Soaring prices for some life-saving and life-altering drugs are pitting drug makers against payers, providers, and patients.

Something has to give.

This year's marketing of the hepatitis C drug Sovaldi at $1,000 per pill and last week's announcement that the FDA has approved pembrolizumab, a new kind of cancer drug said to cost $150,000 per year for treatment of melanoma, raise a vexing question in the healthcare industry and broader American society: Can the country craft a more affordable way to continue development of life-saving and life-altering drugs?

Lowell Schnipper, MD, a practicing oncologist and leader of a task force at the American Society of Clinical Oncology seeking to boost value in cancer care, told me this week that healthcare providers have no choice but to face the daunting drug-cost dilemma.

"It's not OK for doctors to just sweep [drug price concerns] under the rug. It comes down to finding responsible ways to maintain quality of care," he said.

"This is a real issue. We are in no way trying to damage companies that are doing research. What we're trying to do is to find a way to measure new treatments against the standard of care."

Schnipper says the rising prices of new drugs that either cure a common disease or provide life-sustaining treatment are at odds with efforts to contain costs in U.S. medicine. "We are getting to a tipping point, and we have to come to a consensus with the stakeholders. It's a collective discussion," he said.

In an email sent to me last week, Brendan Buck, vice president of communications for America's Health Insurance Plans, offered a more biting critique of the volume-based pricing model that Gilead Sciences followed with Sovaldi.

"Many of these specialty drugs are tremendous breakthroughs, and we want to find a way to provide access to them. But access is threatened by the pricing. We also cannot have affordable healthcare in America without affordable pricing. There's long been a balance kept between affordability and rewarding innovation. This pricing has brought that balance tumbling down," the health insurance industry spokesman said.

Government Solution?
Chris Wing, president CEO of Long Beach, CA-based SCAN Health Plan, tells me that the healthcare industry and regulators need to intensify efforts aimed at blunting the economic impact new specialty drugs.

"In many cases, these drugs are very expensive and cost becomes either a barrier to access or a hardship upon those expected to pay, as there are no lower-cost generics to turn to. The challenge for government and the healthcare community is to find a way to afford these miracle drugs without financially undermining the rest of the health system," he said.

What About Value-Based Pricing?
In cancer care, where patients often face out-of-pocket expenses for medication totaling thousands of dollars, Schnipper says value-based pricing has to be part of the solution.

"We're working toward the development of a formula or algorithm," factoring in drug toxicity, the cost of administering it, and its clinical benefits. "We're getting feedback. We've spoken with representatives of the pharma industry as well as specific companies. We're also going to meet with payers."

The oncologist said one way to increase value in cancer medication is to avoid "me-too drugs" that provide marginal clinical gains over existing drugs. "Those are drugs that shouldn't be highly valued like a drug that provides four times the value," he told me. "From a societal perspective, we shouldn't give them a high price designation."

While pricing is crucial, garnering the highest possible value from cancer drugs involves more than pricing models, Schnipper says. "Cancer therapy usually means drugs, but the problem needs to be seen as broader than just drugs." That's because the significant costs of treating cancer don't stop at drug costs—they include hospital services and an approach to end-of-life care that underutilizes hospice services. "It's really complex."

VBP Seen to Have Limited Impact
Drug companies are familiar with trying to maximize the value of their products, and are actively looking for new opportunities to boost the value of medications, says Matthew Hudes, a principal and bio-pharma practice leader at Deloitte Consulting. He cites drug companies' longstanding advocacy for medication compliance as a way to reduce unnecessary hospitalizations and readmissions. "There's an ability for the industry to get out in front of this," he says.

Deloitte was one of the first consultancies to publish detailed research on value-based drug pricing, but Hudes says pharma companies are exploring several other value avenues. "Pricing is a valuable component, and, if done correctly, it can have some impact. But I wouldn't hang my hat only on value-based pricing."

Hudes says pharma is moving toward "digital media mode," embracing wearable technology such as sensors that can help chronic disease patients to get the most benefit from their medications. "[Drug manufacturers] are all very much focused on this area of digital health," he said. And utilization of data analytics has the potential to boost development of more effective medications and to examine the impact of drugs on the "actual patient experience."

