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Pharmaceutical Pricing and Reimbursement: USANEHA KALAL1ST SEMESTER, DOPM NIPER, MOHALI 2015-16

2 FLOW OF PRESENTATION Why? Demographics Economics Background: Legislation and Historical Developments Flow of funds in US healthcare Healthcare in US Healthcare financing Pricing Reimbursement Bibliography

3Why? First, from the perspective of US consumers,

prescription drugs constitute 12 % of total U.S. health care spending (2008) or roughly 2 % of GDP

Second, from the perspective of all consumers, the U.S. constitutes about 40 % of the world pharmaceutical market.

4Demographics

Population 318.9 million

Median age 37.8 years

Life expectancy at birth 79.68 years

Sources include: United States Census Bureau, World Bank, CIA

5Economics

GDP 16.77 trillion USD

GDP per capita 46405.26 USD

GDP growth rate 2.10%

Inflation Rate 0.2%Sources include: Trading economics, US inflation calculator

6Background: Legislation and Historical Developments

Congressional hearings conducted by Senator Estes Kefauver’s Anti-Trust and Monopoly subcommittee between 1959 and 1962

Kefauver’s hearings led to enactment of the Kefauver-Harris Drug Act in 1962

Provisions that stopped inexpensive to manufacture generic drugs from being marketed as expensive drugs under new trade names as new breakthrough medications

7Background: Legislation and Historical Developments

Important development of the 1960s was the 1965 passage of Congressional legislation adding Titles XVIII (Medicare) and XIX (Medicaid) as Amendments to the Social Security Act, which took effect in July 1966

At that time, Medicare covered only prescription drugs taken by hospital inpatients under Part A and physician administered drugs (typically injections) under Part B

Part D of Medicare which covered outpatient drugs, was enacted later in 2006

8Flow of fund in US healthcare

PRIV

ATE

HOUS

EHOL

DS P

RIVA

TE

HO

USE

HO

LDS

PROVID

ERS OF

HEALTH

CARE

Other private spending

Out of pocket at point of service

Individually purchased health insurance or additional premiums to top off employment based insurance

PRIVATE HEALTH INSURERS

PRIVATE EMPLOYERS

Cuts inPaycheques

FEDERAL GOVT

STATE GOVTState and local taxes MedicaidPremium paid private insurers for state employees

Federal TaxesPremium contributions for federal employees

Medicare Medicaid

9Healthcare in US US population, 318.9 million, complex healthcare

system intertwining relationships between providers, payers, and patients receiving care

US is the third most populous country in the world, spending $2.8 trillion on health care or 17.9% of the (GDP) in 2012

10 Healthcare in US  Department of Health and Human Services (HHS), at

the federal level, is the primary agency responsible for regulating the health care system in the US

Each state, has its own Department of Health (DoH) to implement state-level health policies

11Health Care Financing Public health insurance schemes operated by the

Centers for Medicare & Medicaid Services (CMS), are financed primarily by government taxes. 

1. Medicare

2. Medicaid

3. Children’s Health Insurance Program (CHIP)

12Medicare

Largest single payer in the US (federal)

To qualify, enrollees must have paid the required social security contributions during their working lives

Providing health care coverage for those age 65 years and older

1. regardless of income or medical history2. and those under the age of 65, with permanent

disabilities or end-stage renal disease

MedicareMedicare Coverage is sub-divided into four parts (Part A to D).

People who are eligible for Medicare are all entitled to Part A. Those covered by Part A can enroll in Part B voluntarily. Around 95% of Part A participants also enroll in Part B benefits. Those covered by Part B can enroll in Part C voluntarily, so on and so forth. Operates on Free-for-service basis

Part A Covers inpatient hospital services including inpatient and hospital prescriptions. Required to pay income based premium

Part B Covers payment for physician, outpatient, home health, and preventive services

Part C Medicare Advantage Prescription Drug Plans (MA-PD) are offered by private plans, HMOs, and PPOs with lower copayment than the “standard” plans that are approved by Medicare

Part D Covers outpatient prescriptions

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14 Medicaid Medicaid is jointly funded by both the federal

government and individual state with each state setting its own guidelines regarding eligibility, services, and reimbursement

Eligibility requirements are based on income status (BPL), age, pregnancy status, disability, and citizenship status

Covers hospital stays, doctor visits, emergency room visits, prenatal care, prescription drugs, and other treatments

15 MedicaidEnrollment

States that chosen to expand medical

coverage in line with reforms

Enroll if income does not exceed 133% of

FDL

States that have not opted to expand

medical coverage

Enrollment limited to, if income less than100% of FDL

States that run “medically-needy”

programs

Enable higher income patients with significant medical costs to enroll in state Medicaid

program

16Children’s Health Insurance Program (CHIP)

CHIP (Children’s Health Insurance Program) is a national health insurance program for children under 18 years of age who are not eligible for other insurance plans (including private insurance coverage)

