As discussed in the previous chapter, clinicians, health care systems, and others are trying to find more efficient and cost-effective ways to treat patients with weight-based drugs. These efforts have been prompted in large part by the high prices of these treatments, particularly in the United States but also in other countries. Given the large volume of weight-based, single-dose drugs discarded each year, a major challenge facing those interested in improving the efficiency of the system in which drugs are developed, administered or paid for, is determining how to calculate the value of that discarded drug. It is easy enough to multiply the per-milliliter cost of a drug by the number of milliliters discarded each year to get a putative value for the portion that is not administered (how much is discarded) and then add up all such drugs to get a total, but interpreting that number as the “value” of the discarded drugs is problematic. These typical calculations produce only nominal values that are based on the assumption that one can assign a value to an ounce of discarded drug that is equal to the value of an ounce of the drug in an unused vial. They do not accurately capture the economic value of discarded drugs and do not reflect the reality of the excess costs to patients and the system. This is because of the factors that go into determining the price of drugs in this country. In particular, it is not at all clear that a successful effort to reduce perceived drug waste would result in the sort of cost savings implied by such a simple calculation—or any cost savings at all. This chapter discusses how the issue of discarded drugs falls within the larger context of drug pricing, makes the economic case for why waste is not the right construct to analyze discarded drugs, offers a different way of
thinking about the issue of waste in discarded weight-based drugs, draws the distinction between short-term and long-term approaches to address the issue, and suggests efficient ways to reduce the quantity of discarded drugs while ensuring patient safety.
If the weight-based drugs in single-dose vials cost patients and payers only a few dollars—or even a few hundreds of dollars—routinely discarding significant amounts would not seem so serious. However, these vials are often thousands of dollars apiece, which makes discarding 20 or 30 percent of one seem wasteful. To calculate the value of this perceived waste from an economic perspective, it is critical to first understand how drugs are developed and prices are typically determined.
Drug Research and Development
The U.S. biopharmaceutical system is both extremely complex and opaque, and it can be difficult, if not impossible, to understand the reasons a particular drug is priced as it is. The most common explanation offered for the high price of drugs in the United States is the high cost of discovering a potential drug and bringing it to market. The cost of this process, which typically takes between 12 and 15 years, has been estimated to be between $757 million (Prasad and Mailankody, 2017) and $2.6 billion (DiMasi et al., 2016). Although there is no disagreement that the costs of drug discovery are large, there is widespread disagreement about exactly how large the costs of biopharmaceutical research and development are (NASEM, 2018).
To eventually show a profit, a biopharmaceutical company must make enough money on a drug’s sales to cover the development, production, and marketing cost for the drug, as well as the costs related to developing drugs that never make it to market—and do it before the drug patent expires. After that, generic or biosimilar1 manufacturers will typically begin to offer lower-priced versions and take a significant amount of sales away from the original developer. Prices typically fall by 20–30 percent with the first generic entrant and by 80 percent when several generics are in the market (Olson and Wendling, 2013). Introducing generics can lead to price competition, where the developer of the branded drug typically drops its
1 A biosimilar is a biological drug that is very much like another biological drug (called the reference drug) that has already been approved by the U.S. Food and Drug Administration. Biosimilar drugs and reference drugs are made from living organisms but may be made in different ways and of slightly different substances.
price significantly to compete with the generic versions, but prices may not decline as rapidly with specialty drugs (Cole and Dusetzina, 2018).
While the high cost of developing drugs may be offered as a justification for high drug prices and certainly imply that biopharmaceutical companies would not keep developing new drugs if they did not expect to be paid well for their efforts, the research and development costs actually explain only a part of the high costs of drugs in the United States.
Basic patent protection for a new drug lasts for 20 years from the date the application is filed, which generally takes place soon after a potential use for a drug is discovered. Since the development, testing, and approval process can take a decade or more, a drug company can be left with a relatively few years of patent protection once a drug goes to market. The Hatch-Waxman Act of 19842 addressed this by making it possible to extend the effective patent life. Drug companies also use a variety of legal maneuvers to extend their period of exclusivity beyond that basic period, a strategy known as “evergreening” (Dwivedi et al., 2010; NASEM, 2018). The goal of patent protection is to make sure that drug developers have the chance to profit before facing competition from others that did not have the risk and expense of developing and testing the new drug. However, some have charged that the system works too well, and there is some evidence for this, as drug companies as a group consistently have higher profit margins than companies in almost any other sector (Chen, 2015; Sood et al., 2017).
