New research finds that even though members of an advisory committee for Medicare are biased toward physician specialties, the partiality often bridges across specialty lines and may improve the quality of its price-setting recommendations.

For the first time, David Chan a core faculty member at Stanford Health Policy and faculty fellow at the Stanford Institute for Economic Policy Research, and his colleague Michael Dickstein from New York University, gained access to more than 4,000 fee proposals that were reviewed over a 21-year span by the committee, which is part of the American Medical Association (AMA). Their independent analysis is in a working paper just released by the National Bureau of Economic Research.

The finding is a surprising insight. Until now, behind-closed-doors deliberations meant nobody has known for sure how the physician-based committee reaches its recommendations for health-care service prices, which Medicare typically adopts. And longstanding criticisms of conflicts of interest have been largely based on anecdotal evidence and the assumption that tasking doctors with setting their own prices must be the equivalent of the fox guarding the henhouse.

But according to the empirical research, even if committee members were entirely neutral, only 1.9 percent of the $70 billion Medicare spends annually on physician care would be redistributed across all services.

“Though the analysis is not a complete vindication of the AMA committee, we find that committee bias has subtle implications for different medical fields and for Medicare,” said Chan, an assistant professor of medicine at Stanford.

“Primary care doctors once thought to be disadvantaged by the presence of specialty physicians on the committee actually benefit from shared interests with other types of physicians,” he says. “And overall, Medicare gets higher-quality information when the committee has connections with specialties.”

Benefits of bias

In their research, Chan and Dickstein, an assistant professor of economics at NYU, set out to uncover whether committee members exhibit bias in their recommendations and, if they do, how much it affects overall prices.

Since 1992, Medicare has tasked the AMA committee, formally known as the Relative Value Scale Update Committee (RUC), with calculating the time and effort component which, together with service costs, accounts for 96 percent of the Medicare reimbursement rate. Most private insurers also establish their payment rates based on Medicare pricing.

The lopsided composition of the committee – specialists significantly outnumber primary care physicians – has also fueled suspicions that prices for complex procedures are rising quickly because doctors on the committee are inclined to increase the cost of the procedures that either fall under or are closely related to their practice areas.

After reviewing internal deliberations on 4,423 fee proposals from 1992 to 2013, the researchers found an increased likelihood that committee members will recommend higher prices for specialties they are connected with. For example, a spinal surgeon on the committee is likely to agree with a price increase for a hand surgery procedure because both share revenue from orthopedic procedures.

The researchers then measured how closely connected a proposed price change was to the specialties represented on the committee and the effect that affiliation had on the recommended reimbursement. They found that the more connected the overall committee was to specialties representing a procedure, the more likely it was to go along with a suggested rate increase.

So why would Medicare rely on a biased industry group to determine its prices? The evidence, Chan said, suggests an explanation: The lack of impartiality on the committee is offset by the finding that the information members contribute to the price-setting process is of higher quality than input from neutral advisers.

“There is this trade-off between bias and the quality of information,” Chan explained. “An unbiased but very imprecise price may be worse than a biased price that is closer to the truth.”

Positive impact on primary care

Contrary to common perception, the researchers also suggest that primary care doctors are not always harmed by these biases. They found that services performed by primary care doctors and specialists often overlap, which means that Medicare pricing policies affect them in similar ways more often than people think. For example, primary care physicians who are internists and family medicine doctors perform some procedures that cardiologists and radiologists do. So, if the price of an electrocardiogram goes up, primary care doctors stand to gain financially from the procedure as much as cardiologists and cardiothoracic surgeons.

And because primary care specialties already benefit from affiliations with other specialties, doubling the number of internists on the committee and quadrupling the number of family medicine practitioners would increase their specialty revenues by less than 1 percent.

Further, the analysis showed that such shared interests — and the closer connection between committee members and the specialties communicating the costs of a procedure — helped boost the overall quality of information behind committee decisions.

“There are very likely several features in Medicare’s pricing structure that disadvantage primary care,” Chan said. “But our research suggests that the arrangement of the RUC is not one of them.”

