Cost Drivers and How To Steer Them

The cost of pharmaceutical drugs is one of the leading causes of expensive health care, according to testimony last week at a state Senate Committee on Health hearing examining the biggest cost drivers in California’s health care system.

“We’ve managed the utilization side of things about as much as we can,” said Ian Lewis, a senior research analyst at Unite Here Local 2, a union for workers in the hotel and restaurant industry. “But utilization is just a piece of [the cost of health care], and it’s not the biggest piece, not by far.”

Lewis said there were two factors that, in his opinion, were driving the cost of health care higher. “Physician fees and drug fees make up 80% of the rising trend we see,” Lewis said. “Our state needs to do more, and do more quickly.”

Amy Shin, CEO of Health Plan of San Joaquin, a publicly funded health plan serving San Joaquin and Stanislaus counties, said it has been increasingly difficult to control costs because the health plan has no control over two major costs.

“The major cost drivers are inpatient services and pharmaceuticals,” she said.

The cost of hospital stays varies dramatically among the four major hospitals serving her rural counties, Shin said, from a high of $2,490 a day to spend a day at Sutter Hospital to almost half as much at the county general hospital at $1,549 a day. “The costs of three [of the four] hospitals exceed our state reimbursement by about $2.33 million total,” Shin said, and there’s nothing that can be done about that, she added. 

But it was the issue of drug costs that really got her going.

“Brand name and generic pharmaceutical costs are increasing,” Shin said. That includes a 27% rise in the cost of generic medications, she said, despite the fact that most of them have been on the market as generics for a long time.

The health plan has spent a lot of time and effort to make sure people utilize lower-cost generics, but she said all of that work is useless if the cost of generics rises just as quickly as brand name drugs.

“We have 90% generic utilization rates,” she said, “but when you have the generics themselves rising at the same rates, the utilization effort doesn’t really matter anymore.”

According to Doug McKeever, chief of the CalPERS Health Policy Research Division, it’s the big-ticket cancer and hepatitis C drugs that are just too expensive. “About 2% of our members accounted for 20% of our drug spending,” McKeever said.

Sameer Awsare, the executive director of Pharmacy and Adult and Family Medicine at Kaiser Permanente, said the ratio was even higher at Kaiser:

“Specialty drugs accounted for 1% of the prescriptions, but 25% of the drug spending,” Awsare said.

“Nothing is of more concern than the pharmaceutical industry pricing for specialty drugs,” he said. “To treat the three million [people in the U.S. who have] hepatitis C it would cost us $300 billion. That’s what the U.S. spends now on all drugs.”