By Steven D. Pearson and Sarah K. Emond
(This commentary is being co-posted by California Health Care Foundation

Rapid growth in the underlying cost of health care is straining state budgets, pushing up health insurance premiums, and forcing higher out-of-pocket payments on many individuals and families. Though national in scope, these pressures are being felt acutely by Californians across coverage types, sociodemographic groups, and geographic regions. In a 2019 KFF/CHCF state survey, one in five Californians reported problems paying medical bills for themselves or a family member in the previous year. This phenomenon has led them to cut back on basic household spending, use up all their savings, or delay or forgo medical treatments or prescription drugs. Nearly half of Californians experienced some type of cost-related access problem for themselves or a member of their family.

One key driver of problems with affordability is the recent rapid growth in the cost of specialty pharmaceuticals, a class of drugs defined by federal officials as any medication for which the price negotiated by the Medicare program exceeds $670 per month. Examples of commonly used specialty medications include Humira for autoimmune disorders and Revlimid for cancer. Total public and private spending on these types of drugs has nearly doubled between 2009 and 2018, a growth rate almost three times faster than that of overall health care costs. While difficult to estimate separately within states, payments for specialty and nonspecialty drugs in California probably exceed 20% of the state’s total health care spending.

State-Based Pharmaceutical Cost-Containment Strategies

Given the high and rising cost of pharmaceuticals, it is no surprise that policymakers in California and other states are experimenting with ways to corral drug spending. The first step is often additional transparency through laws requiring manufacturers to publicly identify drugs whose prices have increased substantially. According to the most recent disclosures from California, 35 drugs with wholesale costs exceeding $10,000 per treatment had price increases of at least 16% over the prior three years, and the vast majority of drug manufacturers did not or could not provide the public with justification for their increases. While reports like these can be helpful, they are just a first step.

What additional steps is California considering? Policymakers have for the last several years explored pooled purchasing approaches across public and private insurers to maximize the state’s negotiating leverage. One of Governor Gavin Newsom’s first official acts (PDF) was to issue an executive order directing state agencies, including the Department of Health Care Services, to further use its bulk purchasing power for pharmaceuticals. Also being examined is forbidding “pay for delay,” the practice of brand-name manufacturers compensating potential competitors for keeping generic drugs off the market. California enacted legislation forbidding this practice last fall, although that law is now being challenged in federal court.

Other states have looked at expanding the use of outcomes-based contracts that reimburse insurers for some of a drug’s costs if medical outcome improvements fall short of expectations. And several have considered or passed “anti-price gouging” legislation that empowers state attorneys general to fine drug makers when pricing is deemed excessive.

The Value of Independent Drug Value Reports

As state policymakers consider these and additional measures, it’s helpful to consider the ways in which independent drug value assessment reports can complement existing approaches and help accomplish their goals.

A drug value assessment report is a systematic review of a drug’s comparative clinical effectiveness versus other drug treatment options, combined with an analysis of the drug’s long-term cost-effectiveness versus those other options. When an independent, nonpartisan research group prepares such a report using transparent methods, it provides a fair benchmark with which to evaluate drug prices set by manufacturers and measure the success of public and private strategies designed to place downward pressure on those prices. In the US health care system, our organization, the Institute for Clinical and Economic Review (ICER), produces value-based price benchmarks expressly for this purpose.

Fortunately, we’re beginning to see widespread use of these benchmarks. Private insurers and pharmacy benefit managers have started using them in their coverage processes as a guide to fair pricing and fair access. The US Department of Veterans Affairs is making greater use of them in price negotiations with drug makersCVS Health has gone further, launching a health benefit design for its employees and for workers at other self-insured employers that choose not to cover a new drug with a price that doesn’t meet the value-based price benchmark.

Drug Value Reports in Medicaid

Independent drug price benchmarks are increasingly being used by state Medicaid programs, many of which have deployed them for prior authorization elements of coverage decisions. But much more can be done. Medicaid programs are less likely than private payers to use formulary design or price negotiation to control costs, though some states are now exploring the possibilities. In 2017, the State of New York passed a law allowing Medicaid to demand supplemental rebates from pharmaceutical companies for expensive drugs. In the first two years, New York’s Medicaid program negotiated with drug makers for rebates on dozens of drugs, saving the state $85 million.

In the first year, when a lone manufacturer, Vertex, refused to offer a discount to New York taxpayers for its drug Orkambi, state Medicaid officials launched a transparent process for determining a fair price. The Drug Utilization Review Board of New York used ICER data about use and effectiveness to determine a fair price. The board called for a supplemental rebate equal to a 75% discount off the list price. Although negotiations between the Medicaid program and Vertex continue, the principle is established: Independent drug value assessment can guide an explicit pricing mechanism for drugs, especially those lacking competition.

Benchmarking Success

Ultimately, independent drug value reports provide the fair benchmark by which to gauge the reasonableness of prices that drug manufacturers set and often increase unilaterally, with limited or no justification. As policymakers experiment with transparency initiatives, bulk purchasing programs, and/or new legal guidelines, independent drug value reports can help determine how effective those initiatives have been in bringing drug prices more in line with the benefit they deliver to patients.

States must find their own ways to address the effects of increasing drug costs for patients, private insurance markets, and state budgets. While the federal government may remain in deadlock over this for years to come, states have the flexibility to align drug prices fairly with the benefits they provide. By continuing to produce independent reports that put evidence at the center of the equation, we hope ICER can support multiple and even coordinated efforts to find solutions.