Drug spend is on track to account for 40% of total annual healthcare spend for commercial plans by 2025 and 2025 is just around the corner. And that's compared to just 4% in 1995. To date, there are 600 new to market drugs seeking FDA approval by 2022 and of those 70% are specialty drugs. Sally and Leigh's guest is Sarah Kline, Partner/Chief Operations Officer at 44 North. This episode covers the supply chain of markups and discounts that are ultimately paid by the employer and employee. You're feeding the supply chain and everyone's taking a little piece of that cost, which really just adds to the cost increase cycle. Listen to this episode: Everyone gets a slice, but who's paying for the specialty drug cake?
The complete transcript to this episode is below.
Sally Pace (01:25):
Thanks, everybody, for tuning in. We are really excited to bring Sarah Kline with ARORx to today's podcast, and we're going to be talking about some really interesting things that her team is doing. It's a topic that is, I'm sure, as everyone's heading into renewal season right now, high on everyone's priority list, and that is the rising cost of prescription drugs.
Sally Pace (01:51):
Before we jump into that though, Sarah, do you mind telling us a little bit about the company? Can you tell us about the genesis of ARORx and why you do what you do?
Sarah Kline (02:04):
Absolutely. I am Sarah Kline and I'm Chief Operations Officer of ARORx, which is a division of 44North. ARORx was really born out of seeing the rising cost of prescription drug spend. 44North is an insurance broker. We focus on employee benefits. Year after year, just seeing our employers, our clients, struggling with the increase in their healthcare costs, it really drove us to find a solution. And that's something that 44North does really well. It's why we became a third party administrator and administering different alternative funding strategies for our clients. The pharmacy space really was a natural progression for us because again, it's the fastest growing expense in healthcare. We knew something needed to be done that we weren't seeing out in the industry. So we decided that we would bring ARORx in to really focus on high-cost drug management.
Leigh Dill (03:01):
You're right. Prescription drug spend is the fastest growing expense in healthcare. What does that look like from y'all's viewpoint? What are you seeing?
Sarah Kline (03:09):
Sure. Well, Sally, what that looks like is drug spend is on track to account for 40% of total annual healthcare spend for commercial plans by 2025, and 2025 is just around the corner.
Leigh Dill (03:23):
Sarah Kline (03:23):
And that's compared to just 4% in 1995. So it's on track really to overtake the cost even of inpatient hospital care, which when we think of healthcare spend, we always think of high-cost procedures and high-cost care being something catastrophic you're in the hospital for. Really that's translated more into the pharmacy space, where it's overtaking that cost.
Sarah Kline (03:46):
Certainly a part of that is just due to the increased utilization of drugs. Currently, 11% of the US population is taking five or more prescriptions a month. That sounds crazy to me. That's compared to just 4% in 1995, really more than doubled the amount of prescriptions that we're taking.
Sarah Kline (04:06):
That really is probably not a surprise to anyone because you are sitting on the couch watching TV. Last year, we were all stuck in the house. We probably watched a lot of TV, and there were a lot of prescription commercials out there. We're constantly being marketed pharmaceuticals. Currently, there are 7,000 prescription medications in development, which is manufacturers do what they do best. They develop new drugs, which is great. There's certainly a lot of advancements and treatments of really serious conditions, but that just means that that pipeline of new and more expensive drugs are coming to market. Of that 7,000 in development, there's 600 seeking FDA approval by 2022, which is only a few short months away. And of those, 70% are for specialty drugs. Those specialty drugs average about $55,000 annually, and most people are not aware of what the true cost of drugs are. We like to use, when we're trying to educate, use sources like GoodRx - people are really familiar with that name and that branding - just to look it up and say, "This drug cost more than just your copays, 55,000 annually."
Sarah Kline (05:19):
The number one selling drug in 2020 was HUMIRA. HUMIRA's been around for a while. It's probably on everybody's drug list, their top drug list. That costs $70,000 annually for someone who's taking HUMIRA every month. What that translates to for health plans is for every 150 employees, at least one new specialty drug is being added to their plan each year. So it's a significant cost that just continues to increase. And although it's really minimal utilization, so when I say only one specialty drug for every 150 employees, utilization-wise, volume-wise, it's a small number, but it represents 40 to 50% of total pharmacy spend.
