How the government makes healthcare more expensive by cutting costs

Increasing healthcare costs are one of the most important issues facing the United States today.  Although the rate of increase has slowed down over the past few years, the amount of money spent on healthcare in the US has risen at an alarming rate over the past decade.   It’s not only an issue for private insurers as the impact of Medicare and Medicaid spending also threatens to balloon the federal budget.  Incredibly, cost savings measures instituted by the government have, and will, lead to further increases in healthcare costs.  How will this happen?  Lets focus on the treatment of cancer for a moment; the cause and effect should be clear.

When a cancer patient requires treatment such as chemotherapy, they are typically treated in one of two settings: (1) a community-based oncology clinic or (2) a hospital-affiliated clinic.  Community-based clinics are private clinics owned by the doctors who practice there and can vary in size from only a few physicians to 50 or more.  These clinics are run like small businesses with physicians paying themselves a salary and the clinic taking either a profit or loss at the end of the year. Hospital-affiliated clinics look very similar to community clinics from the outside, but differ in that the hospital system handles all of the accounting and the physicians who work there are typically paid a salary.

Another, very important difference between the two settings is that treating a cancer patient in a hospital-affiliated clinic is typically much more expensive than treating a patient in a community clinic.  Data gathered by Avalere shows that, on average, the cost of treating a cancer patient is 20% to 55% more in a hospital-based setting (table 3 in this report).

Now, if you wanted to reduce the cost of healthcare, it would seem prudent to encourage cancer patients to receive their care at community-based clinics.  If you’re saving roughly a third per patient on average, it adds up to a significant amount of money.  The reality is that the government has instituted two different programs that are pushing patients away from community-based clinics towards hospital-affiliated clinics.  And incredibly, both of these programs were instituted to reduce healthcare costs.

The first government program was an attempt to reduce the amount spent on the drugs used to treat cancer.  Typically, oncologists are reimbursed through “buy-and-bill.”  Physicians purchase a cancer drug using their own money and once they have used it to treat a patient, they bill the patient’s insurance company.  Insurers, both public and private, typically pay physicians more than what the drug actually costs  in order to cover some of the overhead associated with treating a patient.  This extra money is typically referred to as the “spread.”  In the past, the spread was quite generous; if a doctor bought a drug for $10,000, they might get an additional 10 or 20% ($11,000 or $12,000 back from the insurer).  As healthcare costs continued to rise, Medicare and Medicaid decided to reduce their reimbursement levels so as to provide as little as an additional 4.2% in spread and there is talk of lowering it further.  These changes have drastically reduced the revenue that community clinics take in and in many cases has forced doctors to sell or close their community-based practices.  A recent report has shown that in 2012 there was a 20% increase in both oncology clinics closing or merging with existing hospital systems.  Between 2005 and 2011, the percentage of cancer patients treated in the hospital setting increased by 150% (from 13.5% to 33%).  As the number of community-based clinics decreases, more patients get treated in the more expensive hospital-affiliated clinics.

The other factor driving patients to hospital-affiliated clinics is the 340b program.  Initially designed to assist hospitals who treat patients with little or no health insurance, the program allows certified hospitals to purchase out-patient drugs (such as cancer therapies) at a 23.1% discount (same discount Medicaid gets).  This certainly helps those hospitals who treat underinsured and uninsured patients, but the program has a catch: 340b hospitals can purchase all of their out-patient drugs through this program, whether they are used for uninsured or insured patients.  In addition, hospitals don’t have to pass along the savings to the insurer, they are allowed to pocket the difference.  It isn’t unusual for oncology therapies to cost more than $100K/yr per patient, so that 23.1% discount becomes a lot of money, all of which goes to the bottom line of the hospitals.  To give you an example, the Duke University Hospital system effectively doubled their profit margin on drugs to 53% for a gross profit of $70M.  This has created a huge incentive for hospitals to both become 340b certified and for them to attract oncology patients to their clinics.

