Over the last couple of years, generic prices increased rather substantially, spurring Congress to open an investigation after reports indicated retail pharmacy generic prices increased 37% over three months.  Congress is a bit late to the party, as it appears prices may be stabilizing after a rather dramatic run-up; more on that in a minute.

Generics make up about 80% of all drugs dispensed in the real world, and a slightly higher percentage in workers comp.

Usually, generic prices for specific drugs decrease over time.  The “usual pattern” changed about two years ago, when a popular and generally accurate price measure showed median generic prices were essentially flat over a twelve-month period ending in July 2014.  

More tellingly, the same assessment showed the average price increase for drugs that went up in price was almost twice as much as the average decrease for drugs with prices that dropped.

Of course, there’s a lot of variation among and between drugs.  Workers comp generic prices jumped from as much as 19% across the board according to TPA Broadspire.  And the largest work comp PBM, Helios, reported generic prices increased 10% in their most recent drug trend report.

So, what’s going on and why?

First, let’s stipulate that drug “price” is a very complicated term.  “price” is supposed to be what one pays for one unit of a service, or in this case, a good.

Things are a lot less clear in the world of drugs; there are many different pricing methodologies and definitions, all with pluses and minuses.  For our purposes, we’ll look at two generally-accepted metrics – AWP and NADAC.

AWP – known as “average wholesale price” or perhaps more accurately “ain’t what’s paid” is the price the drug’s manufacturer reports to the national drug price compendia – Medispan et al.  There is no auditing, no validation, no way to determine if an AWP actually reflects reality – and in many cases it doesn’t.

AWP is the basis for workers’ comp drug fee schedules in those states that have fee schedules.

NADAC is the national average drug acquisition cost, and is seen as a more accurate reflection of the real price buyers pay.

A shortage of some key drugs is a major contributor. Tetracycline and acetaminophen/ codeine drugs are among those in short supply; prices for tetracycline have exploded, up 7400% to 17,000% from 7/2103 to 7/2014.

There are anecdotal reports of shortages of chemicals needed to manufacture some drugs as well.

Some very old drugs have very few manufacturers.  Investors, seeing this as an opportunity, have snapped up companies making these drugs, consolidated the manufacturing, and gained pricing power.

Another reason for generic price inflation is a lack of competition among manufacturers.  The FDA has to approve new generics, and of late they’ve been quite backed up in their approval process for new generics.   In addition, there are reports that the FDA is loathe to approve many offshore drug manufacturers.  While this is in all likelihood due to significant concerns over processes and safety and other manufacturing and consumer protection issues, if many Indian manufacturers are not able to sell into the US, price competition suffers.

There’s also been significant consolidation among generic manufacturers, leading to fewer companies making specific drugs.  In turn, that means buyers have less success pitting one manufacturer against others.

Finally, my sense is drug manufacturers are raising prices for a simple reason – because they can.  With more Americans now covered by health insurance, there is a bigger market of buyers less concerned about price than they were before they had coverage.  And, there’s pent-up demand as people who needed but weren’t taking drugs now have access to those medications.

Recent price increases are no surprise to those who saw the same thing happen after Medicare Part D implementation; when seniors got their drug cards, the drug industry got a windfall.

Where next?

Of late, price increases have moderated significantly; about half of the generics increased in price (averaging 5.3%).  For those that declined in cost, the drop was almost the same at 5.1%.

I’d expect generic drug price inflation to continue to moderate; the FDA has committed to decreasing the approval backlog and new manufacturers will almost certainly see an opportunity, thereby adding suppliers.

There’s a LOT of activity around the country related to drug formularies.  Four states (OH OK TX and WA) have implemented formularies and at least 4 more are considering doing so (CA, ME, MT, TN). (AR was scheduled to do so this year but pulled back)

The “Why?” is obvious; the proliferation of opioids, inappropriate prescribing of other drugs (Soma(r)), exploding volume of compounding, and rampant off-label use of drugs is seen as a major problem in work comp.

The “What”, as in, what formulary to use, is demonstrably not obvious.

