Know the Pharma Basics: USA Healthcare


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The United States (US) has a population of over 324 million people and one of the most complex healthcare systems in the world. US health care system is in a constant state of change. The United States spends the most on health care per person — $9,237 – according to two new papers published in the journal The Lancet ($3.2 trillion total in 2015). For comparison, the global spending on health in 2014 was US$9·21 trillion.

US Health Care Organization and Financing

At federal level Department of Health and Human Services (HHS), is the primary agency responsible for regulating the health care system in the USA. Each state also has its own Department of Health (DoH) to implement state-level health policies. Health care provision and financing for those serving or formerly serving in the military are independently managed by either the Department of Defense (DoD) or the Department of Veterans’ Affairs (VA).

The health care sector includes public and private financing sources.

Public health insurance is financed primarily by government taxes:

  1. Medicare is the largest single payer in the US, providing health care coverage for those age 65 years and older –regardless of income or medical history– and those under the age of 65, with permanent disabilities or end-stage renal disease. Medicaid is jointly funded by both the federal government and individual state with each state setting its own guidelines regarding eligibility, services, and reimbursement.
  2. Medicaid provides care to individuals below the poverty level and to those who cannot afford to pay for health care given their eligibility.
  3. Children’s Health Insurance Program is a national health insurance program for children under 18 years of age who are not eligible for other insurance plans (including private insurance coverage).

Private financial sources consist of private health insurance plans and/or out-of-pocket payments (patients not insured via a public or private plan).

In the USA, it is common that employers contribute to private insurance premiums either in whole or part for their employees. Some individuals also buy private health insurance for themselves; the private insurers then collect premiums from the individuals and employers. In turn, they pay their providers (hospital and physicians) for health services according to the contracts they have with the providers.

Individuals may choose health care providers based on coverage through their particular health insurance plan:

  1. Health maintenance organization (HMO) plan will provide both health insurance and health care services to their enrollees while individuals are restricted to health care services and providers available only within the HMO network.
  2. Provider organization (PPO) plan contracts with specific health care providers, restricting access to only those contracted physicians. If PPO enrollees choose to be treated by non-contracted providers, she will pay significantly more out-of-pocket costs.

Hospitals are typically paid based on “Diagnostic Related Group” payment. DRGs are widely used by CMS and many private payers as a payment scheme for hospitals. The DRG-based payments cover accommodation costs in a hospital. Most drugs are reimbursed by CMS by the inpatient DRG.  Some expensive and innovative drugs are paid separately in the outpatient DRG, called an Ambulatory Payment Classification (APC).

Physicians who are self-employed are paid through fee-for-service.

Healthcare Decision Making Bodies

The Department of Health and Human Services (HHS) are responsible for protecting the health and providing essential human services for all Americans. HHS and state-level Departments of Health develop and supervise the implementation of health policies and management of the vast of health care expenditure via The Center for Medicare & Medicaid Services (CMS). Several agencies function under HHS:

  • Center for Disease Control and Prevention (CDC) is the leading national public health institute of the United States. The CDC is a United States federal agency under the Department of Health and Human Services, headquartered near Atlanta, Georgia. Its main goal is to protect public health and safety through the control and prevention of disease, injury, and disability in the US and internationally.
  • The Food and Drug Administration (FDA) is a regulatory body responsible for approving and registering pharmaceutical drugs and medical products in the US, as well as monitoring their safety and efficacy while on the market. Center for Drug Evaluation and Research (CDER) is the division within the FDA that regulates over-the-counter and prescription drugs, including biological therapeutics and generic drugs.
  • National Institutes of Health (NIH) is the primary agency of the United States government responsible for biomedical and public health research, founded in the late 1870s.
  • Agency for Healthcare Research and Quality (AHRQ) is responsible for supporting research designed to improve the quality of healthcare, reduce its costs, address patient safety and medical errors, and broaden access to essential services.

 Other Healthcare Influencers:

The Pharmacy and Therapeutics (P & T) Committee develops and manages the formulary systems used in many different settings, i.e., hospitals, long-term-care facilities, Medicare, Medicaid, insurance companies, and managed care organizations. They act as the liaison between pharmacy and medical staff in terms of choosing therapies that are effective, safe, and cost-effective for their particular facility or insurance plans.

Public Health Insurance such as Medicare, Medicaid, Children’s Health Insurance Program (see above section on a public health insurance).