The situation we now have is that cancer patients are being pushed out of the less expensive community-based setting as oncologists struggle to stay profitable and pulled into the more expensive hospital-affiliated clinics as hospitals seek to capture as much 340b business as possible.  Not exactly a great way to save money now is it?

Controlling healthcare spending will be a priority for the US in the coming decade.  In order for that to happen, we need a coordinated effort by the government and private insurers to find a way to incentivize not only quality care but also cost-efficient care.  Without an understanding of the economic pressures and incentives offered by the current system, this may prove a very difficult task.

Big pharma’s “pay-to-delay” deals: Helping or hurting patients?

A few weeks ago it was announced that Jon Leibowitz has decided to leave his post at the Federal Trade Commission.  Jon has been the driving force behind the FTC’s attempt to ban so called “pay-to-delay” deals that have become increasingly common between branded and generic pharmaceutical companies.  The FTC claims that these deals are “anti-competitive” and basically amount to collusion between branded and generic companies.  According to the FTC, these deals cost the American public $3.5 billion per year in higher drug cost as cheaper generic drugs are delayed from entering the marketplace.  Jon’s efforts seem to have paid off as Senator Chuck Grassley recently introduced legislation banning the deals and the Supreme Court will soon decide if the deals are legal.

You might be wondering what these “pay-to-delay” deals are exactly, so lets look at a hypothetical example:

Let’s say a branded pharmaceutical company is selling a patent-protected drug with annual sales of $5 billion per year.  The company’s patent on the drug doesn’t expire until 2020 so they will continue to promote and sell the drug until then, upon which time a generic drug company will begin producing and selling a generic version (after gaining approval from the FDA).  Generic companies compete with each other to get their generic version approved first, since it comes with a 180 day exclusivity period where no other generic company can sell their version.  During the 180 days, the generic company will undercut the price of the branded therapy and grab a large part of the market share.  Since the generic drug company only has to do a fraction of the R&D that the branded company did, the 180 day exclusivity is very profitable.  After the 180 days are up, any generic drug company can sell their generic and the price falls to the point where there is little profit to be made.

Where thing get complicated is that generic companies often don’t wait until the branded drug’s patent expires.  Instead, they will challenge the validity of the patent in court and if successful, they will get the coveted 180 days of exclusivity and can start selling their generic version immediately.  As you can imagine, this potential payoff creates a lot of incentive to challenge a patent.

What does the patent holder do when their patent is challenged?  Since there are often billions of dollars of profit at stake, they fight it out in court by hiring some very expensive lawyers to argue that their patent is valid .  If the generic drug company has already started selling their generic version before the patent issue is settled (a so called “at risk” launch), the branded drug company can sue for damages if the patent is found to be valid.  Since the law allows for recovery of triple damages, losing a patent decision is what generic companies fear the most (for a great example of such an outcome, look no further than Pfizer’s request for $2 billion in damages  for Teva’s at-risk launch of Protonix).

As you can see, the stakes are very high for both companies if a patent challenge actually ends up being decided by a judge.  It’s an all or nothing outcome: one party will win big and one party will lose big.  It’s for this reason that many patent challenges lead to out-of-court settlements that include so called “pay-to-delay” deals.  In exchange for a payment from the branded drug company (either in the form of cash or other financial incentives) the generic drug company will agree to delay the launch of their generic version.  You can think of this as a way to “meet in the middle”.  Both companies get something out of the deal and it eliminates the risk of being on the losing end of a winner-takes all outcome.

However, is the FTC’s allegation that pay-to-delay deals delay entry of cheaper generic drugs and hurt the consumer true?  No.  The launch of the generic drug is only delayed in the sense it would enter the market later than if the generic company succeeded in invalidating the patent.  However, the reason why the generic company agrees to the pay-to-delay deal is because it doesn’t believe it will succeed in invalidating the patent.  If pay-to-delay deals were banned, the generic company would likely just pack up its bags and head home as the possibility of losing the patent challenge is more risk than they can tolerate.  If anything, pay-to-delay deals actually result in a generic drug entering the market sooner than it would have otherwise.