Vendors are already deploying technology to help connect healthcare providers with the most inexpensive medications available, says Peter Kaufman, MD, chief medical officer of DrFirst. "We make it very easy for providers using our program to enter brand name drugs and then switch to generic, to help save money if applicable. We also offer formulary information. If a patient is covered for a medication, providers will see messages suggesting less-expensive alternatives within the same class. This gives providers more insight into how much a particular drug therapy costs."

Price vs. Value
Jennifer Wall, senior director of communications for PhRMA, the industry group representing "the pharmaceutical research and manufacturers of America" says the pharmaceutical industry is ready, willing, and able to debate the value of the medications it creates. "Bio-pharma leads the world in research and development. No one spends more on R&D than us," she told me. "The return is great because patients are getting incredible medicines that do incredible things."

Wall says any efforts to establish standards of value for drugs must take the views of patients into account. "Who's talking with patients? Who's asking patients what 'value' means to them? Value means something different to everybody. A patient who lives three months, two years, or a decade longer than expected can get huge benefits from that, including more time with their family."

Echoing Warren Buffett's quotable line about stocks, "Price is what you pay. Value is what you get," Wall turns the question around and asks: "Are we willing as a society to accept the fact that many medicines, while not necessarily inexpensive, provide a great return on value because a child's life has been saved or a parent suffering from a life-threatening disease has been cured?"

An appeals backlog for Medicare claims decisions has prompted CMS to offer providers a settlement, but hospitals and health systems consider it insufficient.

Healthcare providers are raising concerns about a Medicare claims appeals settlement offer from federal officials.

From a hospital or health system's perspective, the 68-cents-on-the-dollar deal is neither a fair resolution nor an adequate step toward addressing providers' concerns over Recovery Audit Contractor reviews of healthcare service claims to Medicare, a New York-based healthcare CFO says.

"I believe that our [appeal] success rate is over 50 percent and that from my understanding many hospitals have had similar success when taking appeals to the administrative law judge," said Mark Bogen, CFO and senior VP of finance at South Nassau Communities Hospital in Oceanside, NY. 

"Additionally, we use outside consultants to help us prepare and submit theses ALJ appeals and they usually get a contingency rate based on the successful adjudication of an ALJ appeal. Therefore, I do not agree that the 68 cents on the dollar is fair when you also take into consideration the time-value of money given the length of time these cases have been at the ALJ as there is no interest given."

In December 2013, Chief Administrative Law Judge Nancy Griswold issued a memorandum that details the claims appeals backlog at the federal Office of Medicare Hearings and Appeals. She reported the backlog had mushroomed dramatically.

"In just under two years, the OMHA backlog has grown from pending appeals involving 92,000 claims for services and entitlement to appeals involving over 460,000 claims for services and entitlement, and the receipt level of new appeals is continuing to rise."

Bogen questioned the motives behind the appeals settlement offer from the federal Centers for Medicare & Medicaid Services.

"This 'offer' is solely being done, in my opinion, by CMS to address the public relations nightmare of trying to defend their inability to timely adjudicate the appeals process and as a way to thwart the threatened/pending lawsuits from the AHA and hospital providers," he said. 

"The settlement may reduce the backlog," he added, "but it will not resolve what probably has caused it. The RAC audits have gone from a focus on medical necessity/physician judgment to a place of service (inpatient versus outpatient) argument, and, as a result, the number of accounts on appeal has grown significantly and the success rate of the appeals has declined as well. The RAC process still needs to be overhauled."

The American Hospital Association is equally unimpressed.

"RACs are not neutral judges," says Alicia Mitchell, senior VP for communications at the AHA. "Their overzealous denials broke the appeals system. This offer addresses the symptoms and does not provide a solution to the underlying problems."

She added the appeals offer does nothing to address hospital officials' concerns over the two-midnight rules cutting into one of their most lucrative lines of business: inpatient care. "This offer does not apply to appeals for admissions after October 1, 2013, when the two-midnights policy became effective," Mitchell said.

