Aaron Hill (00:00): The market has changed so profoundly in the last five, six years that those tools which have been so effective at a managing drug spend are now proving to be less effective as we move into the 2020s. Abby Burns (00:14): From Advisory Board, we are bringing you a Radio Advisory. Your weekly download on how to untangle healthcare's most pressing challenges. I'm Abby Burns. We've talked about the pharmaceutical market a lot on Radio Advisory from new therapies like CGT's and GLP-1's that are reshaping healthcare to some of the policy decisions that have been up for debate in Washington. A lot of the pressure on this part of the industry comes from the fact that drugs are expensive. They're expensive to patients, they're expensive to employers, plans, providers, really you name it. Every part of the healthcare ecosystem seems to be grappling with how to pay for these incredible treatments that can improve health and quality of life, but that are also driving massive unsustainable spend. Our researchers spent months looking around the industry to try and find organizations that are pursuing new and innovative ways to manage this ballooning drug spend. Spoiler alert, they didn't find much. So today I've invited them on Radio Advisory to share what they did find and what paths forward they see for managing drug spend. I'm joined by advisory board experts, Chloe Bakst and Aaron Hill. Hey Chloe. Hey Aaron. Chloe Bakst (01:28): Hey Abby. Aaron Hill (01:29): Hey Abby. Abby Burns (01:31): Guys, we have talked on this podcast about cell and gene therapies. We've talked about GLP-1's we've talked about the fact that the drug pipeline is full of specialty drugs that are going to continue to essentially upend the industry. The through line across all of these things is really a double-sided coin. One, improving access to high quality, potentially life-changing care, but on the other side, this comes at an utterly unsustainable cost. Aaron, I'm hoping you can start us off by making this second side of the coin real for us. We know drug spend is rising, but what does this actually look like in 2025? Aaron Hill (02:09): We've been averaging about 8% growth in annual spend per year in our pharmacy benefit right now. It looks to be continuing to outpace both medical spend and the rates of growth we've seen in the past. What's really scaring folks right now is that the annual growth rate has actually been steadily increasing from just around 2% back in 2018 to a bit north of 11% in 2023. Abby Burns (02:35): 11%. Aaron Hill (02:39): Yes. These are double-digit numbers that we haven't seen since the early 2000s, and that's really making folks nervous. Abby Burns (02:47): Aaron, when you say we, we are averaging about 8% spend on pharmacy, who is the we there? Aaron Hill (02:55): Mainly purchasers for end users. These would be health plans, unions, employers, folks who are purchasing drugs for their employees, for their plan members, for folks to actually use those drugs. Abby Burns (03:10): Can you give us the quick backstory of how we got here? Aaron Hill (03:15): Yeah. It's a moment of a history lesson. We saw big climb in drug spend in the early 2000s with the rise of the first crop of blockbuster drugs, drugs like Lipitor for instance. But through a combination of increasing generic use, the creation of the Part D program that helps folks on a fixed income manage those costs, and then also some increased utilization management tools. We brought that annual spend growth down through most of the 2000s and 2010s. What's happened toward the end of the 2010s was that we maxed out our generic substitutions. We're up around 90% now, and we've plateaued there. Meanwhile, the cost of new drugs has skyrocketed. In 2008, it was only $2,000 a year or so for net price for a new therapy. But by 2021, that had jumped to over $180,000 per year for a new therapy. And that's the net cost. Abby Burns (04:13): That's a huge jump. Aaron Hill (04:15): Yeah. Exactly. So we saw both a combination of a giant jump in the cost of a new drug plus growing number of drugs we have to prescribe. In 2010, we had about 1200 or so different drugs that we were prescribing, but only 10 years later by 2020 that number had jumped to over 2000. And so it's that combination of a huge jump in the cost of a new therapy combined with many more legitimate opportunities to prescribe them. And you combine those two together and you can see why now we face rising drug costs every year. Abby Burns (04:51): Yeah. And not just rising, but pretty much unsustainable. Chloe, you came on the podcast last fall and you told us that your research team, including Aaron, you were embarking on a research study to find the new and innovative ways that employers, payers, purchasers are working on to curb drug spend, and you would be back to share what you've learned. Well, you are back, but I don't think our conversation today is going to look the way that we might have hoped. Am I right about that? Chloe Bakst (05:21): Oof. It's hard to hear, but yes, I think you're right, Abby. We had conversations in the fall of last year with leaders from provider sponsored health plans, from employee benefit coalition groups, from health plans, large, medium, small, and the reoccurring theme of those conversations was that this is something everyone is challenged by. And by this I mean the rising spend in the pharmaceutical benefit and all of the challenges embedded within that Aaron just talked through. But that nobody really knows what to do next. And for context, we weren't going in here blind. We had a theory of a case, a sense of what we were expecting to see. Abby Burns (06:07): What was your theory? Chloe Bakst (06:08): We thought we were going to see a lot more outcomes-based contracting around drug costs. So we thought this would be the