Chapter 8: The Economics of Pharmacotherapeutics

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Okay, so for any advanced practitioner out there, you know that knowing the right drug, the right dose, well that's really only half the challenge, isn't it?

It really is.

Because the other half is navigating the financial side, understanding the gatekeepers who decide if your patient can even get that prescription.

So today, we're diving into the economics of pharmacotherapeutics, really trying to get under the hood of how managed care organizations,

MCOs and pharmacy benefit managers,

PBMs control drug costs.

Right.

Because, you know, if you understand their decision -making process, you can prescribe more effectively, not just clinically, but cost -effectively, too.

And this whole idea of paying for health care, dealing with the financial risk, it's not exactly new.

I mean, patients used to pay fee -for -service, right, out of pocket.

And the serious illness could be devastating financially, just wipe people out.

It had to change.

I was actually reading that the roots of modern prepaid coverage go way back.

Baylor University Hospital, 1929, offered teachers hospital care for just six bucks a year.

Six dollars.

Imagine that.

Yeah, that was really the beginning of trying to manage that risk through prepayment.

But for a long time, insurance was mostly indemnity, that classic fee -for -service model.

Where providers get paid for volume, basically.

More services, more money.

Exactly.

And there was zero incentive to control costs.

Yeah.

So, surprise, surprise, health care spending started to spiral.

Dramatically.

Which is where the government finally stepped in, I take it.

They had to.

The first big structural move was the health maintenance organization, the HMO.

Nixon signed the HMO Act back in 73.

And the goal was specifically cost control.

Explicitly.

Slow down those rising costs by integrating care, using primary care gatekeepers, focusing on prevention and efficiency, trying to build a system.

And that shifted the risk, right?

Put more accountability on the MCO, less on the individual patient just paying fee -for -service.

Precisely.

Now, HMOs grew like crazy in the 80s and 90s.

But the market keeps shifting.

Now we see more PPOs, more high -deductible plans.

But regardless of the specific plan type,

these MCOs, they need solid data, right?

Especially when deciding whether to cover a new drug for potentially hundreds of thousands, even millions of members.

Oh, absolutely.

They're not just looking at, like, the phase three trial results.

They use a whole field called pharmacoeconomics.

Pharmacoeconomics?

Okay.

Yeah.

It's the analytical toolbox they use to basically quantify a drug's value against its cost compared to everything else available.

Okay.

So, tools in the toolbox.

What are the main methods they use?

You mentioned four primary types.

So, the first one, kind of the foundation, is cost -benefit analysis,

CVA.

Yeah, you can't ashit.

Got it.

And it sounds simple.

You try to convert all the outcomes, the good stuff, the benefits, and obviously the costs into one single unit, money.

Usually dollars.

Usually U .S.

dollars, yeah, which is great for comparing, say, a drug program versus maybe a public health initiative, totally different things.

How do you put a price tag on everything?

Like, feeling better or peace of mind seems tricky.

That's the major limitation, exactly.

Those intangible benefits are really hard to quantify in a way everyone agrees on.

Okay, so CVA tries to monetize everything, but they don't just pick the absolute cheapest option if it doesn't work as well, right?

There must be another analysis for that.

Correct.

When you have two or more options that are considered to have identical clinical outcomes, same efficacy, same safety profile, then you use cost minimization analysis or CMA.

Identical outcomes.

Identical.

So if the results are the same, the only thing left to compare is the price tag.

Ah, so that's what drives generic substitution, find the cheapest twin.

That's the classic use case, yeah, it's the low -hanging fruit for savings.

Makes sense.

But most drugs aren't identical twins.

What happens when you're comparing clinically different treatments?

Good question.

That's when we move to cost -effectiveness analysis, CEA.

Okay.

Here, you're combining the monetary part with a specific health outcome that isn't money.

You end up with a ratio.

Like dollars per something?

Exactly.

Like dollars spent per life year saved,

or dollars per point reduction in blood pressure, or blood glucose, a specific clinical measure.

Okay, that seems more clinically relevant.

