According to an August 2015 survey, 72 percent of Americans find drug costs unreasonable, with 83 percent believing that the federal government should be able to negotiate prices for Medicare. Recently, Acting Administrator of the Centers for Medicare and Medicaid Services (CMS) Andy Slavitt commented that spending on medicines increased 13 percent in 2014 while health care spending growth overall was only 5 percent, the highest rate of drug spending growth since 2001.

Some of the most expensive drugs are covered under Medicare’s medical benefit, Part B, because they are administered by a physician. They are often administered in hospital outpatient departments and physician offices, and most commonly used to treat conditions like cancer, rheumatoid arthritis, and macular degeneration. Between 2005 and 2014, spending on Part B drugs has increased annually by 7.7 percent, with the top 20 drugs by total amount of Medicare payments accounting for 57 percent of total Part B drug costs. While overall Part B drug spending is a small portion of Medicare drug spending, the high growth rate is a concern, especially as new expensive breakthrough cancer drugs enter the market and have a negative effect on consumers’ pockets.

Unlike Part D, the prescription drug benefit, there are fewer incentives built in to Part B for providers to consider lower cost treatments for patients even if the lower cost drug may be clinically equivalent to the more expensive drug, because prior to budget sequestration, providers received 6 percent on top of the Average Sales Price (ASP) of the drug. Larger providers and hospitals often receive discounts on these drugs as well, increasing the amount they receive directly on top of the out-of-pocket cost of the drug.

This leads to more out-of-pocket costs for the consumer, as patients usually pay 20 percent of Part B services. The Government Accountability Office (GAO) estimated that in 2013, among new drugs covered under Part B, nearly two-thirds had per beneficiary costs of over $9,000 per year, leading to out-of-pocket costs for consumers of amounts between $1,900 and $107,000 over the year. On top of these high costs, this can lead to problems with medication adherence, even for serious conditions such as cancer.

A New Payment Model

To help change these incentives and control costs, CMS has proposed a new demonstration program, which offers a few different reimbursement methods for Part B drugs. The program includes a geographically stratified design methodology to test and evaluate the different methods. One of the methods garnering a lot of attention is a proposal to lower the administration add-on payment to providers, from current 6 percent of ASP, to 2.5 percent plus a flat fee of $16.80 per administration day.

Policymakers, physician organizations, and patient advocacy organizations have voiced major concerns raising the alarm that this initiative will negatively affect patient access to vital drugs and therefore produce poorer patient outcomes. The sequester will also have a significant impact on the percentage add on, reducing it to closer to an estimated .86 percent plus the flat fee. But we believe the goals of the program and its potential to reduce costs represent an important step in the right direction. We hope the details can be further shaped by the important communities of providers and patients who will deliver and receive medical care.

Geographic Variation

Last year, we wrote a Health Affairs Blog that highlighted some of the uses and limitations of publicly available Part B physician payment data. One major use was to show the geographic variation in practice patterns and drug administration, and we particularly looked at the difference across states in Lucentis v. Avastin usage. As seen in Exhibit 1, variation in administration is wide among states, even though both are drugs used to treat the same condition, age-related macular degeneration, and were proven to have clinically similar outcomes, but the cost of Lucentis was $2,000 per dose, while Avastin was only $50 per dose.

Using the same price estimates from our previous research, which are from 2012, we found that physician reimbursement under the proposed demonstration would potentially change from $120 to $66.80 for Lucentis, and increase from $3 to $18.05 for Avastin. Under the first payment model, providers were receiving 40 times as much to administer Lucentis instead of Avastin, while under the new proposed payment model, they would only receive 3.7 times as much.

While still a formidable gap, this new policy would have decreased financial reimbursement for providers to administer Lucentis, a costly, clinically similar drug to the much cheaper Avastin. As seen in Exhibit 1, a majority of physicians prescribe Avastin, thus this policy will allow for increased reimbursement in those cases, but in states where Lucentis is prescribed in higher proportions, prescribing patterns might start to change as a result of the proposed demonstration.

Source: Author’s estimates using 2012 CMS Cost Data and Sequestration Estimates from DrugAbacus.org

The proposed demonstration program includes much more than the ASP modifications in its second phase, including:

• discounting or eliminating beneficiary copays,
• indication-based pricing that would vary payments based on the clinical effectiveness,
• reference pricing for similar drugs,
• risk-sharing agreements with drug manufacturers based on clinical outcomes of the drug, and
• creating clinical decision tools for providers to help develop best practices.

This is all at the same time that a new model in oncology care (OCM) is being launched, which could help to draw attention to total cost of care. It is important that CMS try to address rising drug costs, but also be sure to consider all relevant considerations during the comment period to fine-tune the proposal to avoid negative effects on beneficiaries’ care.

