Rising Drug Costs: The Impact on Dermatology

M.J. Rico, MD


Associate Professor of Dermatology, New York University School of Medicine, and Deputy Chief of Staff, Dept of Veterans Affairs, New York Harbor Health Care System, New York, New York, USA

ABSTRACT

In the US prescription drug costs are rising faster than any other component of health care expenditures, and show no signs of slowing¹. Spending on prescription drugs has been estimated by the Health Care Finance Administration (HCFA) to be rising by approximately 12% per year, more than twice the rate for national health care expenditures (5.1%)². Factors driving the rise in prescription drug costs include the introduction of new drugs, and consumer demand.

Key Words:
co-pay, prescription costs, brandname drugs, generic drugs

More New Drugs and Faster Approvals

The majority of new drugs are highly effective, offer better therapy than agents currently in use, and are targeted to specific niche markets. In 1997 and 98, 88 new drugs were approved by the US Food and Drug Administration (US FDA), including the “block buster” hit Viagra, and the nonsedating antihistamines: Claritin, Allegra and Zyrtec. In 1999, we saw the approval of the male pattern baldness agent, Propecia and the Cox-2 inhibitor, Celebrex. These products represent “life-style drugs”. They improve the quality of the patient’s life, but may not be medically necessary. Antihistamines currently rank as the second most commonly prescribed class of prescription drug for managed care organizations.

New drugs are arriving on the market faster. The US FDA has slashed the time for new drug approval from 31 months in 1988, to 11.7 months in 1998. The number of drugs in development and seeking approval has also increased. These include very expensive “designer drugs” and biologic response modifiers, such as interferons and colony stimulating factors.

Consumer Marketing

The increase in cost has been partially driven by consumer demand. In 1997, the US FDA approved direct consumer marketing. Since then, direct marketing to consumers has expanded to a $1.3 million/year enterprise, an increase of more than 23% over the last year alone. Patients are much more savvy about their medical conditions and their treatment options. They often arrive at the doctor’s office, literature search in hand, requesting the latest, and often the most expensive, new therapy.

Approximately 85% of patients in the US are now covered by a third party payer for prescription costs and as a result, they pay a lower, flat rate (co-pay) for their medications. This is a driving factor for both cost and consumer demand. Co-pays for prescriptions are relatively low when compared to the prescription cost, and there is no incentive for either the patient or the provider to write for an equally effective, but lower cost alternative drug. While 60% of third party payers offer a tiered patient payment structure, with a higher co-pay on brand name drugs than the copay for generic drugs, the difference in cost is not sufficient to change prescribing behavior. Most patients do not pay proportionately for the total cost of the prescription, although such price restructuring has been advocated.

Cost Control Efforts

Pharmacy benefit managers negotiate with pharmacies for discounted rates on prescriptions. Often these discounted rates reimburse pharmacies for medication acquisition costs only and include deeply discounted or no dispensing fees. Pharmacies pass a higher percentage of operating expenses along to those patients not covered by third party payers. The net result:

1. Prescription costs are rising rapidly, particularly for those patients not covered by insurance.
2. Premiums and deductibles for prescription drug plans are rising fast, but not fast enough to keep up with soaring drug costs.

Several methods to control spiraling prescription costs are in place with more to come. Closed formularies, in which a limited number of medications are covered, are common to Health Maintenance Organizations (HMOs) and some pharmacy benefits programs. Provider profiling tracks prescribing patterns of physicians and is used by HMOs and pharmacy benefit managers for performance improvement activities. Some pharmacy benefit managers are negotiating with pharmaceutical companies to control direct advertising in the community. Expensive medications such as Accutane are increasingly subject to preauthorization by benefit programs.

Table 1: Some agents frequently prescribed by dermatologists⁴.
*AWP: average wholesale price in US dollars; **HCFA established price for Medicaid recipients.

Impact on Dermatology

Clinicians should be aware of the costs of various medications used in the management of acute and chronic skin diseases. A retrospective analysis of nondermatologist and dermatologist prescribing patterns noted that the nondermatologists used a combination antifungal/topical steroid preparation 7 times more often than the dermatologists³. Substituting a less expensive, yet just as effective, antifungal agent would result in annual savings of $10-25 million.

Table 1, while not exhaustive, lists some average wholesale prices (AWP) of agents frequently prescribed by dermatologists⁴. Pharmacy acquisition costs are typically discounted from the AWP. The cost to the patient is calculated based on pharmacy acquisition costs, plus a dispensing fee. Third party payers negotiate prescription reimbursement costs with a deeply discounted fee structure. The average co-payment by patients for generic drugs is currently $6.19 (range $5-10), and $12.56 for brand name drugs (range: $5-$20)². Some pharmacy benefit programs require a higher co-payment for brand name drugs offformulary with the average co-pay for these agents at $26 (range: $10-50). The final cost paid by the patient, and by insurance companies, varies widely.

Conclusion

Efforts to control prescription prices have, to date, focused on negotiating better pricing through group purchasing and other actions at the margins. The key to controlling pricing will be partnership of physicians with industry and pharmacy to prescribe appropriate medications, keeping costs in mind. Physicians must recognize the implication that spiraling prescription costs have for our patients and the health care system, and play a lead role in advocating the use of cost-effective medications.

References

1. Health expenditures ease a bit; drugs lead cost-of-care increase. Managed Care 8(8):13-4 (1999 Aug).
2. Hensley S. Prescription costs become harder to swallow. Providers and payers get a big dose of reality with explosive spending and patient demand for new drugs. Mod Healthc 29(34):30-4 (1999 Aug).
3. Smith ES, Fleischer AB Jr, Feldman SR. Nondermatologists are more likely than dermatologists to prescribe antifungal/corticosteroid products: an analysis of office visits for cutaneous fungal infections, 1990-1994. J Am Acad Dermatol 39(1):43-7 (1998 July).
4. Cardinale, V. 1999 Drug Topics Red Book, Montvale, N.J.:Medical Economics, 1999. Ed.103rd.