Soaring prescription prices cause a nasty divorce in the healthcare market

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Money always ranks high among the reasons for divorce. In the failing marriage between Anthem Blue Cross and Express Scripts, it’s reasons one through 15 billion. That’s how many dollars the party of the first part thinks it’s been cheated out of by the party of the second part.

For those who missed the wedding announcement back in 2009, Anthem Blue Cross is the nation's second-largest health insurance company; Express Scripts is the nation’s biggest pharmacy benefits management firm, or PBM. They seemed to be in a marriage made in heaven, until household finances strained the relationship to the breaking point. 

To be precise, the issue is the run-up in pharmaceutical high drug prices, which Express Scripts was tasked with moderating. According to Anthem, the pharmacy firm either failed to achieve the savings it expected, or kept too much of them for itself. 

(Express Scripts') breach ... has resulted in massive damages to Anthem and an obscene profit windfall to ESI.

— Anthem's chief claim in its lawsuit against Express Scripts (ESI)

Now they're in litigation. Anthem on Monday sued Express in New York federal court, alleging that the latter owes it at least $13 billion, and as much as $14.8 billion, in undelivered savings from negotiating lower prices on prescription drugs for Anthem's customers. The filing is assumed by observers to be the final break after attempts at working things out failed. Earlier this year, Anthem Chief Executive Joseph Swedish told an investment conference that his company was overpaying for drugs by $3 billion a year, and blamed Express Scripts. 

Express hasn't responded to the lawsuit in court, but in statements its spokesmen have said Anthem had "mischaracterized" its obligations and that the lawsuit is "without merit."

At a conference call about Express' 2015 earnings, its retiring CEO, George Paz, said he had "no clue where the $3 billion came from.... The number doesn't make any sense to me." He did imply, however, that Anthem may not have achieved the savings it expected in drug pricing because it wasn't sufficiently rigorous in dictating which drugs it would cover for patients, a system known as a "formulary."

"One of the biggest things you can do to manage your costs," he said, "is by really focusing your buying on the most efficacious, best priced products."

That's a hint that the core problem is the incredible run-up in pharmaceutical prices generally in recent years. That explosion in drug costs has upended the finances of federal programs such as Medicare, state-funded health programs such as Medicaid, and private insurers alike. Much attention has focused on such profiteers in generic drugs as Martin Shkreli, the former CEO of Turing Pharmaceuticals. But the real damage has occurred in the market for branded wonder drugs such as Gilead Sciences' Sovaldi and Harvoni for hepatitis C, which cost as much as $100,000 per 12-week treatment and address a potential market of millions of patients. 



How a hugely overpriced hepatitis drug helped drive up U.S. health spending 


Prescription costs lead Americans’ top healthcare concerns. That’s according to a poll released in October by the Kaiser Family Foundation, in which 77% of respondents said that ensuring affordable treatments for such conditions as hepatitis and cancer should be a top priority for the president and Congress. Some 63% listed “government action to lower prescription prices” as their top priority.

In a report last year, however, actuaries for Medicaid and Medicare projected that although prescription spending would grow faster than overall healthcare costs through 2024, the difference in the trends was modest. Spending would rise because improved benefit management for patients with chronic diseases would keep more of those patients on their drug regimens, they projected, and because pharmaceutical companies would shift more of their research and development budgets toward specialty drugs. 

These drugs, which include cancer drugs and Gilead Sciences’ blockbuster hepatitis C treatments, Sovaldi and Harvoni, command prices as high as $100,000 for a course of treatment. Still, the actuaries projected that prescription drugs’ share of total healthcare spending would rise only from 10.1% in 2015 to 10.4% in 2024. The annual growth in drug prices, they estimated, would moderate to about 6.6% in 2018-2034 from 12.6% in 2014. (That huge leap in 2014 was due almost entirely to the hepatitis treatments.) But the drugs may be almost too effective for their impact to be sustained. They provide a complete cure for more than 90% of hepatitis C sufferers, with minimal side effects. 

In fact, sales of the Hep C drugs — Gilead’s two treatments and AbbVie’s competing Viekira Pak formulation — may have peaked in March 2015, when a combined 56,800 prescriptions were filled at retail, according to the healthcare consulting firm Symphony Health Solutions. Last month, the consulting firm estimates, combined retail sales came only to about 38,330.

But these still are big numbers — retail spending on prescriptions came to more than $328 billion last year. That has made the work of pharmacy benefit management firms, which use their bulk buying power as middlemen to squeeze drug makers for discounts, more important to health insurers such as Anthem, and given the firms a bigger footprint in the healthcare industry. According to PhRMA, the drug industry’s trade organization, the five biggest PBMs have a market share of more than 80%, led by Express Scripts, which covers 85 million patients, with 29%, or 85 million patients. 

The run-up in drug prices has placed a premium on pharmacy benefit management and brought added value to PBMs, which function as middlemen to buy in bulk to extract discounts from drugmakers. Express Scripts is the largest such management firm, but also one of the few unaffiliated with an insurance company or drug retailer.  

As the journal Modern Healthcare observes, CVS and Rite-Aid both have PBM units. UnitedHealth Group, the nation's biggest health insurer, is expanding its PBM, OptumRx -- which might inherit Anthem's drug-buying contract if Anthem breaks with Express Scripts. Aetna is taking over Humana, which has its own PBM. Industry observers believe that the lawsuit's aim may be to unwind the two companies' partnership, which is due for renewal in 2019.

In its lawsuit, Anthem paints a portrait of a dysfunctional partnership. Anthem ended in-house drug buying in 2009 and turned over its PBM to Express Scripts on a 10-year contract, with provisions requiring periodic renegotiations over drug prices. Anthem became Express Scripts' largest single customer, accounting for about 16.3% of its $101.8 billion in 2015 revenue.

The insurer says Express has been dodging its efforts to launch the next renegotiation cycle. It says it has determined that the prices Express Scripts is charging are "not remotely competitive," with the excess coming to $13 billion over the remainder of the contract to 2019, and an additional $1.8 billion during a post-contract transition year.

Anthem says it has offered Express deals several times to save the contract, including accepting smaller discounts than the $13 billion it says it deserves through 2019, but Express has ignored or rebuffed them. Industry observers say the lawsuit signals that the relationship may be beyond repair. 

But in the larger picture, efforts to limit prescription costs are warranted. More prescription drugs priced so high that thousands of potential patients are excluded from treatments that soon could reach the market. Americans pay much more than patients in other countries for many brand-name drugs, including Sovaldi and Harvoni, which excessively burdens the U.S. healthcare system. 

Medicare’s policy of reimbursing doctors a flat 6% of the average cost of drugs they prescribe and administer in their offices or outpatient clinics arguably gives doctors an incentive to order the most expensive drugs for their patients; a new proposal to reduce the reimbursements for costlier drugs and increase them for cheaper prescriptions aims to reverse these incentives.

The burden of high prescription prices looks to be sticking with us for many more years. The spat between Anthem and its drug middleman is only one symptom.


High cost of hepatitis drug reflects a broken pricing system

The Shkreli saga: A huge spike in the cost of an old drug reignites the pharma pricing debate

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11:12 a.m., Mar. 27: This post has been updated with background on pharmaceutical prices.

7:25 a.m., April 1: This post has been updated to clarify that the change in Medicare drug reimbursements applies only to drugs administered in a doctor's office or outpatient clinic.