If pay-to-deal deals are banned and branded and generic companies lose the ability to “meet in the middle”, the availability of generic drugs will likely be delayed in many cases, which is exactly what the FTC is trying to avoid.  It will remain to be seen if Chuck Grassley’s bill passes into law, but in the mean time, keep an eye out for the Supreme Court decision.  The court’s decision will have far reaching consequences for the pharmaceutical industry and in the end the consumer.

Pfizer’s Lipitor strategy worked… pretty well!

It’s been almost 3 months since Pfizer’s Lipitor lost exclusivity so it’s not a bad time to assess how the company’s strategy of maintaining market share has worked so far.  Keep in mind that Pfizer really broken new ground with this strategy.  Most R&D-based pharmaceutical companies practically abandon all sales and marketing efforts once a drug loses patent protection since within a month or two almost all of their market share is wiped out by the lower priced generics.  However, Lipitor is not your typical drug as shown by its $10B+ per year revenue numbers.  If Pfizer could keep even 10% of that market share, they would have a revenue stream that a lot of pharmaceutical companies would kill for.

Before we look at the numbers, how about a quick primer on how the generics market works?  When an R&D-based pharmaceutical company first gets a new (small-molecule) drug approved, it’s via a New Drug Application (NDA).  Based on either the patents around the new drug, or the market exclusivity awarded through the NDA, the company has the sole right to sell the drug.  The logic behind this right is that it allows a company to recoup the costs associated with R&D over a defined period of time.  The period of exclusivity ends when a generics company gets an ANDA (Additional New Drug Application) approved after the patent “runs out” (or sometimes before it runs out by proving the patent is invalid).

Now here is the important part.  The ANDA has its own period of exclusivity.  The first generics company to get an ANDA approved gets 180-days of exclusivity as the sole provider of a generic alternative to the branded drug.  Again, the logic behind this is to provide a financial incentive to offset the costs of getting an ANDA approved and that incentive is substantial.  During the 180-day period, the price of the drug drops only 10-20% (so the generic manufacturer gets almost the same profit margin as the branded-manfucturer did, but only for 180 days).  Once that 180-day period of exclusivity runs out, any generics company can get an ANDA approved and sell the drug, thus competition drastically increases and drug prices drop to maybe 10-30% of the branded drug’s price.  At this point, profit margins are razor-thin and the drug is basically a commodity.  Due to the rather steep price cuts that come along with generics, the brand name drug typically loses all of its market share within a month or two of the first generic hitting the market, as most brand name manufacturers have little interest in competing on price.

In the case of Lipitor, Ranbaxy was awarded with the first ANDA approval and with a little help from Teva, they were able to overcome some manufacturing (and regulatory) difficulties and got their generic version of Lipitor to the market just after Pfizer’s last patent ran out.  The other generic was a so-called “authorized generic”, which is in fact a generic version of Lipitor produced under the approval of Pfizer (which the rules allow).  That version is produced by Watson and Pfizer gets a pretty nice slice of that pie as a result of the arrangement (70% of revenues according to this article).

Now with all the background out of the way, how has Pfizer’s strategy fared so far?  Pretty good.  As of mid-February, Pfizer still has approximately 41% market share of all atorvastatin prescriptions.  If we run some rough numbers based on Lipitor sales for 2010 ($10.7B), a 41% market share would bring in over $2B in revenue for the 180-day ANDA exclusivity period (the only time Pfizer has a chance of keeping market share).  Lipitor had been slowly losing market share even before the patent expired, so let’s assume a more conservative $1.5B.  All of the effort that Pfizer put into keeping market share (PBM contracts, co-pay cards) doesn’t come cheap, so let’s knock the figure down to $1B.  However, Pfizer’s cut of sales from Watson’s authorized generic (which by some simple math has about 20% of the market) probably pushes that up to $1.25B.