As global health assistance for developing countries dwindles, a Stanford student working on her PhD in health policy has developed a novel formula to help donors make more informed decisions about where their dollars should go.

Donors have typically relied predominately on gross national income (GNI) per capita to determine aid allocations. But using GNI is problematic because it effectively penalizes economic growth. It also fails to capture contextual nuances important to channeling aid effectively and efficiently.

So Tara Templin, a first-year Stanford PhD student specializing in health economics, and her Harvard colleague Annie Haakenstad, have developed a framework that estimates funding based on needed resources, expected spending and potential spending into 2030. They believe the more flexible model makes it adaptable for use by governments, donors and policymakers.

“We've observed development assistance for health growth attenuate over the last seven years,” said Templin, who was a research fellow at the Institute for Health Metrics and Evaluation before coming to Stanford. “There are difficult trade-offs, and this entails honing in on the specific challenges and countries most in need.”

Their research published in the journal Health Policy and Planning outlines how their “financing gaps framework” can be adapted to short- or long-run time frames, between or within countries.

“Depending on donor preferences, the framework can be deployed to incentivize local investments in health, ensuring the long-term sustainability of health systems in low- and middle-income countries, while also furnishing international support for progress toward global health goals,” write the authors, who also are Stephen Lim of the University of Washington, Jesse B. Bump of Harvard and Joseph Dieleman, also at the University of Washington.

The authors developed a case study of child health to test out their framework. It shows that priorities vary substantially when using their results as compared to focusing mainly on GNI per capita or child mortality.

The case study uses data from the Global Burden of Disease 2013 Study, Financing Global Health 2015, the WHO Global Health Observatory and National Health Accounts. Funding flows are anchored to progress toward the U.N. Sustainable Development Goals’ target for reductions in the death rates of children under 5. More than six million children die each year before their fifth birthday, so the United Nations set a goal to reduce under-5 mortality to at least 25 per 1,000 live births.

To build their child health case study, the authors relied on a 2015 study that estimated the average cost per child-life saved is $4,205 in low-income countries, $6,496 in lower-middle income countries and $10,016 in upper-middle countries.

The framework considers three concepts. First, expected government spending is constructed from national health accounts, which are standardized financial reports from countries around the world. Second, ability to pay is estimated by looking at countries with similar levels of economic development and looking at associations with country investment in the health sector. Lastly, needed investment considers a health target, the country’s current health burden, and average costs to save children’s lives in each country.

“Our focus is on the gap between the resources needed to reach critical health targets and domestic health spending,” the authors wrote. “We highlight two facets of domestic health resources—expected spending and potential spending—as critical. While donor preferences may vary, basing aid allocation on expected or existing spending levels incentivizes countries to spend less on health. We therefore propose the use of potential spending, which is a measure of a country’s ability to pay, as the domestic resource benchmark.”

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Instead of the gap between expected spending and need, their framework focuses on the gap between potential spending and the health resources needed to meet global health targets. In the framework, policymakers can choose which gap they want to target, since this decision can involve many factors.

“By focusing on that gap, donors can catalyze sustained domestic spending while also addressing the resource needs critical to reaching international health goals,” they wrote.

They then looked at 10 countries with the most need for additional child health resources. The gap between expected spending and potential spending was highest in Afghanistan, at 79 percent, and lowest in Cameroon, where expected spending exceeded potential spending.

“Fifty years ago, GNI was the best proxy for countries’ ability to finance their own development and health,” the authors wrote.

But today, more empirical data and technology are available, allowing donors to incorporate a broader set of health financing measures into their decision-making process.

“The flexible but targeted nature of our framework is critical in the current era of global health financing,” said Haakenstad, the lead author. “Our framework helps to ensure the poor and disadvantaged, the majority of which now reside in middle-income countries, are reached by development assistance and other public financing. This funding is critical to reducing death and disability and reaching global targets in health.”

The authors’ research was supported by the Welcome Trust (099114/Z/12/Z).