We believe CMS should consider offering a waiver for organizations already participating in Center for Medicare & Medicaid Innovation (CMMI) models like the OCM, because financial benchmarks are based on past performance and any savings recognized in the future could be artificial, attributable to this demonstration rather than to better care coordination and some of the other practice requirements that are part of the proposed OCM. Furthermore, because this demonstration sets a new research precedent and because it is mandatory in the selected study areas rather than voluntary, CMS must try to anticipate and avoid unintended consequences related to geographic stratification.

For example, it is possible to imagine organizations with multiple locations directing patients to optimal sites for their business. Also, without a control group, some findings may be unreliable. The proposed rule currently lacks much detail, and there does not seem to be enough time for organizations to evaluate the impact of the proposed rule on their operations. Having said that, it will be important for stakeholders of all types to submit comments to the proposed rule in an effort to improve the final rule prior to implementation.

The critical question for the policymakers and stakeholders is whether this model can align with the multitude of other payment model reforms — unintended consequences could mitigate all the positive outcomes that a CMMI model offers to beneficiaries. Helping beneficiaries is and should be CMS’ ultimate obligation.

For the last several years, the US government has been negotiating a free-trade agreement known as the Trans-Pacific Partnership (TPP) with 11 other countries across the Asia-Pacific and Latin American regions, which could have major impact on the pharmaceutical market.  When finalized it will be the largest free-trade agreement in history, impacting up to one-third of world trade and roughly 40 percent of the global gross domestic product. The deal has attracted a fair share of criticism from a wide range of groups, including concerns over proposed regulations for biologic drugs in participating countries. Specifically, critics are concerned about the length of data exclusivity granted to the companies that hold the patents on these drugs. Below is a primer on biologics and how they are being addressed in the TPP.

Biologic drugs include any therapy derived from a biological source; a group which includes vaccines, anti-toxins, proteins, and monoclonal antibodies. Because they are typically much larger and more structurally complex than traditional ‘small-molecule’ drugs, they are also more difficult—and much more costly—to develop and manufacture. Biologics are also among the most expensive drugs on the market, costing an average of 22 times more than nonbiologic drugs. Avastin, a cancer drug, can cost more than $50,000 a year, while the rheumatoid arthritis drug Remicade can cost up to $2,500 per injection.

Given these high costs, there is substantial interest in encouraging the development of biosimilars, a term used to describe follow-on versions of an original biologic. Estimates of the potential cost savings vary substantially, but some have predicted that competition from biosimilars could reduce US spending on biologics by $44 to $66 billion over the next ten years.  In the European Union, biosimilars have been on the market since 2006, and a 2013 analysis found that, for the 14 biosimilars on the market, the average price discount was about 25 percent. By 2020, the overall cost savings are projected to total $16-$43 billion.

After the Affordable Care Act (ACA) was passed in 2010, the US Food and Drug Administration (FDA) developed an accelerated approval pathway for biosimilars, modeled after the pathway used for the approval of small-molecule generics. In order to meet the criteria for biosimilarity, the drug must share the same mechanism of action for the approved condition of use, and there must be no clinically significant differences between the two drugs in terms of purity, safety, or potency. FDA recently approved its first biosimilar, Zarxio, which is a copy of the oncology drug Neupogen.

Under current FDA regulations, biologic drugs are granted 12 years of data exclusivity following approval. During this period of exclusivity, the FDA may not approve a biosimilar application that relies on the data submitted as part of the original biologic application. This form of temporary monopoly is distinct from patent protection, which is granted well before approval and is not related to clinical data.  Data exclusivity does not prevent another company from generating the data independently, but drug companies are unlikely to go to the considerable (and costly) effort of replicating a full course of clinical trials for a drug that is already on the market. (Though biosimilars may need to undergo some additional clinical testing under current FDA regulations, the amount of data required to support approval would certainly be less than what is required for an original biologic approval.)

The 12-year exclusivity period for biologics was established in the ACA following intense debate, and has continued to attract criticism. (By contrast, the period of data exclusivity is just five years for small-molecule drugs.) Supporters argue that given the greater cost and difficulty of bringing a biologic to market a longer period of exclusivity is necessary to incentivize innovation. Others argue that the resulting restrictions on competition keep drug prices unnecessarily high, inevitably putting a strain on the health system and keeping potentially life-saving drugs out of reach for many patients.