Not bad at all!  Rather than leaving Lipitor to the generics companies, Pfizer spent a little time and money and has successfully held onto a sizeable chunk of the market and gets to put another $1B or so in the bank.  A wise investment by any stretch of the imagination.

What will be interesting to see is if any of the other R&D-based pharmaceutical companies follow suit.  There are some big drugs going off patent in 2012 (Seroquel, Plavix, Singulair) and Pfizer may have just proven that a little effort can provide some big pay offs.  Keep a look out for more stories like this in the coming year!

UPDATE (3/15/2012): Adam Fein over at Drug Channels just put up a great post about Pfizer’s Lipitor strategy and it has some more recent data.  I suggest you check it out!

More Lipitor news: Ahhh… that’s why independent pharmacists are mad!

Yet another updated on the Lipitor-is-going-generic saga.  Rather than reiterating what I said in prior blog posts, I’ll just add some interesting tidbits of information.

Over at the drug distribution blog DrugChannels (highly recommended), Adam Fein posted some very interesting commentary on the Lipitor story.  When the news about Pfizer’s agreements with major PBMs to get preferential treatment for Lipitor, even after the generics became available (in some cases the PBM wouldn’t reimburse for the generic at all), a group called Pharmacists United for Truth and Transparency (PUTT) had this to say:

The statement called the move “a blatant attempt” by benefit managers to keep Pfizer’s discount while employers still have to pay the full price of the brand-name drug.

Hmmm…. that’s awfully heartwarming that a group of pharmacists decided to look out for employers who offer drug coverage.  However, if you dig a little deeper, you’ll see there is a “healthy dose of economic self-interest” in play here, as outlined in Adam Fein’s blog.  What is of particular interest is this chart Adam put together…

Now things become a little clearer!  PUTT says they are outraged that employers will be stuck paying higher drug prices if Lipitor is used instead of the generic (which, by the way, they have no proof of), but I would hazard to guess that some of their anger comes from the fact that they are missing out on those juicy margins they usually make during the 180-day exclusivity period.

If you want to see how contentious this issue of pharmacy margins can be, check out the comment section of a another blog post by Adam here.  Who knew drug distribution strategy could elicit such emotion?

Update: Pfizer and Lipitor (Show me the money!)

I posted a few days ago about Pfizer’s strategy for dealing with the upcoming loss of exclusivity for it blockbuster drug Lipitor.  Well, there is more news on that front, this time concerning the Federal Trade Commission’s (FTC) interest in the deals Pfizer made with pharmacy benefit managers (PBMs).

As reported by Pharmalot, the FTC has started calling around, asking about the details of the contracts.  It’s not an official investigation yet, but does show that the federal government is concerned that Pfizer is participating in anti-competitive practices.  However, if you read the letters from the PBMs to pharmacies that were leaked, it does appear that Pfizer (through the use of discounts) is making the continued use of branded Lipitor the cheapest option out there.  If you check out page three of the link, you’ll see that Catalyst Rx is being offered a 31% discount, which bring the cost of Lipitor for the insurance company to just under what generic Lipitor would cost in the first six months after the patent expires.

In addition, it appears that my guess that Medco was passing on all of the discount to the insurance provider was correct.  Coventry (which relies on Medco to manage its pharmacy benefits) had this to say…

A Coventry spokesman confirms the deal was cut directly with Pfizer. “Most of Coventry’s fully-insured members will save money on Lipitor when we pass on the savings by lowering their pharmacy co-pay to the amount they would pay for the generic. We think our members will appreciate the change and lower co-pays, but it also reduces our bottom-line cost of Lipitor, which helps Coventry keep coverage more affordable.” He declined, though, to offer any specifics.

So it would appear that Pfizer is isn’t doing anything underhanded at all.  They are providing discounts which makes Lipitor the lowest cost option, even after generic become available.