In April 2016 the Equal Employment Opportunity Commission (EEOC) sued Mission Hospital, a large North Carolina health system, after it denied employee requests for religious exemptions from an influenza-vaccination requirement. The lawsuit, which alleges that the hospital violated Title VII of the Civil Rights Act of 1964, is one of a trio of lawsuits in the past two years in which the EEOC has intervened to challenge vaccination mandates for health-care workers. Facing a full-blown trial in February, the hospital agreed to settle the case on January 12, compensating the employees and revising its vaccination mandate policy.

Michelle Mello, PhD, JD, a professor of health research and policy and professor of law, and her colleague James A. Sonne, JD, an associate professor of law and director of Stanford Law School’s Religious Liberty Clinic, write in this week’s New England Journal of Medicine that the EEOC litigation “is cause for unease” among the growing number of hospitals with mandatory influenza-vaccination policies. Their article is co-authored with Douglas J. Opel, MD, MPH, an assistant professor of pediatrics at the University of Washington.

“These policies are an important public-health strategy since vaccination rates for health-care workers continue to fall short of the Healthy People 2020 target of 90 percent,” the authors write. “But they create thorny problems when it comes to exemptions. In particular, when and how must health-care workers’ religious objections be accommodated to conform to the law?”

The paper comes during what could be the worst flu season since the 2009 swine flu pandemic. The Centers for Disease Control and Prevention reports that this influenza season has claimed the lives of 37 children and is on track to rival the 2014-2015 flu season. The CDC estimates that 34 million Americans got the flu that season; more than 700,000 were hospitalized and about 56,000 people died.

So far this season, an influenza A virus called H3N2 has been the most common form of influenza. Preliminary estimates suggest that this season’s influenza vaccine is about 40 percent effective. Yet antibodies made in response to vaccination with a certain set of influenza viruses can sometimes provide protection against different but related viruses.

Stanford Health Policy asked Mello and Sonne questions about their research and findings.

Q: What prompted you to undertake this research and write about the subject?                                   

Mello: More and more hospitals are mandating their employees get vaccinated against influenza. This is good policy: influenza is a serious disease and voluntary programs have had disappointing results. Having a policy that requires health-care workers to be vaccinated helps protect employees themselves but also the patients they take care of, who are often at high risk of serious complications from influenza. We wrote this article to help make hospitals aware of potential legal challenges based on religious discrimination claims and help them ensure their own mandates are well-written and reasonably applied in order to avoid legal challenge and maintain a healthy and productive workplace. 

Q: Did anything surprise you while conducting your research?

Mello: Yes. First, the Equal Employment Opportunity Commission filed the three latest lawsuits on behalf of the employee. That’s unusual; the EEOC typically only injects itself into an individual employee’s dispute when it perceives that the employee’s case presents an issue of public concern.

Second, there have been about 15 cases filed between 2011 and 2016 that have challenged hospital influenza vaccination mandates on religious grounds, and most of them didn’t get thrown out by the judge—they were settled, or are heading toward trial. This indicates a need to understand the claims made by these lawsuits so that hospitals can avoid future legal challenges. When we looked at the plaintiffs’ grievances, we saw some pitfalls that can be easily avoided if hospitals are attentive to what the law requires and what seems to provoke employees to sue. For example, some hospitals were unduly rigid, to the point of seeming arbitrary, in enforcing deadlines or reviewing exemption requests.

Q: Is it common for hospitals to have influenza vaccination requirements for their employees?

Mello: Many hospitals do, and some states require it. Evidence suggests that these requirements are effective at increasing vaccination rates of their employees. However, hospitals’ requirements vary, with some allowing their employees to opt out of getting the influenza vaccine for religious reasons and others only allowing opt-outs if the employee has a medical contraindication to influenza vaccination, such as having experienced a severe allergic reaction to a prior dose of the vaccine or having an allergy to a component of the vaccine.

Q: Why allow religious exemptions to employer vaccination requirements at all?

Sonne: One reason might simply be to defuse perceptions of coercion and enhance the sustainability and acceptability of the requirements. In addition, Title VII of the Civil Rights Act of 1964 requires employers to reasonably accommodate employees’ religious practices unless doing so presents an undue hardship for the employer. Carefully crafted religious exemptions to influenza-vaccination requirements are a strategy that employers might need to use to avert religious-discrimination claims.

