The Recent Surge in Drug Costs – And What Can be Done About it?
Healthcare costs are continuing to grow significantly faster than the rate of inflation, up an estimated 6-7% this year and another 8-9% next year, according to two recent surveys – one by the Business Group on Health (which surveyed 125 large U.S. employers that provide health benefits to about 17 million employees) and the other by AON (which surveyed more than 950 U.S. employers providing health benefits to about 7 million employees).
Next year’s expected rate of increase would be roughly four times the projected rate of inflation, and it would bring employers’ total annual cost of healthcare per employee to more than $16,000, not including the portion employees pay through payroll deductions, co-pays and co-insurance.
Some of the current and projected increase in healthcare costs is driven by increased demand for outpatient care, tests and other medical services, which is partially due to a residual rebound from care that was delayed during the COVID-19 pandemic. However, unprecedented growth in pharmacy costs is the real driver of increased healthcare costs. Pharmacy costs as a percentage of all employer health benefit costs have risen six points over the last two years alone, from 21% to 27%.
There are two key drivers of the outsize growth in pharmacy costs, one you have heard a lot about and another that has not received as much attention. In the former category, demand for GLP-1 diabetes and weight loss drugs – including Ozempic, Wegovy, Monjauro, and Zepbound – which cost about $1,000 per month – continues to surge and shows no sign of abating. In the latter category, so-called “specialty drugs” that provide breakthrough treatments for relatively rare medical conditions are used by less than 2% of the population but account for roughly 51% of all drug benefit costs.
Financial Impact of GLP-1s
I have covered the pros and cons of GLP-1s in a previous blog [GLP-1 Agonists: Silver Bullet or Arrow in the Anti-Obesity Quiver] so I won’t repeat myself here, except to underscore that this category of drugs (and others that are closely related to it) are having an immense clinical and financial impact. Both Goldman Sachs and J.P. Morgan have estimated that GLP-1s will be a $100 billion category by the end of the decade, and this may be conservative.?
The financial impact of GLP-1s on their manufacturers has been stunning. Novo Nordisk, maker of Ozempic and Wegovy, now has a market capitalization of more than $600 billion (as of August, 2024), which is greater than the GDP of its home country of Denmark. And Eli Lilly’s Monjauro and Zepbound now account for almost 40% of the company’s 2024 projected sales of $46 billion.
As impressive as the financial impact of GLP-1s has been on their manufacturers, the clinical and financial impact of GLP-1s on patients and third-party payers has been even more profound. Patients with diabetes have flocked to Ozempic and Monjauro due to their proven clinical efficacy as well as their well-publicized secondary impact on weight loss, and millions of other patients opted for Wegovy and Zepbound once they gained FDA approval for weight loss (Wegovy is also approved for treatment of cardiovascular disease).
And this is only the beginning, as about 142 million Americans?– more than half of the adult population – meet the FDA’s prescription criteria for these drugs, according to the Institute for Clinical and Economic Review.
This surging demand is despite the fact that GLP-1s don’t work for everyone and have some clinical drawbacks (including muscle loss), and more impressively despite their very high costs. Since most patients cannot afford the roughly $1,000 per month price tag, many third-party payers have agreed to cover their cost for diabetic patients, and more are electing to cover their cost for obese individuals (though Medicare is still withholding coverage for the weight loss drugs).
Demand is Outstripping Supplies
In fact, demand for GLP-1s has been so strong that it has outstripped the manufacturers’ ability to meet it. This resulted in the FDA designating many of these drugs as in shortage, which has in effect created a rapidly growing new product category for the roughly 7,500 “compounding” pharmacies in the U.S., some of which are creating drugs that are theoretically similar to GLP-1s. They do this by mixing semaglutide (the key ingredient in GLP-1s) and other FDA-approved ingredients in attempts to mimic what it took Novo Nordisk and Eli Lilly many years and billions of dollars to develop, test, and secure FDA approval for permission to market.?
Some of the organizations that market GLP-1 look-alikes – including Hims & Hers Health, Inc. – are public companies that can provide some assurance that their less expensive compounded versions are at least produced by FDA certified and regularly inspected pharmacies.
However, the compounded versions themselves are not FDA approved as being safe and effective, are not similar in the same precise way that FDA-approved generic and biosimilar drugs are to the off-patent branded drugs they are designed to replace at lower cost, and the compounded versions have not undergone any testing that compares their efficacy to that of their branded reference drugs.