However, the question remains, why is Pfizer doing this?  Is it simply to cash in on another 6 months of Lipitor profit (albeit at a lower margin and smaller overall market)?  That could be, but I would guess that this the first stage of a multistage strategy to keep Lipitor profits flowing (or at least a significant portion of them).

As I mentioned in my previous post, keep an eye out in the next 3-4 months for news about Lipitor and Pfizer.  If there is a long-term plan involved, Pfizer should start rolling out the next stage soon.

What on earth is Pfizer up to with Lipitor?

Now it’s not everyday that you see something this unexpected in the pharmaceutical industry, so I have to comment.

It’s old news at this point, but Pfizer’s Lipitor, the best selling drug in the history of the industry, will lose its market exclusivity on November 30, 2011.  At it’s peak, Lipitor had annual sales of over $13 billion dollars, so this is no minor event.  A lot of people in the industry were wondering how Pfizer would deal with this and it appears we’re getting a sneak preview of their strategy.

Today, a number of news agencies reported on a letter that Medco Health Solutions (one of the largest pharmacy benefit managers in the US) sent to a number of pharmacies.  The letter basically stated “…even though generic Lipitor will become available, keep filling prescriptions with Lipitor from Pfizer.”  Now why on earth would they do that?  Typically, as soon as drugs lose their market exclusivity (usually because a patent expires) generic drugs flood the market and the price drops very quickly.  Why would Medco want pharmacies to keep prescribing the more expensive, branded version of Lipitor?  Well, if we read the news reports, we quickly find out why…

“Pfizer has agreed to large discounts for benefit managers that block the use of generic versions of Lipitor, according to a letter from Catalyst Rx, a benefit manager for 18 million people in the United States.”

Get out the pitchforks!!!  Pfizer is colluding with pharmacy benefit managers (PBMs) to keep generics out!  Just another example of multinational corporations, drunk with power, steamrolling the little guy, right?  At least that’s what it sounds like if you listen to Geoffrey F. Joyce, an associate professor of pharmaceutical economics and a health policy expert at the University of Southern California…

“This is just an egregious case. Clearly there’s been some negotiation between Pfizer and the large P.B.M.’s saying we’re going to make this cost-beneficial to them, but the plan sponsors are going to eat it.”

OK, before you get too worked up, a quick lesson on PBMs.  PBMs are hired by insurance companies and by employers with health plans to manage their drug expenses.  In fact, they compete with each other, trying to provide the best plans they can.  That’s why it seems like your prescription drug benefit changes every year when its time to re-enroll in your employer’s health plan.  Do you really think Medco is going to negotiate an agreement where Pfizer gives them a discount on Lipitor and they pocket the entire thing?  Hardly.

What’s happening here is Pfizer has negotiated with the PBMs and agreed to a rebate structure that basically undercuts the yet-to-arrive generic versions of Lipitor.  Although the prices of generic drugs are less than the branded price, they typically only drop 20-30% in the first six months because the first generic version gets 6 months exclusivity (they are the only one who can sell generic Lipitor).  After the 6 months of exclusivity are up, the drug basically becomes a commodity and the price drops 80-90% compared to the branded version.  What Pfizer is doing here is providing some pretty hefty discounts to the PBMs (probably 20-30%), undercutting the generic companies and making branded Lipitor the most attractive option from a price perspective.  Those hefty rebates that the PBMs negotiated?  They aren’t keeping them.  That money will filter through to the insurance providers and employer-sponsored plans.  If it didn’t, Medco would be in a world of hurt.

Now that we have that figured out, the more interesting question is “What on eath is Pfizer up to with Lipitor?”  There has to be some strategy behind this because once the 6 month generic exclusivity runs out, the price is going to drop even more and Pfizer is unlikely to agree to a 80-90% discount.  There has been talk of an over-the-counter (OTC) version of Lipitor coming out, but that would take over a year to get approval from the FDA.

All I can say is, keep an eye on Pfizer.  They are up to something and it’s a strategy that the pharmaceutical industry has never seen before.