Private Insurers the key operators that make purchasing, coverage, and payment decisions regarding health care services.

Managed Care Organizations (MCO) (e.g., Blue Cross and Blue Shield, United Healthcare) are healthcare providers whose goal it is to provide appropriate, cost-effective medical treatment. These include health maintenance organization (HMO) and preferred provider organization (PPO).

Pharmacy Benefit Managers (PBMs) design, implement, and manage pharmacy benefits and coverage. Payers (MCOs) often partner up with PBMs and let the latter manage pharmacy-related insurance responsibilities (e.g., Express Scripts, CVS Caremark).

Academy of Managed Care Pharmacists (AMCP) is a national association of pharmacists, clinicians, and others responsible for providing health care, education, and policies affecting Americans covered by a managed pharmacy benefit.

Drug Pricing & Reimbursement Process

Before pharmaceutical products (both brand-name and generics) can be marketed in the US, they are subject to market approval by the US Food and Drug Administration (FDA). A product must demonstrate sound efficacy and safety through various phases of clinical trials, which are undertaken by the pharmaceutical sponsor and assessed by the FDA’s Center for Drug Evaluation and Research (CDER) prior to regulatory approval. Trial data are evaluated by CDER to determine whether the drug is ready for sale and if the pharmaceutical company can apply for a new drug application (NDA/BLA) to introduce the medicine into the USA Market.

Once approved by the FDA, pharmaceutical sponsors will typically submit clinical and economic evidence of their product for formulary consideration, market access, and reimbursement. In the US, the Academy of Managed Care (AMCP) has developed the AMCP Dossier for the evaluation of a product’s attributes by key healthcare decision makers and payers (hospitals, health plans, government plans, PBMs, etc.). The Evidence dossier must be considered for formulary inclusion by the Pharmacy and Therapeutics (P&T) committee. The dossier is made available to health care decision makers (health plans, Pharmacy Benefit Managers (PBM), government agencies, etc.) to support reimbursement and/or formulary placement, consideration of a new product, new indication, or new formulation of an existing product.

Manufacturers are allowed to set their prices freely. However, payers are allowed to set the reimbursement price/rate. The reimbursement process differs between the public sector (CMS) and the private sector.

For prescription drug coverage, Medicare offers a prescription drug plan (Part D), which is offered through health plans and PBMs approved by Medicare. Similarly, Medicare Advantage Plans typically offer the same prescription coverage. These plans have their P&T committees make decisions on what drugs to include in the formulary, using the information from evidence dossiers and accounting for drug acquisition costs and potential budget impact. Typically, CMS is required to approve the formulary of these health plans.

Coverage decisions for private health insurance plans are customized per individual health plan. Many health plans use evidence dossiers and/or conduct a clinical and budget impact review to determine coverage for a particular drug and/or procedure. PBMs also conduct their own internal review to make decisions regarding coverage. Reimbursement varies across health plans.

Hospitals also form their own P&T committee to develop and manage the hospital formulary liaising between pharmacy and medical staff. They choose therapies that are effective, safe, and cost-effective. Hospitals often create their own evidence dossier by gathering information including clinical trial data, package inserts, and published literature to conduct their own analyses to make formulary decisions. Moreover, they take into account the budget impact. Once implemented, physicians use the established formulary as a tool for prescribing treatment to patients.

Health plans maintain a formulary of drugs they plan to cover for their enrollees under a particular insurance policy. The formulary is structured in a tier co-payment or co-insurance system, where the beneficiary pays for a percentage of drug cost versus a fixed-fee co-payment. Generally, plans may have a three-tier system including generic drugs under tier 1, preferred brands under tier 2, and non-preferred brands under tier 3 (co-payment amounts vary for each tier). For drugs not included on the formulary, a patient covers 100% of the drug cost out-of -pocket.

Medicare, for Part B prescription drugs, pays the average sales price plus 6% for drugs administered in the physician office or clinic, whereas for Part D and Medicare Advantage Prescription Drug (MA-PD) plans, Medicare negotiates rebates and discounts with drug manufacturers. Since Medicaid is managed by individual states, it will pay pharmacies or MCO for drugs dispensed using rates based on wholesale acquisition cost (WAC) for brand drugs, and maximum allowable cost (MAC) for other brands and generics. WAC’s are set by manufacturers and is an estimate of the manufacturer’s list price for wholesalers or other direct purchasers, not including discounts or rebates.




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