Political discussion on how to solve America’s drug pricing problem has been ongoing for years, and for good reason.
Patients in the United States often face intimidating prices when filling their prescriptions. According to data provided by the Centers for Disease Control and Prevention, nearly 8 percent of Americans do not take their medications as provided because of cost concerns. One 2017 Consumer Reports survey indicates that even more — 24 percent — of regular prescription medications users felt “not at all confident” that they would have access to affordable medicine in the future.
The problem is even more pressing for those with long-term and complex conditions. In 2013, a study published by the American Society of Clinical Oncology found that nearly half of participating oncology patients (45 percent) engaged in cost-related medical nonadherence. As the researchers write:
“Four percent took medications prescribed for another person, 22% took less medication than prescribed, 25% filled a partial prescription, and 27% did not fill a prescription, all as a result of cost Non-adherent participants were more likely than adherent participants to reduce spending on basics like food and clothing to pay for medication, and borrow and/or use credit to pay for medications.”
Intuition and prior research tell us that medical nonadherence can make drug interventions less effective and harm patient health outcomes. The idea that patients in the US may need to choose between filling their prescriptions and buying food, or between their immediate survival needs and long-term health, is undeniably alarming. To that end, Republicans and Democrats have put forward proposals to lower sky-high drug prices. There are two leading solutions: creating an international pricing standard and building a single-payer system to negotiate lower costs.
Republican Proposal: Creating an International Pricing Standard
While the idea of establishing an international standard has been around for years, it gained new visibility when the US Health and Human Services Secretary Alex Azar proposed the International Pricing Index (IPI) in 2018. As proposed, the IPI would tie prices for Medicare Part B drugs to government-set benchmarks in Greece, Austria, Ireland, and the Czech Republic.
In theory, this approach would prevent drug prices in the US from spiking above the global community’s “reasonable” baseline. Some proponents of the IPI have further suggested that these benchmarks could be applied beyond Medicare negotiations to insurers and the commercial market.
Democratic Proposal: Creating a Single-Payer System to Negotiate Lower Prices
A single-payer model refers to a system that relies on one public agency to provide health care coverage while private businesses deliver the majority of health care services. Because such systems consolidate negotiating power within one agency, one-payer systems tend to have significantly more leverage when in price conversations with drug companies. Examples of this model can be seen in the UK, as well as Canada, Denmark, and Australia.
Currently, two proposals for single-payer healthcare in America — collectively dubbed Medicare for All — are undergoing review in the House and Senate.
Both of these price-limiting solutions have their merits and flaws. However, what makes this conversation so interesting is that a few specialties have tied their profitability to high drug prices. This reliance means that when price-limiting measures eventually come into play, they will have an adverse effect on clinical practices within our current fee-for-service system.
Understanding the Buy-and-Bill Model
To understand some specialities’ reliance on drug prices, one first needs to understand the fee-for-service system that underlies it. As the name suggests, every service provided to a patient comes with a price — typically one negotiated by the provider (physician, hospital, outpatient network, etc.) and the insurer. Once rendered, these services are itemized, added up, and billed to the patient’s insurer and, if not fully covered by the payer, the patient.
In a fee-for-service system, many retina practices adhere to what is colloquially known as the “buy and bill” drug acquisition model and gain a significant portion of their revenue from drugs rather than procedures. In this approach, a clinician purchases drugs from a distributor, adds a markup, and resells the medicine to their patients.
The system works as New York Times writers Andrew Pollack and Reed Abelson describe: “Doctors make a markup when they buy a drug and then use it. Medicare is supposed to pay 6 percent over the average price of the drug. That percent represents a larger number of dollars for an expensive drug than for a cheap one.”
“The United States is the only profit-motivated healthcare system in the world, and perhaps it is no coincidence that this country also has the most expensive healthcare of any nation,” Gary Branning and Martha Vater further wrote for American Health & Drug Benefits in 2016. “Although virtually every stakeholder that contributes to the US healthcare system does so with the primary goal of helping patients and improving healthcare outcomes, their parallel objective to earn a profit (an entirely reasonable expectation) has often added unintended consequences and costs to an already complex system.”
Case Study: Retina Practices
For many retina practices, buy-and-bill logic is key to business survival. Some ophthalmologists have come to depend on the revenue that reselling certain drugs provides. Take the treatment of macular degeneration as an example. The foremost medication used to treat the condition is an injectable drug called Lucentis, which typically costs over $2,000 per treatment and is administered as often as once per month.
In the above-mentioned Times article, Pollack and Abelson spotlighted a Milwaukee-area doctor who performed over 6,000 eye injections in 2012. Lucentis administrations, they noted, accounted for $7 million of the doctor’s total Medicare reimbursement of $8.6 million.
That said, it is worth noting that the profit margin for drug provision isn’t enormous for these drugs, as a significant portion of the fee goes back into paying for the medicine. A 2011 study published in Clinical Ophthalmology found that profit margins at retinal practices varied from 62 percent for non-laser surgery to just 1 percent for intravitreal injections. However, a one percent profit on a $2,000 dose of Lucentis still accounts for more revenue than 1 percent of the drug’s significantly cheaper alternative, Avastin, which costs just $150 per dose.
No matter the drug cost, however, price controls pose a real danger to practices that rely on slim buy-and-bill profit margins.
Case Study: Oncology
Oncology practices present another example of a specialty dependent on the buy-and-bill model. The function of this model in oncology is identical to that seen in ophthalmology — a clinician purchases cancer drugs from pharmaceutical companies at one price, then bills the insurer at a higher one after they administer that drug to a patient. Past research indicates that around half of gross practice revenues are tied to oncolytics billing.
As mentioned earlier, this reliance on resale income leaves buy-and-bill practices vulnerable to price fluctuations and market changes.
Value-Based Care as Buffer Against Dropping Drug Prices
Any attempt to resolve America’s pricing problem may have the unintended consequence of damaging some specialty clinics’ ability to survive in a buy-and bill, fee-for-service system. To that end, any discussion of lowering drug prices must include conversations about shifting to a value-based model of care.
Value-based care is a reimbursement model that pays healthcare providers based on patient health outcomes instead of services rendered. As one writer for Catalyst explains, “Under value-based care agreements, providers are rewarded for helping patients improve their health, reduce the effects and incidence of chronic disease, and live healthier lives in an evidence-based way […] The ‘value’ in value-based healthcare is derived from measuring health outcomes against the cost of delivering the outcomes.”
In the current fee-for-service model, lower drug prices could be damaging for the retina clinics that rely on higher rates to turn a buy-and-bill profit. However, lower drug expenses would only be beneficial for value-based practices. With government-negotiated or IPI-fixed prices, clinics can provide the same care at less cost, thereby facilitating greater profit. Equally important, value-based contract frees physicians from needing to weigh their clinical decisions within the context of their business’ survival. They can choose to prescribe medicine based on their determination of what medical literature and the patient’s individual circumstances suggest would be clinically best for the patient.
American drug prices are high for the consumer. That said, lowering them without thought of the economic consequences posed to buy-and-bill providers would be a problematic move. No matter which method we deploy to bring down medical costs, we must also execute a parallel solution to bolster value-based care. America’s elderly depend on the clinical support provided by retina and oncology. Poorly-implemented price-lowering measures could inflict lasting damage to buy-and-bill practices and could, in the worst cause, lead to widespread closures. Implementing a thoughtful, value-based model, however, could help such practices — and their patients — thrive.
Shifting America’s reimbursement model to a value-based approach is the best cost and quality decision for patients and providers alike.