Benefits are very similar to that of Medicare Part A

17Private financing sources Private financing sources consist of private health

insurance plans and out-of-pocket payments by individuals who are not insured via a public or private plan

Self-insured plans (organized by large companies)

Employers contribute to private insurance premiums either in whole or part for their employees

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PRICING

19PRICING Prices are not regulated Prices tend to be higher than in more regulated

market Actual market prices are established by range of

factorsi. Discounts and rebatesii. Drugs patent statusiii. Market statusiv. Prompt payment

20PRICING

Pricing benchmark

s

Existing benchmarks

New benchmarks

21Existing benchmarks

Wholesale acquisition cost (WAC) : Manufacturers sell drugs to wholesalers at a list price, called WAC

Average wholesale price (AWP): an estimate of the average price at which wholesalers sold to pharmacies was published by pricing agencies as a list price called AWP

For example, a payer may set pharmacy reimbursement at AWP-18%, where the discount off AWP is negotiated between the payer and the pharmacy chain

WAC+ 20%= AWP

22Existing benchmarks

Average manufacturer price (AMP): Average price a manufacturer receives from a medicine sold, for distribution to retail pharmacies.

AMP is used to calculate the rebate, manufacturer pay on drugs dispensed to medicaid patient

Best price: Lowest ex-factory price to any PBM, HMO or other private wholesaler or distribution network

23Existing benchmarks

Average sales price (ASP): Average ex-factory price net of any rebates and discounts, to all purchases in the US, including wholesalers, retailers, HMO, hospitals and government entities and Medicare part D but excluding state and federal agencies such as Tricare

Average acquisition cost (AAC): Calculated based on survey of actual average prices paid by retail pharmacies in the state for prescription drugs

24New benchmarks

National average drug acquisition cost (NADAC): Established via voluntary monthly survey of pharmacy

purchase prices Off-invoice rebates and discounts are not taken into account NADAC never equals or exceed AWP

National average retail price (NARP) To reflect the actual prices that retail pharmacies are paid for

prescription drugs [ ingredient cost + any applicable patient copayment + pharmacy dispensing fees

25Pricing of Generic Drugs

The traditional microeconomic theory toolkit is mostly sufficient for analyzing generic drug pricing

Reiffen and Ward also report that generic price continues to fall as the number of generic entrants increases up to five or so, but thereafter levels off

The number of generic entrants increases with the size of the branded molecule market (measured in dollars) prior to the loss of patent protection

26Payers & Providers

PROVIDERS

retail and mail order

pharmacies

hospitals

Wholesalers

PAYERS

health care plans

PBMs

GPO

27Distribution Channel Logistics and PricingManufacturers

Wholesalers and chain warehouses

Retail and mail order pharmacies

28Pharmaceutical benefit managers (“PBMs”)

PBMs services include benefit design and contracting with manufacturers for third party payers (insurers, employers, governments)

Pharmacy network formation

Real time prescription benefit eligibility certification and claims processing

Formulary management and rebate negotiations with manufacturers

Payers and pharmacies; drug utilization screening and review

Operation of mail order pharmacies (eg Express Scripts and Caremark)

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REIMBURSEMENT

30REIMBURSEMENT

Payers in the US do not regulate the price of a pharmaceutical product, allowing the manufacturers to set prices freely

However, payers are allowed to set the reimbursement price/rate

31Drug benefit cost-sharing provisions

•For a generic drug prescription, the customer pays, small amount like $10 for a month1st

Tier•for a branded drug, customer faces a

larger copayment, say $25 for a month2nd Tier

•Brands for which PBM was unable to negotiate, copayment are higher, say, $50 for a month3rd

Tier

32DRG PAYMENT Hospitals (public and private hospitals) are typically paid based on

“Diagnostic Related Group,” or DRG payment. The DRG-based payments cover

accommodation costs in a hospital (i.e., room and board, facility costs, etc.) procedure costs support staff (nurses, technicians, etc.) drug/medical device costs this system does not include physician fees

 Most drugs are reimbursed by CMS by the inpatient DRG, though some (especially some expensive and innovative drugs) are paid separately in the outpatient DRG, called an Ambulatory Payment Classification (APC)

33Payment to self employed physician

Physicians who are self-employed are paid through fee-for-service

Patients covered by public health insurance schemes, the price of the health care service is defined by CMS and based on either the Physician Fee Schedule (PFS) or by the Medicaid PFS

 The prices of the procedures conducted by physicians are calculated based on

national uniform relative value units (RVUs, points given to a procedure)

regional costs per unit.

34Bibliography1. Pricing and Reimbursement in U.S. Pharmaceutical Markets Faculty

Research Working Paper Series, Ernst R. Berndt, Joseph P. Newhouse, September 2010 RWP10-039

2. ISPOR global health care system maps, US pharmaceutical

3. Reinhardt U. E. The Money Flow from Household to Health Care Providers (2011) [5]

4. CMS, National Health Expenditures 2012 Highlights.

5. IMS Institute for Healthcare Informatics, The Use of Medicines in the United States: Review of 2011, 2012

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