For the 11 countries besides the U.S. that are involved in the TPP, current data exclusivity protections range from zero (Brunei) to eight years (Japan). Under the Obama Administration’s current proposal, participating countries would increase those periods to match the US standard of 12 years. Curiously, this proposal directly contradicts the administration’s ongoing domestic efforts to lower the period of data exclusivity. Since the ACA passed, the Obama administration has repeatedly proposed reducing it to seven, arguing that this would save Medicare $4.4 billion over the next decade. Some have noted that, once the 12-year period is enshrined in the TPP, it will become significantly more difficult to change it through the US legislative process. Furthermore, imposing US standards on the 11 member countries would inevitably restrict competition at the global level, and many patient advocacy and international humanitarian organizations have argued that doing so would undermine the efforts of US global health initiatives like the Vaccine Alliance and the Global Fund to Fight AIDS, Tuberculosis and Malaria, which rely on price competition to manage program costs.

It is unclear whether the US will be successful in its efforts. There have been reports that the issue of data exclusivity has become a significant point of contention, and the US delegation may seek to compromise on its demands. It may, for example, negotiate exceptions for the poorer countries involved in the negotiation, as the Washington Post notes. However, the details of the negotiations are largely confidential, which makes it challenging to assess the possibilities, their relative advantages, or how the US Trade Representative (which is leading the US negotiations) is balancing the need to ensure adequate incentives for innovation with the need to control drug costs and facilitate patient access to potentially life-saving therapies.

Editor's note: Elizabeth Richardson, a research associate in the Center for Health Policy, contributed to the research and writing of this post. 

Editors’ Note: Organized crime actors have increasingly adopted advanced technologies, with law enforcement agencies adapting accordingly. However, the use of ever fancier-technology is only a part of the story. The future lies as much behind as ahead, writes Vanda Felbab-Brown, with criminal groups now using primitive technologies and methods to counter the advanced technologies used by law enforcement. This post was originally published by the Remote Control Project, a project hosted by the Oxford Research Group.

The history of drug trafficking and crime more broadly is a history of adaptation on the part of criminal groups in response to advances in methods and technology on the part of law enforcement agencies, and vice versa. Sometimes, technology trumps crime: The spread of anti-theft devices in cars radically reduced car theft. The adoption of citadels (essentially saferooms) aboard ships, combined with intense naval patrolling, radically reduced the incidence of piracy off Somalia. Often, however, certainly in the case of many transactional crimes such as drug trafficking, law enforcement efforts have tended to weed out the least competent traffickers, and to leave behind the toughest, meanest, leanest, and most adaptable organized crime groups. Increasingly, organized crime actors have adopted advanced technologies, such as semi-submersible and fully-submersible vehicles to carry drugs and other contraband, and cybercrime and virtual currencies for money-laundering. Adaptations in the technology of smuggling by criminal groups in turn lead to further evolution and improvement of methods by law enforcement agencies. However, the use of ever fancier-technology is only a part of the story. The future lies as much behind as ahead (to paraphrase J.P. Wodehouse), with the asymmetric use of primitive technologies and methods by criminal groups to counter the advanced technologies used by law enforcement.

The seduction of SIGINT and HVT

The improvements in signal intelligence (SIGINT) and big-data mining over the past two decades have dramatically increased tactical intelligence flows to law enforcement agencies and military actors, creating a more transparent anti-crime, anti-terrorism, and counterinsurgency battlefield than before. The bonanza of communications intercepts of targeted criminals and militants that SIGINT has come to provide over the past decades in Colombia, Mexico, Iraq, Pakistan, Afghanistan, and other parts of the world has also strongly privileged high-value targeting (HVT) and decapitation policies-i.e., principally targeting the presumed leaders of criminal and militant organizations.

The proliferation of SIGINT and advances in big-data trawling, combined with some highly visible successes of HVT, has come with significant downsides. First, high-value targeting has proven effective only under certain circumstances. In many contexts, such as in Mexico, HVT has been counterproductive, fragmenting criminal groups without reducing their proclivity to violence; in fact, exacerbating violence in the market. Other interdiction patterns and postures, such as middle-level targeting and focused-deterrence, would be more effective policy choices. 

A large part of the problem is that the seductive bonanza of signal intelligence has lead to counterproductive discounting of the need to:

1. develop a strategic understanding of criminal groups’ decisionmaking—knowledge crucial for anticipating the responses of targeted non-state actors to law enforcement actions; Mexico provides a disturbing example;
2. cultivate intelligence human intelligence assets, sorely lacking in Somalia, for example;
3. obtain a broad and comprehensive understanding of the motivations and interests of local populations that interact with criminal and insurgent groups, notably deficient in Iraq, Afghanistan, and Pakistan; and 
4. establish good relationships with local populations to advance anti-crime and counterinsurgency policies, such as in Colombia where drug eradication policy antagonized local populations from national government and strengthened the bonds between them and rebel groups. 

