Prior to the COVID-19 pandemic, few healthcare issues received as much attention and public discourse as prescription drug prices. The attention paid to the costs of pharmaceuticals is understandable when one considers that, in many ways, medicines are arguably the backbone of the U.S. healthcare delivery system. Whether a person is seeking treatment for a simple infection or complex diseases like cancer or multiple sclerosis, prescription drugs are the primary tools employed by our nation’s healthcare professionals to address illness.

However, informed debate over drug prices is challenging because the nature of drug prices requires layers of context. That said, the common understanding of the American public appears to be that the pricing practices of drug manufacturers are primarily to blame for high drug costs.

While there is certainly truth to the notion that drug manufacturers are key contributors to the prices paid for medicines, in our latest drug pricing report – our study of 32.6 million retail pharmacy claims from independent, small chain, and mid-size chain pharmacies over a 12-month period between January 1, 2020 and December 31, 2020 – we found that a great deal more context is needed to understand drug prices at the pharmacy counter.

More specifically, in our analysis, we find that the overwhelming majority of the prices paid at the pharmacy counter are based on price points established by the drug supply chain intermediaries known as pharmacy benefit managers (PBMs).

For expensive brand medications, the data demonstrates that PBMs establish variable payment rates based upon differentiating the discounts offered to manufacturer price points. For generic medications, the most routinely utilized of all drug therapies, we observed that proprietary PBM prices (i.e., maximum allowable cost, or MAC) were used for setting the majority of all prescription costs and that like their brand counterparts, generic drug prices were highly variable and disconnected from the manufacturer or pharmacy established price for the medication.

This study unpacks how drug prices are set at the pharmacy counter – and how those point-of-sale prices impact pharmacy providers, plan sponsors, and patients.

Estimates of U.S. Brand Drug Commercial Net Prices

Drug pricing is complicated, and as lawmakers and consumers lament the rising costs of medicines, often overlooked in the discourse is the impact of the growing disconnect that exists between the list prices of medicines and the net prices of those drugs after all drugmaker concessions are accounted for. Further complicating matters is the degree with which those concessions are – or more importantly, aren’t – being reflected in the prices paid patients and plan sponsors. In this study, we used the publicly available Federal Supply Schedule (FSS) pricing data to develop a net drug price estimate for brand pharmaceuticals in the U.S. We then analyzed our estimate to known net drug prices and found that our estimate produced similar results to the stated net price by the manufacturer. While other researchers and organizations have developed estimates of net prices based on a “top-down” approach by exploring drug manufacturer financial statements and sales data, our methods may be best described as “bottom-up,” as they are developed for individual products based upon the public FSS data.

3 Axis AdvisorsFebruary 15, 2023Federal Supply Schedule, VA prices, rebates, Medicare Part D, DIR, insulin

Understanding pharmacy reimbursement trends in Oregon

Oregonians, like many Americans, currently experience hardships due to high healthcare costs. A 2021 survey of Oregon adult residents found that 55% encountered cost-related barriers to getting healthcare, including cutting medication in half, skipping doses, or not filling a prescription due to cost. It is well documented that the United States spends enormous sums on healthcare. And while the common perception may be that “you get what you pay for” in regard to health outcomes, the data does not support that perception with regards to U.S. healthcare. The reasons for the low performance are undoubtedly multi-factorial, but an area of increasing interest is disparities of care, which arise based on social characteristics of a population. Indeed, one of the primary goals of the Centers for Disease Control and Prevention (CDC) is to achieve health equity by eliminating health disparities and achieving optimal health for all Americans.

While prescription drugs represent just one component of healthcare costs and utilization, they provide one of the most transparent ways to contextualize potential healthcare inequality. This is because the reimbursement structure of prescription drugs is inherently unequal. There are more than a dozen pricing benchmarks that could be utilized from a typical drug reference file to determine a drug’s price. Such benchmarks might be “objective” in that they could be sourced from a drug reference file directly, but rarely does that objectivity translate into a consistent price at the pharmacy counter for any particular drug. The options for how to pay for drugs become nearly limitless when you consider that each payer for prescription drugs potentially pays for the same product and service in a different way despite the same reliance on the same pricing benchmarks. When there are many prices for a product, there is effectively no price for that product.