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A small proportion of workers may want to serve in the health-care field but nonetheless feel very strongly about not receiving the vaccine as a matter of their religious faith. Depending on the context, accommodating those sincere beliefs doesn’t necessarily impact public health and, arguably, it’s a better use of hospitals’ time and resources to focus on getting the vaccine to the vast majority of unvaccinated workers who don’t object but just haven’t gotten around to being vaccinated. Again, we’re not talking about a large group of people who both work in the industry and have these religious conflicts.

Q: A new civil rights division at the Department of Health and Human Services aims to protect health-care workers who refuse to provide services that violate their religious beliefs. Will there be more support now for health-care workers wanting to opt out from influenza vaccine for religious reasons?

Sonne: This is a good question, but the answer is unclear so far. The “Conscience and Religious Freedom Division” will be part of HHS’s already-established Office of Civil Rights. It will be charged with enforcing laws in the health-care field that forbid religious discrimination or require accommodation of religion—which certainly expresses an enforcement priority in this area of law. That said, the division doesn’t appear to create any additional legal duties but is meant only to enforce existing laws. And its creation also appears to have been motivated more by concerns about having to provide services that some clinicians find morally objectionable, like abortion, which arguably is a different situation. We’ll see.

Q: Are health-care organizations struggling to get their employees vaccinated against influenza?

Mello: HHS’s Healthy People 2020 goal is to have 90 percent or more of health-care personnel vaccinated against influenza. Recent estimates show that only about 78 percent of health-care personnel got vaccinated during the flu 2016-17 season, so we are falling short of that goal. The CDC recommends that all health-care personnel receive an annual influenza vaccination.

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Mello: Studies have shown that some of the primary deterrents to immunization are concerns related to the safety and efficacy of the influenza vaccine, despite the fact that each year the vaccine undergoes a review by FDA to assure its safety and potency before it is approved for immunization of the public.  Health-care workers also may underestimate their risk of getting the flu or the risk they pose to their patients if they get sick—or they may simply be busy enough that they don’t prioritize getting vaccinated.

The fact is that healthy adults can pass the influenza virus to someone else one day before symptoms begin, and they can continue to infect others up to five days after getting sick. Therefore, it is possible for a healthy adult to unknowingly spread the virus to patients at high risk for serious complications from influenza.

Q: What did you find in your analysis of the lawsuits?

Mello: We found some clarity regarding the type of belief that qualifies for a religious exemption under Title VII. One court that dismissed a lawsuit, for example, stated that a religious belief can't simply be a personal moral code or something specific to vaccines. Rather, it must relate to ultimate questions about life, purpose and death. Providing a religious belief definition in hospital policy and explaining what does and doesn’t qualify should help reduced misguided requests and lawsuits.

Sonne: We also found that employers can satisfy their legal obligation to reasonably accommodate workers’ religious beliefs in a variety of ways aside from granting exemptions from vaccination, but should try to find the least onerous option that still protects patients. Tailoring accommodations to the specific individual based on, for example, how much contact they have with patients is good policy.

Finally, we found that, as in so many other litigation contexts, lawsuits in this area are often inspired by a feeling by the affected employees that the processes used to weigh their opt-out requests just weren’t fair. Hospitals can, therefore, avert problems by affording employees a reasonable opportunity to explain their deeply held religious beliefs, avoiding unnecessary or overly rigid administrative procedures and rules, explaining their reasons for denying exemptions and treating religious objectors with respect.

The federal Centers for Medicare & Medicaid Services (CMS) sent a letter to state Medicaid directors on January 11 announcing a policy change that allows states to experiment with how they deliver the public health insurance for low-income residents of their states. The provision that prompted headlines was its suggestion that state officials seek a waiver to Medicaid regulations allowing them to attach work requirements, or what CMS calls “community engagement,” for eligibility among able-bodied adults.

CMS Administrator Seema Verma said the work requirement among eligible adults would “make a positive and lasting difference in the health and wellness of our beneficiaries.”