Sarah Kline (06:02):
That's really what we're seeing as the costs are growing. And that disparity is just going to increase more as more of those drugs are coming to market.
Sally Pace (06:11):
So what are you doing, Sarah? What is a ARORx doing to combat those costs? Are they working with the formularies and not allowing some of these high-cost specialty drugs? Or are you going to negotiations with the drug providers? What is y'all's course of action?
Sarah Kline (06:31):
Sure. I'll take a step back a little bit and talk about just some of the traditional things that have been done first and then walk it into where we're focusing because a lot of things have already been done in the market over the years. Things like really pushing generic utilization have been around for a very long time. There was a day when you didn't have a co-pay at all for prescriptions, and then it turned into a $5 co-pay or $10 copay. The health insurance industry has worked towards moving some of that cost and education over to patients and the employees of the employer-sponsored plan so that they at least have a little bit of skin in the game.
Sarah Kline (07:09):
It's done a good job. Between that and things like step therapy, where patients have to take a less expensive drug before they take the most expensive one that maybe their doctor prescribed. But that's probably been over the last 30, 30-some odd years that that's been happening. It's pretty common to see 85%-plus generic utilization. That's something that should already be in place. Whatever generic opportunity exists, it's already being maximized.
Sarah Kline (07:38):
Where ARO comes into play is we really focus on the drugs that can't be impacted by the generic transition, and that's specialty and high-cost drugs, which account for 40 to 50% of the overall prescription spend. What I mean by specialty drugs, these are things that are biologics so they're biologically engineered. They're the most expensive drugs on the market. They're relatively more recent, but they have been on the market long enough that, normally, when you look at the traditional brand to generic transition, most of the time that market exclusivity has dropped off. Well, that isn't the case with biologics because you can't really create an equivalent with the biologics. So you have biosimilars that come to market. It's very hard for those to get approved because they don't exactly replicate what's happening like in the generic space that it can.
Sarah Kline (08:38):
When we look at those specialty drugs, there are about 200 biologic drugs that were approved by the FDA. But when it comes to biosimilars, there are only 23 biosimilars that have been approved because they don't exactly replicate that. Because that process is harder, you don't see as many to market, that competition isn't there. So you don't see those reduced costs like you would see in a generic situation.
Sarah Kline (09:04):
And then on top of that, when they are able to be manufactured, the manufacturers of the brand drugs, the biologics, they've used legal settlements to delay the introduction of those biosimilars. It holds off that competition even longer. So even fewer actually make it to market.
Sarah Kline (09:24):
There really isn't that opportunity just to do things like the step therapies that you can do when you've got an equivalent there. It's even a bigger issue now that gene therapies are there to market, where it's changing DNA and RNA, and those kind of therapies can cost several hundred thousand dollars per year per patient. Sometimes they're administered for life.
Sarah Kline (09:48):
The first approved DNA-altering gene therapy, it treated inherited form of vision loss. It's really, it's an amazing therapy, and it uses these specially-engineered viruses to basically, they smuggle the drug past the body's immune defenses. They permanently alter the part of the genetic code that's responsible for the disease. It's these amazing things these manufacturers are doing, but when this therapy was launched, the cost was $425,000 per eye.
Sarah Kline (10:21):
So again, there's all of these costs that are coming to market, and what we can do to address those can't be the same traditional path that we've used before. What we've seen in the market really with these high-cost drugs, the only thing we've really seen introduced was rebates. You hear that all the time, rebates, when we talk about these high-cost drugs.
Sarah Kline (10:44):
What the rebates really were there for is it was a mechanism for the drug spend being returned to the PBMs. And then you would hope that it was shared with the health plan itself. But when rebates were first being used, really we didn't hear about them. The PBMs were holding onto them.
Sarah Kline (11:03):
When we partner with more transparent PBMs, a lot of those dollars are now starting to be released back to the health plans. Really partnering with transparent PBMs, and more and more transparent PBMs are coming to market and being available and more self-funded plans where they're seeing their actual spend, that's where we're initially seeing some reduction in cost. What ARO does then to complement that and really take control of those high-cost drugs is we get just really hyper-focused on is there a different way that we can actually fund those drugs.
