Second annual report reveals costs, profits associated with manufacture, sale of diabetes drugs - The Nevada Independent

Eight bottles of insulin sitting on a table on Tuesday, Nov. 3, 2015. (Alan Levine/Courtesy under Creative Commons)

Second annual report reveals costs, profits associated with manufacture, sale of diabetes drugs

June 7th, 2019 - 2:00am

Drug companies made an average of $1.52 in profit for every $1 they spent on manufacturing and administration for diabetes drugs in 2018, just six cents less than the average profits they reported receiving the year before, according to the second annual diabetes drug pricing report released by the Nevada Department of Health and Human Services last week.

The findings of the report held fairly consistent with the results of the first diabetes drug pricing report released earlier this year. The state is required to produce the reports annually pursuant to a diabetes drug pricing law passed by the Legislature in 2017. This session, lawmakers approved and Gov. Steve Sisolak signed into law a bill that will impose the same reporting requirements on asthma drugs.

In total, the state identified 695 so-called national drug codes — which refer to a specific drug in a specific amount in a specific packaging — for essential diabetes drugs in 2018. Of those, 155, or 22.4 percent, experienced a significant price increase over the previous one or two years. (A drug is determined to have a “significant price increase” if its cost increased by more than the medical care component of the Consumer Price Index over the last one or two years.)

“Price increase percentages greater than these published values during each one-year period cannot be justified alone as maintaining pace with general medical inflation,” the report states.

The average increase for drugs over the previous calendar year was 6.4 percent, while the average increase over the two year period was 21.7 percent.

As part of its analysis, the state is required to collect data from both drug manufacturers whose drugs experienced a significant price increase and the middlemen in the drug pricing process, known as pharmacy benefit managers (PBMs), who act as the go-between for insurance companies, pharmacies, and drug companies, involved in selling them. Using that data, the report then attempts to identify some of the factors that contributed to the increasing costs of diabetes drugs.

Here are some of the key findings of the report:

Drug manufacturer costs and profits

As was the case in the first diabetes drug report, the state found wide variations in the profitability of manufacturing diabetes drugs. The average profit reported by manufacturers for essential diabetes drugs was $52 million, 48 times higher than the median, which was about $1 million.

In statistical analysis, the median, which is the middle value in a given dataset, is often a more useful number than the average, which can be skewed by outliers.

“The inflated average compared to the median was due to a subset of reports from large pharmaceutical companies that produced drugs with very high production and administrative costs and profits,” the report states.

Reports from drug manufacturers show that 21 percent of drugs either turned no profit or incurred a loss.

The report also found that the essential diabetes drugs were typically responsible for a small portion, 3.33 percent, of manufacturer’s profits, though there was wide variation with a standard deviation of 12.53 percent.

“Even considering the standard deviation, this data shows that the manufacturers’ profits were generally not dependent on a single drug,” the report states.

The report found that the average drug production cost was $59 million, with an average reported total administrative expenditures, which includes advertising and marketing costs, coming in at about $65.5 million. It noted that those average values were at least 18 times higher than their respective medians, again showing the wide variation in the data.

In total, 76 percent of drugs included in the analysis earned profits that exceeded the costs of production and administrative expenditures.

Financial assistance and rebates

The analysis also looked at whether drug manufacturers provided financial assistance to patients or gave significant rebates to pharmacy benefit managers for facilitating the sale of their drugs.

Fifty-eight percent of reports indicated that drug manufacturers provided no financial assistance, though the average amount of financial assistance provided among the drug companies totaled $12.9 million. The report noted that average was inflated due to a number of bigger drug companies providing higher levels of financial assistance.

The average rebate provided by manufacturers to PBMs was $3 million, though 55 percent reported providing no rebates to PBMs.

“Thus, there is substantial variation among drug manufacturers of EDDs in how they negotiate rebates with PBMs,” the report concluded.

Price increase justification

Manufacturers are also required to submit to the state the reasons why the cost of their diabetes drugs increased more than the rate of medical inflation. The report found that the most common justifications for price increases were research and development (26 percent), the drug having more competitive value (12 percent), changes in marketplace dynamics (11 percent), rebates (11 percent) and investment in manufacturing (8 percent).

Four percent of justifications states that companies increased prices to generate profit, either to maximize value for investors or to avoid not generating a profit at all.

PBM profits

The report found that PBMs negotiated more than $1.9 billion in rebates with manufacturers of diabetes drugs. That total reflects rebates negotiated for most insured Nevadans, with the exception of those covered under plans regulated by the federal government.

Of those negotiated rebates, PBMs kept 6.59 percent of them, which the report noted “might appear small” but represents $126.8 million in rebates.

Sales representatives

Another reporting requirement in the 2017 legislation requires pharmaceutical sales representatives to submit annual reports to the state on any samples or monetary compensation distributed to doctors or other health professionals over the course of the year. The 2018 report identified 1,783 pharmaceutical representatives from 182 drug manufacturers who had distributed compensation or samples in the state.

Of those, 52 percent provided samples or compensation to doctors, 12 percent to nurse practitioners, 10 percent to physician assistants and 9 percent to other health-care providers. The total compensation from pharmaceutical representatives was $2.4 million, with an average of $20.28. Under the report, compensation includes food, beverage, monetary benefits, educational materials, travel and transportation, among other items.

Doctors received a total of $597,023 in compensation from pharmaceutical representatives, though the average for each event was only $24.41. Pharmacists received the most compensation on average, $32.02, followed by registered nurses, who received $25.37. Doctors came in third.

In total, pharmaceutical representatives spent $2.2 million on food and beverage, representing 90 percent of reported compensation, though the average was only $18.83. But the highest average compensation was in the monetary benefit category, with representatives spending $411 on average.

The report also found that the most frequently distributed samples by sales representatives were to treat diabetes (26 percent), lung health (12 percent), mental health (9 percent), and digestive health (8 percent.)

Medicaid spending on diabetes drugs

The report found that 10 percent of Medicaid expenditures on prescription drugs were on essential diabetes drugs, a total of $60.9 million. Among that category of drugs, 65 percent of the spending was on drugs that experienced a significant price increase, for a total of $40 million. (The state used 2017 Medicaid expenditure data in its analysis.)

Insulins accounted for 65 percent of the state’s total spending on essential diabetes drugs.

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