And that leads us to the fourth type, the one often called the gold standard.

That would be cost -utility analysis, CUA.

This one focuses on quality of life.

Quality, not just quantity of life year.

It uses a metric called the quality -adjusted life year, or QALY is the main outcome.

QALY, I heard that term a lot.

Yeah, it's huge.

A QALY tries to capture both how long a patient lives after a treatment and how well they live during that time.

One QALY is like one year in perfect health.

So why is the QAL considered the gold standard, strategically speaking, for these MCOs?

The big advantage of the QALY is its portability.

Let's say MCO compare the value of spending money on, say, a really expensive cancer drug for a small group versus maybe managing diabetes better for a huge population.

Apples to apples, even with different diseases.

Exactly.

It gives them a seemingly objective way to decide where to put their resources,

justifying maybe not covering a very high -cost drug if the 2 -AOY gain is pretty small.

Okay, so they've done their pharmacoeconomic homework using CBA, CMA, CEA, CUA.

Now they need to actually implement those decisions.

And with drug spending being, what, $335 billion back in 2018,

the pressure is immense.

Immense.

And the main tool for enforcing those coverage decisions is the formulary.

The drug list.

Every practitioner knows about formulary.

Right, the preferred drug list.

And its stated purpose is always to promote medications that are safer, more effective clinically, or more cost -effective.

How are they usually set up?

Typically, they're organized by a therapeutic category.

Yeah.

And they'll list the drug, brand, or generic status, often some kind of cost indicator.

You see those dollar signs.

Yeah.

Lowest cost gets one dollar sign.

Right.

And it shows the copay tier.

And importantly, any utilization management rules, like prior authorization or step therapy needed.

Now, I remember learning about different types of formulary, like closed versus open.

Yeah.

Historically, you had closed formularies, very restrictive.

Only drugs on the list are covered, period.

Then open formularies, basically.

Anything is covered, though maybe with different copays.

Neither seems ideal, too restrictive or too expensive.

Exactly.

Which is why the most common approach now is the tiered formulary.

It's the compromise.

Tier 1, tier 2, tier 3.

We see these all the time.

Right.

Tier 1 is usually low -cost generics.

Tier 2 might be preferred brand names.

Tier 3 and higher could be tier 4.

Tier 5 now are for non -preferred brands or expensive specialty drugs.

And the genius of the tiers is?

It nudges behavior without an outright no.

By making those higher tiers much more expensive for the patient out of pocket, they effectively steer people towards the lower -cost preferred options in tiers 1 and 2.

Clever.

It works, too.

You mentioned almost half of employer plans have four or more tiers now.

It's very effective financially for the MCO.

Okay.

So who actually builds and maintains this formulary, decides what goes in what tier?

That's the job of the Pharmacy and Therapeutics Committee, or P &T Committee.

The P &T Committee.

Who sits on these committees?

Is it just pharmacists?

No.

It's designed to be broader.

Primarily physicians and pharmacists, yes.

But you often find nurses, nurse practitioners, PAs, administrators, sometimes even ethicists or patient advocates.

They aim for a mix of perspectives.

And their job is basically constant review and revision of that formulary.

Constantly.

When a new drug comes up or new data emerges, they review it.

What key information are they really digging into when they consider adding a drug or changing its status?

It's pretty comprehensive.

They look at the basics, of course, FDA approved uses, how the drug works, safety data, any black box warnings.

The standard stuff.

But crucially, they want clinical evidence.

Not just did it lower a lab value, but did it improve actual patient outcomes?

Did it reduce heart attacks, prevent hospitalizations?

Patient -oriented outcomes.

Makes sense.

And of course, the pharmacoeconomic data we just talked about.

How does this cost and value compare to what's already on the formulary?

And they're supposed to be very skeptical data funded solely by the drug manufacturer.

Looking out for bias.

Good.

So the P &T committee sets the formulary rules and the MCO needs tools to actually manage how those drugs are used day to day to control utilization and costs.

And the biggest tool, the one with the most savings, is probably generic substitution.

