004) and AARP Prescription Drug Program.
Recent Drug Price Increases:
Jan 31, 2004 vs Jan 31, 2003
% Change in Price
2004 v 2003
(Average Wholesale Price)
20%
18.3%
19.9%
18%
15.6%
16%
15.7%
14.2%
14%
12%
11.5%
10%
8%
6%
Consumer Price Index – All Items 2.2%
4%
2%
0%
Evista
Lescol XL
Altace
Synthroid
Tricor
Premarin
Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.
Recent Drug Price Increases:
Jan 31, 2004 vs Jan 31, 2003
% Change in Price
2004 v 2003
(Average Wholesale Price)
Consumer Price Index – All Items 2.2%
Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.
Rx Price Impact
Who pays more when AWP increases?

AWP Increases Result in:
•  Cash Pay Consumers
•  Employer Health Plans
•  State Medicaid & SPAP Programs
•  Medicare Part B & Discount Card
•  State & Federal Employees
Top Drugs Most Used by Elderly
Brand Price Inflation & CPI All:
Annual %
Change
1998 to 2004
Brand Inflation
9%
Drug Firm
Discount Cards
8%
AWP
7%
National
Elections
6%
WAC
4% 3.2%
3%
Medicare
Discount Card
4.1%
3.8%
4.7%
CPI All Items
3.4%
2.8%
2%
Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC and Penn. PACE program annual reports.
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
1.6%
Aug-99
Apr-99
2.3% 2.3%
2.2%
1% 1.5%
Dec-98
7.2%
6.9%
6.1%
5%
0%
8.1%
Discounts
• Current Focus on:
• % Discount (rarely describe from what?)
• Retail pharmacy price
• Getting More Rebates
• Should Focus on:
• Defining Starting Point for Discount
• Actual Net Price
• Who Is Getting Reverse & Perverse Incentives?
Do Bigger Discounts
Mean Lower Net Price?
Don’t Count on It.
Beware of Pricing Games !
Actual AWPs Listed in Price Database
Celebrex Cap 100 mg (Jan 1, 2003)
$1.78
Direct Dis
$3.10
$3.10
$3.00
$2.95
$2.94
$2.56
$2.56
$1.97
$1.76
Pharmacia
$1.96
$1.76
Pharmacia
$1.94
$1.76
$2.00
Pharmacia
$2.50
Phy Tot Ca
$2.46
$3.00
$2.52
AWP Inflation vs Original AWP
2% to 77%
$2.94
15 Re-Labeler Products With Inflated AWP
$1.92
$3.50
3 Originator
NDCs with
Same AWP
Phy Tot Ca
$/Unit
Orig AWP
$1.50
$1.00
Hj Harkins
Hj Harkins
Hj Harkins
Hj Harkins
Hj Harkins
Hj Harkins
Pdrx Pharm
Hj Harkins
Nucare Pha
Pdrx Pharm
Medvantx
$0.00
Phy Tot Ca
$0.50
Source: Compiled by PRIME Institute, University of Minnesota from data found in PriceChek PC (Facts & Comparisons, Inc), January 1, 2003
Drug Purchasing: State Strategies
•
•
•
•
•
State as Regulator
•
Utility Model:
[ME, most developed countries]
Drugs as Public Good
State as Wholesaler
•
Controlled Distribution:
State as Importer
•
[certain EU countries, untested in US]
State Liquor Stores
[IL, WI, MN & others,
Importation from Canada & EU: Free Trade Approach
State as Subsidizer
•
•
[PA, NY, NJ many others]
Welfare Program Model: Medicaid or Food Stamps
State Pharmacy Assistance Programs: Coordination with Medicare
State as Prudent Purchaser
•
•
•
•
esp., border states]
[IA market, OR ref prices]
Market-based Competition: Competitive Bidding
Payment-Limits Model: Set Maximum Payment / Reference Price
Multi-State Purchasing or PBM: Competitive Bidding
State-wide Purchasing: Combine all state programs
(Medicaid, SPAP, State hospitals & mental health facilities, prisons, state employees & retirees,
county & local employees, colleges & universities, state retired teachers, public health clinics, etc.)