In addition, not all compounding pharmacies are regulated in the same way and must adhere to the same standards. Compounding pharmacies play a valuable role in our healthcare system by giving physicians the ability to make small adjustments to an FDA-approved drug that makes it more effective for a particular patient – for example, by varying the dosage, adding flavor (for a child), changing the form (from a pill to a liquid), or removing allergens.
However, this doesn’t necessarily qualify these pharmacies to respond safely and effectively to major GLP-1 supply shortages, and adverse safety and efficacy issues have been reported, so make sure you understand the qualifications of the pharmacies and pharmacists if you decide to go the compounding route.
High-Cost Specialty Drugs
As expensive as GLP-1s are, their cost pales compared to the cost of many specialty drugs. These biotech drugs offer extraordinary breakthrough treatments for severe medical conditions including HIV, multiple sclerosis, cancer, and therapies for rare genetic conditions. However, they come with very high price tags. According to RxBenefits, some of the most expensive specialty drugs include:
Used to treat urea cycle disorders (UCDs), a genetic condition that can cause ammonia to build up in the body.?Ravicti is an oral liquid taken three times a day and costs nearly $700,000 annually.?
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A one-time gene therapy for hemophilia B that costs $3.5 million.?After infusion, 94% of patients in a trial no longer needed routine prophylaxis therapy.?
A one-time gene therapy for early-onset metachromatic leukodystrophy (MLD), a hereditary condition, that costs $4.25 million.?
Other expensive specialty drugs include:?
These drugs are particularly expensive for multiple reasons, including the fact that they are difficult and costly to manufacture. They also frequently require a prescription by a specialist, special handling, intravenous administration, and a high degree of patient management to ensure compliance and safety.?In addition, these drugs usually face less competition because of the small patient populations available to use them.
Specialty drug costs in the U.S. were about $68 billion in 2023 and are expected to grow to about $1.5 trillion by 2033, and specialty drugs are expected to represent up to two-thirds of newly launched drugs over the next five years. In 1990, there were 10 specialty drugs on the market.?Today specialty pharmacies (another category of pharmacies that is different from compounding and community pharmacies) manage over 500 drugs in 40 therapeutic categories.
Great Progress, but How Can We Afford It?
The scientific advances and companies that have brought us GLP-1s and specialty drugs are to be celebrated, as they have meaningfully improved the treatment of widespread and life-threatening diseases like diabetes (~32% of the population) and obesity (~40% of the population) and have offered new hope for those who have crippling rare diseases.?
However, particularly given the fact that that many more of these expensive new drugs are in the pipeline, it is difficult to imagine how individuals, third-party payers, and ultimately we as a nation are going to afford them without breaking the proverbial bank.
While it is theoretically possible that some of these drugs will sufficiently reduce overall healthcare costs in the long run to justify the cost of covering them, this has yet to be proven and would likely require employees / members to stick with their health insurers for much longer periods of time than is currently the norm.?? ?
While it is hard to dispute the fact that free markets have enabled pharmaceutical breakthroughs in many ways, it also seems clear that changes will have to be made in the current system. Enabling Medicare to negotiate directly with pharmaceutical companies, which has recently begun with a limited set of drugs, will lower costs but take a long time to have a meaningful impact under the current law (which also capped the out-of-pocket cost of insulin for Medicare beneficiaries).
Increased competition among manufacturers will also lower prices, as evidenced by Eli Lilly’s recent decision to significantly reduce the cost of Zepbound for cash-paying patients who are willing to self-administer single-dose vials using a needle and syringe rather than the injector pen that most patients prefer.
Other key strategies for reducing drug costs in the U.S. without upending the system that has consistently produced breakthrough therapies and one of the largest categories of U.S. exports include the following:
·???????? Plugging loopholes that prevent pharmaceutical companies from employing some of the patent-related tactics they have used to delay generic and biosimilar competition, including evergreening, patent thicketing, pay-for-delay deals, manipulation of the FDA’s citizen petition process, and product hopping; and
?·???????? Creating more transparency in the practices used by the Pharmacy Benefit Managers (PBMs) that manage drug benefits for most self-insured employers and health insurers.
More to come on these strategies in my next issue!
Respectfully,
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