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The Actuary Magazine

Actuarial Perspectives on Prescription Drug Financing

INTRODUCTION

By Gregory Warren and Joan C. Barrett

MAY 2020


Photo: iStock.com/arsenisspyros

March 23, 2010, was a career-changing day for many in the health care community. Suddenly, there were new regulations to be read, new policies to be written, systems to be changed and so much more. Amid all of this activity, there was an elephant in the room: the cost of health care.

As Figure 1 shows, the United States spends roughly twice as much as comparable countries on a per capita basis—18 percent of gross domestic product (GDP) in the United States is spent on health care, compared to 11 percent of GDP in comparable countries.1 In addition, a 2017 study from The Commonwealth Fund ranked the United States last in overall quality of care compared with similar countries.2

Figure 1: Health Consumption Expenditures Per Capita, U.S. Dollars, PPP Adjusted, 2017

Hover Over Image for Specific Data

Source: Sawyer, Bradley, and Cynthia Cox, How Does Health Spending in the U.S. Compare to Other Countries? Peterson-KFF Health System Tracker, December 7, 2018 (accessed August 2, 2018).

With this issue in mind, the Society of Actuaries (SOA) joined forces with the Kaiser Family Foundation (KFF) in 2017 to charter Initiative 18|11: What Can We Do About the Cost of Health Care? The Healthcare Financing Management Association (HFMA) later joined our efforts. The inaugural event for Initiative 18|11 occurred on March 7, 2018, in Washington, D.C. The meeting attendees included more than 30 thought leaders throughout the health care community, including actuaries, health economists, employee benefits experts and hospital administrators. At the conference, participants focused on two key drivers: the price of goods and services and the chronic disease burden. Participants also noted that fragmentation of care within the United States can result in unnecessary administrative expenses and make finding solutions more difficult.3

Several participants lamented the lack of transparency in the current health care system, especially in terms of how pharmacy prices are determined. An important step in determining how to solve a problem is to describe the underlying process. With that in mind, the Initiative 18|11 leadership, along with the Health Section Council of the SOA, launched a strategic initiative entitled “Actuarial Perspectives on Prescription Drug Financing” to document and analyze the underlying process. Although actuaries are the target audience, others may benefit from our findings.

OUR ANALYSIS AND FINDINGS

The research for this pharmacy strategic initiative was conducted in four primary topic areas:

  1. Drug development process
  2. Economic impact
  3. Consumer impact
  4. Regulatory process

Produced out of those four primary areas of research, “Actuarial Perspectives on Prescription Drug Financing” is a web-exclusive series that includes seven articles.

Drug Development Process

Traditional Drug Development Process by Jean Lu, FSA, MAAA; Kerri Miller, Pharm.D.; Ian Smith, FSA, MAAA; and Gregory Warren, FSA, MAAA, reviews how different stakeholder entities in the United States work together to fund and conduct pharmaceutical research and discovery. The drug then makes its way through several phases of development and approval processes. The article closes with a discussion about several studies that result in a wide range of estimates of what the drug development process costs and identifies opportunities for actuaries to uniquely contribute to this process.

Economic Impact

Too Much or Too Little? by Scott Fry, FSA, MAAA; Tze Min Lim, ASA, MAAA; Gregory Warren, FSA, MAAA; and Troy Wieck, ASA, MAAA, discusses how much the United States is spending on prescription drugs as a percentage of GDP, as a percentage of total health care expenditures and per capita. It also reviews the structure of the prescription drug market in the United States, including pharmacies, wholesalers, manufacturers and pharmacy benefit managers, and how they each contribute.

What Is the Price Anyway? by Scott Fry, FSA, MAAA; Tze Min Lim, ASA, MAAA; and Gregory Warren, FSA, MAAA, informs about the flow of products and funds in the prescription drug market in the United States. It explains many of the prescription drug measures used amongst various stakeholders (e.g., WAC, AMP, AWP, NADAC, rebates), different pricing structures that can be employed (e.g., spread pricing, pass-through pricing) and emerging pricing approaches. It closes with a summary of some international drug pricing approaches that can be considered as we continually seek to improve drug pricing in the United States.

Trends in Prescription Drug Spending by Scott Fry, FSA, MAAA, and Rebecca Owen, FSA, MAAA, defines the key components of drug price trends: unit cost and utilization. It explores the different components of unit cost and the key drivers of utilization, how they have been changing over time (both recently and over the longer term) and the various causes of those changes, including the significant impact of specialty drugs.

Consumer Impact

Direct-to-Consumer Pharmaceutical Advertising by Sarah S. Hellems, FSA, CERA, MAAA, discusses a relatively unusual aspect of the United States pharmacy ecosystem (New Zealand is only other nation where this exists). The history, regulation, growth and impact of direct-to-consumer pharmaceutical advertising (DCTPA) are summarized. Then arguments for and against DTCPA are shared, and potential futures of DTCPA are considered.