Sarah Kline (11:37):
One of our philosophies at ARO is we don't like that whole idea of you’ve got to try a different drug before you actually get the drug that your doctor prescribes. Step therapy, while it certainly has some merit, and it has a place, we find that there's still these high-cost drugs hitting the plan. If you think about that, somebody went through those steps before they actually took the drug. You went 60 days, 90 days, however long it took to try all those drugs before, to finally get to what was an effective treatment. We don't like really getting in between the physician and the patient when it comes to what drugs they're going to take. Instead, we like to say, "How can we just help fund that drug and get that to the patient?" That's really where we look more at the funding, more so than altering what somebody is taking.
Sally Pace (12:27):
Drug spend is a hot topic as people are analyzing their, their plan design for 2022. Nationally, I would say the other hottest topic is supply chain. Even my eight-year-old has come to understand the supply chain issues that we all might face come the holidays. But that's very different when we talk about supply chain and the way that it works in our industry. Educate us around that and what you are doing to help in that space.
Sarah Kline (12:59):
Yes. As soon as you said that and you talked about the eight-year-old, it took me back to this weekend when I was grocery shopping, and there were no ramen noodles on the shelf. Of all things, I'm like, "Why do I not have ramen noodles?"
Sarah Kline (13:14):
So yes, this is a little bit different than the supply chain of the prescription drug market. The supply chain is complex. There are so many hands that are in the supply chain, and along the line, every hand, everyone is profiting from that. Now, when you look at each piece, every piece likes to talk about how they're able to discount the cost. Whether it's from the manufacturer to the wholesaler, the wholesaler builds in a discount. Then from the wholesaler to the pharmacy, then there's another discount. Or when you're looking at the cost of the PBM, the PBM discounts. Everyone's got all of these discounts built into that supply chain. Well, at some point, the manufacturer, basically they build in that cost to be able to discount it all along the supply chain. What happens is you're just, you're feeding the supply chain, and everyone's taking a little piece of that cost, which really just adds to the cost and continues to cause those costs to rise.
Sally Pace (14:16):
You all have built quite a reputation and built an incredible business around helping to combat the high cost of specialty drugs. For our listeners, we love to share success stories. What has that looked like for you all? And can you point to one or a couple of stories that you're really proud of?
Sarah Kline (14:41):
Sure. We have a health system down in Florida. They've got about 700 employees on the plan. They're actually one of our first clients so they've been with us for a number of years. But they were initially spending about $2 million in prescription drug costs, and they were already self-funded so they were aware of their spend, and they were very closely monitoring it.
Sarah Kline (15:01):
When they came onto the ARORx program, we were able to take all of their specialty drugs on their high-cost spend and pretty much remove of it from the plan. When they were initially paying $2 million in claims, we were able to reduce it down to just under $500,000 a year for their prescription drug cost. So $1.5 million reduction, that's 77% savings.
Sarah Kline (15:28):
Now that certainly has probably been the biggest savings we've provided to our clients, but it's not uncommon for us to see that 40 to 50% savings range. If we drop down to 30%, we're actually surprised if it goes down that far. Definitely. It's pretty common that 40 to 50% savings that we're able to achieve, really just by targeting those high-cost drugs.
Sally Pace (15:50):
We see this a lot with healthcare innovators across the board in our industry. You're up against some pretty well-funded, large, well-known names. What differentiates you in the marketplace?
Sarah Kline (16:04):
You're absolutely right. There are some big names out there. When we look back at the supply chain, those big names, they're starting to merge. There's definitely a compression happening within the supply chain where PBMs are purchasing insurance carriers, and insurance carriers are purchasing PBMs, or they're forming their own PBMs. We've seen a lot of that in just the last few years, 2019, 2020. CVS purchased Aetna for $69 billion. Cigna purchased Express Scripts for $54 billion. And then of course, Anthem, this big name, they created their own PBM. Those big names, they're almost circling the wagons, it feels like. They want to keep as many of those dollars or keep those dollars within that supply chain and then just basically compress it.
