Finalist: The Wall Street Journal, by Jonathan D. Rockoff, Joseph Walker, Jeanne Whalen, Peter Loftus and Ed Silverman

By Jonathan D. Rockoff and Ed Silverman

On Feb. 10, Valeant Pharmaceuticals International Inc. bought the rights to a pair of life-saving heart drugs. The same day, their list prices rose by 525% and 212%.

Neither of the drugs, Nitropress or Isuprel, was improved as a result of costly investment in lab work and human testing, Valeant said. Nor was manufacture of the medicines shifted to an expensive new plant. The big change: the drugs’ ownership.

“Our duty is to our shareholders and to maximize the value” of the products that Valeant sells, said Laurie Little, a company spokeswoman. “Sometimes pricing comes into it, sometimes volume comes into it.”

More pharmaceutical companies are buying drugs that they see as undervalued, then raising the prices. It is one of a number of industry tactics, along with companies regularly upping the prices of their own older medicines and launching new treatments at once unheard of sums, driving up the cost of drugs.

Since 2008, branded-drug prices have increased 127%, compared with an 11% rise in the consumer price index, according to drug-benefits manager Express Scripts Holding Co. Needham & Co. said in a June 2014 research note there were as many as 50% drug-price increases during the previous 2 1/2 years as there were in the prior decade.

For drug companies, price hikes offer an easy way to boost sales without years of costly, risky research to find new medicines.

Profits help pay for companies’ research, says Paul Howard, director of health policy at the Manhattan Institute. Increases help bring the prices more in line with the value the medicines provide to patients and hospitals, and the returns pay for manufacturing the drug, “in marketing it and even researching additional indications for the product that deliver more value to patients,” he said.

So far, the impact on total health-care spending has been limited. Prescription drugs still account for only about one-tenth of the country’s health-care costs, and drug spending overall has risen relatively slowly the past few years to $376 billion last year, because many of the biggest-selling medicines lost patent protection and lower-priced generics were prescribed instead.

But hospitals and drug-benefit managers increasingly worry about having to absorb higher costs. There aren’t as many big patent expirations looming, which will mean fewer cheap generics to offset the rising prices of brand-name drugs.

Some payers and health-care providers complain they are already feeling the hit from large and sudden price increases for drugs like Isuprel and Nitropress.

Cleveland Clinic says the price hikes for the two Valeant drugs is unexpectedly adding $8.6 million, or 7%, to this year’s budget of roughly $122 million for medicines administered at its hospitals.

Like its peers, Cleveland Clinic generally pays for drugs it administers, then hopes the reimbursement it receives for patient care will cover the expense. Hospitals typically pay a wholesale cost that is less than the list price known as average wholesale price, but still experience the increases.

“We’re already under tremendous pressure to reduce costs because of reimbursement changes due to health-care reform,” said Scott Knoer, Cleveland Clinic’s chief pharmacy officer. He had hoped to lower his drug budget by $10 million this year, but no longer expects he will in large part because of the two drugs. “In one fell swoop, it eliminated nearly all of the savings we projected we would achieve,” he said.

The companies are paying up for the drugs whose prices they raise. Early last year, Mallinckrodt PLC paid $1.4 billion for Cadence Pharmaceuticals, though the Ofirmev pain injections that were the crown jewel of the deal were projected to have just $110.5 million in 2013 revenue, according to a Mallinckrodt conference call with analysts discussing the deal.

Three months later, the list price for a package of 24 Ofirmev vials jumped almost 2 1/2 times to $1,019.52, according to health-care data firm Truven Health Analytics, which publishes average wholesale prices based on information from drug companies.

“It seemed like highway robbery,” said Erin Fox, who directs the drug-information service at University of Utah Health Care. After the increase, three of the Salt Lake City health system’s four hospitals were spending as much as $55,000 a month on the drug, up from $20,000 to $25,000 a month, Ms. Fox said. The system tried to steer doctors to alternative medicines, but it still spends about $40,000 a month.

Ofirmev was losing money before its price was raised, Mallinckrodt said, and even at the new price, hospitals using the drug save on patients’ hospitalization costs in the thousands of dollars.

The price increases can be very lucrative for companies. Horizon Pharma PLC upped the price of Vimovo pain tablets after buying the rights from AstraZeneca in late 2013. On Jan. 1, 2014, its first day selling Vimovo, Horizon raised the list price for 60 tablets to $959.04, a 597% increase, according to Truven.

Horizon raised the price again on Jan. 1 this year to $1,678.32 for the tablets, Truven said.

Last year, Vimovo had $163 million in sales, up from $20 million in 2013, even though there were fewer prescriptions for the drug last year, Horizon said. In the first two months of this year, the drug had $50 million in sales, according to IMS Health.

Horizon said one of the company’s “primary drivers is and always will be ensuring a limited financial impact on the patient,” and about 97% of Vimovo patients don’t pay any out-of-pocket
costs due to the company’s efforts.

Companies don’t want to raise prices so much that hospitals or patients can no longer afford the medicine, causing demand to plunge, said Mick Kolassa, a former drug industry pricing official who now advises companies at Medical Marketing Economics LLC. Yet companies must balance those concerns with pressures they face to sustain their business and from shareholders.

When companies hold calls discussing drug costs with investors and analysts, “I’ve heard them ask, ‘Why didn’t you price it higher.’ I’ve never heard anybody say, ‘Why don’t you price it lower?’” Mr. Kolassa said.

The company leading the pack in drug-price increases is Canada-based Valeant, which lifted list prices by at least 20% some 122 times since the beginning of 2011, according to Needham & Co., in its June 2014 research note.

Isuprel and Nitropress, the heart drugs Valeant bought earlier this year, have been staples of medical care for decades. Doctors use Isuprel during procedures treating heart-rhythm problems, and give Nitropress to emergency patients whose blood pressure has risen to life-threatening levels. Doctors say there are few good alternatives.

Valeant was interested in the drugs in part because they hadn’t yet faced generic competition even though they had lost patent protection, according to a person familiar with the matter. Adding the drugs would also expand Valeant’s portfolio of hospital-administered drugs, the person said.

After Valeant agreed to buy the drugs in early January, the company hired a consultant to look at their prices. The consultant found the prices didn’t reflect the benefits of the drugs to patients and the costs that hospitals save by using the medicines, the person said. Valeant decided to raise the price. The list price of a one-milliliter vial of Isuprel, a treatment for abnormal heart rhythms, jumped to $1,346.62, up from $215.46, according to Truven. Meantime, a two-milliliter vial of Nitropress, which combats dangerously high blood pressure and acute heart failure, increased from $257.80 to $805.61.

Pricing isn’t the main driver of Valeant’s organic growth, as the company counts on higher prices and more sales, the person said.

Terms of Valeant’s purchase of the drugs from Marathon Pharmaceuticals LLC weren’t disclosed. Isuprel notched $103 million in sales last year for privately held Marathon, while Nitropress recorded $58 million, according to Jefferies & Co.’s analyst David Steinberg. He expects the increases to help Valeant to “very substantially exceed” that in 2015.

Ascension health system, which operates 131 hospitals across the country, estimates the increases will triple its spending on the drugs this year to $8 million. Richard Fogel, a heart doctor at Ascensions St. Vincent Heart Center in Indianapolis, said the lack of good alternatives in certain clinical situations leaves him little choice but to keep using the pair.

“It is very frustrating, especially as we try to develop new systems to take better care and more efficient care of our patients,” he said.

How Pfizer chose to set the cost of its breast-cancer drug at $9,850 a month

By Jonathan D. Rockoff

Days before Pfizer Inc. was to set the price for a new breast-cancer drug called Ibrance, it got a surprise: A competitor raised the monthly cost of a rival treatment by nearly a thousand dollars.

Three years of market research — a stretch that started almost as soon as the
new treatment showed promise in the laboratory — was suddenly in doubt. After
carefully calibrating the price to be close to rivals and to keep doctors and insurers happy,  Pfizer was left wondering if its list price of $9,850 a month for the pills was too low.

“What do you think if we take that up?” asked Albert Bourla, Pfizer’s executive overseeing cancer drugs, speaking to his colleagues at the final price-setting meeting last January.

It was a tricky issue. Drug companies have been reaching for new heights of pricing. They routinely raise the cost of older medicines and then peg new ones to these levels.

Yet Pfizer knew setting a price too high for Ibrance might backfire. It could antagonize doctors and prompt health insurers to make prescribing the pills a cumbersome process with extra paperwork that doctors dislike.

A look at Pfizer’s long journey to set Ibrance’s price — a process normally hidden from view — illuminates the arcane art behind rising U.S. drug prices that are arousing criticism from doctors, employers, members of Congress and the public. A Senate committee is holding a drug-price hearing on Wednesday, focusing on sudden large increases imposed by companies that purchased the rights to drugs developed by others.

The average cost of a branded cancer drug in the U.S. is around $10,000 a month, double the level a decade ago, according to data firm IMS Health. Cancer doctors say high costs are unavoidable because all of the options are pricey.

