Prescription Medicines Costs in Context Jan2019

Prescription Medicines:
Costs in Context
2019
Prescription Medicines: Costs in Context www.phrma.org/cost
We are in a new era of medicine where breakthrough science

is transforming care with innovative treatment approaches...
Then Now
Medicines made of chemical

Medicines made from living cells
compounds
Medicines targeted to specific

Medicines treat broad diseases
patient based on genetic makeup
Radiation and chemotherapy to

Immunotherapy that harnesses
treat cancer
body’s own immune system to
fight disease
CAR T-cell therapy
CRISPR
2
…and enabling us to more effectively treat chronic disease,

the biggest cost driver.
Treating people with one or more chronic condition consumes

90 cents of every dollar spent on health care.
Prevalence and Spending by Number of Chronic Conditions (2014) Health Care Spending by Number of Chronic Conditions (2014)
12%
AVERAGE ANNUAL SPENDING PER PERSON IN DOLLARS

Number of Other
16% 41% chronic conditions Home health
5+ Prescription
3–4 ED
PERCENTAGE
31%
1–2 Office and outpatient
26%
0 Inpatient
Note: Total health care spending defined as the amount Note: Total health care spending
40% 23% spent on all outpatient and inpatient health care is defined as the amount spent on
services across all payers, including out of-pocket health care services across all
payments. payers, including patient out-of-
pocket payments.
10%
Total Total
population expenditures Number of Chronic Conditions
Source: RAND Corporation
3
In the midst of this incredible progress, medicine cost

growth is declining.
3.8% 3.2% 3.9%

2016 2016 2016
1.5% 1.9% 0.6%

2017 2017 2017
Note: IQVIA data is reflective of retail and physician-administered medicine spending.

4
In fact, after discounts and rebates, brand medicine prices

grew just 1.9% in 2017.
Invoice Price Growth Estimated Net Price Growth**
Source: IQVIA. Medicines use and spending in the U.S.: a review of 2017 and outlook to 2022. Published April 2018. Accessed April 2018.
*Includes protected brand medicines only (ie, brand medicines without generic versions available in the year indicated).
**Net price growth reflects impact of off-invoice rebates and discounts provided by manufacturers.
5
Spending on retail and physician-administered medicines

continues to represent just 14% of spending…
Admin Costs
8%
Home Health & Nursing Home Care
12%
31%
Prescription Medicines
U.S. Health
Care Physician & Clinical Services
Spending, 14%
2015 Other**
4%
Dental Services
13%
18%
Hospital Care
Source: PhRMA analysis of CMS National Health Expenditures data, Altarum Institute study and Berkley Research Group study.
**Supply chain entities- stakeholders involved in bringing medicines from manufacturer to patient, including wholesalers, pharmacies, PBMs and healthcare provider locations.
6
…and a small share of total Medicaid spending…
34%
Dental Services
Other
2%
3% Prescription Medicines
TOTAL
7%
$545B Government Administrative Costs
Physician and Clinical Services

32%
11%
Home Health and Nursing Home Care
12% Hospital Care
Note: Prescription drug data is net of rebates and includes both retail and non-retail drugs. Data used were predominantly derived from CMS 64 reports. Pre-rebate expenditures were tabulated using FY2015 CMS
State Drug Utilization data files and CMS brand/generic indicators for each NDC.
Source: CMS National Health Expenditure Data and Altarum Institute.

7
…and is projected to grow in line with health care spending

through next decade.
Percent Annual Growth Rate
Health Care Retail Prescription Medicines
Note: Total retail sales include brand medicines and generics.

Source: Centers for Medicare & Medicaid Services (CMS).
8
At the same time, growth in other health care services will be

5 times total medicine spending growth through next decade.
Projected Cumulative Growth in Spending (in millions), 2017–2026
5x
Other Health Care Services Total Prescription Drug Expenditures
(10-year cumulative increase: $1,958 billion) (10-year cumulative increase: $401 billion)
Source: CMS National Health Expenditures Report, December 2017

