Paying Less By Paying Less By Purchasing SmarterPurchasing Smarter

Gerard Anderson, PhDGerard Anderson, PhD

Professor Professor

Johns Hopkins UniversityJohns Hopkins University

OutlineOutline

Economics of Bulk Purchasing and Economics of Bulk Purchasing and FormulariesFormularies Why the existing systems have problemsWhy the existing systems have problems

International perspectivesInternational perspectives Why do other countries pay lower prices for Why do other countries pay lower prices for

drugs? drugs? Opportunities for MedicaidOpportunities for Medicaid

Market power using price transparencyMarket power using price transparency Comparative effectivenessComparative effectiveness

Economics of Bulk Economics of Bulk Purchasing and FormulariesPurchasing and Formularies Single purchaser/single decision maker Single purchaser/single decision maker

Wal-Mart directly purchases billions of Wal-Mart directly purchases billions of cans of dog foodcans of dog food

Wal-Mart limits consumer choices to a few Wal-Mart limits consumer choices to a few brands of dog foodbrands of dog food

Medicaid is not a single bulk purchaserMedicaid is not a single bulk purchaser Does not directly purchase drugsDoes not directly purchase drugs Cannot interfere with practice of medicineCannot interfere with practice of medicine

OBRA 90 prohibits formulariesOBRA 90 prohibits formularies

Other Countries Use Bulk Other Countries Use Bulk Purchasing and Formularies Purchasing and Formularies to Obtain Lower Prices for to Obtain Lower Prices for

DrugsDrugs

Drug prices are roughly half US Drug prices are roughly half US pricesprices

They use multiple strategies to They use multiple strategies to determine what specific drugs they determine what specific drugs they will purchase including:will purchase including: Bulk purchasingBulk purchasing FormulariesFormularies

National Institute for National Institute for Clinical Effectiveness (NICE)Clinical Effectiveness (NICE) Advises National Health Service (UK) on Advises National Health Service (UK) on

which drugs to purchasewhich drugs to purchase Objective is to recommend the lowest cost Objective is to recommend the lowest cost

therapeutically equivalent drugtherapeutically equivalent drug Not top 3 drugs in same classNot top 3 drugs in same class Not 150% of lowest priceNot 150% of lowest price

Employs comparative effectiveness criterionEmploys comparative effectiveness criterion Compares costs of different drugsCompares costs of different drugs NHS negotiates to buy one drug in bulkNHS negotiates to buy one drug in bulk

Options for MedicaidOptions for Medicaid

Price transparencyPrice transparency Better preferred drug listsBetter preferred drug lists

Price TransparencyPrice Transparency

Rebates are difficult to monitorRebates are difficult to monitor Is the state actually getting the appropriate Is the state actually getting the appropriate

rebate? rebate? Instead compare the prices that different Instead compare the prices that different

entities pay for the same drugentities pay for the same drug Medicaid versus CanadaMedicaid versus Canada Medicaid versus VAMedicaid versus VA California versus MarylandCalifornia versus Maryland Maryland Medicaid versus Maryland PrisonsMaryland Medicaid versus Maryland Prisons

Price Transparency Price Transparency ExamplesExamples

Drug A price Drug A price $1.00 Canada$1.00 Canada $1.10 VA$1.10 VA $1.05 Maryland Medicaid$1.05 Maryland Medicaid $1.05 California Medicaid$1.05 California Medicaid $1.06 California Prisons$1.06 California Prisons

Drug B PriceDrug B Price $1.00 Canada$1.00 Canada $1.15 VA$1.15 VA $1.25 Maryland Medicaid$1.25 Maryland Medicaid $1.50 California Medicaid$1.50 California Medicaid $2.50 California Prisons$2.50 California Prisons

Use the Bully PulpitUse the Bully Pulpit

Begin by identifying specific drugs where Begin by identifying specific drugs where state agencies are paying much higher state agencies are paying much higher drug pricesdrug prices

Use information to question drug Use information to question drug companies on the specific prices they are companies on the specific prices they are chargingcharging

Most drugs are probably more like Drug A Most drugs are probably more like Drug A than Drug Bthan Drug B

Use Bully Pulpit on Drug BUse Bully Pulpit on Drug B

Preferred Drugs ListsPreferred Drugs Lists

Offer much greater potential for Offer much greater potential for obtaining cost reductions than bulk obtaining cost reductions than bulk purchasingpurchasing Drugs on preferred drug list are more likely Drugs on preferred drug list are more likely

to be prescribed – similar to bulk purchasingto be prescribed – similar to bulk purchasing Savings depend of quality of preferred Savings depend of quality of preferred

drugs list and willingness/ability to drugs list and willingness/ability to exclude drugsexclude drugs Legislative changes may be needed Legislative changes may be needed

