Prescription drug costs continue to climb in the United States, but tightening a loophole in a federal law may help curb rising expenses, according to research published this week in Health Affairs.
Efforts to control US health care spending commonly target growing prescription drug costs, which ripple through the balance sheets of businesses and households alike. Indeed, after years of debate, Congress recently took aim at drug prices through provisions in the Inflation Reduction Act. But there are many systemic factors leading to high drug prices, and the research highlights one counterintuitive driver: the fact that in the US, pharmaceutical companies subsidize the purchase of their drugs.
Medicare, the government insurer for elderly or disabled people in the US, encourages patients who can’t afford their drug costs to seek out patient-assistance programs, and allows drugmakers to fund them. New research from Harvard Business School and Harvard Kennedy School professor Leemore Dafny suggests that many pharmaceutical companies may find it highly profitable to fund these programs—particularly for expensive drugs. The companies fund patients’ portion of the price, but Medicare pays the rest.
“I’M REALLY WORRIED ABOUT WHAT’S HAPPENED TO OUR DRUG PRICES AND THE INCENTIVES WE HAVE EMBEDDED IN OUR SYSTEM TO ENCOURAGE HIGH PRICES.”
After analyzing the drug expenses of more than 3 million Medicare Advantage patients in 2010 and 2017, Dafny and her coauthors found contributions to patient-assistance programs were likely to be profitable even if a small share of eligible patients used the manufacturer’s drugs as a result.
This contributes to conditions that keep prescription drugs pricier for Americans than people in other countries. The study, coauthored by Christopher Ody of Northwestern University and Teresa Rokos of the University of Southern California, appears in the September issue of Health Affairs.
“I’m really worried about what’s happened to our drug prices and the incentives we have embedded in our system to encourage high prices and utilization that doesn’t consider prices, particularly because so much of the tab is being picked up by insurers, including public insurers,” says Dafny, who is currently an expert for the US Department of Justice in legal challenges related to drugmakers’ relationships with these programs.
The copay problem
The federal Anti-Kickback Statute prohibits the exchange of anything of value that rewards or generates business reimbursable by federal health care programs.
While the law prohibits drugmakers from directly covering copays and other out-of-pocket costs for Medicare patients, under guidance from the US Department of Health and Human Services, manufacturers may donate to charitable organizations that cover these costs, and can earmark their donations for specific disease categories. The amount contributed to these organizations skyrocketed after Medicare enrollees gained prescription drug coverage in 2006, reaching $1.85 billion in 2018, says the paper. Most of that money came from drugmakers.
“PATIENT ASSISTANCE PROGRAMS LIKELY HARM A RANGE OF STAKEHOLDERS, INCLUDING THE PATIENTS THESE CHARITIES ARE OSTENSIBLY DESIGNED TO HELP.”
“This is a loophole that allows manufacturers to subsidize the purchase of their own drugs, which violates the spirit of the Anti-Kickback Statute. That statute protects both seniors and the federal government from fraud and abuse, which is rampant in health care,” says Dafny, the Bruce V. Rauner Professor of Business Administration. “This assistance can drive up costs by encouraging the use of expensive drugs over cheaper alternatives.”
Drugmakers can provide direct aid to privately insured patients—and they do. For example, many drugmakers issue “copay coupons” that cover cost-sharing for their drugs. According to Dafny, that prevents insurers from using different tiers of copays to encourage patients to use cheaper options—like generic versions over brand-name drugs—and push drugmakers to accept lower prices in exchange for favorable tiering.
Following drugmaker donations
When manufacturers donate to these charities, they fund cost-sharing for all drugs for a given condition, not just their own. Using Medicare data from 2010 and 2017, Dafny and her coauthors estimated the share of sales that assistance would need to induce to make such broad donations profitable for the leading 1-2 manufacturers in each condition covered by a charity. They call this the “breakeven inducement percentage,” noting that “inducement” refers to use that would not occur in the absence of assistance, even if it is medically appropriate.
Among the 10 conditions with the highest drug spending per patient, the median breakeven figure in 2010 was 14 percent. By 2017, it had fallen to 3 percent, meaning that in 2017, “if charitable assistance induced just 3 percent of spending on the top manufacturer’s drugs, the median manufacturer would have found it profitable to finance all assistance for the relevant condition,” the paper states.
The authors determined that the scope of patient assistance charities is growing:
- The number of patient conditions addressed by these organizations jumped to 154 in 2017 from 87 in 2010.
- During that period, the percentage of Medicare enrollees potentially eligible for assistance expanded to 41 percent from 29 percent.
- The average condition was associated with $23,084 in assistance-eligible drug spending in 2017, nearly doubling from $12,297 in 2010.
- Patients shouldered less of the cost over time, paying $685 in 2017 versus $835 in 2010.
Urging change
The release of Dafny’s study comes on the heels of the passage of the Inflation Reduction Act, which aims to constrain price growth of existing drugs, cap seniors’ out-of-pocket drug spending, and eventually enable drug price negotiations, Dafny says. While “it’s a little too soon to forecast the impact of these measures on the role of patient assistance charities,” says Dafny, she expects the influence of assistance on drug sales to wane due to the reduction in out-of-pocket spending. Patients might be likelier to buy a more expensive drug even without assistance if they have to pay less, she explains.
Dafny and her collaborators say the government should rescind or substantially revise its guidance on patient-assistance programs. They conclude that current guidance or enforcement of the guidance enables drugmakers to earn kickbacks from their donations, and encourages drugmakers to charge higher prices.
“Patient assistance programs likely harm a range of stakeholders, including the patients these charities are ostensibly designed to help,” the paper says.