Source: Altarum Institute. "Projections of the prescription drug share of national health expenditures including non-retail." May 2018.
9
Insurers and PBMs have a lot of leverage to hold down

medicine costs.
Negotiating power is increasingly concentrated among

fewer pharmacy benefit managers (PBMs). Insurers determine:
FORMULARY
if a medicine is covered
22%
TIER PLACEMENT
29%
patient cost sharing
Top 3
Market Share: ACCESSIBILITY
71%
utilization management through
prior authorization or fail first
25%
PROVIDER INCENTIVES
24%
preferred treatment guidelines
and pathways
OptumRx (UnitedHealthGroup)
CVS Health (Caremark)
Express Scripts
All Other
Source: Drug Channels Institute, February 2018.
10
In fact, more than 1/3 of the list price is rebated back to payers,
the government and other stakeholders in the supply chain.
Brand companies retain just 63% of list price Rebates, discounts, fees and other
spending on medicines price concessions have more than
doubled since 2012
6.9%
12% $153B
18.5% $74B
62.6%
Brand Companies
2012 2017
Market Access Rebates and Discounts
Statutory Rebates and Fees
Supply Chain Entities
Source: Berkeley Research Group. Fein AJ; Drug Channels Institute

11
Hospitals also benefit from misaligned incentives in the supply
chain.
Nearly one in five hospitals marks If a hospital purchased a medicine An analysis found that 320
up medicine prices to 700% or for $150, a 700% markup could hospitals mark up some
more of their acquisition cost result in patients being billed medicine prices at least 1000%
$1,050 for that medicine
$1,050 Amount
billed by
hospital
1000%
Amount
paid by $150
hospital
Source: The Moran Company. Hospital Charges and Reimbursement for Medicines: Analysis of Cost-to Charge Ratios. September 2018.
12
And patients face higher out-of-pocket costs at the pharmacy
counter even though total spending on hospital care is far higher.
Hospital spending is much higher Yet patients pay more out-of-pocket

than prescription drug spending. for medicines than for hospital care.
$1,142.6B
$800B $46.7B
$33.9B
$333.4B
Total U.S. Spending Total Patient Out-of-Pocket Spending

Hospital Care Retail Prescription Drugs Hospital Care Retail Prescription Drugs
Source: Drug Channels Institute analysis of National Health Expenditure Accounts, Office of the Actuary in the Centers for Medicare & Medicaid Services, December 2018. Outpatient prescription drug figures exclude inpatient
prescription drug spending within hospitals and nearly all provider-administered outpatient drugs. Figures in billions.
13
90% of all medicines dispensed in the United States

are generics.
88% 90%
72%
52%
43%
33%
$1.79
trillion
19%
10-year savings
(2008-2017)
1984 1990 1996 2002 2008 2014 2017
Source: IMS Health.

Source: Generic Pharmaceutical Association, “Generic Drug Savings in the U.S. Report,” 2018.
14
Generics cost a fraction of the price of the initial

brand medicine.
Medicine % Change
DIOVAN VCT® $87

-92%
Hypertension (2010) $7
LIPITOR® $85
-93%
Cholesterol (2010) $6
PLAVIX® $166
-98%
Blood Thinner (2011) $4
SEROQUEL® $87
Schizophrenia (2010) $2
-98%
ZYPREXA® $393
Schizophrenia& (2010) -96%
Bipolar Disorder $17
Brand Name THEN Generic NOW
Note: Figures represent the average annual price for 30 pills of the most commonly dispensed form and strength. "Then” price
represents the average price in the year prior to generic entry. “Now” price represents the average price in December 2017.
Source: IQVIA Institute for Human Data Science analysis for PhRMA. May 2018.
15
Competition from generics and biosimilars is expected to
reduce U.S. brand sales by $105 billion from 2018 to 2022.
2013-2017: $74 Billion 2018-2022: $105 Billion

Projected
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-$12
-$15 -$14
-$16
-$17 -$17
-$19 -$18
-$26 -$26
Source: IQVIA. Medicines use and spending in the U.S.: a review of 2017 and outlook to 2022. Published April 2018. Accessed April 2018.
16
At the same time, innovator companies race to be the first to

market with a new medicine.
Time Between Approval of First and

10.2 Second Medicines in a Therapeutic
Class Has Declined Dramatically
2.3
years
1970’s
years
2005-2011
Competing brands generally launch within years
Source: Tufts Center for the Study of Drug Development (CSDD).

