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September 23, 2020
Looking for the Right Prescription to Regulate State Drug Markets
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David Burda
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Economics Outcomes Policy
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Looking for the Right Prescription to Regulate State Drug Markets

Of all the sectors of the healthcare industry, the one I know the least about is the pharmaceutical sector. Journalists have made careers out of covering drug companies or even one drug. I’m not one of them.

With that profession of ignorance, what I’m going to talk about in this post is state regulation of drugs. I do know a little about regulation, competition and prices. My belief is that those three market dynamics apply equally to drugs as they do any other service or product in any other industry.   

Four researchers from Kaiser Permanente, the University of Washington, Vanderbilt University and the National Bureau of Economic Research tested those dynamics in a new study in the New England Journal of Medicine. You can download their study here.  

The researchers wanted to know if placing out-of-pocket spending caps on specialty drugs reduced out-of-pocket specialty drug costs for patients and increased specialty drug costs for patients’ health plans. The old push-the-balloon-down-on-one-end-and-watch-it-get-bigger-at-the-other-end analogy health pundits love to use when talking about healthcare spending.

They compared outcomes of 2,332 commercially insured patients in three states (Delaware, Louisiana and Maryland) that capped out-of-pocket spending at $150 per monthly prescription with outcomes of 3,718 commercially insured patients in three neighboring states (New Jersey, Arkansas and Virginia) that didn’t cap patients’ out-of-pocket spending on specialty drugs. 

All of the patients in both groups took specialty drugs for at least one of six diseases, including Crohn’s disease, Hepatitis C and rheumatoid arthritis. During the six-year study period, 2011 through 2016, CMS defined a specialty drug as one that costs at least $600 for a monthly supply. Today, that figure is $670.

Here’s what they found:

  • The highest-cost users of specialty drugs in cap states spent $351 or 32 percent less per month on their specialty drugs than the highest-cost users of specialty drugs in non-cap states.
  • The average patient per-month spending on specialty drugs by health plans was basically the same in cap and non-cap states, $821 and $817, respectively. 

The three cap states pushed down on one end of the balloon, but the other end didn’t get any bigger.

“Since a primary function of insurance is to spread the financial risk of catastrophically high spending for a small population, we interpret the caps as strengthening this risk-spreading function without detectably increasing spending for the broader population,” the researchers said.

In short, the health plans absorbed any extra expense created by the caps by spreading it around with presumably no loss of revenue for the drug companies that manufacture the specialty drugs.

Meanwhile, in a separate study, researchers from Brigham and Women’s Hospital, the Harvard Medical School and Massachusetts General Hospital, chronicled state laws that govern the substitution of brand-name drugs with generic equivalents or interchangeable biologic drugs.

And, by states, I mean 50 of them and the District of Columbia, so everything adds up to 51. You can download their study, which appeared in JAMA Internal Medicine, here

What they found was all over the board as of Sept. 1, 2019: For example, for generic equivalents:  

  • 32 states permitted pharmacists to make brand-name substitutions; 19 states mandated that pharmacists make brand-name substitutions
  • 33 states mandated pharmacists to notify patients of a substitution; 18 states did not
  • 22 states gave patients the right to refuse a substitution without requiring that patients consent to a substitution
  • 8 states required pharmacist to obtain the patient’s consent for a substitution
  • 27 states protected pharmacists who made substitutions from liability; 23 didn’t mention liability; and one said patients could sue pharmacists

“We found substantial variation in drug product selection laws,” the researchers said. “Optimizing state laws to facilitate generic drug substitution as the default option is an important level to increase medication adherence and reduce excess drug spending.”

In-other-words, the researchers are advocating for uniform state laws that make substitutions the law of the land unless patients specifically refuse a substitution or need the original brand-name drug. 

Who am I to tell health services researchers from Harvard what to do, but it would be interesting to look at consumer drug costs by the types of state laws chronicled in the study. For example, are costs lower in states that mandate substitutions compared with states that simply permit substitutions? 

What the two studies tell me about drug spending is states are trying to use their regulatory powers to reduce drug costs for their residents. They just need to figure out what types of regulations work best to create competitive, functioning drug markets that keep drug prices affordable.

Thanks for reading.

Stay home. Stay safe. Stay alive. 

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About the Author

David Burda

David Burda began covering healthcare in 1983 and hasn’t stopped since. Dave writes this monthly column “Burda on Healthcare,” contributes weekly blog posts, manages our weekly newsletter 4sight Friday, and hosts our weekly Roundup podcast. Dave believes that healthcare is a business like any other business, and customers — patients — are king. If you do what’s right for patients, good business results will follow.

Dave’s personnel experiences with the healthcare system both as a patient and family caregiver have shaped his point of view. It’s also been shaped by covering the industry for 40 years as a reporter and editor. He worked at Modern Healthcare for 25 years, the last 11 as editor.

Prior to Modern Healthcare, he did stints at the American Medical Record Association (now AHIMA) and the American Hospital Association. After Modern Healthcare, he wrote a monthly column for Twin Cities Business explaining healthcare trends to a business audience, and he developed and executed content marketing plans for leading healthcare corporations as the editorial director for healthcare strategies at MSP Communications.

When he’s not reading and writing about healthcare, Dave spends his time riding the trails of DuPage County, IL, on his bike, tending his vegetable garden and daydreaming about being a lobster fisherman in Maine. He lives in Wheaton, IL, with his lovely wife of 40 years and his three children, none of whom want to be journalists or lobster fishermen.

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