By far.

We're talking massive savings, nearly $2 trillion between 2009 and 2018, just from substituting generics for brands like, say, pregabalin for Lyrica.

$2 trillion.

That's staggering.

But how do we know those generics are truly equivalent?

That's the FDA's job.

They assign therapeutic equivalence codes.

The key one is A rated.

A rated means?

It means the FDA considers the generic to be bio equivalent and therapeutically equivalent.

Same clinical effect, same safety profile.

So pharmacists can substitute automatically.

And if it's not A rated?

Then it gets a B rating, meaning it's not considered equivalent and substitutions shouldn't happen automatically.

Okay, but sometimes, even with an A rated generic, the prescriber might want the patient to stay on the brand for clinical reasons, right?

Absolutely.

Especially for what we call narrow therapeutic index drugs.

Things like warfarin, some seizure meds, levothyroxine.

Where tiny differences could matter.

Exactly.

In those cases, the prescriber can use a specific dispense as written code or DAW code.

DAW codes.

Right.

Specifically, DAW 7 is often used in these situations.

It tells the pharmacy, no substitution, brand name medically necessary, overriding the automatic generic switch.

Good tool for prescribers to have.

Now, besides generics, there's also therapeutic interchange.

How is that different?

Therapeutic interchange is substituting a drug that's chemically different, but considered therapeutically similar.

Same class, similar effect.

Like switching between different statins.

That's a classic example.

Or different proton pump inhibitors.

This has become much more common because of, well, Me2 drugs.

Me name.

New drugs that come out in an existing class often don't offer any real clinical advantage over older, cheaper options.

But they launch with a really high price tag.

So therapeutic interchange lets the MCO push towards the more cost -effective established drug within the same class.

Precisely.

Now, in an outpatient pharmacy setting, the pharmacist usually needs to contact the prescriber to okay this kind of switch.

But in hospitals or integrated systems,

the P &T committee might approve protocols allowing pharmacists to make these interchanges automatically based on the formulary.

Okay.

Then we get to the ones that often cause the most headaches for prescribers and patients.

Prior authorization and step therapy.

Yes.

PA.

The bane of many practices.

So PA is basically kneeing approval before the drug is covered.

Right.

It's typically required for drugs that are not on the formulary or are very expensive or maybe have safety concerns or potential for inappropriate use.

And the process usually involves the pharmacy trying to fill it.

The claim gets rejected electronically.

The pharmacy notifies the prescriber's office.

And then the prescriber or their staff has to decide.

Either go through the often time -consuming PA process with the insurance company or just switch the patient to a different covered drug.

Which takes time away from patient care.

It absolutely does.

And then step therapy or ST is really a specific type of prior authorization.

It mandates a certain sequence of treatment.

You have to step through one or more preferred drugs first and show they didn't work or weren't tolerated before the MCO will approve the target drug.

And this can be for cost reasons or clinical reasons?

Both.

A cost -driven example is requiring a trial of a generic antipsychotic before approving a newer, very expensive branded one like say, Resulti.

Okay.

A clinically driven example might be requiring patients with type 2 diabetes to try Metformin first, the foundational drug, before approving a newer, pricier agent like a DPP4 inhibitor, you know, Cliptin.

So with all these rules, formularies, tiers, PA, step therapy,

how do MCOs actually track if prescribers are, you know, following the program?

They can't just look at total spending, can they?

No.

Total spending is misleading.

A busy practice will naturally have higher total costs.

They use a much smarter metric.

The per member, per month report or PMPM.

PMPM, per member, per month.

Right.

It calculates the average drug cost for each patient enrolled with that MCO for each month attributed to a specific prescriber or group.

Ah, so it averages it out.

Exactly.

So you might have a prescriber, let's call her prescriber A, who has really high total spending on cholesterol drugs because she manages a huge panel of complex patients.

But her PMPM cost might be right around the average.

She's actually efficient despite the high total.

Correct.

But then you might have prescriber C with maybe lower total spending, but their PMPM cost is the highest.