In a speech to Medicaid officials in November, Verma criticized the Obama administration for focusing on expanding Medicaid enrollment under the Affordable Care Act, rather than helping the poor move out of poverty and into jobs that provide health insurance.

“Believing that community engagement does not support or promote the objectives of Medicaid is a tragic example of the soft bigotry of low expectations consistently espoused by the prior administration,” she said. “Those days are over.”

So far, the states that have applied for the Medicaid waiver that would allow them to impose the work requirement are Arizona, Arkansas, Indiana, Kansas, Kentucky, Maine, New Hampshire, North Carolina, Utah and Wisconsin. The Kentucky waiver application said it would require most nondisabled Medicaid beneficiaries age 19 to 64 to work at least 20 hours a week.

Medicaid was created in 1965 for families on public assistance and low-income seniors. It is now the nation’s largest health-insurance program and covers 70 million people, or about one in five Americans, and includes pregnant women and newborns, the elderly in nursing homes and people with disabilities.

Opponents of the work requirement say it demonizes the poor and that low-income people will fall through the cracks and could be denied coverage because of technicalities or errors in their paperwork.

We asked FSI senior fellow and Stanford Health Policy faculty member Jay Bhattacharya — a professor of medicine and health economist who is an expert on government policies designed to benefit vulnerable populations — a few questions about the new policy.

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Stanford Health Policy: A study by the Kaiser Family Foundation found that among nonelderly adults with Medicaid coverage — the group of enrollees most likely to be in the workforce — nearly 8 in 10 live in a working family and a majority are working themselves. They also found most Medicaid enrollees who work are working full time but their annual incomes are still low enough to qualify for Medicaid. So who are the Medicaid recipients that the Trump administration is targeting — and to what end?

Bhattacharya: The CMS decision permits states to experiment with work requirements for able-bodied Medicaid enrollees. That is, it does not permit state experiments with work requirements for Medicaid enrollees who qualify because of a disability, or qualify because they are pregnant, or otherwise qualify because of physical or medical incapacity to work. At least as a first cut, the CMS decision permits states to impose work requirements for Medicaid enrollees who qualify through the expansion in Medicaid induced by the Affordable Care Act and does not permit work requirements on traditional Medicaid population who qualified in ways permitted before the ACA. States can also require alternatives to work, including volunteering, caregiving, education, job training and even treatment for a substance abuse problem.

The end goal as stated in the CMS letter is to improve the health and well-being of the able-bodied poor. The logic is that (1) for able-bodied individuals, regular work is an important component of overall health, and (2) all income-linked welfare programs (Medicaid included) induce incentives not to work, or to work less. There is a literature in economics that documents this incentive (see this paper by Aaron Yelowitz.) The mid-1990s welfare reform law required this sort of linking of work and welfare, and CMS argues this decision permits states to align Medicaid with other income-linked welfare programs. If the KFF study is right, the decision will have an effect on a minority (perhaps a substantial minority) of able-bodied Medicaid recipients, since the majority are already working.

Stanford Health Policy: Under current law, can states impose a work requirement as a condition of Medicaid eligibility?

Bhattacharya: For a state to impose a work requirement, they must request a waiver from the Social Security Act to conduct a demonstration project. These waivers are permitted under current law, but are provided at the discretion of the appropriate executive agencies, in this case, CMS. A different administration might decide not to permit these waivers, and I think in general the Obama administration was more reluctant to permit this kind of state experimentation. The main substance of the CMS decision is to broadly signal to states that they will now be willing to provide such waivers.

Stanford Health Policy: Do critics of the work-requirement waiver have valid fears that low-income elderly or disabled people will fall through the cracks on technicalities or challenging paperwork?

Bhattacharya: Paperwork mistakes and problems caused by bureaucratic indifference are always possible when it comes to a program like Medicaid, which has such a complicated variety of paths to qualify. It is an empirical question whether such considerations would be more salient were a state to impose work requirements for a subset of Medicaid enrollees on top of the existing requirements.  Every state has experience with similar work requirements for qualification for other welfare programs, such as temporary assistance for needy families (TANF). Given that, it seems unlikely to me that — because of technicalities or paperwork — additional work requirements would be incorrectly applied to many elderly or disabled people applying for Medicaid.