How NOT to commit Medicare fraud…

Last week, Amgen announced their third quarter earnings which included a $780 million charge related to a legal settlement they entered into with the federal government and a number of states concerning “illegal sales and marketing practices”.  Now $780 million dollars is a large amount of money by anyone’s measure, but if you read the third quarter report, it sounds like there were some “questionable” actions on the part of Amgen, but it’s all worked out now and we can get on with business, right?

Wrong.

If you read the Massachusetts whiteblower lawsuit court documents, it appears that Amgen committed some very serious crimes which weren’t the action of just one or two employees, but rather an intentional marketing tactic that involved a large number of Amgen employees all the way up to senior management.  And if you live in the US and pay taxes, you should be very, very mad.

The product in question is Amgen’s Aranesp, a erythropoetin analogue, which stimulates the production of red blood cells in the body.  It is used in patients undergoing chemotherapy (since many anti-cancer drugs damage bone marrow, where red blood cells are made) and patients with chronic kidney disease (since erythropoetin is made in the kidneys) to boost their levels of red blood cells.  It’s a very profitable drug for Amgen, with total sales just north of $2.5 billion dollars in 2010.  Now this is where things get a little complicated…  Aranesp is a longer-acting version of another Amgen product, Epogen, the first erythropoetin analog that was originally used for dialysis patients.  When Epogen was developed, Amgen outlicensed the rights to Epogen, outside of use in dialysis, to J&J, which sells it’s version as Procrit.  So as you can imagine Amgen’s current strategy: get patients who use Epogen or Procrit to use Aranesp, since why would you want to share the market with J&J?

Now that we have the background laid out, we can get down to the details of the case.  Aranesp is sold in either vials (as pictured above) or as prefilled-syringes.  Since it’s impossible to to get all of the liquid out of a vial, or inject all of the liquid in a syringe, manufacturers of injectable drugs often “overfill” their products, or basically add a little bit more of the drug to the vial or syringe, so that when a physician or patient administers the drug, they get the full dose.  How much do they need to overfill? Less than 10% typically.

Well, someone at Amgen had a smart idea that they could overfill the vials or syringes of Aranesp by more than 10%, then “hint, hint, nudge, nudge”, let doctors know that they are actually getting more drug than what they paid for.  Why would they do that you ask?  Well, doctors can bill insurance companies and Medicare for each dose of Aranesp they give patients (they actually bill in 5ug increments).  So if a doctor orders 5 vials of Aranesp (each one overfilled by 20%), they can actually bill for the 6 doses of Aranesp they actually gives patients (basically pooling the extra 20% until it adds up to a full dose).  Amgen was giving physicans a kick-back for using Aranesp, paid for by YOU, the taxpayer (in the case of Medicare/Medicaid patients).

Now you might be thinking this was a scheme devised by a few rogue Amgen employees, working on their own accord.  Well, you’d be wrong.  Nevermind the fact that sales reps don’t have any control over how much “overfill” is included in each vial or syringe of Aranesp (that’s a decision made by manufacturing), there is also the fact that information on how much the vials were overfilled and how much extra money physicans could make charging insurance companies for the overfill amount was sent out by Amgen’s medical affairs department (document below is from this link).

And to top it all off, it appears that Amgen’s CEO, Chris Sharer, knew about the overfill scheme the entire time.  An email from a Senior Manager of Medical affiars reads as follows…

… an email dated January 6, 2006 from Edwin Mar, Senior Manager of Medical Information, to Helen Torley, Vice President and General Manager of Nephrology, and Leslie Mirani,  Vice President of Sales, states: “In regards to your request to provide  EPOGEN overfill historical information to [CEO] Kevin Sharer, these are  the information I have available so far regarding EPOGEN 1.0 mL vial  fill volumes.” The email goes on to provide the overfill amounts for  Epogen from 1993 through January 2006:

(1993-Q4/2002) – 1.168 mL

(Q4/2002-Q1/2004) – 1.144 mL

(Q1/2004 – present) – 1.111 mL

Yup, you read that right, the older erythropoetin analog that Amgen wanted patients to stop using?  They started to reduce the overfills in that product to ensure that doctors were only getting a kick-back for Aranesp.