CMS officials defended the settlement offer in an email to HealthLeaders: "CMS examined and evaluated multiple matters when making its determination. As is conventional practice during settlements, CMS developed a balanced value that considered both the best interest of the government, and rendering an obtainable settlement. Based on the data and CMS's analysis, we determined 68 percent was an appropriate offer for resolving these cases."

CMS says it is trying to improve the performance of the RAC program. "This settlement is only intended to address pending appeals related to place of setting," they say. "Our goal with the Recovery Audit program is to strike the right balance between our responsibility to ensure all beneficiaries maintain access to care and ensuring all Medicare claims are paid accurately. Based on feedback received, CMS made improvements to the Recovery Audit program. CMS now has in place a Recovery Auditor Validation Contractor to measure the accuracy of the Recovery Auditor determination."

The reaction to the proposed appeal deal at the American Association of Medical Colleges ranged from lukewarm to chilly last week.

AAMC spokesperson Ivy Baer said it was "hard to say" whether the offer from CMS is fair. "Each institution must weigh the cost of continuing the appeal, and the uncertainty of how the appeal concludes, against a certain amount," she said. 

"However, the CMS notice mentions a 'reconciliation process' in the event of discrepancies, so it's not clear when this would be a done deal. A hospital doesn't just submit and get paid."

Baer says RAC audits and the two-midnight rule remain problematic for providers. "The RAC process remains deeply flawed. This [settlement deal] merely addresses the enormous backlog of appeals," she said. "The settlement may help some hospitals, but the problems with RAC audits and the unreasonableness of the two-midnight rule are not addressed."

Medicare Beneficiary Perspective
A patient group that has filed two lawsuits against federal Department of Health and Human Services over the Medicare appeals backlog, the Willimantic, CT-based Center for Medicare Advocacy, is pressing for an overhaul of the Medicare claims review and appeals process.

"The goal of the lawsuit we just filed on August 26 (Lessler et al. v. Burwell) is to ensure that Medicare follows the law and provides timely decisions on beneficiaries' Administrative Law Judge appeals," Alice Bers, a lawyer at CMA, said last week. 

"Congress mandated that ALJ decisions be issued within 90 days of the request for a hearing being filed, but the system is far out of compliance with that standard. Beneficiaries should not have to wait so long for answers on Medicare coverage when they are on the hook financially for the services in question and may be going without needed care."

Bers says patients are paying a price for an ongoing squabble between CMS and providers over Medicare reimbursement reforms. "From the beneficiary's point of view, reimbursement to providers should be logical and efficient. Tremendous backlogs for providers in the appeal system affect beneficiaries because they use the same appeal system and are necessarily affected by the overburdened system."

The CMA attorney said the two-midnight rule, which is in effect but yet to be strictly enforced, is contributing to the appeals backlog.

"Confusion over inpatient/outpatient billing and RAC appeals do seem to be significant contributing factors to the backlog in the appeal system," Bers said.

"CMA does not believe that the two-midnight rule is clarifying inpatient/outpatient billing issues nor is it helping beneficiaries who have been caught up in the confusion."

Appeal Deal's Complicated Calculation
CMS is set to hold a conference call Tuesday to brief hospital officials on the Medicare appeal settlement offer.

"We will participate in the CMS phone call," Dartmouth-Hitchcock Medical Center officials said last week in a prepared statement. "Our questions are about the process and procedure that will need to be followed to process these claims; and what costs will be associated with filing for the settlement.

"Once we have the information we need on the offer, we will assess the appeals in our pipeline, determine those eligible and conduct a financial analysis. Our analysis will consider the cost to continue the appeal or the risk of losing the appeal versus the benefit of accepting the 68-cents-on-the-dollar settlement offer. While we don't know the final outcome, we expect there will be cases where the settlement may be the best option."

After decades of gorging at the fee-for-service trough, all healthcare industry stakeholders are facing a more austere future.

The healthcare party is over.