Stanford Health Policy: Some states have proposed tying Medicaid eligibility to work requirements using waiver authority that may be approved by the Trump administration. What could this mean for Medicaid recipients in those states? In Kentucky, which expanded Medicaid, some state officials have said work requirements could lessen the program’s impact on the state budget.

Bhattacharya: I suppose it could have some effect on state budgets by reducing the number of people who qualify for Medicaid. I anticipate only a small effect on state budgets, though, because through the ACA, the Feds pay 100 percent of Medicaid costs for people who qualify via the ACA’s income provision, although that gradually phases down to 90 percent in 2020 and remains at that level.

Stanford Health Policy: How will the states that do not apply for the waiver, such as the large-population states of California and New York, be impacted by this change in Medicaid policy?

Bhattacharya: States that do not apply for a waiver will maintain their existing requirement for Medicaid qualification, including no work requirements for able-bodied Medicaid enrollees who qualify through the ACA’s Medicaid provisions.

At least 91 Americans die every day from an opioid overdose. The epidemic has claimed more than 300,000 lives since 2000 and is expected kill another half million over the next decade.

So perhaps it’s time to step up lawsuits against the drug manufacturers that sell the opioids to the tune of $13 billion per year, Stanford Health Policy’s Michelle Mello argues in a commentary in the current issue of The New England Journal of Medicine.

Mello, a professor of law and of health research and policy, and co-author Rebecca L. Haffajee, an assistant professor of health management and policy at University of Michigan School of Public Health, note that although heroin and illicitly manufactured fentanyl account for an increasing proportion of opioid overdoses, the majority of people who are addicted to opioids get hooked on prescribed painkillers.

While clinicians and health-care providers are trying to prescribe fewer opioids, Mello and Haffajee believe litigation is another crucial method to fight the crisis.

“The search for solutions has spread in many directions, and one tentacle is probing the legal accountability of companies that supply opioids to the prescription market,” the authors write.

The final report of President Trump’s Commission on Combating Drug Addiction and the Opioid Crisis details decades of aggressive marketing of oxycodone from 1997-2002 that led to a tenfold rise in prescriptions to treat moderate to severe pain. “To this day, the opioid pharmaceutical industry influences the nation’s response to the crisis,” the report said, noting the industry had sponsored some 20,000 conferences for physicians on managing pain with opioids while claiming their potential for addiction was low.

Mello and Haffajee argue that similar to the early cigarette promotions by Big Tobacco, opioid manufacturers have failed to adequately warn patients about addition risks on drug packaging and in their marketing campaigns.

“Some recent claims allege that opioid manufacturers deliberately withheld information about their products’ dangers, misrepresenting them as safer than alternatives,” they write.

Early attempts to bring class-action suits against opioid manufacturers have encountered procedural barriers. Judges typically find that proposed class members lack sufficiently common claims because of different circumstances surrounding opioid use and clinical conditions.

But the tide may be turning. There has been an uptick in litigation against Big Pharma since Purdue Pharma, the maker of the blockbuster painkiller, OxyContin, agreed in 2007 to pay $600 million to settle charges that it misled federal regulators, doctors, and patients about the drug’s risk of addiction and its potential to be abused.

“As the population harmed by opioids grows and more information about the population is documented, it becomes easier to identify subgroups with similar factual circumstances and legal claims — for example, newborns with neonatal abstinence syndrome,” they said.

Perhaps most promising, the authors write, is the “advent of suits brought against drug makers and distributors by the federal government and dozens of states, counties, cities, and Native American tribes.

“Because the government itself is claiming injury and seeking restitution so that it can repair social systems debilitated by opioid addiction, these suits avoid defenses that blame opioid consumers or prescribers,” they said. “They also garner substantial publicity.”

The government is borrowing from the playbooks used to sue tobacco and firearms companies, relying on four strategies:

• Focus on the “public scourge” created by the opioid manufacturers due to their oversaturation of the market, arguing that opioids constitutes a public nuisance;
• Paint the opioid companies’ business practices as deceptive;
• Call out the manufacturers’ lax monitoring of suspicious opioid orders; and
• Ask courts to make companies disgorge the “unjust enrichment” they have reaped at the government’s expense through their unfair business practices.

