shopping trolley with medicine

Step therapy explained: An increasingly popular tool for cost control

News that the Centers for Medicare and Medicaid Services will allow Medicare Advantage programs to enact “step therapy” programs for drugs under Part B as part of an effort to combat rising drug prices has been making rounds in the health policy world recently.

Step therapy is used by all major private insurers and is aimed at curbing expenditures on expensive drugs. It requires that a patient to try a less expensive alternative treatment. Those who fail treatment with the less expensive drug would then be eligible for coverage of the more expensive treatment. Note that it is very similar to prior authorization, a ubiquitous policy tool in which a drug is approved for coverage only after ensuring certain clinical criteria are met.

What was once a relatively rare tool is now commonly used. I examined UnitedHealthcare’s list of step therapy drugs and there are now over 100 listings. This is an order of magnitude increase from the number of drugs listed just four years ago, when I first got interested in this issue.

Drugs listed for step therapy tend to be either new, extremely expensive therapies (e.g., 3rd-line biologics for rheumatoid arthritis, sofosbuvir for hepatitis C) or more expensive formulations of common drugs (e.g., extended release formulation of quetiapine).

Tackling excessive drug prices seems to be one of the few things that Democrats and Republicans agree on, though few concrete steps have been taken thus far. This summer, the Trump Administration released a blueprint to lower drug prices and out-of-pocket costs. Some of the better policy points seem to be directed at the specific anti-competitive behaviors that have slowed down generic entrants. These include actions by brand-name manufacturers imposing barriers for generic manufacturers in obtaining drug samples for bioequivalence studies, as well as price-gouging by single-source generics (i.e., the Martin Shkreli problem). Introducing step therapy for Medicare Part B, as CMS just announced, is another one of these policies to keep drug prices and spending down.

However, other policy proposals seem completely off-base.

For example, one proposal suggests that by getting other countries to pay more for drugs, pharmaceutical companies would result in lower drug prices in the US. I use this example because beyond the unrealistic proposition that other countries would ever pay more for pharmaceuticals, the proposal simply gets the economics of drug prices backwards.

Other countries pay less for pharmaceuticals because they negotiate the drug coverage and price on a national basis using the threat of non-coverage to negotiate better prices. In the U.S., we allow a manufacturer to set the price and then essentially require insurers to provide coverage of “medically necessary” therapies. This basic fact of the U.S. pharmaceutical market is key for understanding why step therapy policies are being pursued by insurers.

When insurers are unable to negotiate drug prices in a meaningful way, they turn to controlling the “demand” to reduce the quantity supplied. For much of the last few decades, this has been in the form of formularies with tiered cost-sharing. Preferred drugs are placed on lower-tiers with minimal cost-sharing for the patient, and the more expensive therapies were placed on more expensive tiers, providing a financial incentive for patients to choose the less expensive therapy.

Of course, in the real world, patients often are only prescribed a single drug and many physicians have no idea which formulary tier any given drug is for any given patient’s insurance. So we are left with a system in which patients face high out-of-pocket costs and have to make a decision on whether to fill the medicine or not (or ask for another medicine from their physician).

Pharmaceutical companies have turned to using drug coupon programs to minimize out-of-pocket costs for patients, eliminating the financial incentive to utilize less expensive therapies. This is a clever way of inducing demand towards more expensive drugs. Pharmaceutical companies more than make up the cost of the drug coupon as the amount is dwarfed by the payment from the insurer for the price of the drug. It also likely leads to higher-priced drugs as pharmaceutical companies have less of an need to negotiate with insurers for preferred tiering for their drugs. Note that for this reason drug coupons are not allowed by Medicare or Medicaid under the argument that it violates federal anti-kickback laws.

As a result, insurance companies are turning to step therapy to more actively manage drug utilization, and as a tool to negotiate on pricing and side-step drug coupons.

There are many parallels with step therapy to the HMO model. In both, insurers are acting as the stewards of health resources with an eye on costs. The goal is intended to reduce spending on low-value care. However, there are certainly incentives to shirk on expensive-but-high-value care as well, to cut costs. Most studies have found that step therapies do save money on the pharmaceutical spending side, however, some have found increased medical utilization as a result of treatment discontinuity. However, the empirical effects of step therapy is an understudied area and likely will depend on the specifics of a particular step therapy protocol.

Several questions regarding the effectiveness and ethics of step therapy remain. First, are patients being harmed by step therapy? Second, does step therapy overly burden physicians and infringe on their medical decision-making, particularly as more and more drugs join the ranks of step therapy protocols? Third, does it really make sense to ration drug coverage in this way, as opposed to a simply negotiating drug coverage and prices on a national basis likely most every other country?

Personally, I think well-done step therapy policies may be one of few robust tools that insurers have to keep pharmaceutical prices and spending in check in the absence of national negotiations of drug coverage like in other countries. In an ideal world, one could even envision that many patients could be made better off with the implementation of more step therapy if they were implemented with minimal copays (after all why would copays, meant chiefly to discourage frivolous care, be necessary if both your doctor and your insurer believe a treatment is medically appropriate).

However, we don’t live in an ideal world. It is inevitable that some insurers will go too far in an effort to cut costs. Ultimately, step therapy, for all its potential, good or bad, is a symptom of our uniquely American healthcare system that is expensive, restricts access based on ability of pay, and is confusing and burdensome for both patients and physicians.

Over the next few years, we will see how this experiment in Medicare drug coverage turns out. But I have high hopes that one day we will realize that allowing Medicare negotiate drug prices upfront, just like most every other country, will be a far more effective solution to our drug pricing problem.

Rahul Nayak is a 2018-2019 Student Fellow at the Petrie-Flom Center.

Rahul Nayak

Rahul Nayak was a fourth-year medical student at Harvard Medical School during his fellowship year. As part of the Program on Regulation, Therapeutics, and Law (PORTAL) at Brigham & Women's Hospital, his research interests are in pharmaceutical policy, physician prescribing habits, and access to health care. He attended Duke University, where he studied biomedical engineering and economics. He then completed a two-year fellowship at the NIH Department of Bioethics. His research has led to first-author publications in JAMA, Annals of Internal Medicine, Health Affairs, and Bioethics. He is currently a resident in the internal medicine residency program at Massachusetts General Hospital. Rahul was a Student Fellow during the 2018-2019 academic year, and completed a project entitled “Public Support for Late-Stage New Drug Discovery,” which examines the role of public-sector research on new drug discovery.

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