Unnecessary Regulations that Increase Prescription Drug Costs

Americans filled an estimated 3.8 billion retail prescriptions in 2011 — about 12 per person in the United States, on average. Sixty percent of all Americans take a prescription drug in any given year, and nearly all seniors do. Drug therapy is arguably the most efficient method to treat most illnesses — often substituting for more expensive hospital and physician therapy. It is the area of medicine where we get our highest rate of return. While drugs make up only about 10 percent of total medical expenditures, physicians account for twice as much, and hospitals accounts for three times the cost of drug spending.

Yet unwise public policies make drugs more expensive than they need to be.

What follows is from the NCPA study, “Unnecessary Regulations that Increase Prescription Drug Costs.”

Barriers to Efficient Networks. Drug plans are increasingly experimenting with limited or “narrow” pharmacy networks in order to lower drug prices through bargaining with specific drug dispensers. But these networks run afoul of state laws that allow any pharmacy willing to abide by the terms of the contract to fill prescriptions for enrollees. The Federal Trade Commission notes that these any-willing-pharmacy laws reduce the drug plans’ bargaining power, leading to higher drug prices and higher premiums for consumers.

Barriers to Mail-Order Pharmacies. Drug plans use a variety of incentives to encourage patients to use efficient mail-order pharmacies for medications treating chronic conditions. Plan sponsors often charge higher deductibles for retail purchases or offer lower copayments for mail-order drugs. Some plans limit the number of times a prescription may be refilled at a retail pharmacy.

Unfortunately, some states at the behest of local community pharmacies are enacting laws that interfere with these practices.

Barriers to Cost-Effective Formularies. There are numerous drug therapies available to treat most conditions, but some cost more than others. Thus it makes sense for drug plan managers to compare both a drug’s cost and efficacy, and advise plan sponsors which drug therapies should be included in a drug plan formulary, and offer incentives to encourage enrollees to use the most cost-effective alternatives that have been shown to work. Formularies that exclude, substitute or discourage certain drugs are now commonplace in state Medicaid programs, Medicare Part D plans and employer plans. Although generic substitution is legally allowed in most states, therapeutic substitution of a different drug from the same class is illegal without authorization from the prescribing physician. Some states continue to hinder therapeutic substitution for a lower-cost drug when it is appropriate.

Barriers to Lower Cost Dispensing Fees. Fees to cover the costs of dispensing a drug in conventional Medicaid plans — counting tablets, filling bottles and administrative tasks — are set by the state. Yet, state officials and state legislatures often yield to political pressure and set dispensing fees that are much higher than what private drugs plans could negotiate if allowed to do so. Average Medicaid dispensing fees range from $1.75 in New Hampshire to $10.64 in Alabama.  By contrast, privately managed Medicare Part D plans negotiate fees with pharmacies of about $2 per prescription.

Barriers to Efforts to Combat Fraud. Health care fraud is a problem faced by all third party payers — drug plans are no exception. Estimates vary, but about 10 percent of Medicare claims could be either fraudulent or abusive, bordering on fraud. Concealed among the billions of claims filed electronically, fraudulent charges often look just like legitimate claims.

Companies that process electronic payments have learned how to detect transaction patterns that deviate from the norm. Computer algorithms can examine thousands of medical claims for services or medications for obvious irregularities. Sometimes a pattern emerges well after a series of fraudulent claims are processed and paid. Strict prompt pay regulations — including regulations requiring Medicare drug plan administrators to pay claims within 14 days — makes it difficult to detect fraud before a claim has been paid. At the very least, drug plans need the authority to delay paying questionable claims to providers suspected of fraud. Plans also need greater authority to exclude or suspend suspected fraudulent providers from networks and conduct routine audits of participating pharmacies.

A Better Way. Congress and state legislatures should avoid well-meaning, but ill-conceived, regulations intended to protect consumers, which often have the opposite result. A better way to ensure desirable outcomes is to promote a competitive environment free of market distortions that favor one party over another.

Comments (18)

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  1. rex says:

    NCPA should focus on promoting health saving accounts. Mail order facilities are owned by crony capitalist PBMs. PBMs have every incentive to play the political game to their advantage. A PBM would never substitute avastin for lucentis, but an owner of an HSA would.

