Pharmaceutical Supply Chain Increases Outpatient Drug Costs

A recent PhRMA report found that the cost of provider-administered medicines is significantly inflated by various aspects in the pharmaceutical supply chain, including coinsurance, HOPDs, and hospital consolidation. 

The report took a closer look at financial flows and found that the cost of provider-administered medicines is not just inflated by the prices charged by pharmaceutical manufacturers. 

For example, the increased drug prices are also attributed to hospitals, which retain a large share of what is assumed to be “drug spending” as profit. 

These markups can increase drug costs for patients and induce higher spending throughout the healthcare system overall.

For payments from health plans to hospital outpatient departments, there are three types of payment arrangements commonly used to determine commercial reimbursement for provider-administered medicines. 

These arrangements include the percentage of billed charges, the average sales price plus a percentage, and the average wholesale price minus a percentage. 

Under each of these arrangements, researchers explained, the HOPD earns a gross profit equal to the difference between the reimbursement rate negotiated with the health plan and the HOPD’s acquisition cost. 

Therefore, hospitals can earn notable gross profits on provider-administered medicines for commercially insured patients. 

Most health plans also require patients to pay a copayment of the medicine’s cost, otherwise known as coinsurance. 

Patients with coinsurance pay a percentage of the reimbursement rate negotiated between the health plan and the provider for the medicine, researchers stated. For medicines administered in HOPDs, the median coinsurance paid by the patient is 20 percent. 

But because coinsurance is based on the reimbursement rate negotiated between the health plan and the provider, patients may face higher out-of-pocket costs when a medicine is administered in a setting like HOPD rather than a lower-cost setting, such as a physician’s office.

On top of this, rebates paid from manufacturers to health plans reduce the product’s final net cost to the health plan. Notably, these rebates don’t affect the prices HOPDs pay to acquire medicines.

Oftentimes, manufacturers and health plans may negotiate their rebates in exchange for favorable coverage terms.

Other dynamics, such as hospital consolidation and higher payment rates for HOPDs, can also significantly increase the costs of provider-administered medicines.

Hospital consolidation itself has led to substantial price increases without improvements in either quality or efficiency.

PhRMA noted a recent government study, which found that hospital-physician consolidation significantly grew between 2016 and 2018 and the share of physicians affiliated with a hospital or health system increased from 40 percent to 51 percent. 

And for HOPDs, recent research showed that health plans paid 86 percent more per unit for infused oncology medicines when they were administered in an HOPD setting compared to a physician’s office setting.

Growth in the 340B Drug Discount Program has also resulted in substantial increases in the cost of treatment, but has failed to ensure patients receiving treatment benefit from the discounts. 

PhRMA researchers mentioned an analysis, which showed that the average per-patient spending on outpatient medicines was nearly three times higher for commercially insured patients treated at 340B hospitals than for those treated at non-340B hospitals. 

“Broader efforts are needed to address the underlying market dynamics driving healthcare costs in the commercial market,” researchers stated.  

“These include the delivery of care in less costly and more efficient settings, supporting informed decision making by payers and patients by improving transparency into the markups charged by hospitals, and reforming the 340B program to ensure discounts are used to help the vulnerable patients the program was originally intended to serve,” they concluded.