There are (roughly speaking) three varieties of formularies;

• Open – pretty much any drug is available to anyone
• Closed – a binary, or yes/no formulary that is drug-centric
• Disease state/Condition-specific – formulary based on the underlying diagnosis and disease state (e.g. acute v chronic)

The closed formulary has some advantages – it is very simple and easy to understand, and from a regulatory perspective, administer and evaluate.

The closed formulary also has some rather significant issues.

1. it starts with the drug, not the patient’s medical condition.  This strikes me as backwards; guidelines should ALWAYS begin with the diagnosis.
2. problems arise when “Y” drugs are dispensed, paid by the PBM, then the payer determines the drug is for an unrelated condition. Think antihypertensives, insulin replacements or asthma meds.
3. it does not differentiate between acute and chronic stages of a disease or condition; treatment can be quite different for these different stages.

What does this mean for you?

While the closed formulary is easy to explain, it’s a lot tougher to manage on the back end for payers, PBMs, and prescribers alike.

And, while I’m no clinician, allowing antihypertensives and duragesic patches without a prior auth no matter the diagnosis, while requiring a PA for benadryl does seem problematic. 

Coventry’s work comp PBM – First Script – released their drug trend review last week; they’ve taken a bit of a different tack than other PBMs, choosing to report broadly across all scripts while differentiating between “managed” (in-network retail/mail and contracted physician and clinic dispensed) and unmanaged scripts.  Note that Coventry reports on compounds separately.

The report is replete with infographics used to highlight cost trends, workflows and decision processes, charts and graphs which make it quite readable; specific data points and issues are easily located and understood.  Overall, the report is well laid-out and professionally done; as with other recent efforts (including CompPharma’s most recent PBM in WC Survey) drug trend reports have benefited greatly from the expertise of graphic designers.

Physician- and clinic-dispensed medications accounted for 5.1% of spend; retail/mail for about 69% of spend. Opioid dollars totaled about a third of total managed drug dollars.

Key cost drivers include an AWP increase of almost 10% across all drugs. That price increase was somewhat offset by a 5 percent decrease in utilization (7.4% for narcotics) which resulted in an overall cost-per-claim increase of 7.3%.

A key finding is a major increase in generic utilization and spending (mirrored by CompPharma’s soon-to-be-released 2015 report).  Generic spend was up a whopping 19.3% while single source brand spend dropped by 9%; generic forms of Cymbalta and Lidoderm helped drive generic utilization up over 5 percent.

Coventry reported a 4.1% decrease in short-acting (SA) narcotic script volume; long-acting dropped by 3.2%. Vicodin, the #1 prescribed drug, saw utilization drop almost 8%. Unfortunately higher AWP pricing for several common SA narcotics more than offset that decrease in units, driving overall SA narcotic spend up 8 points.

There are helpful statistics on utilization by drug class by age of claim; changes in specific drug spend and utilization year over year, details on what drugs saw the biggest changes in volume and price, charts illustrating various correlations between claim age and pharmacy, and details on compound utilization.

Notably, Terocin(c), a compound, accounts for more unmanaged spend than any other drug; the growth in all topical medications is quite remarkable. In total, compounds accounted for 7.7% of managed spend and 28.1% of unmanaged spend.

Coventry’s report is data-rich, and this is particularly illuminating in their in-depth analysis of compounds.  Trends in utilization and spend by state, claimant usage, and in-network v out-of-network are analyzed in depth.

What does this mean for you?

Compounds are growing rapidly, efforts to control narcotic utilization are bearing fruit, and generic price inflation remains problematic.

The penultimate conference of the “spring” starts today in Atlanta, where the third annual Rx Drug Abuse Summit convenes this afternoon.

Specific to workers’ comp is the third party payer track; great discussions of Prescription Drug Monitoring Programs, the impact of opioids on worker’s compensation, legislative trends, and identifying high-risk claimants.

Thanks to Millennium Health for their lead sponsorship of the Summit; Millennium has been a consulting client for three years and I’m proud to work with them; they are good people looking to do drug testing the right way.

For those looking for additional education, can’t do better than Washington State L&I’s one-day educational conference on Evidence-Based Pain Care.  The sessions will review the new Agency Directors’ guidelines on Prescribing Opioids for Pain. Fifty bucks gets you educational credits, parking, breakfast and lunch…

Updates coming from the Rx Drug Abuse Summit from your loyal reporter…