The disparities in pharmacy pricing and the inequality of payment experienced across provider types resulted in 3 Axis Advisors being commissioned by the Oregon State Pharmacy Association (OSPA) to review reimbursement trends between payers and retail pharmacies between 2019 and 2021. The primary request was to identify if there may be the existence of differential pricing in payment or PBM-to-pharmacy spread pricing among Oregon Medicaid retail pharmacy networks, which could compromise the sustainability of some providers and create barriers to care for many Oregonians.

We ended up uncovering so much more.

Deserving of better: How American seniors are paying for misaligned incentives within Medicare Part D

Millions of America’s elderly rely on the Medicare Part D program to afford prescription medications. Because adherence to prescription medications is a primary determinant of treatment success, Medicare Part D represents one of the most critical programs to the overall health of the elderly in this country. However, despite the availability of a prescription drug benefit, many Medicare beneficiaries still struggle to afford prescription drugs. The Centers for Medicare and Medicaid Services (CMS) reports a growing disparity between gross Part D drug costs, calculated based on costs of drugs at the pharmacy counter, and net Part D drug costs, which account for all Direct and Indirect Remuneration (DIR). The growing divergence between gross and net spending in Medicare Part D has significant implications for the Part D program. This is because the majority of a Medicare enrollee’s cost share is determined from gross, and not net, drug spending. Medicare is not the first program to struggle with prescription drug costs. Medicaid, another federal program overseen by CMS, has adopted a relatively new model for paying for prescription drugs – one that aligns program costs to surveyed benchmarks meant to approximate the prices paid by pharmacies to purchase medications. The most common benchmark utilized by state Medicaid programs is National Average Drug Acquisition Cost (NADAC), which is typically used as the basis for both the state’s cost exposure and the pharmacy’s reimbursement for the drug’s ingredient cost. Because NADAC is meant to cover just the cost of the drug itself, it is then coupled with a professional dispensing fee that is meant to cover the cost of the service and overhead incurred by pharmacy providers. Amidst growing complaints from providers and patients regarding the inflated and unpredictable prices for prescription drugs within the program, 3 Axis Advisors explored how application of the bedrock of Medicaid’s drug pricing design into Medicare might alleviate ballooning costs within the program.

3 Axis AdvisorsMarch 7, 2022Medicare Part D, NADAC, AWP, DIR, PBM, Pharmacy, Clawbacks, Medicaid

Pharmacy benefit manager exposé: How PBMs adversely impact cancer care while profiting at the expense of patients, providers, employers, and taxpayers

In February 2022, Frier Levitt, a national boutique law firm focused exclusively on healthcare and life sciences, and the Community Oncology Alliance, a non-profit organization dedicated to advocating for community oncology practices and the patients they serve, released an extensive deep-dive into practices employed by large pharmacy benefit managers (PBMs) that can exacerbate high drug prices, restrict patient choice, create inequitable treatment among providers, and create numerous market distortions that can cause plan sponsors and patients to overpay for their medicines. 3 Axis Advisors supported the study through the creation of infographics derived from our prior analyses of millions of prescription drug claims across multiple states.

3 Axis AdvisorsFebruary 17, 2022PBM, Oncology, rebates, DIR, Medicaid, Medicare Part D, Specialty

Purple Haze: How a little purple pill called Nexium exposes big problems in the U.S. drug supply chain

In 2018, the U.S. Department of Health and Human Services (HHS) released a report detailing Medicare Part D spending on brand-name drugs that were also available as multi-source generics. At the top of that list was a popular medication known as Nexium, for which Medicare spent $1.06 billion (pre-rebate) in 2016, despite its manufacturer losing its patent exclusivity in early 2015.

Motivated to understand the root cause of the elevated spending on this high-profile brand-name drug in 2016, we started to research the story of Nexium, and the old drug from which it was derived, Prilosec. We struggled to find a comprehensive overview of the entire Nexium story that was supported by data and analytics needed to fully understand its many moving parts. To fill this void, we received funding from Waxman Strategies through a grant provided by Arnold Ventures to complete and publish this work. Our goal was simply to provide a full data-driven analysis of the Nexium story to help educate lawmakers and the general public on how a drug commonly viewed as a line extension first became a blockbuster drug for AstraZeneca and then exposed a host of warped incentives across the U.S. drug supply chain that continue to be exploited today. The information in this report can serve as the foundation for a more constructive debate on what regulation is needed to help reduce waste in the drug supply chain without sacrificing innovation.

info@3axisadvisors.com

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