Pricey options

“I think that says something about where we all are in terms of drug costs: We’ve gotten used to something that is pretty outrageous,”msays Eric Winer, who heads the women’s cancers division at Dana-Farber Cancer Institute in Boston.

Pfizer’s multistep pricing process shows drugmakers don’t just pick a lofty figure out of the air. At the same time, its process yielded a price that bore little relation to the drug industry’s oft-cited justification for its prices, the cost of research and development.

Instead, the price that emerged was largely based on a complex analysis of the need for a new drug with this one’s particular set of benefits and risks, potential competing drugs, the sentiments of cancer doctors and a shrewd assessment of how health plans were likely to treat the product.

In the end, “we went to the right point where patients get the maximum access, payers will be OK and Pfizer will get the [returns] for a breakthrough product,” Dr. Bourla said.

The process began in November 2011 when Mace Rothenberg, a scientist who oversees Pfizer’s development of cancer drugs, flew to California to review early clinical-trial data on a laboratory compound.

Then called simply PD-0332991, it grew out of work on proteins that help regulate how cells form and divide. In cancer, some of these can shift into overdrive. The research on this won a Nobel Prize. It also set off a hunt by drugmakers for a way to put the brakes on the overactive proteins, called cyclin-dependent kinases.

Visiting Pfizer labs in La Jolla, Dr. Rothenberg saw a slide with two curves veering far apart. It showed that the length of time before breast-cancer patients’ disease progressed was twice as long for those who took Pfizer’s compound in addition to an existing drug versus patients getting just the older drug.

“I think we have something special,” Dr. Rothenberg told the scientists leading the research.

When he got back to New York, he began talking up the compound to win the internal investment needed to develop it, as well as to involve others who would eventually set a price. Pfizer wasn’t going to fund further clinical testing and other development costs if it couldn’t anticipate good financial returns from a resulting drug.

In this case, the opportunity was clear. Pfizer’s novel compound targeted advanced breast cancer fueled by estrogen — a disease for which existing therapies, a decade or more old, offered only a modest extension of life. A drug that could do better would fill an unmet need and could be priced accordingly. So in 2012, while scientists continued their work, Pfizer employees on the commercial side started on the market analysis that would eventually lead to a pricing decision.

More clinical results arriving in December 2012 supported the compound’s promise, but also showed it was associated with lower counts of infection-fighting blood cells. The studies weren’t long enough to answer a key question: whether the compound helped people live longer.

They were encouraging enough to keep the Pfizer pricing team going, though. The team began interviewing cancer doctors, seeking to gauge interest in a possible drug with this one’s profile of benefits and risks.

Importantly, Pfizer wanted to know what the oncologists would consider comparable treatments.

Among the doctors consulted was Debu Tripathy, then co-leader of the Women’s Cancer Program at the University of Southern California. Dr. Tripathy, now at University of Texas MD Anderson Cancer Center in Houston, says he was excited
about the prospective drug described, though he would have liked to see evidence it extended lives.

For a drug comparison, he says he pointed the company to a widely used breast-cancer drug called Herceptin.

Pfizer’s compound “looks about as good as Herceptin. Maybe you should price it like that,” Dr. Tripathy recalls telling Pfizer.

Herceptin was much cheaper than most other branded breast-cancer drugs, he knew. It cost about $4,775 a month in late 2013, according to its maker, Roche Holding AG, and data firm Truven Health Analytics.

Dr. Tripathy says Pfizer staffers told him it would be better to compare their compound to newer drugs. These are much costlier than Herceptin.

Pfizer says Herceptin wouldn’t have been a good benchmark because it wasn’t one of the newest drugs in use and because of differences in how it is taken, the kind of cancer it treats and the length of time it stalls tumor growth.

In 2013, Pfizer hired outside firms to conduct hourlong interviews with more than 125 cancer doctors in six cities, while commercial staffers observed. Doctors said they were impressed, and many said that despite having to monitor patients for infections, they would prescribe “Product X” if the price was reasonable. Most of the doctors, according to two Pfizer staff members, pointed to three drugs the company should consider as pricing benchmarks: Kadcyla and Perjeta from Roche and Afinitor from Novartis AG.

Like Herceptin, two of these differed from Pfizer’s drug in the kind of breast cancer treated and in how they were administered. Only Afinitor closely paralleled Pfizer’s compound by attacking the same type of breast cancer and being in pill form.

For all three, the cost of treating a patient for a month was between $9,000 and $12,000, including any other drugs that had to be taken with them. These are list prices, from which health plans and insurers negotiate discounts of 20% or so.

“We’re going to be somewhere in this ballpark,” a Pfizer staffer involved in the pricing research recalls thinking.

Competing factors

The company wanted a price that would maximize its revenue without deterring health plans or keeping the drug from getting to patients it could help. Dr. Bourla recalls telling staff members in late 2014 that the company had “a moral obligation”: The patients had a deadly disease that this drug could help, and “it is our responsibility to get it to them.”

It was time to talk to insurers.

Pfizer hired firms that surveyed more than 80 health-plan officials such as medical directors and pharmacists. They were asked what restrictions, if any, they might place on a drug with this one’s profile, at various monthly prices from $9,000 to $12,000.

At $11,000 a month, one official said the plan “would definitely require physicians to document medical necessity for Product X,” according to a person familiar with the surveys. It was the kind of paperwork obstacle Pfizer wanted to avoid.

Staff members put together a chart estimating the revenue and prescription numbers at various prices similar to those of the three drugs Pfizer had decided to use as benchmarks.

The chart showed a 25% drop in doctors’ willingness to prescribe the new drug if it cost more than $10,000 a month. This indicated Pfizer might collect higher returns by charging toward the lower end of its range.

Pfizer also had been talking with the Food and Drug Administration. The agency agreed in late 2014 to a speedy review, without waiting for results from an elaborate “Phase 3” clinical trial, so that patients with life-threatening conditions could get the drug earlier. This sped up the time to market by about two years.

Pfizer took steps to put the drug in patients’ hands as fast as possible after FDA approval. Oral cancer medicines aren’t dispensed at local drugstores but at specialty pharmacies that help patients gain insurance approvals, remind them to take pills and assist with side effects. Pfizer lined up 24 of these to supply the drug once approved.

Hoping to smooth the drug’s way onto health-plan lists of covered medications, Pfizer economists created a dossier containing data on clinical benefits and risks, plus — important to the plans — the likely effect on their budgets.

The economists mined electronic health records, drug-prescription tallies and health-insurance claims to estimate the number of prescriptions, costs of treating side effects and monitoring patients for infections, and spending that might be avoided if the drug kept cancer at bay longer.

The economists cited a 2012 report showing that a typical million-member commercial health plan spent $320 per member a month, of which the spending on cancer drugs came to just $4.20. Scenarios they ran indicated the new drug, if priced below $10,000 a month, would increase that spending no more
than six cents.

Pfizer staff members staged two mock reviews by health-plan officials. The officials, who were paid for their time, sat around a conference table and simulated a day-long discussion of how to handle a drug such as this one.

Pfizer employees say the mock reviews supported a monthly price below $10,000.If it was higher, insurers could start requiring doctors to fill out paperwork justifying its use.

The staff felt they finally had it. When they met in November 2014 to nail down a price, they picked a figure just below the cutoff: $9,850 a month. This would be the list price, from which health insurers and pharmacy-benefit managers would negotiate discounts and rebates with Pfizer.

The staffers just needed a green light from Dr. Bourla, the executive overseeing cancer drugs.

The price they had picked was well below the cost of treatment involving one of the three benchmark drugs Pfizer had identified. But it was close to the price of the other two, and slightly above the price of the most direct competitor, Novartis’s Afinitor.

Then, on Jan. 6, 2015, Novartis raised Afinitor’s price 9.9%. Novartis says it adjusts prices to reflect “an evolving health-care and competitive environment,” new evidence and the need to support R&D.

The new price for the close rival drug put its monthly price $687 above what Pfizer was planning to charge.

Meeting in Dr. Bourla’s New York office three days later, Pfizer staff members mentioned that price increase. Dr. Bourla asked if Pfizer, too, should go higher.

“This may make some plans just not use it, and some will make things difficult and that will frustrate patients,” he recalls being told.

Alternatively, Dr. Bourla asked, should Pfizer charge a lower price than it was planning? Would doing so reach substantially more patients? He says staffers told him that a price closer to $9,000 a month wouldn’t improve health-plan coverage, and Pfizer would be leaving money on the table.

They were back to $9,850. “Let’s go with that,” Dr. Bourla said. On Feb. 3, the FDA approved Ibrance. Within hours, pills were on their way to pharmacies.

Sales are off to a strong start. The drug has been taken by about 18,000 breast-cancer patients so far.

Industry analysts expect Ibrance will eventually bring Pfizer billions of dollars a year in revenue.

Out-of-pocket costs for pricey new drugs leave even some insured and relatively affluent patients with hard choices on how to afford them

By Joseph Walker

BELLEVILLE, Ill.— Jacqueline Racener ’s doctor prescribed a new leukemia drug for her last winter that promised to roll back the cancer in her blood with only moderate side effects.

