Richard Lu

Reflections on the Session: Drug Costs, Value, and Innovation


On February 3, 2021, The Zetema Project’s Panel and Fellows convened to discuss “Drug Costs, Value, and Innovation”. 

The initial debate focused on whether drug costs in the US are, on net, appropriate for the value they provide. Discussion then ranged on ways to reign in drug costs while maintaining the industry’s capacity to innovate.

It was a broad conversation that touched on a number of discrete issues. Most memorably, with regards to the pharmaceutical landscape in the US:

  • We operate in a four-tiered marketplace, where the user of the drug (the patient) is separated from the prescriber (the physician), the payor (health insurers), and the price negotiators (pharmaceutical benefit managers).
  • There is a growing discrepancy in “gross-to-net” price of drugs, which is the difference between the amount paid for the drug and the amount accrued by the pharmaceutical manufacturer.
  • A key driver of negotiations is the use of rebates, which are discounts provided by pharmaceutical manufacturers to health payors. Pharmaceutical benefit managers often broker these deals.
  • While generic drugs make up 90% of prescriptions, they make up only 20% of drug costs. Branded and “specialty drugs” (>$670 / month per Medicare) make up a vast majority of drug costs (and cost increases), and should be considered separately from cheaper generics.
  • It is expensive to produce new pharmaceuticals, and that must be taken into consideration when discussing drug pricing.

Some potential solutions that were offered by different members of the group included:

  • Medicare may be able to negotiate the price of drugs, though they may need assistance given they are not experts in drug price setting.
  • Providers could be involved in creating a drug formulary and formulary compliance metrics, like Kaiser, to allow for greater negotiating power when purchasing drugs.
  • The CivicaRx model of investing in producing quality generic medication warrants attention and investment.
  • There could be improved patent regulation to prevent patents for trivial/incremental changes on biologic molecules that in essence extend patent protection.
  • A shared savings program from Medicare Part B could incentivize utilization of lower-cost drugs.
  • Shifting Medicare Part B to Part D could lead to a 7-18% decrease in drug spending after rebates.
  • The system of rebates could be removed, or at the very least made more transparent.
  • Value-based payments could be negotiated based on the effect of the drug, though the devil is in the details of how you measure value; an incremental cost-effectiveness ratio may need a refresh.

Like all Zetema sessions, there was no single consensus reached except, perhaps, that the policy questions around US drugs are so vast, complex, and political that the country has its work cut out for it.