Featured Health Business Daily Story, July 2, 2015

Blues Plans Can Use Various Tactics to Mitigate Generic Drug Price Inflation

Reprinted from THE AIS REPORT ON BLUE CROSS AND BLUE SHIELD PLANS, a hard-hitting independent monthly newsletter on new products, market share, management strategies, profitability, strategic alliances and executive compensation of BC/BS plans. (Not affiliated with the Blue Cross and Blue Shield Association or its member companies.) Sign up for a $72 two-month trial subscription today.

By Angela Maas, Managing Editor
July 2015Volume 14Issue 7

In a recent Evercore ISI webinar, Howard Wild, vice president of generic strategies for pharmacy benefit manager (PBM) MedImpact, Inc., said the generic inflation rate has been “astronomical.…We’ve seen some drugs go up in excess of 2,000%,” he said, adding that price increases exceeding 100% “are not unusual.” And while the inflation eased up a bit at the beginning of 2015, it started going up again in April, although to a lesser degree.

There are various reasons behind the generic drug price inflation. “With some generics, it is due to scarcity of raw ingredients,” explains Robert “Ned” Giles, Jr., Pharm.D., manager of formularies at BlueCross BlueShield of Tennessee. According to Patrick Gill, director and chief pharmacy officer for Horizon Blue Cross Blue Shield of New Jersey, “Raw materials can be constrained by many different influences, from the political climate of the source country to weather patterns, which can affect price.”

“Manufacturer consolidation has been a key driver, as it has reduced competition and, thus, increased prices,” maintains Gill. “Related to this trend is that drugs with low sales volume or low margin of profit may have been discontinued after consolidation. Price increases can also be attributed to drug shortages. If one manufacturer of a given generic encounters production issues, the rest of the manufacturers cannot immediately backfill the volume.”

Randy Vogenberg, Ph.D., principal, Institute for Integrated Healthcare, notes that the FDA has cited “quality and manufacturing issues” as “a major reason for drug shortages.” Gill explains that “the FDA has issued sanctions for some key generic manufacturers (due to their failure to adhere to Good Manufacturing Processes), limiting their ability to manufacture certain drugs.”

“But much of it is due to the economic law of supply and demand,” Giles asserts. “As generic dispensing rates (GDR) go up, manufacturers realize there is more market for their products.” Steve Johnson, senior health outcomes director at PBM Prime Therapeutics LLC, points to “the decrease in the remaining blockbuster brand drugs anticipated to lose patent protection.”

Gill also contends that “drug price inflation can be driven by lawsuits and the six-month exclusive period. The first generic on the market for many blockbuster drugs often has a very high price, as it is the only generic available on the market. There have also been instances in which litigation between the brand and generic companies delays the introduction of a generic.”

What Drives Drug Price Inflation?

The kinds of generic drugs that have experienced price hikes are “older, very inexpensive and easy-to-manufacture medications,” says Giles. “Due to lack of competition, market dominance came into play, and pricing soared on some of these products. While shortages of raw materials may have been a factor in some of these cases, that certainly was not the root cause for the situation as a whole.”

One pharma industry expert, though, notes that the issue is broader than simply prices of generic drugs increasing. “While there are a number of generic drug products with very large price increases, this is not a new phenomenon,” maintains Stephen Cichy, founder and managing director of Monarch Specialty Group, LLC, a partnership firm and investment company within the specialty drug space. He says his company “see[s] the debate surrounding the price of generics as part of a much larger issue relating to escalating drug prices, especially specialty drugs, that are widely viewed as unsustainable. In 2014, specialty drugs accounted for over 20% of the average employer’s overall pharmacy costs, and are projected to make up to 40% of an employer’s total pharmacy spend by 2020. Price inflation is a leading driver of this trend, with prices of many specialty drugs growing at double-digit rates.”

Nevertheless, generic price inflation doesn’t show any sign of slowing. For one thing, said Wild, the FDA’s Office of Generic Drugs “has at least a two-and-a-half-year backup on approvals,” which he said is “unheard of.”

“Generic prescriptions represent well over 80% of all prescriptions, and the average cost has increased over the past 18-24 months, and this is expected to continue and possibly even accelerate in the years to come,” says Johnson. “We could reasonably anticipate generic prices will continue to rise especially for highly prescribed products, those with a limited number of manufacturers and those made from ingredients that are in short supply,” Giles tells The AIS Report.

So with these expectations, what can Blues plans do to mitigate the financial impact of these high-cost generic drugs?

Owned by 13 not-for-profit Blues plans, subsidiaries or affiliates of those plans, Prime Therapeutics works with its owner plans, as well as with employers, managed care plans and other PBMs, to coordinate care for more than 26 million members, including managing drug costs. Johnson tells The AIS Report that “tactics Prime is considering and/or implementing include developing new cost-share tiers for high-cost and low-cost generics, increasing the use of preferred pharmacy networks and implementation of utilization management programs or exclusion strategies targeting high-cost generics.”

Prime co-owner Blue Cross and Blue Shield of Kansas has “not implemented any policies to address high-cost generics, nor have we pursued a two-tier approach to generics, as some plans have done,” says spokesperson Mary Beth Chambers. “We continue to educate our members about choosing generics when they are available because we still believe generics offer a cost savings over their brand name counterparts. We, in partnership with Prime, will continue to monitor the costs of generics and will adjust our philosophy if we deem necessary.”

At the Tennessee Blues plan, says Giles, “We will continue to closely monitor generic drug pricing to provide the best care and value to members. In some cases, this could mean particular generics either aren’t added to our formulary, or some could be removed if there are alternative products with more reasonable pricing.”

“Ongoing monitoring of the supply and pricing channels is critical,” asserts Horizon’s Gill. “In some cases where a therapeutic alternative is available, we will consider utilization management strategies to encourage utilization of lower-cost alternatives. Where permitted, we consider new cost-share tiers for high-cost and low-cost generics, increasing the use of preferred pharmacy networks and implementation of utilization management programs.”

Some of those utilization management strategies are “prior-authorization and step-therapy protocols, generic incentives, consumer education and physician outreach,” Cichy says.

“Most plans continue to focus on contracting and rebates with manufacturers along with consolidating volume where possible with a single generic manufacturer,” says Vogenberg. He cautions that tiered systems that shift more costs to members create “an additional patient cost burden. How such shifting of costs to consumers impact adherence, persistency, and abandonment remain to be seen. However, past history does not bode well for just shifting more cost onto the plan member or patient.”

Cichy maintains that payers should be vigilant about monitoring the market because “manufacturers may change the dosage form of their product — for example, tablet to capsule, or tablet to tablet extended-release — as a means to drive improved product access and limit generic substitution, since different dosage forms of the same drug cannot be substituted without the doctor’s express written permission. Generic drug products that are associated with unique dosage forms will often have pricing behavior more consistent with a brand-name drug product.”

© 2015 by Atlantic Information Services, Inc. All Rights Reserved.


Get more hard-hitting news for health plans, PBMs, pharma companies and employers in AIS's Drug Benefit News. Sign up for an $86 two-month trial subscription today!

It's quick and easy to sign up for FREE access to AISHealth.com!

Why do I need to register?