Then she found out how much it would cost her: nearly $8,000 for a full year, even after Medicare picked up most of the tab.

“There’s no way I could do that,” Ms. Racener says. “It was just prohibitive.” Worried about depleting her limited savings, Ms. Racener, a 76-year-old legal secretary, decided to take the risk and not fill her prescription.

The pharmaceutical industry, after a long drought, has begun to produce more innovative treatments for serious diseases that can extend life and often have fewer side effects than older treatments. Last year, the Food and Drug Administration approved 41 new drugs, the most in nearly two decades.

The catch is their cost. Recent treatments for hepatitis C, cancer and multiple sclerosis that cost from $50,000 annually to well over $100,000 helped drive up total U.S. prescription-drug spending 12.2% in 2014, five times the prior year’s growth rate, according to the Centers for Medicare and Medicaid Services. High drug prices can translate to patient costs of thousands of dollars a year. Out-of-pocket prescription-drug costs rose 2.7% in 2014, according to CMS.

For many of the poorest Americans, medicines are covered by government programs or financial-assistance funds paid for by drug companies.

For those in the middle class, it is a different story. Though many patients can get their out-of-pocket costs paid by drug companies or drug-company-funded foundations, some patients make too much money to qualify for assistance. Others are unaware the programs exist. Medicare patients, who represent nearly a third of U.S. retail drug spending, can’t receive direct aid from drug companies.
The upshot is even patients with insurance and comfortable incomes are sometimes forced to make hard choices—tapping savings, taking on new debt or even forgoing treatment.

“Drugs are so expensive that once they flow through our ragtag insurance system, we have patients who can’t afford them, or they can barely afford them, so they’re not getting therapies,” said Peter Bach, a physician and health-policy researcher at Memorial Sloan Kettering Cancer Center in New York.
A quarter of U.S. prescription-drug users said it was difficult to afford them, in an August survey by the Kaiser Family Foundation. In another survey, published in the journal Lancet Haematology in September, 10% of insured U.S. patients with the blood cancer multiple myeloma said they had stopped taking a cancer drug because of its cost.

A look at how patients are coping with the cost of the medicine prescribed for Ms. Racener, called Imbruvica, illustrates the issues.

The drug blocks proteins that cause malignant cells to multiply and stay alive. Approved in 2013 for a rare illness called mantle-cell lymphoma, the medication, which is known generically as ibrutinib, was later approved to treat some patients with chronic lymphocytic leukemia, the condition Ms. Racener has.

“People who had one foot in the grave after failing multiple prior chemotherapies, when given ibrutinib, had dramatic responses,” said Kanti R. Rai, a leukemia expert at North Shore-LIJ Cancer Institute in Lake Success, N.Y.

The drug’s wholesale list price is $116,600 a year for leukemia patients. For the higher dose needed for lymphoma, it is about $155,400. Producers gave insurers discounts averaging 11% in 2014, financial statements show.

For patients on Medicare—more than half of Imbruvica users—the federal insurance picks up the bulk of the cost under the Part D prescription-drug plan. But most Medicare patients still faced out-of-pocket costs of $7,000 or more a year.

For patients with insurance purchased privately or provided by an employer, out-of-pocket costs vary widely, from a small copay to thousands of dollars. The Affordable Care Act capped commercially insured patients’ out-of-pocket costs for all care, including drugs. The 2016 cap is $6,850.

Drug companies, aware that costs borne by insured patients can limit sales, have stepped up their spending on programs to defray them, such as copay coupons.

The aid programs can come with income limits and other restrictions. In the case of Ms. Racener in Belleville, a suburb of St. Louis, a hospital social worker looked into help from nonprofit foundations funded by drug companies. Her income was too high to qualify.

She earned about $80,000 between her job and Social Security. Her car payments, credit-card debt and a $600 monthly mortgage on her ranch house made the drug prescribed for her leukemia in February unaffordable.

Ms. Racener’s adult children offered to take out loans to help. “We’re middle-class, we don’t have that type of money in the bank,” said her oldest daughter, Rebecca Brawley.

Ms. Racener didn’t want to burden them. She decided to skip the drug and, if her symptoms got worse, to try chemotherapy, a therapy that would be covered by her insurance with minimal personal expense, but one she dreaded.

Then some good news came along—riding on bad news. In August, Ms. Racener’s work hours were cut back, and her pay fell by 40%. She applied for aid to a drug-maker-funded nonprofit called the Patient Access Network Foundation, and, with her much-reduced income, she qualified.

In October, eight months after Imbruvica was prescribed for Ms. Racener, she filled the prescription and began taking it. Her disease causes a proliferation of white blood cells. Their number has come down significantly, her doctor says.

“Thank you, Lord,” Ms. Racener remembers thinking. “Thank you that I’m going to be able to get this, and it’s not going to cost my family beaucoup bucks.”

Ms. Racener’s doctor, John DiPersio, chief of oncology at Washington University School of Medicine, says the expense of new cancer drugs is burdensome for growing numbers of patients whose insurance entails substantial copays. “The financial destitution that modern therapies bring on patients and their families is enormous,” he says.

Imbruvica was developed by Johnson & Johnson and Pharmacyclics LLC, a company AbbVie Inc. acquired in May. AbbVie has pegged global sales of the drug at $1 billion this year and $5 billion in 2020.

AbbVie declined to comment on the drug’s price. Pharmacyclics’ former CEO, Robert Duggan, said in a June interview the price represents its value in the marketplace. After patents expire in about 15 years, a generic version will be much cheaper, he said, adding: “That’s where society wins. People look at it in the very short term.”

The other producer of Imbruvica, Johnson & Johnson, says new drugs are helping turn some cancers from life-threatening to manageable, but “more costs are being shifted to patients, making it hard for some to get the medicines they need.”

Health insurers say patients pay more for their care because costs continue to climb. Drug prices are one of the main drivers of insurance-premium increases, says Clare Krusing, a spokeswoman for America’s Health Insurance Plans, an industry group. Lowering patients’ share of expensive drugs’ cost would mean even higher premiums, she says.

Drug companies point to aid they provide. J&J says it helps patients manage costs both through its own programs and by donating to charities.

Pharmaceutical companies can’t provide copay aid directly to Medicare recipients. Doing so could be construed as a violation of the U.S. anti-kickback statute, which prohibits companies from using financial incentives to encourage the sale of their products to federal health-care programs. Companies can, however, point the patients to nonprofit organizations they finance, which cover copays for patients who meet income tests.

For commercially insured patients, drugmakers can directly provide copay aid, and frequently do. The makers of Imbruvica will cover all but $10 of such patients’ monthly copays, regardless of income.
More broadly, about 44% of commercially insured patients’ prescriptions for so-called specialty drugs—costly medicines for serious diseases that sometimes need special handling or storage—involved copay coupons in 2013, said a study in the journal Health Affairs.

Copay assistance is only relevant, of course, if insurance is covering the bulk of the drug’s cost. That isn’t the case for Brien Johnson of Sterling, Va.

Mr. Johnson never expected to be unable to afford medicine he needed. He and his wife own a legal-advertising company that has provided a good living.

A few years ago, after his doctor noticed swollen lymph nodes, Mr. Johnson was diagnosed with mantle-cell lymphoma. Treatment with chemotherapy was ineffective. He began taking Imbruvica around December 2013. In about a month, he says, his disease went into remission.

His health insurance paid for it for about a year. Early in 2015, according to Mr. Johnson, the insurer said it wouldn’t continue paying for the drug under the medical portion of his policy, which covers services provided in doctors’ offices. Instead, Imbruvica—an oral drug taken at home—would fall under the policy’s prescription-drug benefit, and that has a maximum yearly payment of $5,000, or only about 4% of Imbruvica’s annual price at the time. The Affordable Care Act banned such limits except for existing health plans for individuals.

Though the Johnsons earned nearly $200,000 a year, the cost would be too much. “If the drug was a couple thousand a month, I could’ve worked it out,” Mr. Johnson says. “But at $12,000 a month, it would have wiped us out in a year.”

His insurance is a Blue Cross Blue Shield policy from Anthem Inc. A spokeswoman for Anthem said the insurer notified Mr. Johnson he could change policies to one that included full prescription-drug coverage, but he chose not to. Anthem agreed to pay for his Imbruvica in 2014 but “clearly communicated that these additional benefits” wouldn’t extend into 2015, said the spokeswoman, Jill Becher.

She said Anthem recognizes the cost of cancer drugs has risen substantially and is “committed to working with our members to ensure that they are able to access the most effective therapy.”

Mr. Johnson says he considered switching his coverage but decided not to because other plans had higher deductibles and he feared his current doctors wouldn’t be available in them.

He got one free month’s supply of Imbruvica from its manufacturers, he says, but was ineligible for continued aid because of his income.

When the drug ran out, his “cancer kicked into a more aggressive level,” he says. He has lost 80 pounds, and his lymph nodes have swollen again.