Whether you are a young doctor starting out your career with less money pouring into your bank, a health plan forced to spend at least 80 percent of every premium dollar on actual patient care, a citizen "incentivized" to stay as healthy as possible, or a hospital getting lower reimbursement for patient services from government programs such as Medicare… the squeeze is on, or at least beginning.

Don't just take my word for it. Otis Brawley, MD, chief medical officer of the American Cancer Society, believes excessive spending on U.S. healthcare is both unsustainable and unjustifiable.

"The problem is in the waste in the healthcare system," the oncologist, author, and global leader in health disparities research told me this week. "We spent $2.6 trillion on healthcare in 2010 and $1.1 trillion on food. If the U.S. health economy were a country, it would be larger than France, the world's sixth-largest economy. Yes, in 2010, we spent more on healthcare than they spent on everything in France.

U.S. Healthcare Spending Growth to Resume

"We average about $8,000 per man woman and child for healthcare [per year]. The average per-person costs in the next most expensive countries are at about $4,000. Those countries are Switzerland and Norway… Our percent of GDP for healthcare has grown every year for the past 20 years and will continue growing until it collapses the U.S. economy."

While they will be bitter pills for many healthcare industry stakeholders to swallow, Dr. Brawley prescribes curbing greed and promoting shared responsibility.

"The solution is for us to be a more evidence-driven medical system. Programs such as Choosing Wisely help, but we all have to get away from the philosophy of gaming the system for all we can. All are responsible for our healthcare system being in extremes to include doctors, healthcare systems, insurers, drug companies, lawyers and patients."

Employer-Based Change
At San Francisco-based Castlight Health, a data analytics-driven company that helps large employers manage healthcare spending, officials believe the light of day has healthcare industry party animals scurrying for the exit to make sure their own houses are in order.

To Cut Healthcare Costs, Start at the Top

"For too long, U.S. healthcare has operated as a merit-free market with little transparency, an asymmetry of information, misaligned incentives, and — as a consequence – restricted competition," says Lorie Fiber, VP of corporate communications at Castlight Health.

"This dynamic is changing, due at least in part to growing transparency to the cost and quality of healthcare. We see large employers at the forefront of this change, working closely with their employees, providers and payers, among others, to enable quality care at an affordable cost and in a highly personalized way. The change means more engagement and accountability for all involved, certainly, and that's a good thing if it means we're more effectively applying the billions spent annually on healthcare."

With America's Health Insurance Plans waging a near daily barrage of press releases, the drug companies have been enduring a beating in the media over costly medications such as Sovaldi. AHIP, in a media statement, says the high cost of specialty drugs is placing a crushing burden on health plans: "Many of these new treatments certainly represent the best care. That's why, despite the cost, health plans provide coverage for drugs like Sovaldi, which offers a chance to cure hepatitis C but also runs $1,000 per pill. When considering the limits on out-of-pocket consumer spending now in law, plans are paying at least 92 percent of the cost of Sovaldi, often more."

But the pharmaceutical industry offers some powerful statistics in defense of marketing medications with astronomical price tags, including the claim that only 2-in-10 approved medicines produce revenues that exceed average research and development costs.

Ruth Krystopolski, president of Sanford Health Plan and executive VP of care innovation at Sanford Health in Sioux Falls, SD, says that changing the mindset of two key healthcare stakeholders is critical to any fundamental reform effort: patients and providers.

"We've had this idea that if something's broken, you can just fix it. You can take a pill," she told me, noting individuals are being cajoled into taking greater responsibility for their health, mainly through a range of economic incentives and employer-sponsored efforts such as wellness programs. "The question is, how will the public respond? For issues like charging people who smoke more, sometimes it's an agonizing talk [for health plans] to have with employers."

Krystopolski says that "changing premiums according to behavior" is one of the most effective ways to prod people to change unhealthy behaviors and adopt healthier lifestyles: "If you hit the pocketbook, that works."

Less punitive incentives may not be as effective, she says: "Positive incentives work, but I don't know how well they work."

Healthcare providers also need a new set of incentives, Krystopolski says. "People do things because they're incentivized to do them. Payment models are moving away from episodic care," and "prevention is everybody's responsibility," she says.

