Modest Drug Costs Hikes Predicted for 2024. Drug Expenditures Are a Different Story

One expert believes that drug price increases will fall in line with inflation as measured by the CPI.

The pharmaceutical sector is a hive of activity these days, buzzing with breakthrough treatments for stubborn diseases such as Alzheimer's and obesity, and with sickle cell anemia, an outfight cure.

These drugs can be very expensive. The gene therapy needed to cure sickle cell anemia, for example, costs almost $3 million per patient. By comparison, the Alzheimer's drug Leqembi, at almost $25,500 per patient, per year, seems like a bargain. The wildly popular weight-loss drug Ozempic, with a cost of merely $900 to $1,300 per month, sounds like a giveaway.

Despite the headlines that conflate expensive new drug treatments with rising drug costs, Eric Tichy, Pharm.D., MBA, vice chair of pharmacy formulary at the Mayo ClinicMayo Clinic, says it's important to make the distinctions between drug costs and drug expenditures.

He offers his thoughts on the topic, and other issues that are expected to confront providers in 2024 in this interview, which has been edited for brevity and clarity.

HL: Do you anticipate big drug price hikes in 2024?

Tichy: There are several things that are going to prevent inflation of drug prices. One of those is the Inflation Reduction Act, which has caps on how much a drug price can be raised year-over-year based on the Consumer Price Index for that given year.

Where we've seen a lot of spend increase over the last couple of years is where there's new drugs developed to treat things that didn't exist before. Think about Alzheimer's disease, where there haven't been effective medications in the marketplace in the last two or three decades. There are some new medications that have been approved to treat Alzheimer's and they're modestly expensive. However, the population of how many people can be treated is very high. That's something that could increase expenditures.

Also, we haven't had effective weight-loss medications until very recently. When you have a therapy that meets an unmet need, there can be huge demand. That's why there's so much uptake of those medications. Those are our biggest drug spends now. Weight-loss drugs will be the No. 1 spend in 2023 once we have all the data.

There's potentially huge downstream savings. We're learning, for example, that some of these medications prevent heart attacks and things like that. But we need time. With some of these savings, we won't see it for 10, 15, 20 years. As we have more of that information over time, it will support the prices of these medications and make the case for why payers should cover them.

HL: What is driving high drug costs?

Tichy: Some of these new drugs treat very rare conditions affecting small populations, and they’re priced to maintain profitability for the manufacturers, despite a low treatment population. If you didn't have these prices, there would not be incentives for manufacturers to develop these products.

The Orphan Drug Act was developed to incentivize production of these rare medications that treat rare conditions, and new developments in medicine have allowed us to get more precise with how we treat these conditions. It's this confluence that's leading to a larger number of high-cost products hitting the marketplace.

There's also an important nuance between drug prices and drug expenditures. I expect the price growth will be close to inflation, maybe even less than inflation. It has been less than inflation for the last couple of years.

People conflate expenditures with prices, and we expect drug expenditures will keep going up. A lot of that's because there are new drugs for things that as of yet don't have treatments, or there are drugs being developed where the current treatment is cheap but ineffective.

HL: How do you see the ongoing drug shortages playing out for hospitals in 2024?

Tichy: Hospitals have had problems with drug shortages for going on two decades and it's gotten worse recently. These shortages are not going to get better unless there are some serious policy changes. I'm optimistic that there's a lot of attention around it, and that Congress is very informed about it.

HL: Have we reached a point where treatments or cures are available – but unaffordable - for diseases such as sickle cell anemia or dementia?

Tichy: The key word is "cure." With sickle cell, for example, you're curing the disease for patients who suffer through a lifetime of illness that might put them in and out of the hospital. They might have to take other expensive medications. Hemophilia patients often spend hundreds of thousands of dollars a year on clotting factor medications. Gene therapies can treat and cure disease in one treatment.

Another challenge is that the healthcare system is designed for chronic therapies. With weight-loss medications, the manufacturer has a patient on that for a lifetime. If they come off the medication they regain their weight. With sickle cell therapy, they do this treatment and they're not going to have symptoms of sickle cell disease for the rest of their lives. How do you pay for that all-in-one, lump-sum upfront? Our healthcare system is not designed to do that.

HL: Didn’t we see that play out with hepatitis C a few years back?

Tichy: That's a great example because about 10 years ago, people were saying, "these hepatitis C medications are going to bankrupt us. It costs $30,000 a month for those therapies." They were $30,000 a month, but for three months of therapy you cured hepatitis C. Now we rarely are treating hep C because we've cured so many people, and by curing hep C we prevent the need for liver transplants and reduce end-stage liver disease and cirrhosis that generates long-term savings.