moment in time where we would see purchasers and manufacturers coming together to create new contracts around if this drug works or it doesn't work, we'll get some rebate or something else down the line. Because we have these innovative drug products and because the price tags are so high, it felt like that would be a natural solution that we saw rise up to the top. But in all honesty, the industry's not there yet or that's not the solution that people want. Abby Burns (06:44): Yeah. It makes sense. It seems like external market pressures might force purchasers hand of, okay, now is the moment where we're going to be trying out these types of outcomes-based contracting, but it's not that purchasers aren't doing anything to manage drug spend, right? Aaron Hill (06:58): That's correct. They have been doing a lot of work and that's not the challenge. They have continued to pursue the strategies that were so effective for them in the early 2000s through the 2010s. And I mentioned this. We increased generic drug substitution from around 50% of all drugs were generics by the end of the 2000s. Today it's over 90%. Abby Burns (07:23): I didn't realize it was that high. Aaron Hill (07:25): It is, and it's hard to push much past that we found. And so that feels like a plateau for that lever. That more rebate pass through dollars that have happened as PBMs have matured as partners for health plans and employers and unions over the course of the 2000s and 2010s, that's been helping. So they are doing a lot. And all those utilization management strategies like step therapy and formulary exclusions, this whole suite of utilization management approaches, they're also doing all of those. The challenge for purchasers is that the market has changed so profoundly in the last five, six years that those tools which have been so effective at a managing drug spend for the first couple decades of the 21st century are now proving to be less effective as we move into the 2020s. Abby Burns (08:16): Yeah. There's less juice for the squeeze. Aaron Hill (08:18): Exactly. Chloe Bakst (08:19): I think the other component that came up in our conversations with health plan and employer leaders was that they know that these strategies may have hit their plateau or aren't doing enough to make the changes they want to see in their drug spend or in managing their drug spend, but they're running into walls because they don't know what exactly else they can do to either beef these up or try something new. And there's a sense of, well, maybe the smart thing for me to do or the only thing for me to do is to wait and see and let other actors like the government come in and fix everything. Abby Burns (08:58): This is where my mind was going because as you're describing both the market and the solutions that purchasers are pursuing, I can't help but feel like these players are really trying to attack structural problems with organization-specific solutions. Let me ask about the government side of things here, because drug spend is one of the rare areas of bipartisan overlap or carryover across the Biden and Trump administrations. We're seeing Medicare drug price negotiations move forward, a lot of state and now federal attention on pharmacy benefit managers with PBMs. The Trump administration is pursuing some version of a most favored nation drug policy. I'm wondering, are these policy moves viable reasons for the attitude, Chloe that you just named, which is for purchasers to take more of a backseat and take that wait and see approach? Chloe Bakst (09:49): I think no. I think what the government's doing right now certainly has the potential to transform the drug industry, but a lot of the targeting we're seeing from both state and federal government actors is focused on lowering drug price. And because of the complications with rebate models and what we know about net list price versus net cost of a drug, it might not trickle down the way that we're expecting to see when it comes to drug spend. So for example, Medicare drug price negotiations, the price that we got in the last round of negotiations was very similar in a lot of cases to the net cost that purchasers were already buying those drugs at. So the list price went down, but the net cost of the drug, the spend didn't necessarily go down. Aaron Hill (10:40): Yeah, I agree with Chloe. The pricing is a important part of this, but I would also remind folks that the government has been intervening in drug prices for a long time. Medicaid has a built-in rebate, and for the Part D folks that is the seniors, the government's been covering some of their costs as well. And so we've seen government interventions already and it has had an effect. A big one. But we're at a moment right now where managing price of new therapies is necessary but not sufficient as managing overall spend. Abby Burns (11:21): Really, the message that I'm hearing from both of you is we're at the point where innovation on the part of purchasers to lower drug spend really is no longer optional. You all talk with purchasers and plans every day. What things should they be pursuing? Aaron Hill (11:39): Individual plans and unions and employers have a difficult time managing to control or change the price of a therapy. So instead they're running much more strongly at managing the utilization of them to manage their overall drug spend. And here we're seeing them look to their existing practices, but then look to upgrade those existing practices to reestablish some sustainable drug spend. Chloe Bakst (12:06): And I think another piece of this in tandem to what Aaron just described, where we see folks wanting to go is toward a total cost of care mindset. So that's certainly more pie in the sky. The ideal version of how you'd be managing your drug spend, getting you to that point I mentioned earlier of