Fast-rising drug prices hit hospitals hard in bottom lines

When drug costs rose $20 million in one year for Beaumont Health in suburban Detroit, CEO John Fox asked executives like Kathy Pawlicki, vice president for pharmacy, why and what could be done about it.

The answer? Not much. Leading factors for drug price increases are mostly out of providers' control, including such recent trends as hedge funds acquiring generic-drug companies and then forcing up prices.

Double-digit price increases have not affected just hospitals, but also clinics, insurers and retail pharmacies, experts said.

Bob Kirby, corporate director for Chicago-based Fitch Ratings, said prices of such injectable heart medications as Nitropress and Isuprel doubled after Valeant Pharmaceuticals acquired the parent companies last year.

Pfizer, Amgen, Allergan, Horizon Pharma and others have raised U.S. prices by up to 10 percent for dozens of branded drugs since last fall. Some drug prices might be discounted with rebates offered to insurers, other payers and group purchasing organizations.

"We are seeing specialty pharma firms buying products or companies and then jacking up the price significantly," Kirby said. "In some cases, consolidation is driving up the increases. Some drugs used in hospitals are only manufactured by a small number of companies."

Total U.S. prescription-drug spending rose 12.2 percent in 2015, accelerating from 2.4 percent growth in 2014, the Centers for Medicare and Medicaid Services said.

But rising drug costs also can be attributed to an increased volume of patients because of Healthy Michigan Medicaid expansion, an improving economy and newer specialty, biotech and personalized medicine drugs, Pawlicki said.

"We have really seen significant increases the past few years. Last year was just intensified and much larger than in the past," Pawlicki said.

Last year, Beaumont spent about $250 million for pharmaceuticals, but this year costs are projected to rise above $270 million, an 8 percent increase, she said.

"The majority of the price increases are for existing drugs, but we also are paying higher prices than usual for newer biotech drugs that are coming into the market," she said. "We have approved 13 new biotech drugs, and we estimate spending about $14.3 million. This is to treat 476 patients, usually in an infusion center, for a chronic disease or oncology."

Executives at St. John Providence Health System and St. Joseph Mercy Health System in Ann Arbor also confirm high drug prices are becoming a problem. St. John's average pharmacy prices are up 13 percent this year, and St. Joe's projects more than a 10 percent increase, up from 5 to 7 percent in recent years, executives said.

Generics made only by a single source, such as Daraprim, are increasing in price without warning due to lack of competition, said Chris Cook, St. Joseph Mercy's regional director of pharmacy.

"Specialty medications for complex disease states such as HIV or cancer are high-technological products and very expensive," said Cook, adding that oncology medications are "not only expensive but the utilization is rising as we get better at detecting and treating more cancers."

Experts project that by 2020, specialty drugs will make up 50 percent of all medication costs nationally, including hospital, retail and clinics, rising from $98 billion spent in 2016 to $212 billion in 2020.

Last year, the Food and Drug Administration approved 45 novel medicines for marketing. Biologics accounted for 12 of the 2015 approvals versus 10 during 2014. More than half were drugs to treat cancer (33 percent), cardiovascular disease (17 percent) and infections (8 percent).

In May, Pfizer agreed to acquire Anacor Pharmaceuticals for $5.2 billion to gain control over its eczema treatment, Crisaborole, which has projected annual sales of $2 billion. But U.S. regulators recently nixed the merger of Pfizer and Allergan.

Other recent targeted transactions include Bristol-Myers Squibb's acquisition of Padlock Therapeutics, which could expand its presence in the treatment of rheumatoid arthritis, and Eli Lilly's acquisition of Glycostasis Inc., which is seeking to develop a form of insulin that self-releases when a diabetic patient's blood sugar level is too high. In addition, Merck bought IOmet earlier this year, adding new immune-oncology technology to its portfolio.

Kirby said he believes some drug companies will be hard-pressed to justify or demonstrate additional value that higher prices might warrant because the drugs have been on the market for some time.

"They claim the drug is so significantly undervalued they had to jack up the price a multiple of times," Kirby said.

Because of the increased scrutiny from Congress and the media, Kirby doubts that drug companies will be able to continue to increase prices.

Several national organizations, such as the Campaign for Sustainable Rx Pricing, The American Society of Health System Pharmacists and the American Association of Retired Persons, have mounted strong campaigns against high drug prices.

"I am critical of how and what is going on in the pharmaceutical industry," Pawlicki said. "There are a number of examples where manufacturers have increased costs without demonstrating any sudden change in the value of drugs."

But Kirby added that some newer specialty drugs for oncology and hepatitis are being priced significantly higher than their predecessors.

"If a drug has been around for 20 years, it shouldn't be priced 500 percent more today," Pawlicki said. "There are some drugs that benefit patients immensely. They reduce hospital length of stay and improve conditions."

For example, the Hepatitis C specialty medicine, which can cost up to $100,000 a year to treat patients, has proven value, Pawlicki said. "These drugs (Sovaldi, Olysio or Harvoni) cure and can save money over time as patients don't have to be chronically treated for two years," she said.

Pawlicki said drug prices appear to have stabilized the past few months but haven't dropped. "Valeant held back some further price increases and promises some retooling, but I haven't seen anything yet," she said.

Meanwhile, executives at Beaumont, St. Joseph Mercy and St. John have taken steps to more effectively manage costs and supplies.

"It's challenging and costly both for health care organizations and the patients and families who need the medications," Pawlicki said.

Hospital systems and medical staffs are coaching doctors and patients about best use of pharmaceuticals and when to use generics or other alternative therapies.

"We are looking heavily at clinical evidence to make sure we are utilizing appropriate clinical medicine and keeping doctors abreast of pricing," Pawlicki said. "We are working alternatives and looking at our formularies, leveraging supply contracts, using different-size vials, a whole host of things to reduce expenses."

Cook said because St. Joseph Mercy is part of Novi-based Trinity Health, bulk purchasing helps minimize costs compared with smaller hospitals or health organizations. Trinity operates 90 hospitals nationally, including 11 in Michigan.

"We created a task force to identify the most cost-effective drugs, utilization strategies and dispensing practices across our five-hospital system," said Cook, noting the effort will save several hundred thousand dollars.

"We continuously look for drug alternatives and advanced utilization strategies to maintain cost effectiveness without sacrificing quality and safety," Cook said.

Pawlicki said hospitals are capped at how much they can charge payers like Medicare and Medicaid for higher drug costs. In outpatient settings, however, patients absorb the higher costs, she said.

"If treatment is at an infusion center or self administered at home, the reimbursement is a little different," she said. "Reimbursement may or may not cover the costs. If a patient obtains meds through outpatient pharmacy, the patient pays out of pocket" for the price increase.

But Pawlicki said Beaumont — like most other hospitals — have special programs to help lower income patients pay for higher-priced drugs. Last year, Beaumont helped 206 patients get access to free or drug company rebates that were worth about $2.4 million, she said.

"Fast-rising drug prices hit hospitals hard in bottom lines" originally appeared in Crain's Detroit Business.