The financial models are challenging because cost is paid upfront for the medication, rather than like chronic diseases where it spans a patient's lifetime.

HL: Are payers discounting reductions in downstream expenditures?

Tichy: Health insurance companies look at their covered lives and say "the average person that we cover is only with our plan for a few years. The benefits of this medication accrue over a lifetime. When the patient has a heart attack or other complications, they might no longer be on our insurance plan. They're going to be on Medicare by that point."

The benefits of weight-loss medications are paid for by the commercial insurance that they're on now because they're employed, and some benefit is going to accrue to the employer but most of it is going to accrue to Medicare once they're over 65 and not having as many complications in their older age.

That’s one of the challenges. People aren't on the same health insurance plan for their entire lifetime. You could pay for my gene therapy that I got yesterday and a month later I switch companies and that new company gets all benefits and the previous one doesn't.

HL: Are downstream savings a factor in setting the prices for these drugs?

Tichy: Payers and manufacturers are doing those pharma-economic analyses and they're coming up with drug prices based on different models. There may be a disagreement between payers and manufacturers on what that's worth. Obviously, the manufacturer has an incentive to have that be a higher number, and the payer would like it to be a smaller number.

HL: Can this be solved by the market, or will it require government intervention?

Tichy: That has yet to be determined. As the technology gets more effective, these treatments can be brought to market more easily with less cost. Think about the COVID vaccines. These new platforms can bring new vaccines to the marketplace and quickly adapt them to variants. That's how the market, through technological advancements, can bring down costs.

The other thing we need is more competition. When the technological burdens are lower, that creates opportunities for more players to come into the market and leads to downward pressure on prices.

Payers may need to come up with different models and maybe even the manufacturers themselves. Some manufacturers have plans where the cost of the drug is spread out over a number of years and that's a market solution. Instead of having to pay everything up front, you spread it out over three years or more. It gets challenging over the longer term as patients may switch insurance.

HL: How does Mayo Clinic determine who will pay for ultra-high-cost therapies, and what options do you have if insurers won't pay for it?

Tichy: That's a big ethical dilemma. With almost all care that we give, we go through a financial process with the payers to make sure that we have that coverage, because at the end of the day, the patient would be the person who's billed for it. We always work with the patients to make sure that, if their insurance doesn't cover it, we can sometimes look to foundations that can cover the cost of drugs. Sometimes manufacturers have programs that will provide the drug if a patient is not able to afford it.

HL: You say in a recent report that high drug prices "may fundamentally alter how health systems deliver care." How so?

Tichy: Mayo Clinic might see a fair number of patients with rare conditions each year. At other organizations, you might see one patient every couple of years. So, these drugs that cure the disease may not be worth the investment for some smaller organizations. We may end up with a system where there's just a handful of centers across the country that are giving these therapies. The patients get referred to those centers, they get cured from those conditions, and they're no longer a chronic patient at their smaller community hospital.

HL: You talk about collaboration between pharmacy leaders and finance experts to assess financial risk associated with the provision of ultra-high-cost drugs. What would that entail?

Tichy: It's an important part of the treatment process to make sure that you have approval and coverage by the payer before you move forward with therapy. Just the raw cost of gene therapies can create cashflow problems for organizations depending on when they get billed for it versus when they get reimbursed by payers. If I'm going to spend $4 million on one treatment for one patient on a given day, if I do two of those in a month versus 10, that can have a big impact on our finances. Those are the things that we need to coordinate with our finance colleagues.

HL: Could AI help providers address drug expenditures?

Tichy: It could help with medications that have very specific indications and the patients with these conditions are rare. Using a patient's medical record, AI could quickly determine if a patient is eligible for therapy. AI can also alleviate the administrative burden that goes along with pulling all that information together.

AI gains its intelligence through the data that is put into the program, but a lot of clinical trials are done on adult, white males. So sometimes, we don't have the depth and breadth of data for other populations, such as children and minority groups. If there are differences in how patients with different genetic backgrounds respond, we could see harm. Unintentional biases can lead to incorrect treatments.

HL: How do you see the ongoing drug shortages playing out at the hospital level in 2024?

Tichy: Hospitals have had problems with drug shortages for going on two decades and it's gotten worse recently. These shortages are not going to get better unless there are some serious policy changes. I'm optimistic that there's a lot of attention around it, and that Congress is very informed about it.

It requires coordinated action by the government. We need to have industrial policy around generic drugs similar to what we do with food. With the Food and Drug Administration, we don't have food shortages because the Department of Agriculture coordinates and ensures that farms are producing the food that we need. We need something similar around drugs to ensure the continuity of our drug supply.