One factor that does not play a particularly large role in the prices of new infused or injectable drugs is the manufacturing cost. Compared with research and development costs, manufacturing is relatively cheap—which is why generic drugs and biosimilars can be sold at such low prices compared to new, patent-protected drugs. In fact, the most profitable way for a patent-holding drug manufacturer to price drugs would be to set that price based on a payer’s willingness to pay for a course of treatment and then ship the drug in packages of whatever size were most economical (Glied and Sampat, 2016). The manufacturing itself does not drive the price.
2 Drug Price Competition and Patent Term Restoration Act of 1984, Public Law 98-417, 98th Congress (September 24, 1984).
Perceived Value and Willingness to Pay
On the demand side, an equally important factor in drug pricing is the payer’s willingness to pay. Drugs that are difficult and therefore costly to produce would not command high prices if consumers had no demand for them. Payers include the individual receiving the drug (or family members), the individual’s health insurance plan, and governmental programs, such as Medicare or Medicaid. This willingness to pay depends in turn on the drug’s value or perceived value. A drug that is more effective against a serious disease or increases survival rates more than existing alternatives can be priced higher than its competitors, and the larger the improvement, the higher the possible price. However, many new drugs with relatively modest advantages over existing drugs are still priced significantly higher (Frank et al., 2020; Vokinger et al., 2020).
Current reimbursement approaches, incentives for intermediaries in the drug supply chain, and insurance design are also important elements affecting observed willingness to pay. Medicare is constrained by its inability to exclude drugs from coverage, which means that Medicare cannot refuse to cover drugs that are significantly more costly than alternatives with similar performance (see, e.g., NASEM, 2018). Under the current approach of paying for clinician-administered drugs, health care providers are paid based on the drug’s prices. Simultaneously, intermediaries, such as pharmacy benefit managers (PBMs), manage drug formularies to define the lists of drugs that a health care provider can administer to a patient and receive reimbursement for based on the individual’s health insurance plan. Therefore, in addition to the payers, health care providers, who often choose which drugs to use, also need to be convinced of the benefit of new drugs.
In brief, U.S. drug prices are the product of a complex and confusing system, one in which many of the components are hidden from outside observers. While the main forces at work are clear—the high cost of research and development, patent protections, new drugs’ real or perceived value, and the willingness of payers, including health insurers and patients, to pay—how these factors and others interact to determine the price of a particular drug is far from clear.
The United States pays more for prescription drugs than any other industrialized country (Kanavos et al., 2013; Sarnak et al., 2017). In 2018, the Assistant Secretary for Planning and Evaluation conducted a study that compared the prices that Medicare paid for selected Part B drugs with the prices paid in 16 other industrialized countries (ASPE, 2020) and concluded that prices in the United States were 1.8 times higher. A previous
National Academies of Sciences, Engineering, and Medicine (National Academies) report, Making Medicines Affordable: A National Imperative, proposed a range of approaches to help prevent drug expenditures from spiraling out of control. A brief overview of those approaches for managing the availability and affordability of prescription drugs for all Americans is discussed next. In the United States the cost of drugs to patients is ultimately the result of negotiations among health insurance companies, drug companies, and intermediaries (such as PBMs) and the type of health insurance coverage and benefit design.
Insights from the Making Medicines Affordable Report
Making Medicines Affordable (NASEM, 2018) examined in detail the factors influencing prescription drug prices in the United States and offered a list of suggested actions for reducing drug costs. Briefly, the report concluded that the high cost of prescription drugs is likely due to a combination of factors—not just the expense of discovering and developing the drugs—although the complexity of the U.S. health care system makes it difficult to know exactly how large a role any given factor plays. In the United States the cost of drugs to patients is ultimately the result of negotiations among health insurance companies, drug companies, and intermediaries (such as PBMs) and the type of health insurance coverage and benefit design. Different patients can pay vastly different amounts for the same drug depending on their health benefit design. Various factors influence these negotiations, including the costs of developing and marketing drugs, the benefits of a drug, and how it compares with other drugs and treatments.
