There are a numberof factors that work against a more efficient drug distributionsystem, including industry privacy agreements that mask financialincentives. (Image: Shutterstock)

The current supply chain for pharmaceuticals has built-inincentives to include low-value, high-cost drugs, a new study finds. For employer-sponsored plansand other purchasers, wasteful spending on such drugs representsignificant costs that could be reduced if purchasers pushed formore efficiency.

The study by the Commonwealth Fund, looked at drug utilizationdata from 15 self-insured plan sponsors, including 13 members ofthe Pacific Business Group on Health (PBGH) and estimated savingsfrom cutting back on low-value, high-cost drugs.

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The researchers found that reducing the use of high-cost,low-value drugs could lead to $63 million in annual savings acrossthe 15 plan sponsors in the study. Depending on a variety offactors, this could represent from 3 percent to 24 percent ofoverall pharmacy spending by those health plan sponsors—indicatingthat in some cases very significant savings could be found in amore efficient system.

Misaligned incentives

The study looked at the drug supply chain and formularies andfocused on practices of pharmacy benefit managers (PBMs), whichhelp manage costs for purchasers but can also create incentives tofavor certain drugs.

"Contracts between PBMs and plan sponsors contain rebateguarantees, perpetuating the demand for high-rebate drugs byencouraging PBMs to maximize rebate revenue, giving preference tosome drugs over others on formularies based on rebate revenuerather than their value and final cost to the patient or plansponsor," the report said. "Additionally, PBMs earn revenue from'spread' pricing, which is the difference between what PBMs paypharmacies on behalf of plan sponsors and what PBMs are reimbursedby the plan sponsor. This also encourages PBMs to prioritizehigher-cost drugs to allow for a larger spread."

Types of inefficient drugs

There are a number of factors that work against a more efficientdrug distribution system, including industry privacy agreementsthat mask financial incentives by preventing manufacturers orpharmacists from disclosing cost information. In addition, consumerdemand for the broadest-possible range of covered pharmaceuticalssometimes discourages formularies from cutting wasteful drugs.

But the study was able to identify a number of characteristicsof high-cost, low-value drugs. The researchers said that theseinclude:

• Me-too drugs: Immaterial tweaking of a particular ingredientresults in a "new" drug that adds no clinical value and oftenextends patent protection.
• Combination drugs: Drugs that combine two active ingredientsinto one pill, resulting in costs substantially higher than thecosts of the individual ingredients.
• Prescription drugs offered when over-the-counter alternativesare available.
• Brand-name or higher-priced generic drugs offered whenlesser-cost generics are available.

The system will resist reform

Creating a more efficient system will have its challenges, theresearchers concede. Competition among players such asmanufacturers, PBMs, and consultants create powerful financialincentives to maintain the status quo—and as long as the systemlacks transparency, companies will seek an advantage even if itresults in some higher costs to consumers.

"While this analysis demonstrates savings from waste-freeformularies can be substantial, employers will need to exercise duediligence with regard to their formularies, data analysis, andvendor contracts," the study concludes. "PBMs may seek otheravenues to replace lost income from removal of high-rebate drugs.Insisting on transparency and informed contract terms with PBMswill bolster employers' ability to retain savings from the type offormulary changes reflected in this study."

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