Technical Challenges in Technical Challenges in Developing Preferred Drug Developing Preferred Drug

ListsLists

Medicaid is not in the pharmacy businessMedicaid is not in the pharmacy business Technically difficult to do comparative Technically difficult to do comparative

effectiveness studieseffectiveness studies Each patient is differentEach patient is different Most clinical trials exclude complex patientsMost clinical trials exclude complex patients Few head to head comparisons of drugsFew head to head comparisons of drugs Costs are difficult to measureCosts are difficult to measure

Each Patient is DifferentEach Patient is Different

The same antibiotic would not The same antibiotic would not necessarily be given to a healthy 20 necessarily be given to a healthy 20 year old with a cut on his leg to a year old with a cut on his leg to a frail 80 year old with a cut on her legfrail 80 year old with a cut on her leg

Patient tolerance for drugs depends Patient tolerance for drugs depends on age, health status, other on age, health status, other medications, etc. medications, etc.

Most Clinical Trials Exclude Most Clinical Trials Exclude Complex PatientsComplex Patients

To get a drug approved by the FDA it To get a drug approved by the FDA it is necessary to demonstrate safety is necessary to demonstrate safety and efficacy (not effectiveness)and efficacy (not effectiveness)

It is easiest to demonstrate safety and It is easiest to demonstrate safety and efficacy in uncomplicated patientsefficacy in uncomplicated patients As a result most clinical trials exclude As a result most clinical trials exclude

complex Medicaid patientscomplex Medicaid patients Limited evidence base for making drug Limited evidence base for making drug

decisionsdecisions

Post Marketing Post Marketing SurveillanceSurveillance

Few studies compare effectiveness in Few studies compare effectiveness in actual patientsactual patients

Few studies compare the relative Few studies compare the relative effectiveness of different drugseffectiveness of different drugs

Lack of effectiveness studies makes Lack of effectiveness studies makes creating preferred drug lists very creating preferred drug lists very difficultdifficult

Cost EffectiveCost Effective

Least expensive is not necessarily Least expensive is not necessarily the least costly the least costly Lower rehospitalization ratesLower rehospitalization rates

Costs are difficult to measureCosts are difficult to measure Direct (medical)Direct (medical) Indirect (transportation)Indirect (transportation)

Measuring EffectivenessMeasuring Effectiveness

Difficult to measureDifficult to measure What is the purpose of medical careWhat is the purpose of medical care

Example – cataract operationExample – cataract operation Improve visual acuity (20/20)Improve visual acuity (20/20) Improve visual functioning (read street Improve visual functioning (read street

signs)signs) Improve quality of life ( drive at night)Improve quality of life ( drive at night)

Three measures not always highly correlatedThree measures not always highly correlated

Multiple Entities in US Conduct Multiple Entities in US Conduct Comparative Effectiveness Comparative Effectiveness

StudiesStudies VAVA AHRQAHRQ CMSCMS NIHNIH BC/BSBC/BS Kaiser PermanenteKaiser Permanente Drug CompaniesDrug Companies Medicaid Medicaid

What Data Should States What Data Should States Use to Create PDLsUse to Create PDLs

Each state should not conduct its Each state should not conduct its own studies own studies Too expensiveToo expensive

States should not rely on drug States should not rely on drug company studiescompany studies Potential for biasPotential for bias

States Need to Information from States Need to Information from NIH, AHRQ, and CMS to create NIH, AHRQ, and CMS to create

PDLsPDLs

Congress needs to appropriate more Congress needs to appropriate more money for comparative effectiveness money for comparative effectiveness research to help statesresearch to help states

ConclusionConclusion

Drug companies need economic reason to Drug companies need economic reason to give a real discount give a real discount Without an economic rationale, drug companies Without an economic rationale, drug companies

will attempt to find ways to will attempt to find ways to ““gamegame”” the system the system Full employment for Attorney GeneralsFull employment for Attorney Generals

Drug companies unlikely to give discounts for Drug companies unlikely to give discounts for drugs unless the state is the actual buyerdrugs unless the state is the actual buyer State could become bulk purchaser for all drugsState could become bulk purchaser for all drugs

PDLs offer promise but comparative PDLs offer promise but comparative effectiveness studies need to be improved effectiveness studies need to be improved and more restrictive preferred drug lists are and more restrictive preferred drug lists are neededneeded