17
The competitive U.S. market provides patients with access to

innovative medicines faster.
For example, American patients have access to cancer

medicines about two years earlier.
Delay in cancer medicine approval and reimbursement, 2010-2014

Germany 10 4 14
France 10 7 17
United Kingdom 10 13 23
Italy 10 15 25
Spain 10 17 27
Australia 15 17 32
Taiwan 22 21 43
0 5 10 15 20 25 30 35 40 45 50
Months
Delay Between U.S. Approval and Country-Specific Approval Delay Between Country Approval and Reimbursement
Source: PhRMA analysis of IMS Consulting Group “Patient Access to Innovative Oncology Medicines Across Developed Markets.” June 2016
18
More medicines are available to U.S. patients.
Nearly 90% of newly launched medicines from 2011 to 2017 were available in the
United States, compared to just two-thirds in the UK, half in Canada and France,
and one-third in Australia.
Number of New Medicines Available by Country*

(of 220 drugs launched 2011-2017)
192
For example, of the 14 new

156
147 diabetes medicines
launched over the period,
only one
108 106 106 was available in France.
87%
80
73
71%
67%
49% 48% 48%
32
36%
33% 17
15%
8%
USA Germany UK Japan Canada France South Korea Australia New Zealand China
Note: New Molecular Entities (NME) approved by the FDA. European Medicines Agency (EMA) and Japan’s Pharmaceuticals and Medical Devices Agency (JPMDA), and launch in any country between 2011-2017
Source: PhRMA analysis of IQVIA Analytics
19
Spending on prescription medicines is a small percentage of

total health care spending around the world.
14% Canada
13% France
16% Japan
13% Germany
11% UK
14% USA
15% Italy 10% Australia
12% Spain
16% Korea
Prescription Medicines as a Percentage of Total Health Care Spending
Note: Total health care spending includes hospital care, physician and clinical services, home health and nursing home care, government administration and net cost of private health insurance, dental, home health and other
professional services as well as durable medical equipment.
Source: OECD Health Statistics Database (accessed February 2016); Altarum Institute, 2015, A ten year projection of the prescription drug share of national health expenditures including non-retail.
20
Patients in the United States are facing rising out-of-pocket

costs and other barriers to care.
Percent of plans with deductibles The use of four or more cost- 51%
on prescription drugs sharing tiers is becoming more
common on employer plans 44%
32%
52%
23%
20%
13% 14%
23% 7%
5%
3%
2012 2017 2004 2006 2008 2010 2012 2014 2015 2016 2017 2018
Source: PWC, KFF

21
And too often negotiated savings do not make their way

to patients.
More than half of commercially insured

Cost sharing for nearly 1 in 5 brand
patients’ out-of-pocket spending for brand
prescriptions is based on list price
medicines is based on the full list price
29%
55%
44%
Copay 26%
Deductible
Coinsurance
Source: IQVIA. May 2018.

22
Sharing negotiated discounts with patients would increase

premiums about 1%.
Certain commercially insured patients could save $145 to more than $800 annually.
Change in Plan Costs with Shared Rebates
PLAN TYPE
Traditional PPO Copay HDHP* Coinsurance HDHP
Net Plan Per Member Per Month Spend $433.91 $374.41 $372.89
Change in Plan Costs $ $0.82 $2.62 $3.84
Change in Plan Costs % 0.2% 0.7% 1.0%
NOTE: Plan cost includes medical and pharmacy claims

*HDHP = High-deductible health plan
23
Biopharmaceutical companies use today’s revenues to invest

in tomorrow’s treatments and cures.
Invested about Industry invests 17% of all domestic research

$90 Billion and development funded by U.S. businesses
in R&D in 2016
And
20% Phamaceuticals Software Automobiles Aerospace Computer Scientific R&D

of revenues are reinvested & Medicines Systems Design Services
into R&D
NOTE: The remaining 57% share of business R&D spending is conducted by other industries, including subsectors of the machinery sector, the computer and electronics products sector, and the electrical equipment, appliance, and components sector.
Source: Research!America report and PhRMA analysis of National Science Foundation data.
24
We need a public policy environment that recognizes and

rewards risk taking.
On average, it takes more than

10 years and $2.6B to research and develop a new medicine.
BETWEEN 1998 AND 2014
Unsuccessful Successful
Attempts Attempts
Just
123 4
Alzheimer’s Disease
12% Alzheimer’s Disease
96 of drug candidates that enter 7

Melanoma clinical testing are approved Melanoma
for use by patients
167 10
Lung Cancer Lung Cancer
Source: Tufts Center for the Study of Drug Development (CSDD).