That tells the MCO that prescriber C is consistently choosing more expensive options per patient.

And that's the prescriber who might get a call or a letter from the MCO's pharmacy department.

That's who the likely investigator try to educate.

Yes.

It pinpoints potential inefficiency.

Makes sense.

Okay.

Shifting gears slightly.

Technology is also changing prescribing patterns pretty dramatically, isn't it?

Especially e -prescribing.

Oh, absolutely.

ERX has been a game changer.

It gets rid of so many problems, illegible handwriting, transcription errors, lost paper scripts, even potential fraud.

And the safety impact is real.

Very real.

There was one study I remember that found something like 37 errors per 100 handwritten prescriptions.

With e -prescriptions, that dropped to only seven per 100.

Wow.

Huge reduction.

Massive.

And the efficiency gains are why it's basically becoming mandatory.

The support act, for instance, required e -prescribing for all controlled substances under Medicare Part D starting, I think, January 2022.

Right.

And another tech trend MCO's are pushing is telehealth or telemedicine.

Yeah.

There's a slight difference.

Telehealth is broader, includes remote monitoring and education, while telemedicine is more focused on the virtual visit itself.

But MCO's love both.

Why the enthusiasm from their end?

Cost savings, primarily.

If a patient can have a quick virtual visit for a minor issue instead of going to the ER or an urgent care center, that saves the plan a lot of money.

Plus improves access,

potentially, especially for specialists or rural areas.

Definitely improves access and convenience for the patient, too.

It's a win -win in many cases, which is why MCO's often incentivize its use.

Okay.

So bringing it to one of the really current conflicts, this battle between drug manufacturers and MCO's over patient costs.

Let's talk copay cards versus copay accumulator programs.

Right.

This is a big one, especially for expensive specialty drugs.

So the manufacturer issues a copay card or coupon to the patient.

To lower their out -of -pocket cost, make the drug more affordable, helps with adherence.

Exactly.

It brings the patient's copay down, sometimes to zero.

But the MCO saw this and thought, wait a minute.

The manufacturer is helping the patient meet our deductible.

Precisely.

So they fought back with these copay accumulator programs.

And what do those do?

Under an accumulator program, the money paid by the manufacturer using that copay card does not count towards the patient's annual deductible or their out -of -pocket maximum for the year.

Ouch.

So the patient uses up the manufacturer's assistance?

Thinking they're making progress on their deductible and then bam, the card runs out.

And suddenly they're hit with the full cost of the drug because, according to the health plan, they haven't actually paid anything towards their deductible themselves yet.

That can be thousands of dollars suddenly appearing mid -year.

It can be a huge financial shock.

It's basically the MCO ensuring that their financial responsibility only kicks in after the patient has personally met their full deductible amount, regardless of any manufacturer help.

It shifts the burden back.

Hashtag tag outro.

Wow.

Okay.

So we've really covered a lot of ground here from, you know, that $6 premium back in 1929.

A long way from there.

All the way to modern P &T committees using QALYs to weigh value, tiered formularies, e -prescribing, and these copay accumulator fights.

It really paints a picture of the complex forces shaping how we prescribe and how patients access medications.

It absolutely does.

And the goal for you, the listener, is to really internalize this MCO playbook.

Understanding why these systems are in place helps you navigate them more effectively.

Making those wise, cost -effective choices becomes part of the clinical decision -making really.

It has to be.

And what's interesting is that ultimately both practitioners and MCOs would say their goal is high -quality patient care.

They just approach it through very different lenses, especially financial ones.

Which lack to a final thought, perhaps.

Yeah.

I mean, given all these controls we've discussed, the PAs, the step edits, the accumulators, it really makes you think, what specific practical steps can you, as a practitioner,

take day to day?

How can you effectively advocate for your patient's access, make sure they can adhere to needed therapy, while still operating within this very cost -conscious health care system we have?

A really important question to keep reflecting on as you navigate these challenges in practice.

Well, thank you for joining us on this deep dive.

And as always, a warm thank you from the Last Minute Lecture Team.