He made plans for a stem-cell transplant, which his insurance covers, but which carries risks of serious side effects. In mid-December Mr. Johnson, 56, began intensive chemotherapy aimed at putting his disease in remission so he can have the transplant.

“I don’t know how much longer I have to live, and I don’t want to spend my last days fighting Blue Cross Blue Shield over Imbruvica,” Mr. Johnson says.

Patients on Medicare are starting to feel some relief from out-of-pocket expenses through a provision in the Affordable Care Act that requires a gradual lowering of patient contributions. When the reduction is complete in 2020, the median out-of-pocket cost for Medicare patients taking oral cancer drugs will be $5,660 a year, according to a study in the Journal of Clinical Oncology. Even that is more than the average beneficiary’s household spends on food in a year, the study said.

Leukemia patient Michele Steele ’s doctor prescribed Imbruvica last year after she finished her fourth round of chemotherapy. Though shocked at the nearly $8,000 out-of-pocket expense for the year, she and her husband, Bill, who are retired and live in Laguna Niguel, Calif., decided to put the cost on
their credit card and find a way to sort it out later.

“How are we going to do this?” Ms. Steele, 68, remembers thinking. “I was just really scared.”
They cut back on nonessentials such as movies and restaurants. “There’s nothing else to cut back on,” Ms. Steele says. “We’ve always lived very frugally.”

In August, they found a way out. They read in an online newsletter for leukemia patients about the Patient Access Network Foundation’s copay grants. After striking out on aid requests in the past, Mr. Steele says, “I just didn’t want to get my hopes up.” But it turned out the couple’s combined income of around $82,000 was just below the cutoff point.

Ms. Steele’s reaction? “Relief, huge relief,” she says.

State buyers drive hard bargains, are willing to say no to a costly therapy

Kristin Svanqvist, left, and Helga Festoy work at Norway’s state health system, which pays for most prescription drugs in the country. (SVEINUNG BRATHEN FOR THE WALL STEET JOURNAL)

By Jeanne Whalen

Norway, an oil producer with one of the world’s richest economies, is an expensive place to live. A Big Mac costs $5.65. A gallon of gasoline costs $6.

But one thing is far cheaper than in the U.S.: prescription drugs.

A vial of the cancer drug Rituxan cost Norway’s taxpayer-funded health system $1,527 in the third quarter of 2015, while the U.S. Medicare program paid $3,678. An injection of the asthma drug Xolair cost Norway $463, which was 46% less than Medicare paid for it.

Drug prices in the U.S. are shrouded in mystery, obscured by confidential rebates, multiple middlemen and the strict guarding of trade secrets. But for certain drugs — those paid for by Medicare Part B — prices are public. By stacking these against pricing in three foreign health systems, as discovered in nonpublic and public data, The Wall Street Journal was able to pinpoint international drug-cost differences and what lies behind them.

What it found, in the case of Norway, was that U.S. prices were higher for 93% of 40 top branded drugs available in both countries in the third quarter. Similar patterns appeared when U.S., prices were compared with those in England and Canada’s Ontario province. Throughout the developed world, branded prescription drugs are generally cheaper than in the U.S.

The upshot is Americans fund much of the global drug industry’s earnings, and its efforts to find new medicines. “The U.S. is responsible for the majority of profits for most large pharmaceutical companies,” said Richard Evans, a health-care analyst at SSR LLC and a former pricing official at drug maker Roche Holding AG.

The reasons the U.S. pays more are rooted in philosophical and practical differences in the way its health system provides benefits, in the drug industry’s political clout and in many Americans’ deep aversion to the notion of rationing.

The state-run health systems in Norway and many other developed countries drive hard bargains with drug companies: setting price caps, demanding proof of new drugs’ value in comparison to existing ones and sometimes refusing to cover medicines they doubt are worth the cost.

The government systems also are the only large drug buyers in most of these countries, giving them substantial negotiating power. The U.S. market, by contrast, is highly fragmented, with bill payers ranging from employers to insurance companies to federal and state governments.

Medicare, the largest single U.S. payer for prescription drugs, is by law unable to negotiate pricing. For Medicare Part B, companies report the average price at which they sell medicines to doctors’ offices or to distributors that sell to doctors. By law, Medicare adds 6% to these prices before reimbursing the doctors.

Beneficiaries are responsible for 20% of the cost. The arrangement means Medicare is essentially forfeiting its buying power, leaving bargaining to doctors’ offices that have little negotiating heft, said Sean Sullivan, dean of the School of Pharmacy at the University of Washington.

Asked to comment on the higher prices Medicare pays compared with foreign countries, the Centers for Medicare & Medicaid Services said: “The payment rate for Medicare Part B drugs is specified in statute.”

In the U.S., few payers, public or private, cite cost as a reason to deny drug coverage, partly owing to a traditional emphasis in the U.S. on doctor and patient autonomy. “They don’t want to impinge on individual choices,” said Neeraj Sood, a health policy and economics expert at the University of Southern California.

Medicare Part B, for example, typically covers drugs and services deemed “reasonable and necessary.”

“If it’s a [Food and Drug Administration]-approved drug and prescribed by a duly licensed physician, Medicare will cover it,” said Gail Wilensky, who ran Medicare and Medicaid in the 1990s.

U.S. drug prices — showing regular increases, sometimes steep — are increasingly a focus of congressional probes and vocal criticism by insurers, doctors, politicians and consumers, who bear part of the cost.

Renee Andrews, an Oxford, Mich., resident whose son has juvenile arthritis and other conditions, said she can’t believe how low medication costs are for families overseas who post messages in her online support group. “Their out-of-pocket costs are considerably less than what we’re paying,” she said.

Research spending

The pharmaceutical industry says controls such as those seen in Europe discourage investment in research and deny patients access to some drugs. “The U.S. has a competitive biopharmaceutical marketplace that works to control costs while encouraging the development of new treatments and cures,” said Lori Reilly, an executive at the Pharmaceutical Research and Manufacturers of America, a trade association.

If U.S. pricing fell to European levels, the industry would almost certainly cut its R&D spending, said Mr. Evans, the healthcare analyst. “Does the U.S. subsidize global research? Absolutely, yes,” he said.

The higher U.S. prices also help drug makers afford hefty marketing budgets that in the U.S. include consumer advertising — something Europe doesn’t allow. Pharmaceutical and biotechnology companies in the S&P 1500 earn an average net profit margin of 16%, compared with an average of about 7% for all companies in the index, according to S&P Capital IQ.

For its analysis, the Journal started with Medicare Part B’s top drugs by payments to medical practices in 2013, the latest such data available. These are mostly drugs administered in a doctor’s office. Costs of drugs sold by U.S. pharmacies are harder to compare because of discounts and rebates.

After excluding drugs that faced generic competition in 2015 and those for which prices elsewhere weren’t available, the Journal compared 2015 third-quarter prices paid in the various jurisdictions.

Some drugs, such as for HIV and hepatitis, cost less in certain overseas markets because companies cut prices for poor countries.

Norway is a wealthy nation, with gross domestic product per capita of $97,000 last year, versus $55,000 in the U.S., according to the World Bank.

In Norway the state pays for most prescription drugs, though patients pay for some used for short periods. The government controls costs in part by setting maximum prices. To do that, it reviews prices in nine neighboring countries and takes the average of the three lowest.

Cost-effectiveness

The Norwegian Medicines Agency, or NMA, then reviews patient data to decide whether a new drug is cost-effective. Its maker must request a reimbursement price at or under the maximum Norway has set and submit a detailed comparison of the drug’s cost and benefits versus existing treatments.

Norway recommends that companies describe a drug’s cost per quality-adjusted life year, or QALY, a gauge used by many government health systems. Medicare is barred from using this gauge as a threshold to determining coverage.

Companies know Norway will sometimes deny coverage, and this threat is often “enough to get them to offer a discount,” said Kristin Svanqvist, head of reimbursement at the NMA. If rejected, they can offer a lower price.

When Amgen Inc. and GlaxoSmithKline PLC sought coverage of the osteoporosis injection Prolia for certain women, the NMA concluded it wasn’t cost-effective compared with an existing infusion called Aclasta.

Aclasta is a different type of drug, a bisphosphonate. These have an advantage in binding to the bone, the NMA said in a 2011 report on Prolia, and protect against fractures for a longer time after treatment stops.

After Norway’s rejection, Amgen and Glaxo lowered Prolia’s price, according to Ms. Svanqvist. The NMA then ruled the health system would provide it for women 75 or older, for whom it appeared to work somewhat better, she said.

A syringe of Prolia cost Norway $260 in the third quarter. By the Journal analysis, that was 71% less than the $893 paid by Medicare, which doesn’t set an age test.

Amgen said, “We partner with local payers in Europe to help ensure that all appropriate patients who could benefit will have access to an important new therapy.” Glaxo referred questions to Amgen.

If a manufacturer won’t budge on price, Norway might refuse to cover a drug altogether. It did that with a brand of insulin called Tresiba.