I’m literally at a loss for words.  The pharmaceutical industry has taken a lot of heat (rightly so) for their off-label marketing of drugs and other nefarious activities, but this takes the cake.  This is not some sales rep promoting a drug for an unapproved condition (in that case, at least the patient is getting what they paid for), this is a deliberate, organized scheme to defraud both private insurance companies, Medicare/Medicaid and in the end, you, the American taxpayer.  Honestly, I think anyone associated with this scheme, from the CEO down to the account managers needs to be fired and the whole organization rebuilt, from the ground up.  I mean, how else do you rid a company of the mentality that thinks this is OK?

In the future, prescription drug prices will be lower than you might think

This is something I’ve been thinking about for a while.  The cost of health care is rising everywhere, but it seems to be a particularly critical issue in the US.  While the cost of drugs is a approximately 10% of total health care spending in the US, it is increasing, albeit more slowly than total health care spending.

This is related to a previous post, where I commented on how it seems like every pharmaceutical and biotech company is jumping on the oncology bandwagon.  One of the big reasons for this trend is that the pricing pressure on oncology drugs is relatively low.  Insurance companies consider oncology relatively “untouchable”, that is, telling a mother of three that you won’t pay for her cancer drugs will cost you far more in terms of public relations than it will ever cost in terms of dollars.  This is why we now have drugs like Yervoy ($120K/treatment) and Provenge ($93K/treatment).  And these high prices aren’t limited to cancer.  There are drugs that cost over $10,000/year in areas such as asthma, multiple sclerosis and lupus, to name just a few.  Is this strategy really sustainable?  The answer is no, it’s not.  But what will stop this trend of ever increasing drug prices?

The answer is you.  You’ll simply stop paying for these drugs.

You’re probably thinking “Come on!  I never pay full price for my drugs!  The worst case scenario is that I pay a $25 or $50 co-pay, not my problem!”  That’s probably true right now, but might not be true in the future if the trend towards high deductible health plans (HDHP) continues.  The number of Americans covered by HDHPs has more than doubled since 2008 and continues to rise (see chart below).   Why?  The premiums on HDHPs are often a fraction of what HMO or PPO coverage is.  It not only reduces costs for your employer, but it also reduces the premiums that are deducted off your paycheck every month.

What are HDHPs?  Well, under typical HMO or PPO coverage, you only pay a co-pay on your prescription drugs.  Depending on if it’s a generic or a branded drug, your co-pay might be $5, $10 or even $50, but that’s all you’ll pay whether or not the drug’s actual cost is $5 or $5000.  Under a HDHP, you pay the full amount of your drug costs, up to the annual deductible limit (the limit includes all health care expenses).  These plans are almost always paired with a health care saving account (HSA), where you (or your employer) make tax-free contributions that you can use to pay for your out of pocket expenses.

So let’s say you visit your physician and he says “Mr. Smith, it looks like you’ve got a bacterial infection, might be serious, let’s put you on Zithromax.”  Under the HMO or PPO plan, you might say, “Sounds good doc!  Thanks!” and then run to your pharmacy and complain about the $25 co-pay.  Under the HDHP plan, you’ll likely repsond “Really?  How much is Zithromax? $200?!?!?  Is there anything else I could take that isn’t so expensive?  Amoxicillan?  $4 at Walmart?  Thanks Doc!!”.  Of course, this isn’t a likely scenario if you have cancer, but for non-life threatening diseases, it’s a conversation I could see happening.

As medical costs in general, and prescription drug costs in particular, continue to be shifted towards the patient, there will be an increased awareness on the part of patients of the costs of drugs and choices will have to be made, hopefully through consultation with physicians.

