Association for Public Policy Analysis & Management

There has been considerable interest in the rising cost of brand-name drugs, and in particular, specialty drugs paid for by Medicare. For example, over the 2010 to 2015 period, the average cost of a prescription for a brand-name specialty drug increased by over 20 percent per year in Medicare Part D. CBO found that for specialty brand-name drugs, innovative new molecules explained about 45 percent of the increases in the average cost of a specialty brand-name drug over the period (see Congressional Budget Office, Prices for and Spending on Specialty Drugs in Medicare Part D and Medicaid, An In Depth Analysis: Working Paper 2019-02 March 19, 2019). This paper will compare the increase in the average net cost of brand-name specialty drugs over the 2010 to 2017 period to that for brand-name nonspecialty drugs in Medicare Part D. For both groups of drugs, we will break out the increase in the average cost of a prescription over the period into three components: the introduction of new innovative drugs, price increases for existing drugs, and changes in mix over time for existing drugs.

We adopt the definition of specialty drugs developed by IMS Health (now IQVIA). Under that definition, specialty drugs treat a chronic, complex, or rare disease and have at least four of seven additional characteristics (such as costing at least $6,000 per year and requiring special handling in the supply chain). We use beneficiary-level claims data for Medicare Part D to estimate total spending at retail prices and the number of units and prescriptions dispensed over the 2010-2017 period by drug. We also have data on total rebates and discounts paid by drug manufacturers under Part D by drug, which allows us to estimate net prices for brand-name specialty and nonspecialty drugs. We then combine those data with Redbook data (by NDC code), which has drug product characteristics as well as with a list of specialty drugs on the market in 2015 provided by IQVIA. To continue the analysis through 2017, we will use the IQVIA definition to identify new specialty drugs approved by FDA in 2016 and 2017.

Separating out the contribution of new drugs to cost growth is fairly new. See for example, “The Contribution of New Product Entry Versus Existing Product Inflation in the Rising Cost of Drugs” by Inmaculada Hernandez et al, Health Affairs, January 2019. Our methodological approach differs from theirs in several respects. In particular, we have access to net prices, which allow us to account for the average prices that manufacturers negotiate with insurers. In addition, we decompose price growth for existing drugs using a price index approach, which allows us to separate the effect of changes in drug mix from year-over-year price growth for a given drug. As utilization shifts toward more expensive drugs over time, it is important to isolate price increases from utilization changes so that policymakers and stakeholders have a clear understanding of the role of price growth in drug spending growth.