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How the Surge of Drug Pricing Has Been Misinterpreted


Healthcare spending in the US has nearly quadrupled since 1980 and is continuing to rise at an alarming rate. Numbers peaked at $3.81 trillion in 2019 and are expected to grow at an average of 5.4% through 2028 reaching $6.19 trillion.


Though these numbers represent the industry as a whole, misinformation has led to prescription drug pricing taking most of the blame essentially clouding the actual problem areas. By providing clarity in this niche of the industry, we can better address shortfalls and ensure spending is producing positive patient outcomes.


Misconceptions About Drug Pricing


Drug pricing is increasing for one predominant reason- the rising use of specialty medications. Vital drugs, such as biologics and injectables, are coming to market at an unprecedented rate and the motives are clear:


  • Pharma can expand their revenue opportunity by providing treatments to new populations of patients who were previously relegated to medical management solutions.

  • By creating specialty drugs that can either cure or drastically improve life-time costly ailments (Hep C, HIV, etc.), insurers and patients are more likely to seek lower-cost specialty medications because they reduce the overall long-term medical cost.


Despite the continued surge in drug cost, spend is shifting to pharmacy much faster than before. The caveat is that it results in the reduction of medical costs. Medical is 3-4 times the price of pharmacy so even if drug cost is exuberant the healthcare industry is still seeing tremendous savings opportunities while producing better patient outcomes.


A recent article published by the Manhattan Institute breaks down how an increase of prescription drug spend lowers medical cost; “The Congressional Budget Office estimates that a 1% increase in prescriptions filled by Medicare beneficiaries reduces spending on medical services by 0.2%. This means that, on average, an extra $100 in prescription drug utilization (including products still covered by patents) by Medicare beneficiaries can be expected to reduce the program’s spending on other medical services by $95 while delivering better outcomes.”


The Breakdown in Pricing Transparency


A common misconception is that PBM’s are driving up costs or forcing more expensive medications on patients when there is a less costly alternative in order to incur more revenue for themselves. While these practices may have known to exist, they are far from the norm in a very mature market.


The unshocking truth is that PBMs do make money when they buy at a lower price than the price it is sold. That’s potentially a very good thing for all of us when it results in lower costs and improved outcomes. Unfortunately, due to a widespread misunderstanding of the PBM revenue model, many stakeholders have developed a distrust in the industry as a whole.


To bridge this gap, complete transparency has been one solution that some companies have implemented to assure clients and patients they are receiving fair prescription prices. However, incentives such as pharmaceutical rebates, that often give PBMs motivation to tightly manage contracts with both pharmaceutical manufacturers and clients, can be negatively affected. By providing full pricing transparency, some of the obstacles might be removed, but often result in eliminating the PBM’s motivation to tightly manage costs.


There is a middle ground, however. A way to exhibit transparency to clients and patients while giving PBMs the ability to deliver lower costs and improved outcomes without fear of retribution. It all boils down to data.


Establishing a Middle Ground


By utilizing healthcare data analytics, all stakeholders can work in concert towards the same goals. Instead of focusing exclusively on pricing transparency, the new trend is focusing on performance transparency. This is a shift towards focusing on outcomes versus solely on pricing methodologies and allows PBMs to use an arsenal of tools to achieve desired performance without instilling payer and patient distrust.


Setting up this type of accountability model, however, requires easy and quick access to automated data analysis surrounding drug utilization, pricing, outcomes, etc. That’s why Xevant’s innovative platform is vital to all key players managing drug trends including; employers, consultants/brokers, health plans, TPAs, and PBMs.


Xevant provides real-time insights that can help determine cost and outcomes performance goals are being achieved without being forced to wait months for antiquated reporting methods to do the same.


The platform automatically analyzes data trends, pinpoints areas for improvement, and flags immediate savings opportunities. This allows all stakeholders to make the best decisions in order to improve cost and patient outcomes for clients while clients can feel confident knowing they are doing right by bringing cost to the healthcare industry down by relying more on pharmacy.


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Contributors

Nick Conway

SVP, Analytics, NFP 

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