Sarah Kline (16:49):
We've even seen more and more insurers that are health systems. That's probably not uncommon to see, really, across the country, but in Michigan, we've had a few health systems merge with carriers. Most recently, just this year, Blue Cross announced they were acquiring an organization that manages over 250 physician practices. So now you don't just have control over the claim that's going through, the cost of the service, but the actual providers that are prescribing the prescriptions are now coming under that umbrella.
Sarah Kline (17:22):
There's a lot out there that's working against us as a smaller, more innovative organization. But what's been great is employers are getting more educated. They are seeing what's happening. There is more transparency. We're seeing more and more of them starting to be willing to self-fund. Even the smaller and smaller employers are doing that because they can see that trend.
Sarah Kline (17:49):
Really, it's educating consumers. It's partnering with other like-minded organizations. I know there's another organization on The Granite List, Drexi, that we partner with quite often, that's a transparent PBM. A lot of education has to be done, where we are basically just showing them what's happening in the industry, describing to them what's happening when it comes to spread pricing and how those profits are being made so that they can't afford to spend $69 billion to buy an Aetna that's out there. Consumers are just becoming much more educated, and it really is our responsibility to help educate.
Sally Pace (18:26):
Are you strictly just in Michigan? Are you national? Can you talk a little bit about your market?
Sarah Kline (18:32):
Even though 44North is our parent company, we connect with a lot of different tPAs on the medical side and a variety of PBMs too. I named Drexi, they are a great partner of ours. But they're not the only PBM that we work with either. As a tPA though, we don't require that you have your medical through us as a tPA. We really will partner with any tPA that will be connected to any of our PBM partners as well.
Sarah Kline (18:59):
It's wide open. While we are located in Michigan, we do have clients all over the country, like I mentioned, our case study example there down in Florida. But we have clients all the way up in Alaska, from all the way down into the Carolinas, over on the east coast, west coast, all over the country, we have clients.
Sally Pace (19:18):
Fantastic. If one of our listeners wants to get in touch with you to learn more about your services, of course they can find you on The Granite List. But can you give us some more contact information or best places to reach you?
Sarah Kline (19:31):
Sure. The contact information on Granite List, our main contact is Vince Babcock. He is the Director of our Pharmacy benefit area and ARORx. His email is vbabcock, V-B-A-B-C-O-C-K, @ARORx.com. Or you can just email [email protected]
Sally Pace (19:51):
One of the things that we love about our community that is drawn through The Granite List is this appetite for always learning more. We love to periodically recommend books to our audience, either through the newsletter or through our podcast. So, Sarah, is there a book that you read recently that has had an influence on how you're doing this?
Sarah Kline (20:12):
Yeah. For me personally, my recommendation, it doesn't relate specifically to the prescription drug spend, but I'm guessing no one will be disappointed that they didn't learn about a book about prescription drug spend. This is certainly more broad. But as travel opened back up, I had flights to California and back, so I actually picked up, I listened to it on audio, and it is It Doesn't Hurt to Ask by Trey Gowdy. I loved, number one, that the audio book was in his own voice so you could hear the real emotion as he really shared some powerful lessons and stories on communicating, persuading, using questions. He used a lot of great stories in there.
Sarah Kline (20:53):
I, as a Chief Operations Officer, certainly more focused on the day-to-day operations, but as I have actually taken on more of a sales role in the company, that it doesn't hurt to ask in the sales process. I picked up a lot of great tips from it, but there were some great stories where you're laughing, but you're crying. So yes, on the airplane, I'm like, "There's dust in the air," pretending that I'm not actually crying. But they're just, it's great stories. I've recommended to several family members and multiple colleagues as well.
Leigh Dill (21:26):
Awesome. Well, now our audience will know about it too, and they will have Sarah Kline to thank for that.
Sally Pace (21:32):
Speaking of thanking Sarah Kline, thank you very much for joining us today. You all are champions in an area that is so needed across our country, for employers and their employees in tackling high-cost drugs by way of specialty drugs. So thank you for the work that you and your team do. Thank you for the broader work that 44North does. And thanks for sharing your story today.
Sarah Kline (21:55):
Thank you, Sally. I appreciate you having me.
Sally Pace (21:57):