  2. Ken says:

    Devon, don’t you realize the government is protecting us? :)

  3. Sandeep says:

    This is such an enlightening post, I agree, since proscription drugs are the most cost effective way to manage health given the fractured health system that we have. Promoting free market principles is going to be the best way we bring cheaper treatment for millions of Americans.

  4. Kumar says:

    When I can buy the same medication at a cheaper price from India than here, why should I bother buying it from here where some of the medications are so expensive,even after health insurance.

  5. Patel says:

    @ Kumar’s comment

    I sometimes think that health insurance makes the market worse by distorting consumers and supplier relationship.

  6. Desai says:

    Pharmaceutical companies function like monopoly. Because of their patent rights to a drug for such an extensive period of time, most of them function like a monopoly or an oligopoly, and so the prices we pay are much higher than they should be. Many pharmaceutical companies say that they need the profits to invest in their R&D, but investigations so that their profits are way higher than what is needed for going into R&D.

  7. Saket says:

    Has there been any changes made on this front since the ACA will play out pretty soon? Why hasn’t the ACA tackled this?

  8. Devon Herrick says:

    @ Rex, I have authored reports dating back 10 years on what uninsured (or HSA-insured) patients can do to lower their drug spending by being wiser consumers of prescription drug therapies. I want consumers to look for drug bargains, and consider OTC options to reduce their costs.

    I also recognize that most HSA-qualified health plans negotiate drug prices on enrollees’ behalf. As a consumer I don’t want the store that supplies the drugs I purchase to have successfully lobbied the legislature to hamper the bargaining power of the firm that negotiates drug prices on my behalf.

    I like to have options – some of which I’m willing to pay more for. But I don’t like third parties lobbying to remove my options to their advantage.

  9. Sadat says:

    @ Ken

    Yes, may be the government’s intention is to protect us, but sometimes protectionism can have costly implications for all of us.

  10. Don McCanne says:

    We should support policies that are designed to get the right prescription to the right patient at the right time. Most of the policies listed do the opposite.

    Other nations ensure timely access to the right medications, and at lower costs than in the United States. The secret (which is no secret, except here) is administered pricing.

  11. Studebaker says:

    Yes, the government is protecting us — and the profits of independent pharmacies.

  12. Karl Stecher says:

    Devon –

    Your first paragraph…Drug therapy…ARGUABLY…”the most efficient”…”most illnesses.” Then you compare it with physician directed diagnosis and therapy. This is such a blanket statement, with absolutely no proof, that I ask you to give such proof. What illnesses? Aren’t many drugs prescribed by doctors, who use them, hand in hand, as part of treatment? Etc.
    “Any willing pharmacy.” Well, I disagree with the FTC’s (not doctor run) statement. Sure, FTC looks at cost. So? If there is no “any willing pharmacy” law, the drug companies (or health plans who own the patients) can get a lower price. But they then hold the big stick over pharmacies, and control access, and limit the number of pharmacies which can conveniently serve patients.
    Note a very important thing in medical care delivery, and insurance coverage in America: The insurance companies own their patients. They have restrictive doctor networks. Insurance companies set the price, and have their patients use only the doctors in the network..A doctor may be the best in his field…but if a patient wants to see him/her, their insurance will not cover it. If there were an “any willing provider” provision in ALL insurance policies, it would allow patients to see the doctor they deem best. Now, that same Federal Trade Commission gave the power to the insurance companies to set fees…which they can do because they own the patients (note that it destroys some of the doctor-patient relationship). But the FTC also ruled that doctors cannot band together for better fees. Tke it or leave it from insurance companies. Payments to doctors are in most cases pitiful. The FTC (government) regulation has destroyed true capitalism in medicine.
    Medicaid dispensing fees are so low in some cases that some pharmacies advertise that they will fill NO Medicaid prescriptions.
    Substituting brand drugs for generic is commonplace among insurance companies, Medicare and Medicaid included. But I can relate three well-known drugs where I have seen generics fail to work: Dilantin, Vicodin, and Wellbutrin. A Blue Cross/Blue Shield patient was denied regular Wellbutrin by Blue Cross/Blue Shield/Anthem. Only the generic was covered, and the brand was too expensive for him to buy. He spent several hours on the phone with Anthem, who promised to get back with him.. He was suicidal. They did not get back with him until 4 PM the next day, despite their promise, and then told him he would have to submit a written request for the brand name drug. So little caring or competence by Anthem. The patient borrowed brand name Wellbutrin from a friend, and survived.
    Point: Some insurance companies substitute cheap generics for brand names despite therapeutic evidence contrary to their edicts.

