The current supply chain for pharmaceuticals has built-in incentives to include low-value, high-cost drugs, a new study finds. For employer-sponsored plans and other purchasers, wasteful spending on such drugs represent significant costs that could be reduced if purchasers pushed for more efficiency.

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

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

Misaligned incentives

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

"Contracts between PBMs and plan sponsors contain rebate guarantees, perpetuating the demand for high-rebate drugs by encouraging PBMs to maximize rebate revenue, giving preference to some drugs over others on formularies based on rebate revenue rather than their value and final cost to the patient or plan sponsor," the report said. "Additionally, PBMs earn revenue from 'spread' pricing, which is the difference between what PBMs pay pharmacies on behalf of plan sponsors and what PBMs are reimbursed by the plan sponsor. This also encourages PBMs to prioritize higher-cost drugs to allow for a larger spread."

Types of inefficient drugs

There are a number of factors that work against a more efficient drug distribution system, including industry privacy agreements that mask financial incentives by preventing manufacturers or pharmacists from disclosing cost information. In addition, consumer demand for the broadest-possible range of covered pharmaceuticals sometimes discourages formularies from cutting wasteful drugs.

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

Me-too drugs: Immaterial tweaking of a particular ingredient results in a "new" drug that adds no clinical value and often extends patent protection.
Combination drugs: Drugs that combine two active ingredients into one pill, resulting in costs substantially higher than the costs of the individual ingredients.
Prescription drugs offered when over-the-counter alternatives are available.
Brand-name or higher-priced generic drugs offered when lesser-cost generics are available.

The system will resist reform

Creating a more efficient system will have its challenges, the researchers concede. Competition among players such as manufacturers, PBMs, and consultants create powerful financial incentives to maintain the status quo—and as long as the system lacks transparency, companies will seek an advantage even if it results in some higher costs to consumers.

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

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Cutting waste out of the supply chain: Study outlines mixed incentives in drug purchasing

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