Producer Novo Nordisk A/S said Tresiba reduced nighttime dips in blood sugar better than other insulins and therefore was a good value. Ms. Svanqvist of the NMA called the documentation of this “quite lousy.”

“We think the reduction is actually quite low,” she said, and not “worth paying 70% more for.”

A spokesman for Novo Nordisk said it believes the drug provides better outcomes and is therefore cost-effective. He also said Norway didn’t ask the company to cut the price.

The way things often work, said Ms. Svanqvist, is that when drug companies are told a product isn’t cost-effective, they can provide more proof, and “if they don’t have better documentation they can only do something about the price. Very often they do something about the price.”

Denying patients access to drugs can be contentious. When Norway last year declined to cover Roche’s injected breast-cancer drug Perjeta because of its cost, “patients and physicians were on television and demonstrating a lot,” Ms. Svanqvist said. Roche agreed to a discount provided the NMA kept the terms confidential, which it grudgingly agreed to do, according to Ms. Svanqvist.

The agreement means Perjeta costs Norway less than the drug’s maximum allowed price in the country, which was $3,579 for a vial in the third quarter. Medicare paid $4,222.

Roche said Perjeta has shown strong efficacy, and the firm and Norway reached an agreement to make it available.

While U.S. payers sound dire warnings of unsustainable drug pricing, the tone in Oslo is much calmer. “We have a system that has been working quite well,” said Helga Festoy, an economist at the NMA.

Norway’s cost-effectiveness reviews sometimes cite the work of England’s health-care cost watchdog, known as one of Europe’s toughest. England’s National Institute for Health and Care Excellence, or NICE, conducts extensive analyses and recommends that the taxpayer-funded health system not cover drugs providing low value. Sometimes after one is rejected, its maker offers a discount.

England also controls prices by capping the level of National Health Service spending on drugs each year and requiring the pharmaceutical industry to reimburse the NHS for any spending over those limits.

Of 40 branded drugs covered by Medicare Part B and also available in England in the third quarter, 98% were more expensive in the U.S., according to the Journal’s analysis of data from Medicare and the NHS’s Business Services Authority.

For instance, two syringes of Cimzia, an anti-inflammatory for rheumatoid arthritis and other diseases, cost England’s healthcare system $1,117 — less than half the $2,357 Medicare paid, the Journal found. An NHS spokeswoman said prices it publishes are “indicative,” and vary in some situations.

Cimzia is sold by Belgian company UCB SA. It didn’t respond to requests for comment.

Canada doesn’t have a single large pharmaceutical payer, but drug prices are substantially lower nonetheless, held in check by regulation.

A federal agency called the Patented Medicine Prices Review Board sets a maximum price for new drugs, based on factors including their therapeutic benefits and the prices in seven other countries — the U.S. and six European ones. Once a drug’s maximum price is set, the maker can’t raise it faster than the national inflation rate or above the highest price in the seven other countries.

A separate body, the Canadian Agency for Drugs and Technologies in Health, recommends whether provincial and other government health programs should cover new drugs for the elderly or for low-income residents. Government agencies in Canada don’t cover most drug costs for most other people.

One such program is run by Ontario’s Ministry of Health and Long-Term Care. Of 30 drugs that both it and Medicare Part B covered in the third quarter, 93% were more expensive in the U.S., according to the Journal’s analysis.

Countries with national health systems tend to feel “we are all in this together” and “we can’t afford everything for everybody at any price,” said Steven Pearson, a physician who founded the Institute for Clinical and Economic Review, a Boston nonprofit that evaluates the cost-effectiveness of health care. “In America it’s more, ‘Well, I’ve paid my insurance premium and I don’t want anyone to tell me no. I don’t want anyone to get in the way of me and my doctor.’”

Boosts outpace inflation and often are imposed even when demand falls

By Joseph Walker

Demand for a drug called Avonex has declined every year for the past 10.

Not a problem for its manufacturer. U.S. revenue from the drug has more than doubled in that time, to $2 billion last year.

The key: repeated price increases. The multiple sclerosis drug’s maker, Biogen Inc., raised its price an average of 16% a year throughout the decade — 21 times in all.

It is an example of drug companies’ unusual ability to boost prices beyond the inflation rate to drive their revenue, even when demand for the drugs doesn’t cooperate.

A result of this pricing power is that across 30 top-selling drugs sold by pharmacies, U.S. revenue growth has far outpaced demand in the past five years, according to a Wall Street Journal analysis of corporate filings and industry data. Revenue growth averaged 61%, three times the increase in prescriptions.

Attention has focused lately on new drugs with eye-popping prices and on a few whose price a new owner abruptly raised several-fold. But what many drug companies rely on for sales growth is a pattern of steady increases, year in and year out, on older medicines. Wholesale-price increases for the 30 drugs analyzed by the Journal averaged 76% over the five-year stretch from 2010 through 2014. That was more than eight times general inflation.

For 20 leading global drug companies last year, 80% of growth in net profits stemmed from price increases in the U.S., according to a May report by Credit Suisse.

Pricing power helps some in the pharmaceutical industry to compensate for sluggish demand, new competition or weak product pipelines. “Pricing has covered up a multitude of other disappointments over the past 15 years” in the sector, said Geoffrey Porges, a biotech analyst at AllianceBernstein LP.

This is no cause for cheer, of course, to certain other market participants, notably the many large companies that pick up the tab for their employees’ prescriptions. Drug pricing has helped drive up spending on benefits at Lowe’s Cos., said Bob Ihrie, a senior vice president at the home-improvement retailer.

“It’s one thing when you read about a new drug in the newspaper, and all the costs of launching it. But when it’s drugs that have been on the market and you see these price increases, you go, ‘Why would this be?’” Mr. Ihrie said. “I feel like we’re really being taken advantage of.”

Pharmaceutical companies defend their pricing as helping to finance development of innovative medicines, an expensive and risky enterprise they say wouldn’t attract investment without the potential for large returns when a new drug succeeds.

Many in the industry also say a focus on drug prices is shortsighted because it overlooks drugs’ role in helping to contain overall health-care costs by preventing disease complications.

Robert Zirkelbach, a spokesman for Pharmaceutical Research and Manufacturers of America, a trade group, said that eventually, prices for all drugs will decline sharply when they lose patent protection and go generic.

Avonex maker Biogen has noted the central role of price boosts in the drug’s success. “For 2014 compared to 2013, the increase in U.S. Avonex revenues was primarily due to price increases, partially offset by a decrease in unit sales volume of 10%,” Biogen said in its 2014 financial report. A similar note has appeared in its annual reports since 2005.

But Biogen points to the way this revenue funds its quest for new medicines. The company spent an average of $1.19 billion annually on R&D from 2005 through 2014, or 24% of total revenue.

Besides Avonex, the company has brought out two other multiple sclerosis drugs and is studying a treatment to repair nerve damage from the disease.

“Over the past two decades, which is the life of Avonex, we’ve done more than any other company to improve the treatment of multiple sclerosis,” said Daniel McIntyre, a Biogen senior vice president. “The reality is that revenues from therapies available today make this possible.”

Users and payers

What gives the pharmaceutical industry so much pricing power? Part of the reason is the patent protection drug makers have on new products, which keeps competitors from offering copies for up to two decades.

Another part of the answer is the insurance-based health system, in which consumers rarely feel the full brunt of price increases.

In most markets, products are ordered, paid for and consumed by the same party, notes Sara Fisher Ellison, a Massachusetts Institute of Technology economist. But prescription drugs are ordered by a physician, used by a patient and usually paid for by a third party, either an insurer or a large employer.

Neither doctors nor patients typically have much of a sense of drugs’ prices. That blunts what economists call price sensitivity, the tendency of higher prices to curb demand.

“It confuses incentives and dampens the normal economic dynamics,” Ms. Ellison said.

In addition, some drugs long on the market develop customer loyalty that provides a price umbrella. If patients who started on a drug such as Avonex a decade ago are happy with it, they or their doctors may see no reason to switch to a new one that comes along.

At an investment conference in 2009, Biogen’s then-CEO James Mullen was asked whether the company could keep raising Avonex’s price. He said he was surprised at “how unresistant the market has been to price increases.”

Mr. Mullen declined to comment.

Until about a year ago, price increases were garnering little public attention because spending on drugs had moderated. U.S. expenditures for most prescription drugs grew by an average of 2.7% from 2007 through 2013, according to data from the Centers for Medicare and Medicaid Services. That was a slower growth rate than in several previous years, due largely to greater use of generics as some big-selling drugs lost patent protection.

The moderating price effect from generics now is tapering off. Pharmacy-benefits manager CVS Health Corp. said drug spending by its customers jumped 12.7% last year, more than triple the prior year’s rise.

Price boosts represented more than 80% of this increase, CVS said.

Similarly, Medicare’s spending on its prescription-drug benefit rose 8% last year on a per capita basis, after several years of averaging less than 1%. A leading reason for the surge was “price increases for both brand-name and generic drugs,” Medicare’s board of trustees said in a recent report.