The report detailed several specific factors beyond the costs of developing and marketing. For example, large health insurance companies influence the cost of drugs by deciding whether they will cover the cost for each drug in a given situation and how much cost-sharing the patient will be responsible for. Intermediaries, such as PBMs, have their own influence too. They act as agents for insurance companies and large employers to negotiate drug prices with manufacturers and retail pharmacies and manage formularies on behalf of payers. These factors and many others interact in complex and often nontransparent ways to influence drug costs, and it is not at all clear how to go about lowering drug prices in the United States without unintended consequences, such as potentially slowing down the drug development pipeline (NASEM, 2018).
In light of the various factors driving the high drug costs, the report offered eight specific recommendations, each with associated implementation actions, to improve the affordability of prescription drugs without discouraging continued innovation in drug development:
- Accelerate the market entry and use of generics and biosimilars.
- Consolidate governmental purchasing power, strengthen formulary design, and improve drug valuation methods.
- Ensure greater transparency of financial flows and profit margins in the biopharmaceutical supply chain.
- Discourage direct-to-consumer advertising of prescription drugs.
- Design insurance benefits to mitigate patient drug cost burdens.
- Improve federal discount programs to aid vulnerable populations.
- Ensure financial incentives for rare diseases are not extended to widely sold drugs.
- Implement reimbursement incentives that align with value.
Box 5-1 highlights some of the implementation actions from the report that relate directly to the Medicare program and its beneficiaries.
Recommendation B-1—allowing the Secretary of the U.S. Department of Health and Human Services (HHS) to negotiate directly for drugs—relates to the topic of discarded drugs as follows: Medicare is the single largest purchaser of drugs in the United States, and Part B drugs are among the most expensive drugs. In the United States, drug manufacturers set their own prices and can simply adjust their prices to maintain their revenues in response to efforts to lower the expense of using drugs (discussed in more detail later in this chapter). The current reimbursement system for most Part B drugs is based on the drug’s ASP plus a percentage add-on. The dollar amount of the add-on for a drug is larger when the drug price is high, thereby increasing patients’ cost-sharing responsibility and raising spending on Part B drugs for Medicare and patients.
According to a survey by the Kaiser Family Foundation, nearly 90 percent of the public favors allowing the federal government to negotiate
drug prices for Medicare (Cubanski et al., 2019). Several lawmakers have introduced bills to change the law and allow government drug price negotiation. (Box 5-2 presents a summary of some of the recent bills related to drug negotiation.) While the bills seek to achieve the same overall goal of price negotiation, they take different approaches. Currently, Medicare has very limited authority to exclude drugs from its formulary. Enabling HHS to negotiate drug prices for all Medicare enrollees would increase its bargaining power with drug manufacturers. Furthermore, giving it the authority to negotiate drug prices would provide the leverage needed to lower drug costs, particularly for high-priced drugs that have no competitors.
For weight-based drugs, two patients with the same condition and the same severity who are prescribed the same drug will generally receive different amounts of that drug. This leads to a fundamental question
concerning the distribution of such drugs: given that the drug cannot always be packaged into one-size-fits-all doses that will be dispensed to everyone who needs them, how should they be packaged?
One approach would be to sell the drugs in larger amounts that could be divided among multiple patients. If, for example, a drug in liquid form was provided in 25-mL containers, Patient A might get a 3.5-mL dose, Patient B a 6-mL dose, Patient C a 4-mL dose, and so on until the container was used up and a new one was opened. This approach has various problems, both medical and practical, however. A major concern is that once the seal on the drug container has been broken, contamination from various sources—not just other patients but the many hazards that can be found in a hospital or a doctor’s office—becomes an issue. Additionally, once opened, the drug has a limited lifetime, during which it must all be used, or else the remainder will be discarded.
These considerations led to the current system in which weight-based drugs are packaged in smaller quantities that are intended for a single use, but this creates another set of issues centered on the basic question of how to determine the best sizes for these packages. Drug companies begin thinking about this issue at the clinical trial stage, when they are also considering the dose strength and volume. This is true for approval for the first indication but not for subsequent indications. Once the dose strength and volume have been determined, the quantity of the drug that a given patient will need is easily calculated.
How big should the vials be? In the example given above, a single 6-mL vial (plus a certain amount of required overfill) would be enough for all adults up to 100 kg, but half the vial would have to be discarded with a 50-kg patient. Or the drug could be distributed in both 3-mL and 6-mL sizes, which would sharply decrease the amount of unused drug for people who weigh 50 kg or less but would make no difference for anyone between 50 and 100 kg. Offering the drug in three vial sizes—3 mL, 4.5 mL, 6 mL—would do even more to decrease the amounts of drugs discarded in various situations.