aligning your drug spend to value in some way. Maybe it's not outcomes-based contract, maybe it's total cost of care, value-based care initiatives. But that feels very intangible to folks right now. It's where they want to go but not where they are. Abby Burns (12:41): I actually like this tandem set because we have one that feels very much like a known and one that feels like an unknown, which means not only can we have an aspiration, a longer-term aspiration, but there's also steps to take now. Let's talk about both of these. You mentioned the traditional strategies for manning drug spend are things like utilization management. I would throw maybe carve-outs in there. What does it actually look like, Aaron, to bring these things into 2025? Aaron Hill (13:09): Yeah. That's a great question. It's the million dollar or billion dollar question. The techniques that worked for those first two decades of the 21st century have to be upgraded. And so for instance, purchasers were able to mainly focus on managing those blockbuster drugs while increasing generic drug substitution. But today, you still have to keep an eye on those blockbuster drugs. After all, they're much more expensive than they were in the past. You have to start to pay attention now to your generic drug spend as well, because it's an increasing site of low value prescribing as well. So that would be an example of an upgrade from what worked for the first two decades of the 21st century to the new market of the 2020s. Abby Burns (13:54): Yeah. I'm reminded of Pareto's law, the 80-20. It used to be you could focus on the 20% of blockbuster drugs. Well, now that 20% needs to get a lot wider because yes, you still have to focus on the blockbuster drugs, but now you actually need to focus on the utilization management around some of your generics as well. Aaron Hill (14:11): Absolutely. Abby Burns (14:12): Are purchasers doing this? Aaron Hill (14:15): Increasingly, although sporadically, right. I think this is what gets to one of the most fundamental challenges right now for purchasers, which is a mindset shift. It's hard to transition from the techniques that worked so well for 20 years, and that's really one of the challenges purchasers are facing right now. And there's not a lot of experience institutionally with these things. This is a moment of experimentation, and that's why I think, as Chloe mentioned earlier, we see a lot of purchasers holding back right now because it's risky to try something new that you haven't vetted or know for sure is going to work. And so I think that's where we're at right now. Abby Burns (15:00): Chloe, you also mentioned the more, to use your words, pie in the sky approach, and that's this idea of widening out to a total cost of care mindset. What does this look like when we're talking about drug spend for purchasers? Chloe Bakst (15:13): Well, this is where it gets really complicated because health plans and employers have pushed their pharmacy benefit management to PBMs. So they have been very hands-off in aggressively managing their pharmacy benefit spend. They've carved that out to experts. Now we're in this new phase where maybe it would benefit you more to have the cross benefit approach and be able to look at your medical benefit drug spend and your pharmacy benefit drug spend together to better understand how they're interacting with each other and where there's opportunities to better manage both of those spends. Abby Burns (15:52): Got it. So integrating the medical and the pharmaceutical. Chloe Bakst (15:57): Yeah. To be able to see across all of your spend, which most plans can't do right now because they just don't have access to all of that data, or the data doesn't speak to each other. So it's really hard to know ... I'm going to use our perennial example GLP-1s. If I'm spending all of this money on these GLP-1's is it actually going to lead to fewer knee replacements down the line? It's really hard to be able to do that kind of analysis. Aaron Hill (16:23): Chloe makes a great point here, and this is a moment where it's not just about upgrading an existing practice, but also innovating in a new direction. It takes an existing practice, which is having your PBM process, your pharmacy claims data, manage your utilization management. You bring that existing practice into a more holistic approach to thinking about the financing of patients, and that's where you can see an upgrade become an innovation in that moment. And so the challenge, as Chloe mentioned, is you have different databases for claims. You have different temporalities for when those claims come in. You have no institutional knowledge on how to integrate two data sets and bring two siloed parts of your organization, the pharmacy benefit folks and the medical benefit folks. How do you bring them organizationally together to make shared decisions around the total cost of care of patients? And so to Chloe's point, this is an upgrade that offers a lot of interesting upsides, but it's really one of the more unproven approaches right now. Abby Burns (17:28): Are there any examples that you can think of plans doing this? Chloe Bakst (17:33): Well, I think, again, we're just going to keep using GLP-1's all the time because that's what anybody thinks about right now when it comes to drugs but I think they're also an illustrative example of this. You see some of the bigger PBMs and plans offering a set of wraparound services for employers or unions and other purchasers whose members want access to those GLP-1's, which are very expensive. And so you can see some examples of bringing medical benefit side, thinking about bringing dieticians in, physical therapy, et cetera. You bring some medical side and integrating it with the pharmacy spend. And so we're starting to see in GLP-1's starting to have a more integrated and