Two large settlements have occurred in state cases that included unjust enrichment claims, the authors note, although the pharmaceutical companies avoided admitting fault. The Commonwealth of Kentucky settled with Purdue Pharma for $24 million in 2015 over allegations that it had profited while Kentucky was left paying associated medical and drug costs of those who became addicted.

Earlier this year, drug wholesaler Cardinal Health Inc. agreed to pay $20 million to settle a lawsuit brought by West Virginia’s attorney general over accusations that it flooded the market with opioids in a state that now has the highest opioid overdose rate in the nation.

Such lawsuits have garnered a lot of media attention and contributed to pressure on the U.S. government to take action against the abusive practices of drug manufacturers and distributors.

“Win or lose, lawsuits that very publicly paint the opioid industry as contributing to the worst drug crisis in American history put wind in the sails of agencies and legislatures seeking stronger oversight,” Mello and Haffajee write. “Together, litigation and its spillover effects hold real hope for arresting the opioid epidemic.”

Listen to a podcast with Haffajee talking about the opioid crisis.

The high cost of prescription drugs in the United States came under scrutiny in a new report from the National Academies of Sciences, Engineering, and Medicine, “Making Medicines Affordable: A National Imperative,” co-authored by Stanford Law Professor Michelle Mello, who is also a professor of health policy and a core faculty member at Stanford Health Policy. Published on November 30, the report aims to increase both affordability and accessibility to crucial—often lifesaving—drugs for Americans, with recommendations such as better government negotiated prices, quicker turnaround for generic drugs, and increased financial transparency for biopharmaceutical companies.

In the discussion that follows, Mello explains some of the key challenges facing Americans in need of prescription drugs and key recommendations in the report.

You note in the report that Americans are paying significantly more for their healthcare but are significantly less healthy when compared to developed countries. Do we also pay more for prescription drugs?

Yes. In fact, many countries use “reference pricing” schemes, through which the price that their national health programs pay for prescription drugs is actually calculated as a percentage of what we pay!  One of the ethical issues that weighed on the Committee as we deliberated was that interventions that tamp down prices in the U.S. could have ripple effects in other, less wealthy countries if drug makers seek to recoup their losses by giving fewer price concessions elsewhere.

What is the most important factor leading to higher prescription drug costs in the U.S.? 

The old adage that “every system is perfectly designed to get the result it gets” really came to mind as we investigated why drugs cost so much.  It’s not just one factor, but a whole ecosystem in which multiple actors and factors are contributing.  At the root of it, though, is that there are distortions in the market for drugs that permit things to happen that wouldn’t occur in a truly competitive market.

Which of the 27 action points recommended in the report stand out to you as a priority—and achievable? 

We view our recommendations as a package that should be implemented together, but there are three that we think are especially promising. First, the federal government should directly negotiate drug prices on behalf of all federal programs (and any state programs that want to join in). To create leverage in these negotiations, federal programs should have the flexibility to exclude certain drugs, such as when less costly drugs provide similar clinical benefit.  Second, to improve transparency about where the money is going and where opportunities exist to recapture some of it, biopharmaceutical companies and insurance plans should make public information about the net prices they receive and pay for drugs, including discounts and rebates. Third, insurance plans—especially Medicare plans— should provide better protection against out-of-pocket drug costs. There should be limits on total out-of-pocket costs, and patients’ deductibles and coinsurance payments should be based on the net price of the drug, not the list price.

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A number of the recommendations seem quite procedural, such as eliminating misapplication of funds and inefficiencies in federal discount programs, ensuring financial incentives are not extended to widely sold drugs, and increasing information sharing about reimbursement incentives. Is part of the high cost we pay due to bureaucracy and inefficiency?  