The Journal examined 30 of last year’s top drugs by revenue that are sold by U.S. pharmacies, looking at data from the start of 2010 through the end of 2014. The analysis used corporate financial statements, prescription figures from IMS Health Holdings Inc. and wholesale-pricing data provided by Truven Health Analytics. It excluded drugs that weren’t yet on the market in 2010 or for which full data weren’t available.

For 18 of these 30 drugs, both revenue and the number of dispensed prescriptions for them rose. But revenue rose twice as fast as prescriptions.

For the cancer drug Gleevec, from Novartis AG, prescriptions rose 2% over the five years, but the wholesale price doubled, to $102,000 for a year’s supply at the end of 2014. The price increases helped to drive Novartis’s U.S. revenue from the drug up 69% over the period, to $2.17 billion in 2014.

Gleevec is a strikingly effective drug that has been approved for more cancers since its 2001 launch for chronic myeloid leukemia, or CML. Asked about the price increases on Gleevec, Novartis said it is “a life-changing medicine” whose “success is funding the next generation CML innovations.”

Drug makers often give rebates from the wholesale prices — also called list prices — to large purchasers such as insurers and pharmacy-benefit managers. Even so, the wholesale prices are a meaningful measure because they are the starting point from which rebates are given.

In competitive markets such as asthma and diabetes therapy, which have multiple drugs that can be substituted for one another, manufacturers often give especially large rebates as they seek better positioning on insurers’ “formularies” of covered drugs.

Take insulin, of which there are several brands, among them Humalog from Eli Lilly & Co. The company gave rebates averaging 56% of its list price last year, Credit Suisse estimates.

A spokeswoman for Eli Lilly said that although it doubled Humalog’s price over five years, steep rebates meant that its net price rose only 3%.

Shallower discounts

With a drug that is harder to substitute for, such as Amgen Inc.’s arthritis treatment Enbrel, discounts are shallower. Amgen raised Enbrel’s wholesale price 88% over the five years. The rebates it provided averaged 21% last year, Credit Suisse estimates.

Over the five years from 2010 through 2014, U.S. prescriptions for Enbrel rose 2% while Amgen’s revenue from it went up by a third.

Some rebates are locked in. Medicaid and the Veterans Health Administration are legally entitled to rebates of at least 23.1% and 24%, respectively, on purchases of patent-protected drugs. Drug companies must also pay additional rebates to the two health programs if their drug prices exceed inflation.

Among the 30 retail drugs the Journal examined, 10 produced revenue increases for their makers last year despite lower demand.

Prescriptions for these drugs declined an average of 17%. But their wholesale prices went up an average of 80%. After discounts, revenue from the drugs rose 22%.

For two drugs in the 30, both revenue and demand fell. But revenue fell less.

For a different category of drugs — those usually administered in doctors’ offices, such as intravenous cancer drugs — prescription volumes aren’t reliably tracked by commercial databases. To assess these, the Journal identified last year’s 10 top-selling such drugs and analyzed 2010-2013 data on how much Medicare reimbursed doctors for them. Medicare bases these reimbursements on the average price that drug makers report receiving from customers, excluding certain government buyers such as the Veterans Health Administration and Medicaid.

For four of the doctor-administered drugs, the number of billing claims from doctors fell, yet Medicare’s outlays to doctors rose because prices went up.

For example, Medicare payments for Neulasta, an infection-fighting drug sold by Amgen, rose 12% over the four years, while claims from doctors who used it fell 8%.

The manufacturer reported that the average net price it received for this 13-year-old drug rose 24% over the four years, undergirding Medicare’s higher payouts.

An Amgen spokeswoman said the company prices its products to “reflect the economic value that is delivered to patients, providers and payers.”

Avonex, the drug with 21 price increases during a decade of falling demand, reached the U.S. market in 1996. It was just the second drug shown to delay symptoms of the most common form of multiple sclerosis.

The maker of Avonex, Biogen, initially set its wholesale price at about $9,200 for a year of treatment. The strategy at that time focused on expanding the market, said a former Biogen vice president of sales, Michael Bonney. “We probably had pricing power, but we decided not to exercise it,” he said.

As more MS drugs appeared, including some taken orally, (Avonex is injected), Avonex’s share of the market steadily fell. Each year from 2005 through 2014, the company sold fewer units of Avonex, company financial statements show.

But Biogen’s U.S. revenue from the drug kept growing as it raised the price up to three times a year. In the decade through 2014, the wholesale price, before discounts or rebates, more than quadrupled to an annual $62,000 per patient.

When former CEO Mr. Mullen was asked about the price increases at the 2009 investment conference, he said, according to a transcript: “If there’s price increases that can be taken and delivered to shareholders, we’ll go get it, but I do think we got to make sure we take a long enough view and you don’t start to put this thing in a box, where you get the backlash.”

Today, Avonex is among the least-popular MS drugs, said Clyde Markowitz, a specialist in the disease at the Hospital of the University of Pennsylvania, but it is still used by patients who have had good results. While costs for all MS drugs have skyrocketed in the past decade, Dr. Markowitz said, Avonex’s price growth has been extraordinary.

“It’s absolute insanity, what’s happened,” he said. “For a drug that’s 20 years old, and they just keep jacking up the price.”

By Jonathan D. Rockoff and Jeanne Whalen

Around the Phoenix-area offices of mail-order pharmacy Philidor Rx Services LLC, employees said they often ran into a friendly colleague named Bijal Patel who tracked prescriptions. But when the employees got an email from the colleague, they say he used a different name: Peter Parker, the alter ego of Spider-Man.

He was among a few workers at Philidor offices who went by one name in person and another in emails during the past two years, according to three former employees. Mr. Patel and the other people weren’t employed by Philidor, though the emails used a Philidor address, these people said. They were employees of drug company Valeant Pharmaceuticals International Inc.

As late as Sunday afternoon, the LinkedIn page for a man named Bijal Patel identified him as manager of access solutions at Valeant in Scottsdale, Ariz. Mr. Patel didn’t respond to requests for comment.

The Valeant employees were placed at Philidor while the pharmacy was in its infancy, to provide help on “structures and processes,” said a Philidor spokeswoman. She said in a statement that the Valeant employees set up separate Philidor email accounts, under “clearly distinguishable names,” to keep “their internal Philidor communications separate from the Valeant communications, primarily to reduce the risk of incorrectly sharing either company’s proprietary information.”

Valeant, which is hosting an investor conference call on Monday at 8 a.m. EDT to explain its relationship with Philidor and its network of pharmacies, declined to comment.

The use of alternative names by workers at Philidor is one of a number of new details emerging about the relationship between Valeant and the network of specialty pharmacies it uses to distribute drugs. The relationship is at the center of questions that investors have raised about the strength of the drug company’s operations and the disclosures of its business ties.

Last week, a short-selling hedge fund accused Valeant of using the pharmacies in an accounting scheme to inflate revenue. The drug company’s shares have lost more than half their value since peaking in early August, partly due to the concerns as well as a federal investigation into how the company prices its drugs and helps patients afford them.

Valeant had generally kept mum on its relationship with Philidor before last week, because Valeant said it considered its use of such pharmacies as “one of our competitive advantages.”

Last week, Valeant said that it had an option to buy Philidor. Valeant also “categorically” denied the allegations made by the short seller and said it complies fully with all accounting rules.

Interviews with former employees, doctors who prescribe Valeant drugs and patients indicate that the ties between Valeant and Philidor are more interconnected than previously disclosed. The people gave details of how the companies worked together, with Valeant employees working directly in Philidor offices, sometimes using fictional names. The people said this was to conceal the ties so it didn’t appear Valeant was using the pharmacy to steer patients to the drug company’s products, which Philidor strongly denied.

The people described how Philidor made it easy for patients to get Valeant drugs, even if insurers balked at the high prices, shedding light on some of the complex efforts used by companies like Valeant to sell drugs that are expensive.

Additional information from interviews and public documents raises questions about the ownership of Philidor, and its ties to another pharmacy in a state where it was denied a permit to do business.

Such pharmacies are one tool Valeant has used to fuel its business, instead of relying on the drug industry’s traditional but costly investment in research and development to discover new medicines. The pharmacies can steer patients to Valeant’s drugs, rather than less-expensive alternatives, and then help negotiate reimbursement with insurers, analysts say.

Use of specialty pharmacies is legal, but Valeant’s efforts to secure reimbursement, and general lack of disclosure until recently, could trigger scrutiny from health insurers and regulators, according to analysts.

Philidor Rx Services was formed in Delaware and lists an office in Horsham, Pa., according to corporate registration documents in Delaware and Pennsylvania. It also has offices in Hatboro, Pa.

Andrew Davenport is Philidor’s CEO, according to the Philidor spokeswoman. Documents filed with California’s Board of Pharmacy in December 2014 and June 2015 list Matthew S. Davenport as Philidor’s chief executive. A LinkedIn profile for Matthew Davenport in the Philadelphia area says he works for BQ6 Media Group LLC. The former Philidor employees say BQ6 consulted for Valeant, among other drug companies.

Andrew and Matthew Davenport couldn’t be reached for comment.