holistic model to the payment side. We've always known that holistic approach to patients was clinically beneficial. What we're starting to see now is that it's also financially beneficial. And I think that's a big turn. Abby Burns (18:29): Aaron, you started taking us down a path that I want to go down because my mind keeps coming back to data here. The theory of what we're talking about makes sense, but to actually make the change of managing total cost of care across medical and pharmacy benefits, I imagine plans and PBMs need access not just to really good data, not just to integrated data even, but maybe even a different type of data than what they've used in the past. Is that a fair thought? Aaron Hill (18:57): I think so. And you can see some third-party vendors helping purchasers do that because you have to do two things at least. One is to find a "space" to bring all that data together. So we talk to each other. It has to be able to speak the same language. And then second of all, you as an organization have to be able to make that data useful for your own decisions, and that means you have to make that data speak almost a third language, which speaks to you. And so all of this translation work is new, but there are folks out there that are helping some of these big plans do that. Chloe Bakst (19:31): And on our research team with Aaron and I, when we were doing this research, we had another colleague, Amanda, who was our expert in these third-party data aggregators called HTAs. And I would love to Abby, if we can call Amanda in to talk about this. Abby Burns (19:48): Yeah. Perfect. (20:33): Now we're going to bring in another advisory board researcher, Amanda Okaka. Hey, Amanda. Thanks for joining us. Amanda Okaka (20:42): Thanks for Having me. Abby Burns (20:44): Amanda, Chloe just floated an acronym to that. I'm hoping you can help us demystify. She was talking about HTAs. What are HTAs and why are they relevant to the conversation that we're having around managing total cost of care for drugs? Amanda Okaka (20:59): HTA stands for health technology assessment, and what that is is a structured evaluation for medical technologies, which in this conversation we're talking about drugs, but that can also include devices and procedures. And so what they do is help payers and health systems make evidence-based decisions by weighing a therapy's clinical effectiveness, cost-effectiveness, and broader impact on health outcomes. You can think of HTAs as the bridge, the link between innovation and reimbursement because they help to determine not just how clinically beneficial a new therapy is, but also is it worth the cost? Abby Burns (21:44): Is this part of the FDA drug approval pipeline? Amanda Okaka (21:47): Not really. It happens outside of that. So HTA, they collect data from manufacturers, whatever they release and whatever they provide across the drug development and launch and post-market pipeline. Abby Burns (22:02): Oh, wow. Amanda Okaka (22:02): But it's not a part of the FDA approval process, but it tends to happen in tandem. Abby Burns (22:08): Okay. So how are purchasers currently using health technology assessments, if at all? Amanda Okaka (22:14): So they use them in a few different ways. The most common is formulary design. So that can look like influencing where products will go on tier placement or step therapy requirements, and if they decide to cover a product, if at all. So for example, a payer might place a drug on a non-preferred tier if the HTA evaluation shows that it offers a marginal benefit over something that's cheaper. Abby Burns (22:46): I'm understanding now why Chloe brought HTAs when we're talking about the idea of value essentially. What are some of the other uses that purchasers have for HTAs? Amanda Okaka (22:57): So it can be used for coverage and management, for example, only covering a drug for patients with a certain biomarker or disease state if the evaluation shows that it's most cost-effective for those certain patients. It can also be used as an anchor point in outcomes-based negotiations. So either party might use it as further validation for their negotiations when it comes to price or placement. And then also it can be used sometimes to justify if a payer no longer wants to cover a certain drug, if they want to deprioritize products that are not offering strong value. That can happen if the HTA report supports it. Abby Burns (23:41): I want to get into how commonly these are being used because it sounds like there are a lot of use cases that are super applicable to the conversation that we're having today. Before I ask you that question though, who is actually doing the health technology assessment? Is this something that PBMs do themselves? Amanda Okaka (23:59): So that's where it gets interesting. It is something that PBMs and payers can do themselves. We're increasingly seeing this being done internally, although it's typically called by another name, whether that's medical policy development or P&T committees are increasingly doing HTA types of analysis, but it can also be done externally by third parties. And so probably the most well-known example in the US is ICER, the Institute for Clinical and Economic Review. Abby Burns (24:32): Yes, I recognize that acronym. Amanda Okaka (24:34): So while ICER doesn't make policy, their reports are often cited in decision-making for large national payers. Abby Burns (24:44): That would be, for example, justifying their coverage policy or their tiering decisions, etc. Amanda Okaka (24:49): Yes. Manufacturers also might even use it to justify their price points if it supports that. Abby Burns (24:55): Okay. Amanda Okaka (24:56): I think the thing that gets tricky here is that payers and purchasers are going to have the best data to be able to do that type of assessment for their specific