We identified ways in which federal programs are being misused, to the detriment of consumers. One example is what is known as the “340B program,” which was intended to ensure that hospitals and other facilities that serve low-income populations receive deep discounts on drug prices, but is being used by a broad range of facilities that don’t necessarily pass those savings on to patients. Another example is the orphan drug program, which provides very valuable financial incentives for manufacturers to develop drugs for rare diseases.  Companies have obtained these rewards even when they also sell their drug for other indications for which there is a huge market, and in some cases have gotten the rewards multiple times for the same drug.  These problems aren’t about bureaucracy, they’re about gaming the system.  These programs were good ideas that have been very successful in achieving their goals, but have had unintended effects that need to be addressed.

Biopharmaceutical companies have gotten a bad rap in the press, but you note that the cost of developing drugs is very high, and success rates low, with 9 out of 10 investigational products never making it to market. So there is an acknowledgment of the high stakes, high-cost nature of the sector. The report recommends accelerating market entry and use of generic and biosimilar drugs. How can this be implemented without discouraging development of new drugs?

Ensuring affordability of drugs while not discouraging innovation is the central tension that our committee had to grapple with. It’s not easy.  The recommendations in the report strike a balance between these two important objectives.  With regard to generics, our patent system creates a workable deal with drug innovators: create a useful new product, and we’ll give you a period of market exclusivity; generics can’t enter until after that period is up. One problem that our report addresses, though, is that companies have developed ways to extend that period of exclusivity. One is to pay generic companies to delay market entry. Another is to seek follow-on patents on incremental changes to their drug. For example, one company got a new patent by demonstrating their drug could be administered by crushing it up and mixing it with applesauce. The use of this tactic, called “evergreening”, should be curbed.

One recommendation in the report is that the federal government consolidate and apply its purchasing power to directly negotiate prices with the producers and suppliers of medicine, and strengthen formulary design and management. Do government-sponsored medical plans, such as Medicaid and Medicare, already do this? 

By law, the federal agency that runs these programs isn’t allowed to negotiate directly for drug prices for Medicare patients. Instead, all the individual, private plans that provide drug coverage under Medicare Part D do the negotiating. They get discounts, but we think the discounts would be deeper if the bargaining was consolidated in one mighty purchaser.

You noted that private investment is increasingly important to drug development. How much of drug development is supported by public funding, via grants to universities, etc., that then go on to become small startups with private investment? If it is significant, does the public get a good deal on its seed investments?

American taxpayers foot the lion’s share of the bill for the basic-science research that generates information about which molecules are promising to pursue. Private companies pay most of the development costs—that is, testing the molecule in clinical trials to see if it’s safe and effective. The public has gotten a great return on investment in the sense that the industry, particularly in the last decade or so, has been turning out a lot of very innovative, useful products. The work that remains to be done is ensuring that those products are financially accessible to everyone who needs them.

One recommendation is that biopharmaceutical companies and insurance plans disclose net prices received and paid, including all discounts and rebates, at a National Drug Code level. Would this cover all international transactions too, so that we could see costs/prices in other countries? 

No, our recommendation relates to the drug supply chain in the U.S., which is highly complex and highly opaque.

Can you talk about this a bit—why this transparency is important?

One of the things that was frustrating about studying drug affordability is that the various players in our system—such as drug manufacturers, health insurance plans, and intermediary organizations called pharmacy benefit managers, or PBMs—all point fingers at one another when you ask them who is responsible for consumers’ high drug costs.  Yet, there’s very little information available by which to assess their claims. Is the problem that drug makers launch their products at excessive list prices? Or that PBMs buy them at a discounted price, which is kept confidential, and don’t pass those savings along to health plans? Or that health plans get drugs at a deep discount but make subscribers pay cost-sharing (for example, the 20% coinsurance you pay at the pharmacy) as though the drug’s cost was the list price?  Nobody will cough up the data necessary to make these judgments.  Our recommendation addresses that problem.

Are there any next steps for you and the authors of this report? Will there be subsequent research by the group—or coordination with policy makers?

We are working hard to make sure policy makers, journalists, and key stakeholders understand our recommendations and the evidence behind them.  This week, for example, our report was presented to a packed room of Senate staffers.  We have also identified some areas where additional research is needed, and hope that research sponsors will respond to that need.  There is a lot of work to be done.