So what does this mean for drug companies?  The strategy of shifting from $200/month drugs for large patient populations, to $10,000/month drugs for smaller patient populations, won’t work forever.  Eventually patients will start to say “This is coming out of my pocket, is there anything cheaper?” and drug companies will be facing real pricing pressure, across the board.

It’s a challenging situation to be in for drug companies since producing safe, effective drugs is an expensive process.  However, eventually another strategy (lower priced drugs) will have to replace the current one.  That’s going to require more than just a shift in strategy by the drug companies, it will require a complete reappraisal of how patients, physicans, insurance companies, the FDA and drug companies view value and risk.

I’ll be honest and say I have no idea what the drug industry will look like in 10 or 20 years.  However, I do know that the drug companies that will be on top are the ones planning for this future right now.

Vivus vs. the FDA: Round Two

In an earlier post, I promised to provide updates about the on-going saga to get an obesity drug approved by the FDA and surprisingly, there is some news on that front from Vivus.

Despite the FDA’s rejection of Qnexa back in October of last year, Vivus has decided to go for broke and give it another try.  If you recall, Qnexa is a combination of phentermine and toperimate, two drugs that are already FDA-approved.  The problem is that mothers who take toperimate during pregancy may have a greater risk of delivering a child with a cleft palate.  Due to the anticipated widespread use of any approved obesity drug (including use by pregnant women), the FDA has set very high standards in terms of safety (some would say ridiculously high standards).  Needless to say, an obesity drug that causes birth defects would not meet those standards.

In their latest press release, Vivus announced that the FDA has accepted an early resubmission of their NDA based on three recently completed studies…

“Topiramate teratogencity data published and presented since our last meeting with the FDA in April 2011 includes two case-control studies….In addition, a birth defect study from Denmark on newer generation antiepileptic drugs including topiramate was published in JAMA. In all of these studies, the authors concluded that topiramate was not a major teratogen,” commented Wesley Day, vice-president clinical development.”

I wish Vivus all the best, but I’m a little concerned about this resubmission.  First off, the quote “the authors concluded that topiramate was not a major teratogen” (the emphasis is mine) doesn’t exactly instill confidence in terms of the drug’s safety for pregnant women and the children they are carrying.  However, it appears that Vivus will be pursuing an indication that excludes pregnant women, at least for the initial NDA…

“In this initial indication, we plan to include a contraindication for women of childbearing potential. We believe this is a sound approach that, if approved, will potentially allow early commercialization in a higher-risk population with a significant unmet medical need.  The FORTRESS study remains important in our plan to more precisely define the teratogenic potential of topiramate and may enable us to expand the indication to include obese women of child-bearing potential.  If the FORTRESS results are favorable, we expect to file for the full indication in late 2012.”

You might be thinking “What’s the problem? They just won’t give it to pregnant women!”

Well, the issue is two-fold:

1. Vivus included a contra-indication for pregnant women with their initial NDA and it was rejected.  You can say that pregnant women shouldn’t take Qnexa, but it’s difficult to convince the FDA that they won’t.  Unless Vivus can institute a very rigid REMS program to ensure that pregnant women won’t have access to the drug, I feel that the FDA is not going to play along.  Since the FORTRESS study results are expected in late 2012, and I assume that it is a very comprehensive study of the teratogenicity of toperimate, the FDA may say “Still too risky, let’s just wait until the FORTRESS date comes in.”
2. If Vivus does offer an acceptably rigorous REMS program to keep pregnant women from getting access to Qnexa, it will severely curtail the launch of the drug.  A rigid enough REMS program will likely mean that only certain doctors can prescribe Qnexa, only certain pharmacies can fill these prescriptions and for each patient who takes the drug, an extensive tracking system will have to instituted to collect all the follow-up safety data.  Not exactly conducive to big revenues, now is it?

However, the FDA did agree to the early resubmission, so I assume that the agency sees some validity to Vivus’ data and amended NDA.  This story will definitely be worth keeping an eye on and if Vivus is successful, it may pay off handsomely for them, but I feel that they still have a long road ahead of them.