The three former employees said several people working at Philidor have Valeant ties, with some joining Philidor full-time from Valeant, while others like Mr. Patel did work at Philidor while working for Valeant. In emails, one used the name Jack Reacher, the protagonist of a series of thriller novels and a Tom Cruise movie, and another went by Brian Wilson, the name of a member of the Beach Boys, the former employees say.

The Philidor spokeswoman said the Valeant employees’ “real identities were well known to the other Philidor employees.” Mr. Patel sent regular emails to Philidor employees detailing how many prescriptions Philidor was filling, which drugs were most popular and what doctors were the biggest prescribers, according to two of the people

Nearly all of the prescriptions Philidor filled were for Valeant drugs like acne medicine Solodyn and toenail fungus treatment Jublia, the employees said. A month’s supply of Solodyn on Drugs.com costs $1,112.69, about 2½ times more than generic versions, which have slightly different dosages. Valeant has said Philidor doesn’t restrict the prescriptions it fills to Valeant.

Doctors who have prescribed Valeant medicines say the company made them well aware of the services provided by Philidor, including financial support available to patients. Three doctors said Valeant sales representatives dropped off brochures and coupons offering help paying for drug copays, and these materials directed patients to call a number for Philidor. The doctors would send prescriptions for Valeant drugs electronically to Philidor.

Once Philidor received the prescription, the pharmacy then called the patients to collect their credit-card number and a mailing address to ship the drug, according to the three former employees. Patients who have a coupon get zero copay. Otherwise the copay is fairly low.

Todd Gribble, a dermatology patient in North Carolina, said he had a coupon for zero copay for his first Valeant prescription. Philidor told him that if he fills it again he’ll have a $40 copay, but it will be more reasonable than the $400 he had to pay when using a different pharmacy for a similar drug, he said.

A separate department at Philidor would seek insurance coverage. If the insurer asked a doctor to explain why the patient needed a costlier Valeant drug rather than a less-expensive alternative, Philidor employees would sometimes fill out the paperwork for the doctor, two of the employees said.

Valeant has said Philidor dispenses generics “as specified in patient’s prescription or as requested by patient.”

Philidor sought to ship drugs so patients got them within days prescriptions were filed, even if the health insurer hadn’t yet agreed to pay, the three former employees said. Sometimes, insurers would never pay, and Valeant would pick up the tab, the employees said.

Valeant has said Philidor and other specialty pharmacies it uses “dispense Valeant medications before adjudication of the reimbursement may be finalized. Patients get their medicines more quickly and Valeant takes the risk for nonreimbursement.”

In August 2013, Philidor applied for a permit to operate as a pharmacy in California. California’s Board of Pharmacy denied the application in May 2014, saying Philidor and the chief executive named in the documents, Matthew S. Davenport, had made “false statements,” including some that concealed Philidor’s true owners and beneficiaries, according to documents from the pharmacy board.

Three months later, a newly incorporated firm—Lucena Holdings LLC—acquired a 10% stake in California’s West Wilshire Pharmacy, which also does business as Brighton Way Pharmacy Inc., according to documents from the pharmacy board, which were first reported by ProPublica.

Delaware corporate records list Matthew S. Davenport as Lucena Holdings’ “authorized person.”

The California pharmacy board documents list Sherri Diane Leon as Lucena Holdings’ CEO, and provide her pharmacist license number in Pennsylvania. A LinkedIn profile lists a Sherri Leon as director of pharmacy operations at Philidor Rx Services in Pennsylvania from 2013 to the present. Ms. Leon didn’t return phone calls or emails seeking comment.

Two of the employees said that Philidor makes sure patients in California are shipped drugs from partner pharmacies like West Wilshire because the state board of pharmacy rejected Philidor’s license application.

The Philidor spokeswoman said it “established a network in California to extend its reach and more efficiently serve patients. Prescriptions that are filled by a network pharmacy include a written information sheet that identifies the pharmacy as part of the Philidor network of pharmacies.”

The Philidor spokeswoman said it has an option to purchase West Wilshire, as well as R&O pharmacies, Safe Rx, of South Plainfield, N.J., and Orbit Pharmacy Inc., of Missouri City, Texas.

Philidor has appealed the pharmacy board’s permit denial; a court hearing for that appeal is scheduled for December.

“We are going to court on this case. The board is charged to identify beneficial interests in pharmacies, and when the board believes it does not have accurate information it will deny the permit,” says Virginia Herold, executive officer of California’s pharmacy board.

Peter Loftus and Lisa Schwartz contributed to this article.

Mail-order company used by Valeant gave staffers instructions for boosting payments

By Jonathan D. Rockoff and Jeanne Whalen

A mail-order pharmacy used byValeant Pharmaceuticals International Inc. had a simple message for staffers charged with getting health insurers to pay up: Don’t take no for an answer.

If a health insurer wouldn’t work with Philidor Rx Services LLC, the pharmacy instructed staff to try again using the identification number of a partner pharmacy to secure payment. “We have a couple of different ‘back door’ approaches to receive payment from the insurance company,” a Philidor training manual said.

Canada-based Valeant has said that Philidor and its network of pharmacies was “one of our competitive advantages,” providing drugs to patients and a source of sales growth. But use of the pharmacy and its affiliates is drawing scrutiny from analysts and investors concerned about the practice’s sustainability.

Some analysts say aggressive tactics could backfire, angering payers and slowing sales at a time when Valeant is under pressure to show it can grow organically and not just through acquisitions. At least one payer, Harvard Pilgrim Health Care in New England, has said that it is reviewing its relationship with Philidor.

Industry experts say Philidor’s use of different ID numbers is unusual. The pharmacy’s identification number “is always supposed to be connected to the actual provider putting in the claim,” said John Norton, spokesman for the National Community Pharmacists Association, a trade group.

The training manual for insurance-claim processors at Philidor and other company documents reviewed by The Wall Street Journal indicate the pharmacy went to great lengths to fill prescriptions when insurers balked. Other instructions include tinkering with a drug’s price, lowering it until a payer’s system accepts the claim, and then raising it again to seek out a plan’s maximum allowable price. Other guidance suggests billing for a lower quantity.

“Philidor is the patient’s advocate in seeking to ensure that they receive the medication that was prescribed by their doctor at the lowest possible cost to them. This includes following up with insurance companies on behalf of patients,” a Philidor spokesman said.

Valeant, which has asked a committee of board members to examine the company’s relationship with Philidor and the pharmacy’s work, declined to comment.

Questions about Valeant’s business practices and its relationship with Philidor, along with federal investigations of its drug pricing and other issues, have weighed on Valeant’s stock, which has lost more than half its value since peaking in August. In recent days, a short seller has accused the company of using Philidor in an accounting scheme, and former Philidor employees say Valeant staffers worked directly in the pharmacy’s offices, sometimes using fake names.

Valeant said last week it acquired an option to buy Philidor last December for $100 million and has defended its accounting. The drug maker has said that Philidor doesn’t restrict prescriptions to any particular manufacturers, but former Philidor employees say nearly all of the prescriptions the pharmacy filled are for Valeant drugs.

The Philidor documents reviewed by the Journal reference only Valeant drugs by name. PowerPoint slides instructing insurance-claim processors use Carac, a Valeant drug for ultraviolet-ray damage to the skin, as an example. The training manual gives only a “Valeant Product and Program Overview,” citing drugs such as Valeant’s acne medicine Solodyn and toenail fungus treatment Jublia.

A bottle of 30 of Solodyn tablets can cost up to $1,040.41, according to Truven Health Analytics, which publishes average wholesale prices. An 8-milliliter bottle of Jublia costs $1,075.72.

To control spending on such pricey medicines, health insurers and companies that manage the plans’ drug benefits use a variety of tools, such as directing pharmacists to substitute a lower-priced generic made by a different drug company, and asking patients to pay higher copays. Sometimes, health plans reject a claim because a drug costs too much.

Philidor used various means to lower patient copays. The training manual, which has one page dated in July 2014 and another in October 2014, outlined six different ways that Philidor staff could lower patient copays to as little as $35. “They all essentially do the same thing,” the manual said, but using them individually helps Philidor “know which insurances pay better than others.”

As far as overcoming rejections, the training manual advised submitting a lower quantity for certain drugs to the payer “to see” if the drugs would then get reimbursed.

The training manual discussed “back door” methods to receiving payment from insurance companies in a section on dealing with insurers “that we are not contracted with” and therefore won’t pay Philidor for any medicines.

The manual directed insurance-claims processors to first submit claims using Philidor’s unique identification number. If that resulted in an error message saying Philidor doesn’t have a contract, the processors should use an identification number for another pharmacy, such as “our partner in California, West Wilshire Pharmacy.” That pharmacy didn’t respond to a request for comment.

In May 2014, California’s board of pharmacy denied Philidor’s application for a permit to operate as a pharmacy in the state, saying the pharmacy had made “false statements,” including some that concealed Philidor’s true owners and beneficiaries, according to documents from the pharmacy board. A few months later, a Delaware-registered firm affiliated with two Philidor executives bought a 10% stake in West Wilshire Pharmacy, of Los Angeles. Philidor has appealed the board’s decision.