However, increasing the number of vial sizes comes at a cost. The development of each vial size will require the manufacturing process to be validated, and its labeling and shipping systems will also need to be developed and validated. In some cases, new parts or equipment would be required for the new production. The paperwork for each vial size must be filed in multiple countries, and each requires an inventory system and a global supply chain. This alternative would add complexity to manufacturing, transportation, and supply chain management. Thus, each additional vial size that is offered raises the overall cost of providing the drug, and drug companies look to balance the cost of the discarded drug versus the cost of offering multiple vial sizes.
The discarded portions of single-dose vials are typically viewed as “wasted.” After all, they were manufactured and distributed and, most often, paid for, but they were never used to treat patients, which would seem to be the very definition of waste. Simply adding up the discarded portions and valuing them on a simple per-milliliter basis leads to the conclusion that the U.S. health care system is discarding billions of dollars of weight-based drugs each year. But this interpretation does not capture the full picture of the value of these discarded drugs.
To understand why these discarded portions may not actually represent waste in an economic sense, the easiest place to start is with the standard calculation that people make when assigning a dollar value to this perceived waste: suppose a single-dose vial costs $2,000, and only 75 percent of that is used. Because one-quarter of $2,000 is $500, the conclusion is that $500 of the drug was wasted. This type of calculation underlies the various estimates that have been reported for the total dollar value of weight-based drugs that are “wasted” each year as explained in Chapter 3.
Hidden in this argument is a basic assumption—that every milligram of the drug in that vial has equal value and that, in particular, the unused milligrams are equal in value per milligram to the used milligrams. However, this is not how drugs are priced. The price of a drug is typically based not on how much is used but on the willingness to pay for the drug’s therapeutic benefit. Put differently, because manufacturing costs do not drive drug prices, the quantity of a drug that a patient receives also does not drive pricing. In general, a patient cares only about getting a correct dose of the drug for a treatment. Thus, the patient—mostly likely through an insurance company or Medicare—has paid $2,000 for this dose and does not care how it was packaged. If the patient needs, say, 600 mg of a drug, the patient does not care if the vial holds 600 mg, 800 mg, or 1,200 mg or if it takes two vials with 400 mg each or any other combination. To the patient, the 600-mg dose is worth $2,000, and the remainder has no value whatsoever. Box 5-3 illustrates other ways to think about the concept of pricing according to what people are willing to pay.
Pulling back to look at the issue of discarded drugs from single-dose vials in a broader context, it becomes clear that much of the concern about these discarded drugs has its roots in the particular approach to paying—and reimbursing health care providers—for them. Specifically,
the pricing and reimbursement for these drugs on a per-milliliter basis, with the cost for a particular treatment dependent on how much is used on that patient, carries with it the implication that each milliliter in a vial has its own inherent value equal to every other milliliter.
But this is not the only logical way to think about the discarded drugs. Consider, for example, a payment and reimbursement system in which every patient, no matter how much of the drug a treatment requires, pays exactly the same amount for it. This is how drugs are priced in many other countries (Roy, 2019). Furthermore, this is a typical approach to pricing in many other areas of the economy. As noted in Box 5-3, items of clothing, for instance, generally cost the same for all sizes, from XS to XXL, even though the largest sizes may need two or more times as much cloth as the smallest ones (and even if the fabric is relatively expensive).
Now suppose that this system were in place in the United States. How would that change the thinking about discarded drugs? In this situation, each patient would pay the same amount for a given treatment no matter how much of the drug was required—and the drug company would receive exactly the same amount for each patient, just like a clothing company selling coats. With a per-treatment cost, there would no longer be an implication that a percentage of a vial’s value is wasted each time less than 100 percent of it is used. Specifically, in contrast with per-milliliter pricing, where there is an advantage to using the unused portion of a vial on a second patient as a way of saving money, per-treatment pricing suggests no such advantage. In theory, a health care provider could share vials, but there would be no reason to because there would be no savings—the money paid to the drug company would rely only on the
number of patients treated, not on how much of the drug was used. With that approach to pricing, there would no longer be any need to calculate the amount of weight-based drugs that are discarded each year. Nothing important about the system would have changed—patients would still be getting the same treatments, and drug companies would still be getting paid about the same total amount, although some patients would be paying less and some more in a more equitable system—but the concerns about billions of dollars wasted each year on discarded drugs would vanish along with the additional administrative work needed to calculate how much drug was not administered.