U.S. Outpatient & Total Rx Expenditures:
1988 to 2012
Expenditure
In Billions
23.8%
$900
of NHE
$800
$642
$700
$600
19.2%
$500
of NHE
$400
$319
Rx Expend:
All Settings
$422
$300
$217
$200
$100
$ 57
$ 38
$143
Rx Expend:
Outpatient Only
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$0
$210
SOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical
Drugs Are a
‘Small Part’
of Health Care ?
Disruptions
•
•
•
•
Medicaid  Medicare
• Moving ~ 50% of beneficiaries to an entirely different drug program
• Legislative price negotiation  PBM negotiation of price or NOT
AWP May Disappear
• Medicaid Chaos
• What will be used for Part D?
• Private Third Party Contracts Chaos
• How Will Medicare Set Rx Payments?
Community  Mail Order Pharmacy
• No one to watch mail order prices or fraud & abuse (PBM owns mail order)
• Shifts Rxs out of communities (esp,, Rural Pharmacies)
• Marginal Cost Becomes Average Cost (No Where Left to Get Acute Rxs)
Re-importation
• May get access to Canadian prices
• Canada may have U.S. type prices
What Direction in the Future?
Stay Flexible
&
Stay Focused
What Tools Can Be Used?
• Better Than “Best Price” Rebates
•
•
•
Not volume, but market share movement
Supplemental rebates get “better than best price” rebates
Best Price is extended to ‘retiree health plans’ in private market
•
•
•
•
Address drug overuse & inappropriate
Counter-balance Direct to Consumer Ads
Disease Management programs
Evidence-based Preferences & Payment
•
•
But Only If They Are Actually Collectable by Pharmacy
Balance effect on utilization & outcomes
•
•
OxyContin: Encourage Pain Med Use / Discourage Street Med
Card Holder Misuse: Selling Card to Someone Else to Use
• Preferred Lists (Formulary) & Prior Authorization
• Co-Payments Can Help
• Fraud & Abuse of Prescription Drugs
Make Sure the Program
Does What
It Was Intended To Do
-- follow the policy advice of former
President Reagan on nuclear disarmament:
Trust and verify!
“You may be on the right track
and moving in the right direction,
but if you are not moving fast enough
the train will still run over you.”
Will Rogers
PRIME Institute
P harmaceutical
Research
In
Management &
E conomics
University of Minnesota
Medicaid Rx Payment Components:
1980 to 2002 (Constant 2002 $)
$ / Rx
$60.00
Rebate
Amount
$50.00
$40.00
$30.00
Drug Product
Payment
$20.00
$10.00
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
$0.00
Dispensing
Fee Payment
SOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical
Assistance Programs, National Pharmaceutical Council, 1976 to 1998.
Drug Rebates as a % of
Total Drug Expenditures
% of Medicaid
Drug Expenditures
% of Drug
Product Cost (AMP)
30%
26%
24%
24%
25%
20%
23% 23%
22%
18%
20%
18%
15%
21%
20% 20% 21%
18% 18% 18% 18%
% of Total
Drug Expenditures
13%
10%
5%
25% 24% 25% 25%
3%
0%
0%
1990
2%
1992
1994
1996
1998
2000
Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under
Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998 and in HCFA Form 64.
2002
PRIME Institute
P harmaceutical
Research
In
Management &
E conomics
University of Minnesota
Reverse & Perverse Economics
Pharmaceutical Firms have been able to
reverse the economic flow in the Rx market
to co-opt major players:



PBM Revenue from Drug Firms
 Creates Conflict of Interest with Client’s Expectations
Medicare Over-Pays for Office-Based Drugs
 Doctor Has Incentive to Prescribe Highest Priced Drug
Brand Firms Pay Generic Firms Not to Enter Market
 Cost of Settling Lawsuit Less than Added Revenue
What About
Buying Drugs from
Canada or
on the Internet?
What About Drugs from Canada?
• May Be Cheaper
 Lower Because Drug Company Charges Less
 Drug Firms Have Threatened Supply Limits in Canada
• Is It Legal?