In other words, the tactical tool, technology—in the form of signal intelligence and big-data mining—has trumped strategic analysis. The correction needed is to bring back strategic intelligence analysis to drive interdiction targeting patterns, instead of letting the seduction of signal data drive intelligence analysis and targeting action. The political effects, anticipated responses by criminal and militant groups, and other outcomes of targeting patterns need be incorporated into the strategic analysis. Questions to be assessed need to include: Can interdiction hope to incapacitate—arrest and kill—all of the enemy or should it seek to shape the enemy? What kind of criminals and militants, such as how fractured or unified, how radicalized or restrained in their ambitions, and how closely aligned with local populations against the state, does interdiction want to produce? 

Dogs fights or drone fights: Remote lethal action by criminals

Criminal groups have used technology not merely to foil law enforcement actions, but also to fight each other and dominate the criminal markets and control local populations. In response to the so-called Pacification (UPP) policy in Rio de Janeiro through which the Rio government has sought to wrestle control over slums from violent criminal gangs, the Comando Vermelho (one of such gangs), for example, claimed to deploy remote-sensor cameras in the Complexo do Alemão slum to identify police collaborators, defined as those who went into newly-established police stations. Whether this specific threat was credible or not, the UPP police units have struggled to establish a good working relationship with the locals in Alemão.

The new radical remote-warfare development on the horizon is for criminal groups to start using drones and other remote platforms not merely to smuggle and distribute contraband, as they are starting to do already, but to deliver lethal action against their enemies—whether government officials, law enforcement forces, or rival crime groups. Eventually, both law enforcement and rival groups will develop defenses against such remote lethal action, perhaps also employing remote platforms: drones to attack the drones. Even so, the proliferation of lethal remote warfare capabilities among criminal groups will undermine deterrence, including deterrence among criminal groups themselves over the division of the criminal market and its turfs. Remotely delivered hits will complicate the attribution problem— i.e., who authorized the lethal action—and hence the certainty of sufficiently painful retaliation against the source and thus a stable equilibrium. More than before, criminal groups will be tempted to instigate wars over the criminal market with the hope that they will emerge as the most powerful criminal actors and able to exercise even greater power over the criminal market—the way the Sinaloa Cartel has attempted to do in Mexico even without the use of fancy technology. Stabilizing a highly violent and contested—dysfunctional—criminal market will become all the more difficult the more remote lethal platforms have proliferated among criminal groups.

Back to the past: The Ewoks of crime and anti-crime

In addition to adopting ever-advancing technologies, criminal and militant groups also adapt to the technological superiority of law enforcement-military actors by the very opposite tactic—resorting asymmetrically to highly primitive deception and smuggling measures. Thus, both militant and criminal groups have adapted to signal intelligence not just by using better encryption, but also by not using cell phones and electronic communications at all, relying on personal couriers, for example, or by flooding the e-waves with a lot of white noise. Similarly, in addition to loading drugs on drones, airplanes, and submersibles, drug trafficking groups are going back to very old-methods such as smuggling by boats, including through the Gulf of Mexico, by human couriers, or through tunnels. 

Conversely, society sometimes adapts to the presence of criminal groups and intense, particularly highly violent, criminality by adopting its own back-to-the-past response—i.e., by standing up militias (which in a developed state should have been supplanted by state law enforcement forces). The rise of anti-crime militias in Mexico, in places such as Michoacán and Guerrero, provides a vivid and rich example of such populist responses and the profound collapse of official law enforcement. The inability of law enforcement there to stop violent criminality—and in fact, the inadvertent exacerbation of violence by criminal groups as a result of HVT—and the distrust of citizens toward highly corrupt law enforcement agencies and state administrations led to the emergence of citizens’ anti-crime militias. The militias originally sought to fight extortion, robberies, theft, kidnapping, and homicides by criminal groups and provide public safety to communities. Rapidly, however, most of the militias resorted to the very same criminal behavior they purported to fight—including extortion, kidnapping, robberies, and homicides. The militias were also appropriated by criminal groups themselves: the criminal groups stood up their own militias claiming to fight crime, where in fact, they were merely fighting the rival criminals. Just as when external or internal military forces resort to using extralegal militias, citizens’ militias fundamentally weaken the rule of law and the authority and legitimacy of the state. They may be the ewoks’ response to the crime empire, but they represent a dangerous and slippery slope to greater breakdown of order.

In short, technology, including remote warfare, and innovations in smuggling and enforcement methods are malleable and can be appropriated by both criminal and militant groups as well as law enforcement actors. Often, however, such adoption and adaptation produces outcomes that neither criminal groups nor law enforcement actors have anticipated and can fully control. The criminal landscape and military battlefields will resemble the Star Wars moon of Endor: drone and remote platforms battling it out with sticks, stones, and ropes.