The coronavirus is crashing state and local budgets. Governments are dramatically increasing health-care spending, even as tax revenue is tanking. Our leaders need to quickly find budget savings to continue providing necessary services and paying their employees and providing health coverage.
Fortunately, a simple way to find some savings exists. Local and state government leaders in Texas could save millions of taxpayer dollars were they more aggressive in encouraging use of the generic versions of biologic medicines. Generic prescription drugs account for 90 percent of the prescriptions sold in the United States.
Even though patients prefer a generic, when appropriate, because it’s much less expensive than its brand-name counterpart, there hasn’t been a similar uptake of the generic versions of the rapidly expanding class of drugs known as biologics. This means patients and their health plans are spending more than they should. Biologics are very complex drugs that contain living cells that are usually injected or infused into the body. Many of the new biologics target some of the most deadly and debilitating diseases such as cancer and arthritis.
We now have generic versions of several biologics, known as “biosimilars.” The number is small but growing—26 biosimilars have been FDA-approved for nine brand name biologics.
Even though biosimilars cost less, they have yet to achieve the U.S. market penetration that traditional generics have. One reason for the slow uptake is the way prescription drugs are reimbursed.
When drug manufacturers release a new drug, they set its “list price,” though very few people actually pay that price. That’s because most Americans are in health plans in which pharmacy benefit managers (PBMs) negotiate both significant discounts off the original price and may also demand rebates from pharmaceutical companies for promoting a particular drug.
Because biosimilars cost less, the PBM middlemen often make more money by steering patients to the brand-name product, which affects how much individuals, and especially employers who provide health coverage, pay for the drugs.
The Pacific Research Institute (PRI) recently published a paper entitled, “The Biosimilar Opportunity: A State Breakdown,” which estimates cost savings if more biosimilars were substituted for brand name biologics. Currently, the use of available biosimilars saves the nation’s health-care system $240.4 million annually. Were their use expanded to 25 percent of the biologic prescriptions, the study estimated a savings nationally of $2.4 billion; $4.6 billion under a 50 percent substitution rate; and $7 billion if it were 75 percent.
What might this mean for Texas? The study estimates that Texans with private health coverage (i.e., not Medicare or Medicaid) currently save about $12.61 million annually by substituting biosimilars for biologics. Since state and local government employees comprise about 10 percent of the employer-provided health insurance market, those government entities are currently saving about $1.2 million annually.
However, those savings could be substantially higher if the biosimilar substitution rate were increased. Extrapolating from the PRI estimate: about $8 million at a 25 percent rate; $15 million at 50 percent; and $22 million at 75 percent.
And these savings could be only the beginning. Biosimilar competition tends to drive down the price of brand-name biologics, and many more biosimilars are on the way, greatly expanding their potential for future savings.
Americans are the world’s top users of generics, but not of biosimilars. State and local governments should encourage a wider uptake for their own employees as an important start—and a much-needed cost savings. Something state and local budgets need now more than ever.