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It’s Time For A Prescription Drug Pricing Revolution

Kumar Srinivas is the CTO for the health plan group at NTT DATA, working to democratize AI for healthcare through co-innovation.

The only consistent aspect of drug pricing in the United States is that the breadth of its variations and fluctuations are inexplicable to the consumer. 

We recently analyzed internal data on three common insulin drugs to see how prices differed and fluctuated among regional areas. Our data suggests that Humalog is the most prescribed and the lowest price option among the three.

What stood out, when looking at the Humalog pricing data alone, was how great the price variation for Humalog was, even across different counties in the same state. Taking three Colorado counties as an example, costs for Humalog ranged from $18 to nearly $30.  

Furthermore, we observed that the higher prices for Humalog were in counties with a higher social vulnerability index (SVI). The CDC determines SVI rank based on 15 social factors, such as poverty and crowded housing. In other words, prices were higher in communities that could least afford it. The troubling potential consequence is high drug prices discouraging patients from taking prescriptions that could help prevent chronic conditions from worsening.

Another example of convoluted pricing: The prices of drugs in the same drug family don’t seem to have any correlation.

Some of our analysis of the Humalog and Novolog price variations between 2012 and 2019 show a big difference between the health plan charge and the NADAC (National Average Drug Acquisition Cost) pricing, which reports drug price benchmarks. Does this gap indicate some kind of kick-backs or rebates or other interesting financial mechanisms being used? 

Drug prices today are often the result of massive, complex agreements between insurers, hospitals, pharmaceutical manufacturers, and pharmacy benefits managers (PBMs). PBMs in particular have great control over the wholesale price of drugs. All these critical stakeholders are operating in a legacy framework with little acknowledgement that the possibilities exist to disrupt how drug prices are set. 

Complexity doesn’t mean there’s no room to transform fundamentally how a market works. Look at how buying stocks has changed in recent years. It used to be expensive and cumbersome for the average person to complete a stock trade. Now people can buy fractions of stocks from their phones.

It’s time to consider some disruptive, market-based solutions to bring some transparency and standardization to setting drug prices.

Three Ways To Bring A More Consumer-Oriented Approach To Drug Pricing

A market-based solution puts the consumer first. How can a drug brand attract consumers (patients and providers) to buy and prescribe it, rather than another option?

First, it can start by pricing based on its actual effectiveness. We see some of this already as more insurance companies want refunds or rebates where the drug prescribed to a patient doesn’t provide clinical results. The FDA approves drugs on a generalized basis, but FDA approval doesn’t address whether a specific drug being prescribed to a particular patient is having the positive impact intended. There’s room to create alternative pricing models that take into account individual efficacy, intensity of side effects, and how long the patient needs to stay on the drug.

The issue of quality control is closely related to tying pricing to effectiveness. One challenge with generic drugs, which are popular due to their lower prices, is that quality control is a challenge, especially for drugs manufactured overseas.

The FDA approves off-shore manufacturers, where much of generic drug production occurs. But FDA approval doesn’t mean that each batch produced meets quality standards. Why can’t others in the market provide batch testing? A company like Valisure, which operates an independent testing laboratory, has discovered a lot of contamination, and helped drive a lot of voluntary drug recalls. Pharmaceutical distribution points can institute randomized testing into their procurement process. Improving batch quality control will go a long way to improving clinical efficacy. Drug manufacturers or retailers can differentiate themselves in the market with proactive, batch quality control procedures.

Both improved quality and pricing models that reflect drug efficacy connect to my third market-based suggestion for improving drug prices: quality scoring, a type of review. Doctors, health professionals, and hospitals all get reviewed. Why should consumers not see a score that reflects a specific drug brand’s or distributor’s quality? A quality score reflecting the quality control and efficacy milestones of a specific drug or distributor brings some pricing transparency to the consumer. The generic brand offered through drugstore A may cost more than other generic versions offered elsewhere, but it’s still less than the name brand and has a higher quality score.

Stakeholders Need To Drive The Revolution

The PBMs, hospitals, drug manufacturers, and insurance companies need to open themselves up to entrepreneurs with the creativity to bring the drug pricing revolution. 

There is a need for a transparent exchange market for drug pricing with a clearinghouse type approach – similar to how discount traders and online brokerages revolutionized stock exchanges with commission free trading and fractional ownership. Drug pricing needs a technology revolution that creates a new platform enabling transparent pricing and a more efficient supply chain – instead of tired old legacy systems that are currently in use.

The stakeholders need to start thinking differently on how to bring transparency and standardization to drug pricing – especially since lawmakers and regulators are getting involved. The state of Louisiana recently banned the practice of “white bagging,” a drug distribution method where health insurers prevent providers from getting the drugs on their own and force the use of a third-party specialty pharmacy to fulfil the prescriptions to the clinic or provider. 

White bagging distribution comes with positives and challenges regarding price transparency and improving clinical results. But its banning in at least one state is a notice to stakeholders that they can either be a part of the drug pricing transparency revolution, or it will happen without their input. They are all critical actors in the U.S. healthcare system and should welcome the opportunity to contribute to the disruption that will improve drug pricing and quality for all – including the patients.


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