 Not Exactly
• Coordination of Care with Others
 Physician & pharmacist review all meds
 Other insurance coverage
What Is Meant by Re-importation
of Drugs from Canada?
• What would re-importation allow:
•
•
•
Purchase of U.S. made drugs from approved Canadian sources
Pharmacies & wholesalers could buy from approved Canadian sources
Consumers could buy from approved Canadian internet sites
• What would re-importation NOT allow:
•
•
Importation of counterfeits from anywhere in the world
Internet purchases from anywhere,
except approved U.S. & Canadian sites
How Many Consumers
Would Buy Prescriptions
on the Internet -If They Could Buy the
Same Medication at
Their Corner Drug Store at the
Same Price?
Factors Contributing to Change in
Medicaid Drug Expenditures:
10-year
% Change
1992 to 2002
(Constant $)
160%
141.4%
140%
110.3%
120%
100%
80%
59.7%
60%
40%
20%
0.0%
0%
-20%
-6.3%
Drug
Rx's/Drug
Avg $
Recipients Recipient/Yr Payment/Rx
-20.6%
Drug
Disp. Fee
Product Payment/Rx
Payment/Rx
General
Inflation
(CPI-All)
Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under
Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998
% of Adults Using Medication
in Previous Week
% Using Meds
In Previous Week
% of Elderly Using Meds in Previous Week
Any
100%Medication includes:
93%
100%
90%
81%
80%
70%
60%
50%
50%
40%
30%
20%
10%
90%
77%
• Prescription drugs
70%
• Over-the-counter
meds (OTCs)
60%
• Vitamins
& Minerals
50%
40%
• Dietary
Supplements
30%
• Natural
& Herbal Remedies
20%
• Contraceptive
Drugs & Devices
10%
80%
0%
0%
Rx Meds
Any Med
Rx Meds
Any Med
Source: JAMA, Vol 287, No. 3, Jan 16, 2002, based on adult population survey in 1998-99.
How to Choose a Direction
What direction should we go?
• Clearly DEFINE the problem you are addressing
• Know SOURCE of the problems you address
• Make sure you TARGET solution to the source
• Know how you will MEASURE impoact
Stephen W. Schondelmeyer, Pharm.D., Ph.D.
Professor and Director
PRIME Institute, University of Minnesota
Definitions & Status of Key Terms
• Access
• Opportunity to buy an insurance plan
(If you can afford it!)
• Choice & Voluntary
• Opportunity to choose who’s plan you buy
• Beneficiary can buy the low cost plan
• Plans can avoid high cost patients
(adverse selection)
Definitions & Status of Key Terms
• Transparency
• Retail Price Published
• Manufacturer Prices & Rebate Not Disclosed
• PBM Rebates & Switching Fees Not Disclosed
• Private Market
• Program Delivery Limited to PBMs
• No Price Negotiation with Drug Firms
Are Drug Prices
Still an Issue?
Is there anyone who has never
been sick a day in their life?
Is there anyone who has not needed
(or used) a prescription drug?
Virtually everyone needs, has used,
or will use drugs in their lifetime.
U.S. Outpatient & Total Drug Expend.
as a % of GDP: 1988 to 2012
Drugs as
% of GDP
Rx Expend: All Settings
4.1%
2.9%
2.2%
2.4%
1.4%
1.7%
1.0%
1.2%
0.6%
0.8%
Rx Expend: Outpatient Only
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under
Medical Assistance Programs, National Pharmaceutical Council, 1975 to 2002 and in HCFA Form 64.
What Tools Can Be Used?
• Preferred Lists (Formulary) & Prior Authorization
•
•
•
Address drug overuse & inappropriate
Counter-balance Direct to Consumer Ads
Disease Management programs
•
•
Not volume, but market share movement
Use Pharmacy & Therapeutics Committee
•
•
But Only If They Are Actually Collectable by Pharmacy
Currently Pharmacy Bears Cost (25%-75% of copays uncollected)
• Better Than “Best Price” Rebates
• Tiered Co-Payments Can Help
• Fraud & Abuse of Prescription Drugs
•
•
OxyContin: Encourage Pain Med Use / Discourage Street Med
Card Holder Misuse: Selling Card to Someone Else to Use
U.S. Outpatient & Total Drug Expend.
as a % of NHE: 1988 to 2012
Drugs as
% of NHE
Rx Expend: All Settings
23.8%
19.2%
16.6%
10.7%
13.8%
8.1%
11.0%
9.3%
5.6%
6.2%
Rx Expend: Outpatient Only
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under
Medical Assistance Programs, National Pharmaceutical Council, 1975 to 2002 and in HCFA Form 64.