Source: Pharmaceutical Research and Manufacturers of America (PhRMA), “Researching Alzheimer’s Medicines: Setbacks and Stepping Stones,” 2015.
Source: Pharmaceutical Research and Manufacturers of America (PhRMA), “Researching Cancer Medicines: Setbacks and Stepping Stones,” 2014.
25
Collectively, these market-based reforms can make medicines

more affordable and accessible.
MODERNIZE THE DRUG DISCOVERY AND DEVELOPMENT PROCESS

• Modernize the FDA to keep pace with scientific discovery and increase efficiency of generic approvals
• Promote and incentivize generic competition.
PROMOTE VALUE-DRIVEN HEALTH CARE

• Remove barriers restricting information companies can share with insurers.
• Reform regulations discouraging companies from offering discounts tied to outcomes.
• Modify Medicaid best price requirements.
EMPOWER CONSUMERS AND LOWER OUT-OF-POCKET COSTS

• Provide patients with access to negotiated rebates.
• Address affordability challenges in the deductible.
• Make more information on health care out-of-pocket costs and quality available to patients.
ADDRESS MARKET DISTORTIONS

• Address burdensome regulations that distort programs like the 340B Drug Pricing program.
IMPROVE TRADE AGREEMENTS

• Enforce existing trade agreements.
• Ensure new trade agreements recognize value of innovative medicines.
26

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Prescription Medicines:

We are in a new era of medicine where breakthrough science

Medicines made of chemical

Medicines targeted to specific

Radiation and chemotherapy to

CAR T-cell therapy

…and enabling us to more effectively treat chronic disease,

Treating people with one or more chronic condition consumes

AVERAGE ANNUAL SPENDING PER PERSON IN DOLLARS

In the midst of this incredible progress, medicine cost

3.8% 3.2% 3.9%

1.5% 1.9% 0.6%

Note: IQVIA data is reflective of retail and physician-administered medicine spending.

In fact, after discounts and rebates, brand medicine prices

Invoice Price Growth Estimated Net Price Growth**

Spending on retail and physician-administered medicines

…and a small share of total Medicaid spending…

Physician and Clinical Services

Source: CMS National Health Expenditure Data and Altarum Institute.

…and is projected to grow in line with health care spending

Health Care Retail Prescription Medicines

Note: Total retail sales include brand medicines and generics.

At the same time, growth in other health care services will be

Projected Cumulative Growth in Spending (in millions), 2017–2026

Source: CMS National Health Expenditures Report, December 2017

Insurers and PBMs have a lot of leverage to hold down

Negotiating power is increasingly concentrated among

Source: Berkeley Research Group. Fein AJ; Drug Channels Institute

Hospital spending is much higher Yet patients pay more out-of-pocket

Total U.S. Spending Total Patient Out-of-Pocket Spending

90% of all medicines dispensed in the United States

Source: IMS Health.

Generics cost a fraction of the price of the initial

DIOVAN VCT® $87

Brand Name THEN Generic NOW

2013-2017: $74 Billion 2018-2022: $105 Billion

At the same time, innovator companies race to be the first to

Time Between Approval of First and

Competing brands generally launch within years

Source: Tufts Center for the Study of Drug Development (CSDD).

The competitive U.S. market provides patients with access to

For example, American patients have access to cancer

Delay in cancer medicine approval and reimbursement, 2010-2014

More medicines are available to U.S. patients.

Number of New Medicines Available by Country*

For example, of the 14 new

Spending on prescription medicines is a small percentage of

15% Italy 10% Australia

Prescription Medicines as a Percentage of Total Health Care Spending

Patients in the United States are facing rising out-of-pocket

Source: PWC, KFF

And too often negotiated savings do not make their way

More than half of commercially insured

Source: IQVIA. May 2018.

Sharing negotiated discounts with patients would increase

Change in Plan Costs with Shared Rebates

Traditional PPO Copay HDHP* Coinsurance HDHP

Change in Plan Costs $ $0.82 $2.62 $3.84

Change in Plan Costs % 0.2% 0.7% 1.0%

NOTE: Plan cost includes medical and pharmacy claims

Biopharmaceutical companies use today’s revenues to invest

Invested about Industry invests 17% of all domestic research

20% Phamaceuticals Software Automobiles Aerospace Computer Scientific R&D

We need a public policy environment that recognizes and