Not-for-profit hospitals are feeling financially pinched as healthcare reform efforts seek to simultaneously increase healthcare accessibility, cut costs, and improve quality.

Marking a second consecutive year of weak financial performance at not-for-profit hospitals, 2013 expenses outpaced revenue growth in the sector and similar results are expected this year, according to Moody's Investors Service.

In a median report released this week, Moody's says "operating revenue growth dropped to an all-time low of 3.9 percent and was outpaced by expense growth for a second consecutive year, an unsustainable trend." NFP hospitals posted 5.1 percent revenue growth in 2012.

Moody's pegged the 2013 growth rate of NFP hospital expenses at 4.3 percent. Expenses grew at 5.5 percent in 2012.

Jennifer Ewing, a Moody's analyst who co-authored the report, says lower reimbursement for services coupled with a shift to outpatient care from inpatient care is bringing financial pressure to bear on NFP hospitals.

She cites several factors dragging on revenue growth: lower reimbursement from commercial payers as they drive harder pricing deals on insurance exchanges as well as shift risk to providers and patients; tighter Medicare reimbursement; "built-in" statutory cutbacks for government programs that help fund hospitals such as reductions in federal Disproportionate Share Hospital payments; and Medicare's proposed "two-midnight rule" for determining outpatient vs. inpatient status accelerating growth of outpatient services at the expense of relatively more profitable inpatient care.

Ewing says "lower-cost providers" such as pharmacy clinics and urgent care centers are also draining revenue from NFP hospitals. They are acting as "new competitor[s]," she said of the new entrants and new business models proliferating in the delivery of healthcare.

Weak Cash Flow
Cash flow is also a weak spot in the NFP hospital median report, which states, "The operating cash flow margin reached an all-time low of 9%."

Despite that grim figure, Ewing sees glimmers of hope for hospital executives. "This is the first year expense growth slowed, [and] it still outpaced revenue."

The report also noted growth in NFP hospital "absolute and relative liquidity measures." Ewing said "we believe the reasons for the increases in liquidity are the strong equity market and wiser capital spending."

"As the stock markets do well, the hospitals do well," added Lisa Goldstein, associate managing director at Moody's and a co-author of the report. "The investment returns can build up your cash."

Goldstein says the imbalance between expenses and revenue growth at NFP hospitals will likely persist over at least the short term. "We expect these 2013 trends to continue for 2014," she said.

'In a Tough Spot'

"The hospital community has been under pressure for some time," said Peter Angood, MD, CEO of the American College of Physician Executives. The ongoing financial squeeze has prompted hospital officials reconsider how they deliver care to patients across the board.

Two of the prime efforts to expand healthcare accessibility—the new public health insurance exchanges and Medicaid expansion—are likely to be a net negative for many hospitals, Angood said.

"That's going to increase pressure on hospitals to manage that new population of patients," he said, noting traditionally low Medicaid reimbursement rates and the bill collection burden linked to the high level of patient cost-sharing on the exchanges.

Katherine Hempstead, team leader and senior program officer at the Princeton, NJ-based Robert Wood Johnson Foundation, said financing an NFP hospital is a lot like keeping an airline afloat, with both industries "highly regulated, with a high cost of entry and high cost structure."

"They really are in a tough spot," she said of NFP hospitals. "The good news is they are becoming more efficient. … Hospitals are becoming much more mindful of what they do that is wasteful and what they do that is efficient."

Hempstead pointed out that a key finding of the Moody's report is the shift away from inpatient care in dollars and cents. "If I were a hospital, I would be looking for other places in the delivery chain where there's growth," she said. "Hospitals are not going to go away, but there are so many forces that are pulling away from inpatient care."

In addition to focusing on efficiency gains and opening new lines of service, NFP hospitals can also hold the line financially through consolidation efforts that build market power and by establishing high quality standards, Hempstead said.

"Hospitals need to demonstrate superior quality," she said. "It's possible we have excess capacity. It's possible we'll see hospital closings. But there's no substitute for hospitals. I don't think [the financial situation] is an existential threat for the whole sector."