Thus, any consideration of the issue of discarded weight-based drugs must take place in the larger context of how those drugs are priced and paid for.
At the committee’s public sessions, several speakers discussed that many people believe that reducing the amount of discarded drugs from single-dose vials is unlikely to result in financial savings for patients because the prices of drugs are determined on the basis of willingness to pay for a treatment’s outcome and not the specific amount of drug dispensed. Some observers believe that if clinicians, hospitals, and health systems are successful in reducing discarded drugs from single-dose vials or if payers (private or federal) promulgate policies to pay for volume dispensed, those efforts will eventually trigger drug companies to raise prices to compensate for their lost revenue. Ultimately, the per-patient price will reflect the average willingness of patients to pay, and the price of dosing units (e.g., a large vial of a drug) will reflect the number of patients each dosing unit can treat.
For example, suppose that patients—or Medicare, or insurance companies—are willing to pay $5,000 for a drug that comes in 5-mg vials ($1,000 per milligram), but the average patient needs only 3 mg. Now, suppose that through vial sharing or some other clinical practices discussed in Chapter 4, clinicians are able to treat three patients with two vials, so now they are paying $10,000 but for three patients instead of two. Basic economic theory would predict that drug companies are not going to keep the same pricing because they know that payers and patients are willing to pay $5,000 per treatment, so they increase the price to $7,500 per vial; now two vials cost $15,000, and it is back to $5,000 per treatment for three patients. However, in the real world, drug prices depend on multiple factors, including payers’ negotiating power and public policies. Vial sharing or some other clinical practices to reduce discarded drugs
could be more worthwhile under a scenario in which the government had a mechanism to negotiate prices or to limit increases in drug prices while acknowledging the need for reasonable profit margins for drug manufacturers. But this scenario does not currently apply in the United States.
This is the basic economic challenge with efforts to save money by cutting back on the perceived waste or designing payment policies that are focusing on reimbursing manufacturers per volume unit of drug dispensed. In the beginning, as long as only a few clinicians are able to reduce discarded drugs through vial sharing or some other clinical practice and that does not affect drug company revenue, the drug companies may be comfortable with it, but if the practice ever becomes widespread, including federal policy or policy by large health care payers, the drug companies would likely respond. The response does not have to be as simple as increasing the price but could involve changing the vial sizes, for instance—and the end result would be that the drug companies still derive the same revenue, but health care providers are doing a lot of extra work to treat multiple patients with a single vial, and the average consumer would pay about the same amount for a course of treatment. But it is not clear whether those price increases would wipe out all the savings achieved by the more efficient use of the drugs. Perhaps there would be some relatively small cost savings, or perhaps that savings would be overwhelmed by the costs of “saving” the discarded drugs, and the total cost to the system in which drugs are developed, administered, or paid for might be greater. Without a detailed economic analysis, it is impossible to predict.
- Differing perspectives about the definition of “drug waste” can lead to differing approaches to address the complexities that contribute to failure to administer all of the drug delivered in vials.
- In the United States, agreement is lacking among stakeholders about whether requiring manufacturers to produce more vial sizes would result in any cost savings to the Medicare program and its beneficiaries.
- The reimbursement of branded or patent-protected weight-based dose drugs is multifactorial and is more reflective of willingness to pay than the cost of production or development costs.
- Under the current system in which drugs are developed, administered, or paid for, when the drug is discarded, there is no money to recoup. Therefore, there is limited economic value to discarded injectable or infused drugs from single-dose vials.
- Concerns about reducing discarded drug take place in the larger context of concerns about drug costs, and particularly the cost to patients, in the United States.
- Under the current system in which drugs are developed, administered, or paid for, approaches to reduce the discarding of drugs from single-dose vials could have unintended consequences. Successful efforts may eventually trigger drug companies to raise the prices to derive constant or increased revenue for their products. Approaches to reducing discarded drugs from single-dose vials would need to leverage other strategies aimed at lowering drug prices, including allowing the Secretary of the U.S. Department of Health and Human Services to negotiate directly with manufacturers regarding the price of drugs.
RECOMMENDATION 5-1: Drug developers, health care providers, and payers should focus their efforts on reducing inefficiencies in drug development, delivery, and payment systems that lead to excess costs for both the health care system and for patients rather than on trying to recoup payments associated with the discarded drugs.
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