Manufacturer Coupons and Patient Assistance Programs by Jonathan Gray, ASA, CERA, informs about what might be the most rapidly emerging dynamic within the U.S. pharmacy ecosystem and its specific impacts on consumers. Helpful definitions are provided as well as regulations affecting manufacturer coupons and patient assistance programs (PAPs). Pros and cons of these programs are discussed in terms of their impact on consumers, and possible futures of these programs are considered in light of emerging payer policies (e.g., accumulators, maximizers, etc.) and potential regulatory or legislative approaches.

Rebates at the Point of Sale by Deana K. Bell, FSA, MAAA, and Karen L. Nixon, MBA, outlines how drug rebates work today. Then different approaches to point-of-sale (POS) rebates are described, with helpful tabular examples provided. Discussion about how the commercial market is incorporating POS rebates follows. The article closes with a discussion of various government proposals in 2018 and 2019 to discontinue the current rebate system and the potential implications of those proposals.

LESSONS LEARNED

Many think the cost of prescription drugs is too high. In fact, one of the few things Democrats, Republicans and Independents all agree on is that the cost of drugs should be a high priority for Congress as shown in Figure 2. On the other hand, increased compliance and adherence to drug therapeutic protocols could reduce the overall cost of care.

Pharmacy development and pricing is complicated. There is no easy fix, and unintended consequences are likely. New analytical techniques are needed to evaluate, and actuaries can uniquely further the development of such analytical techniques and evaluations with more and deeper involvement as they work with key stakeholder groups in the pharmacy ecosystem in the United States.

Four attributes emerged as common themes throughout each area of research conducted for this series. Each attribute represents opportunities for improvement, and each is also an area in which actuaries can contribute uniquely and positively. These attributes are:

  1. Increasing transparency
  2. Encouraging competition
  3. Aligning stakeholder incentives
  4. Mitigating total cost of care increases

New, scalable actuarial models and methods are needed to clearly quantify the effects of clinical improvements, better access and convenience that pharmaceutical therapies deliver in terms of impact on total cost of care, extension of life and impact on all affected stakeholders. Such modeling and associated actuarial judgment in day-to-day decision-making can lead to value-based contracting frameworks that increase transparency, encourage competition, align stakeholder incentives and mitigate total cost of care increases. We look forward to further actuarial involvement in this important area of health care as we all work together to reduce the 18/11 gap and improve health outcomes across the United States.

WHERE DO WE GO FROM HERE?

Another installment of this strategic initiative is scheduled to be released later this year. That installment will address pharmacy regulation and specialty and precision drug development.

Health actuaries are constantly analyzing and reviewing what is going on in health care. To find more information about our work, please visit the Health Section Council webpage or our LinkedIn subgroup page. You can also follow us on Twitter and LinkedIn using the hashtag #soahealth.  For more information specific to pharmacology, you can also join the Pharmacy subgroup.

Gregory Warren, FSA, MAAA, serves as senior vice president and chief actuary at Optum Advisory Services.
Joan C. Barrett, FSA, MAAA, is a consulting actuary with Axene Health Partners, LLC.

Acknowledgments: Our appreciation goes to the authors, the members of the Health Section Council, and our staff partner, Joe Wurzburger, FSA, MAAA, and section specialist, Ladelia Burger.


REFERENCES:

  1. Gonzales, Selena, Marco Ramirez, and Bradley Sawyer. How Does U.S. Life Expectancy Compare to Other Countries? Peterson-KFF Health System Tracker, December 23, 2019 (accessed November 29, 2018).
  2. Schneider, Eric C., Dana O. Sarnak, David Squires, Arnav Shah, and Michelle M. Doty. Mirror, Mirror 2017: International Comparison Reflects Flaws and Opportunities for Better U.S. Health Care. The Commonwealth Fund, July 14, 2017 (accessed November 29, 2018).
  3. Initiative 8|11: What Can We Do About the Cost of Health Care?  2019. Society of Actuaries and Henry J, Kaiser Family Foundation.

Traditional Drug Development Process

How the process of drug development works and impacts overall health care benefit cost projections
Read More

Too Much or Too Little?

How much money is spent on prescription drugs in the United States
Read More

What Is the Price Anyway?

By understanding the drug pricing process, actuaries can help develop new payment methods
Read More

Trends in Prescription Drug Spending

Measuring and understanding cost trends will help address increasing pharmaceutical costs
Read More

Direct-to-Consumer Pharmaceutical Advertising

Actuaries should consider DTCPA impact when developing cost projections and setting premium rates
Read More

Manufacturer Coupons and Patient Assistance Programs

Actuaries should account for the impact of coupons and PAPs on the health care system
Read More

Rebates at the Point of Sale

Initiative 18|11 explores prescription drug rebates and their impact on consumer pharmacy spend
Read More
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