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Not drugs but hospitals spurring soaring health costs?

April 8, 2017

Under fire from all sides for high drug stickers and price hikes, pharma has put R&D costs front and center in its defense. But a secondary argument—or attempt to shift the blame, depending on your point of view—might be more effective, if it managed to find its way into the spotlight.

As high as pharmaceutical costs may be, they’re dwarfed by hospital and physician expenses—and lawmakers eager to cast blame may be finding it politically expedient to point to big bad pharma, according to David Dreier, a former congressional rep himself.

“[E]very member of Congress has a hospital in the district but only a few have drug manufacturers,” Dreier pointed out in a recent op-ed for The Hill.

Drugmakers have complained for years that they’re scapegoats for rising healthcare costs, and they love to point out that drugs account for about 10% of U.S. healthcare spending, a stat that has tended to remain steady over time. In 2016, the United States spent $3.4 trillion on healthcare, including $1.1 trillion in hospital costs, $683 billion in physician and clinical expenditures and $348 billion on prescription drugs, according to a report from the Altarum Institute.

Companies also argue that proper drug therapy saves money in the long run. Gilead Sciences, for one, defended the high price tags on its hepatitis C drugs by citing the high cost of hospitalizations for liver disease, and the even higher expense of treating liver cancer and delivering liver transplants. Novartis has tried to make a similar case for its heart failure drug Entresto, which has shown it can prevent costly hospitalizations for those patients.

But Big Pharma’s image with patients has hampered those attempts. A recent Kaiser Health poll found that 77% of Americans believe drug costs are too high, and stats like that empower Congress to keep its focus on the issue. Dreier pointed out that hospital, physician and clinical expenses grew $87 billion last year, compared to a $13 billion increase in drug costs.

“If you were the CEO of any business, where would you put your efforts to control costs?” he questioned.

It’s worth noting that during his career as a congressman, Dreier received nearly $300,000 from pharmaceutical and health product companies, according to the Center for Responsive Politics. Since 1998, pharma has spent more than any other industry on lobbying expenses, according to the nonprofit, a fact the industry’s critics often highlight.

Still, the former rep’s argument is one the industry will likely echo as it forges ahead against all of the negative pricing attention. But it isn’t one that holds much water, according to the American Hospital Association’s EVP of government relations and public policy, Tom Nickels. Speaking with FiercePharma, Nickels called the argument “laughable.”

“Just because you are a bigger part of something doesn’t mean that you should be the focus in terms of cost reductions,” he said. It’s more important to look at where costs are going up the fastest, Nickels said, adding that some drug companies have implemented “predatory pricing” practices.

“On a bipartisan basis, from Donald Trump to Elijah Cummings, many public officials have pointed out, and we would agree with them, that rising drug costs are a huge problem,” Nickels said.

U.S. drug spending grew 14.4% in 2014, 5.8% in 2015 and 4% in 2016, according to the Altarum Institute’s report. Hospital costs grew 6.3% in 2014, 3.3% in 2015 and 5.3% in 2016.

For more than a year since Martin Shkreli’s Turing Pharma hiked the price of Daraprim by 5,000% overnight, lawmakers have railed against the industry’s pricing practices, with controversies from Mylan, Valeant Pharmaceuticals and others fueling the fire along the way. Larger drugmakers with big R&D budgets have tried to distinguish themselves from those companies; Pfizer CEO Ian Read, for one, has said Turing, Valeant and their ilk—and their buy drugs, raise prices strategy—are nothing like research-based “ethical” drugmakers.

Addressing a gathering recently at the National Press Club, Read made his own argument about hospital costs versus drug spending. Patients pay 3% out of pocket for hospital expenses compared with 15% for drugs, he said. The current U.S. insurance system doesn’t incentivize paying for expensive long-term cures. Rather, it incentivizes insurers to avoid sick patients, he said.

Novartis has experienced those dynamics firsthand with its Entresto launch. A recent study found that for every 1,000 patients treated with the Novartis med, 220 hospitalizations would be avoided over the patients’ lifetimes. When figuring in the fact that patients on generic enalapril were projected to die sooner, the effect came to 59 hospitalizations prevented.

The drug showed “good value” at its $4,500-per-year price, according to standards from the American College of Cardiology and American Heart Association.

In European countries with single-payer systems that stand to save when a patient experiences a drug’s long-term benefits, the company has seen stronger uptake than in the U.S. In the States, the launch has been hobbled by tight-fisted payers that have been slow to grant access due to cost and effectiveness concerns—and the sheer fact that their membership turnover is high. Insurers are chary of spending up front on pricey drugs for a patient who’ll move to another plan before they realize the cost savings.

“The savings that Entresto could provide across the system is being recognized,” Novartis CEO Joe Jimenez said last year of uptake in Europe.

To work with payers, Novartis has struck pay-for-performance agreements that link rebates to Entresto’s performance, a trend that’s been picking up in the U.S. as drugmakers look to make the most of their products in a tough pricing environment.

Drugmakers can point to other hospital spending numbers. A new report from pharmacy benefit manager Magellan Rx Management shows that injectable drug costs differ greatly depending on where they’re administered. Due to differences in reimbursement methods, the cost per unit for Janssen’s Remicade, for instance, was $233 at hospitals in 2015, compared with $88 at physician’s offices.

Pfizer VP of worldwide policy Kirsten Axelsen told FiercePharma that hospital costs are “generally higher than drug costs and going to the hospital to be treated for a disease is less pleasant in general than using an effective treatment or prevention to avoid the hospital visit to begin with.”

“[D]rug prices are an issue for patients because they are exposed to them more directly than they are hospital fees given the way insurance plans are designed,” she added.

Pricing from large drugmakers continues to be an important topic amid the larger debate over healthcare costs, however. Like it or not, fairly or not, many patients and much of the public don’t respect the pharma industry, and that makes it tough for drugmakers to argue effectively in their defense.

RELATED: Top 15 pharma companies by 2016 revenuePfizerNovartis

Trade groups have mounted expensive image campaigns, but the industry’s image continues to suffer. In an annual PatientView survey, for instance, only 38% of patient groups said the industry had either an “excellent” or “good” reputation, down from almost 45% last year. Some of that decline can be traced back to their views on drug prices.

Can high-profile promises and transparency efforts help? Allergan CEO Brent Saunders famously committed to limit price hikes to single digits last year, and several drugmakers have joined his pledge since. Merck, Johnson & Johnson and Eli Lilly have each released high-level pricing information outlining trends throughout their portfolios, including heightened pressure from pharmacy benefit managers.

But even single-digit price hikes can account for major spending boosts. For instance, AbbVie’s 8.4% price increase on Humira earlier this year could mean an additional $850 million in spending for 2017, Raymond James analyst Elliot Wilbur said last month, according to the Wall Street Journal.

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