Dynamic Market
• Change at All Levels
• Manufacturer
• Wholesaler
• Pharmacies
• Patients
• Payers
• PBMs
• Many Moving Parts
• New Business Models
• Transparency & Intense Scrutiny
What is the
Source of Drug
Spending Growth?
Medicaid Rx Payment Components:
1980 to 2002
$ / Rx
$60.00
(Current Dollars)
$57.63
$48.97
$50.00
$53.45
Drug Product
Payment
$4.18
Dispensing
Fee Payment
2002
$4.18
$4.21
2000
$39.68
$4.24
$34.54
$4.33
1998
$4.32
$26.50
$4.29
1996
$22.78
$4.28
$20.98
$4.15
1994
$18.74
$4.11
$4.10
$15.28
$4.00
$13.91
$12.82
$3.59
$3.81
1990
$11.27
$3.52
1988
$10.46
$3.44
$9.69
$3.41
1986
$8.71
$3.30
$7.90
$3.02
1984
$5.92
$2.99
$3.03
$5.03
$2.88
1982
$4.19
$0.00
1980
$10.00
$2.87
$7.06
$6.90
$12.01
1992
$20.00
$17.27
$17.72
$29.95
$30.00
$44.76
$27.06
$48.12
$40.00
SOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance
Programs, National Pharmaceutical Council, 1976 to 1998.
10-year
% Change
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
Factors Contributing to Change in
Medicaid Drug Expenditures:
1992 to 2002
(Constant $)
141.4%
110.3%
Total Drug Expenditures
↑
↑
303% current $
215 % inflation adjusted $
59.7%
0.0%
-6.3%
Drug
Rx's/Drug
Avg $
Recipients Recipient/Yr Payment/Rx
-20.6%
Drug
Disp. Fee
Product Payment/Rx
Payment/Rx
Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under
Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998
General
Inflation
(CPI-All)
Discount Cards & Discounts
• What is a discount?
• Lower net price at the time of purchase.
• Lower price that is based on market forces.
• What is NOT a discount?
• Rebates not passed on to the end payer.
• A $600 subsidy; it helps but is not a discount
• A generic price already available in market
Recent Drug Price Increases:
Jan 31, 2004 vs Jan 31, 2003
% Change in Price
2004 v 2003
(Average Wholesale Price)
9.8%
10%
8.8%
7.8%
8%
6.4%
6.9%
7.0%
6%
4%
Consumer Price Index – All Items 2.2%
2%
0%
Neurontin
Zoloft
Plavix
Toprol XL
Flomax
Ambien
Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.
Dynamic
Market
Drug
Purchasing
Role of Coverage & Price
“Coverage without
consideration of price
is the equivalent of
writing a blank check
to pharmaceutical firms.
-- Stephen W. Schondelmeyer
PRIME Institute, 2002
Dollar Spent
(Drug Expenditures)
Discounts
Dollar Charged
(Drug Prices)
Are Drug Prices Still an Issue?
Top Brand Drugs Most Used by Elderly
Wholesale Cost / Year: 1997 to 2004
Wholesale
Cost $/Year
$1,288 $1,337
$1,207
$1,116
$1,061
$1,046
$996
$923
Sep-04
May-04
Jan-04
Sep-04
May-04
Jan-04
Sep-04
May-04
Jan-04
Sep-04
May-04
Jan-04
Sep-00
May-00
Jan-00
Sep-99
May-99
Jan-99
Sep-98
May-98
Jan-98
Sep-97
May-97
$837
Jan-97
$1,500
$1,400
$1,300
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
Brand Drugs
Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC and Penn. PACE program annual reports.