  13. Ryan Hall says:

    I, as well, don’t really like the idea of having third parties lobbying to remove my options to their advantage. Let me tell you, our broken health care system is way out of control to the point where people don’t want to get treatment because the costs are out of this world.

  14. Hyatt says:

    The consumer and supplier market in our health care industry is non-existent. I don’t know the details of how extensive distortions are in the market, but I do know they’re significant enough for me to call for a major overhaul of the system.

  15. Doctor Tom says:

    Generic substitutioncan can, in many cases, save consumers money whenaddressed honestly. Unfortunately, the pharmacies see generic substitution as a cash cow. Many will offer generics at a savings to the consumer of $5-10 over the branded alternative. This then provides a substantial profit over the branded with marginal savings to the consumer. Many big box pharmacies offer bonus incentives based on the number of generic conversions that are processed.

    Generics also have a danger in that they may not be as effective as the branded or contain fillers and preservatives that are cheaper but carry a higher rate of adverse reaction for the patient. The prescribing physisican is then blamedfor giving the patient a drug that caused a bad reaction.

    Some generics have great efficacy while others are a real problem. The pharmacy buys from the lowest cost provider which means from m onth to month theere can be fluctuations in the efficacy of the drug and in the side effcts profile.

    Therapeutic substitution is a whole other problem. Just because a drug is in the same therapeutic class does not mean it has the same positive effect on the patient’s treatment or is even therapeutically appropriate.

    The dispensing pharmacist has no clue as to the patient’s medical history especially regarding comorbid conditions and previous reactions to or failures of medications in the same therapeutic class. Many times they will recommend a generic in the same therapeutic class as a current branded medication. It has been shown in many studies that the response from branded to generic or branded to branded can vary significantly.

    If the pharmacist is willing to accept responsibility for the adverse effects that the therapeutic substitiution causes then let them play doctor and change the medication but, then they must communicate with the prescribing physician so that he/she has the option of continuuing that patient’s care or turning the full responsibility of the patient’s medical future over to the pharmacist.

    Unfortunately, there are many issues involved with the dispensing of medications that are not evaluated by articles such as this. What is the pharmacist’s motivation for recommending one medication over another? Profit motives still rank very high in the decision matrix. Pressure from corporate to contain the options offered to customers, personal experience that does not replace research in the peer reviewed literature, personal predjudices about one company or form of treatment (traditional, herbal, pharmaceutical, etc)and of course competence in decision making.

  16. Sammy says:

    “Sixty percent of all Americans take a prescription drug in any given year, and nearly all seniors do.”

    Seems kinda high. Obviously, prescription drugs have a huge market.

  17. DoctorSH says:

    Prescription costs will never decrease as long as third parties are involved.
    There is no competition in pharmacy pricing. Contracted prices do away with it.

    I am surprised to read this post that seems to go along with big corporate third party pricing as opposed to a true free market competition.

  18. scree72 says:

    Dr Tom….you are an arrogant, ignorant fool. I pity your patients if you show them the same lack of respect that you have demonstrated for all pharmacists here. The pharmacist is THE expert when it comes to choosing and managing appropriate drug therapy. We have YEARS of education in the pharmaceutical sciences like NOBODY else in the medical field , MDs included, receives. We have the FIRST HAND knowledge about drug costs, which by the way, usually differ MUCH more than $5-10 between brand and generic. And seriously, do you even know the function of the FDA in regard to prescription drugs?

    We don’t look to ‘replace’ physicians or any other member of the healthcare team, but we do need to be recognized for the tremendous impact we already have on patient outcomes, and for the wealth of expertise we are educated and trained to provide. Any lack of patient’s history we have is only due to your laziness and could be remedied with a simple fax or phone call. You are missing out on a valuable and readily available resource and denying your patients advantages that YOU, sir, simply cannot provide. So get over yourself.

    As for the original argument, FREE enterprise is the simple solution. Allow FREE competition and costs will decline naturally. Pharmacy benefit managers have ruined pharmacy and only drive costs UP. Any “managing” entity (HMOs, PBMs, etc) are ONLY interested in their own profits. Everyone else loses: government agencies, providers, and especially patients.