patient population. But as they're increasingly needing to justify these value based decision making we might see these third-party HTAs have more of an influence if folks are looking for that sort of evaluation that's being done, not tied to the payer, not tied to the manufacturer or the government. Abby Burns (25:28): That makes sense. The objective perspective on the value equation. So I have to imagine that these assessments have only become more important as both the number and the complexity and the price of drugs has grown. Is that what you found in your research? Amanda Okaka (25:46): No. That's what we thought that we would find. But like I said, as payers are increasingly doing this internally, we haven't found that these independent assessors have been able to really increase or broaden their influence. However, life sciences leaders are starting to think more about how they work with HTAs. As CMS takes on more HTA-like evaluations, there's potential that there might be an appetite for more of that third-party objective assessment. So life sciences leaders are in the very nascent stage of starting to figure out how they can better align their evidence generation and value proposition plans with ICER's value framework, which has been evolving in response to the things that payers are saying that they're looking for, which is more of that real-world evidence and health equity concerns. Abby Burns (26:47): Amanda, Chloe, Aaron, as we come to a close, we spend a lot of time in this conversation talking about the future. Where do we want to get to in order to effectively manage pretty out of control growth and drug spend. We also have to be mindful of the climate that we're in right now. There's a lot of turmoil, there's a lot of uncertainty that can make it really hard to try new strategies to a point that Aaron made earlier. How do you reconcile the need to try new spend reduction strategies with the harsh realities of the current market that purchasers that plans are operating in? Chloe Bakst (27:25): Despite the fact that we had lots of conversations with lots of payers where folks were in this wait and see mode. I want to be very clear that nobody is saying we're waiting and seeing because we don't care about this, or we don't think that this is an issue that deserves our attention. They're waiting and seeing because it feels overwhelming and they don't know where to start. So take baby steps. Maybe it's just pulling pharmacists into your value-based care agreements so that you get that drug lens. Maybe it's opening a conversation with your PBM partner about what their cross benefit management offerings are, and if there's a way that you can come to an agreement that both sides feel comfortable with. There's no silver bullet solution here that's going to stem the bleeding of our unmanageable rising drug spend, but there are ways to move forward piece by piece. Abby Burns (28:17): Amanda. Amanda Okaka (28:19): As the drug pipeline gets more complex and more expensive, my inclination is that health technology assessment is going to become more instrumental in making responsible coverage and utilization management decisions. In other words, get up to speed on what health technology assessments are, how your organization is either conducting them or involved in them or leveraging them and figure out how you can advance that value conversation. Aaron Hill (28:52): I would just say very broadly that purchasers need to do two things. The first is that they need to recognize that they are in a new pharmaceutical market now. So understanding what has changed, why it's changed, and why the techniques that help them manage their drug spend in the past are no longer working is the first step toward making smart experiments in coming up with new ways to re-establish drug sustainability. The second thing that purchasers need to do better moving forward is communicate those facts to their members and those patients, because from a consumer standpoint, you're seeing your premiums go up while at the same time you're seeing more and more restrictions around the drugs that you read about in the news and that you want. And the purchasers are in an unenviable position where they have to communicate to their members or to patients why that is the case. And in order to do that second job, they have to have their heads around the first job. And that's what a lot of our research has attempted to do, is to frame this challenge, offer some potential smart experiments moving forward, and set our friends in the drug purchasing world up for success moving forward. Abby Burns (30:18): Well, Aaron, Amanda, Chloe, thank you for coming back on Radio Advisory. Amanda Okaka (30:24): Thanks for having us, Abby. Chloe Bakst (30:26): Yeah, thanks. Aaron Hill (30:27): Thank you. Abby Burns (30:31): Drug spend isn't going anywhere, and unfortunately it seems like there are no silver bullets employers and other purchasers can use, but there are ways to make progress, whether it's bringing your utilization management strategy up to date, taking steps to integrate medical and pharmacy benefits, even figuring out how to include drugs in value-based care contracts. If you're trying any of these strategies or others that our team should know about, get in touch with us. If you want help with any of the ones we've mentioned, also get in touch with us because remember, as always, we're here to help. (31:37): If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts and leave a rating in a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Abby Burns, as well as Rae Woods, Chloe Bakst and Atticus Raasch. The episode was edited by Katy Anderson with technical support provided by Dan Tayag, Chris Phelps, and Joe Shrum. Additional support was provided by Leanne Elston and Erin Collins. We'll see you next week.