The PowerPoint, which isn’t dated, gave step-by-step instructions on what to do when an insurer rejected a prescription over cost. It advised calling the insurer for an override, and also tinkering with the drug cost until the insurer agreed to pay. Specifically, the manual advised dropping the drug’s cost in $500 increments “until paid and then increase by $100 to get as close as possible to the max amount allowed by the insurance company.”

At the University of Minnesota, strategies include paying for the priciest pills just a few at a time

By Peter Loftus

MINNEAPOLIS — At the University of Minnesota, employees with cancer face a new rule under the health plan. If they are starting on certain expensive drugs, they get just a two-week supply, half the usual amount.

Before they can get two more weeks’ worth, a nurse at the university’s pharmacy partner has to confirm they are doing well enough.

The policy, called “split fill,” is designed to avoid paying for drug prescriptions that go half-unused if patients develop side effects and must stop them. It is part of a growing effort to rein in a drug bill the university says rose 8.9% last year, roughly double the rate for other health expenses.

“I don’t want to penalize the patients, but what the drug companies have to realize is they put us in that box” by charging such high prices, said Stephen Schondelmeyer, a pharmacy professor who advises the administration on its benefits for nearly 39,000 employees, retirees and family members. Some of the cancer drugs cost as much as $13,500 a month.

Rising drug costs are forcing tough decisions on those who foot the bill for much of American health care: employers. The pinch is most acute for the many large employers that, like the University of Minnesota, are self-insured — hiring an insurance company to administer benefits but paying the bill themselves.

Employers have for years been shifting more health costs to workers, through higher premiums and deductibles. With drugs, they face a growing challenge. Specialty medications for ills such as cancer and multiple sclerosis are so pricey that despite making up only about 1% of prescription volume at the University of Minnesota, they account for 28% of its drug costs, said Kenneth Horstman, director of benefits and compensation. Pharmacy costs are about 17% of its health plan’s spending, up from less than 14% in 2013.

Nationally, employers’ pharmacy costs are rising about 9.5% this year and will go up 10% in 2016, according to Aon Hewitt, a benefits consultant. The firm expects employers’ other medical costs to rise far less, 4.5% this year and 5% in 2016.

“This is a tsunami,” said John Bennett, president and chief executive of Capital District Physicians’ Health Plan in Albany, N.Y., a nonprofit insurer with corporate clients. Pharmacy costs are “the single biggest driver of our medical inflation in the last few years.”

In tackling them, employers are becoming more aggressive. Many have expanded requirements that doctors obtain advance approval from health-plan administrators for certain costly drugs, a practice called prior authorization. For instance, about 89% of employer health plans now mandate prior authorization for certain anti-inflammatory drugs for diseases like rheumatoid arthritis, up from 61% in 2007, according to survey by drugmaker EMD Serono Inc.

Another increasingly common strategy is “step therapy,” which requires that patients to be treated with lower-cost drugs before the health plan will pay for a more expensive option. This year, about 69% of employers had step-therapy rules, compared with 56% in 2011, according to the Pharmacy Benefit Management Institute, a research organization.

A newer tactic is pursuing supply contracts that cap annual price increases for drugs at a set percentage, says Jim DuCharme, CEO of Prime Therapeutics, a pharmacy-benefits manager that negotiates such deals.

The University of Minnesota’s health plan is among the more ambitious in attacking drug costs. Its efforts include resisting drug-company programs that help patients with their copays, which encourage use of expensive brand name drugs over cheaper options.

University officials hold monthly brainstorming sessions in a Minneapolis hotel with people from about 15 other large employers to discuss cost saving drug strategies. The university has “been able to test a number of strategies that go a lot further than other employers,” said Carolyn Pare, president
and CEO of the Minnesota Health Action Group, which organizes the sessions.

As employers push back, employees sometimes feel their access to drugs is being restricted, and costs increasingly foisted upon them. The university last year increased its highest patient copay to $75 from $60,applying it to branded drugs such as Flovent asthma inhaler and the antibiotic Zyvox.

Amy Boemer, a library manager who has diabetes, said her doctor switched her to a new insulin product this year because the university made it a “preferred” drug, and her cost would have risen if she wanted to stick with her old one. She says the new insulin isn’t controlling her blood sugar as well.

“What’s frustrating to me is I was on a drug, had been on it for two years,” said Ms. Boemer. “It worked for me. It’s frustrating they’re making me change it.”

The university chose a new preferred insulin “based on price, delivery and drug effectiveness,” said Mr. Horstman, the benefits director. He said plan members can ask their doctor to file an application for coverage of a different insulin if it is medically necessary, and if the university’s pharmacy benefit manager agrees, the drug will be covered with just a $10 copay. Or the patient can take a nonpreferred insulin anyway, but for a $75 copay.

Officials don’t exclude drugs on cost alone, said Kathryn Brown, vice president for human resources. She said they make coverage decisions “in a way that allows them to provide the benefit to employees who need them, but also allows our self-insured plan to continue to be viable.”

The university’s plan has monthly premiums for family coverage of about $300. The national average is $413, according to the Kaiser Family Foundation. The university doesn’t make employees pay a percentage of the price of the most expensive drugs — a practice called coinsurance that is increasingly common elsewhere.

So far, the university has declined to pay for two new drugs — each priced at over $14,000 a year — for people who need greater cholesterol reduction than they can get from statins. It is awaiting more information on efficacy and potential discounts before deciding on coverage, Mr. Horstman said.

The university became self-insured in 2002, switching from a plan for state government employees and adopting one of its own called the “UPlan,” in a bid to get better control of costs.

At the vanguard of the cost-control effort is Dr. Schondelmeyer, who holds two pharmacy doctorates and has had 40 years’ experience studying pharmaceutical economics. Outside the classroom, the university’s health plan serves as his laboratory, where Dr. Schondelmeyer, 65 years old, tests cost-saving ideas as an adviser to the benefits and compensation department.

Employees sometimes stop him in the hall and ask, “What are you doing about the high prices that drug companies are charging us? How can we put pressure on them?” he says.

“It’s tougher personally and corporately” to make decisions about drugs that affect colleagues, he says. “I make every decision with the thought of, ‘How does this impact individuals at the institution and their loved ones?’” Covered by the plan himself, he declines to say what drugs, if any, he uses.

Decades ago, Dr. Schondelmeyer became an advocate of generic drugs for cost control. Research he did at the University of Kentucky on generics’ safety and effectiveness convinced him that wider use of them could hold down costs while preserving health outcomes.

The university is already close to maximizing that strategy. Its usage of generic drugs has risen to 84% of prescription volume from about 50% a decade ago, encouraged by lower copays.

A way pharmaceutical companies try to thwart the shift to generics is with coupons that can reduce patients’ copays for brands to the same level as for generic drugs, or even to zero. University officials say that while the coupons cut costs for patients, they raise them for the payer, because of how they encourage use of more-expensive branded drugs.

Dr. Schondelmeyer says some companies leave coupons with doctors and their staffs to be handed out to patients. A doctor who gives them out — telling patients the coupons are a way to save on a branded-drug prescription — may not think about the cost impact to a health plan.

“On the surface it sounds like a good deal for the employee, but a zero-dollar copay may mean the patient is using a $500-a-month drug when a $50 drug is better,” Dr. Schondelmeyer said.

The university, with his support, began plotting a response last year. It has a benefits advisory committee made up of employees, which meets monthly. At a meeting a year ago, Karen Chapin, a university manager of health programs, told members that drugmakers were using coupons to counter generics and keep patients on branded drugs. At another meeting two months later, she outlined a plan to eliminate coverage for some “heavily couponed” brands.

In the summer, the UPlan stopped covering about 90 branded drugs for which manufacturers were distributing copay coupons, including the Nasonex allergy treatment and Belsomra insomnia drug, both from Merck & Co. Patients can still get coverage if their doctors can show the drugs are medically necessary.

In an interview, Merck CEO Kenneth Frazier said, “There’s a legitimate role to be played for assisting patients with copays for medically necessary products, when there is an economic barrier to their using the products they need.” He said Merck sets prices for drugs based on their benefit to patients and the health-care system, and whether they address an unmet medical need.

Newer, high-price specialty drugs pose a particular challenge to the university because there typically aren’t lower-cost alternatives. That is where the split-fill strategy comes in.

Last year, Dr. Schondelmeyer and university officials began considering it for initial prescriptions of certain costly cancer drugs, among them Sutent, made by Pfizer Inc. Some can have side effects, such as rashes, that may cause patients to stop taking them and leave part of a one-month prescription unused.

Asked about the policy, a Pfizer spokeswoman said that “cost control interventions must consider individual patient care in order to minimize complications and burdens for patients including disruptions in treatment at critical moments in the management of their disease.”

University officials began briefing the benefits committee on a split-fill plan in the fall of 2014 and adopted it in February, for nearly 20 drugs.

A new patient gets an initial two-week supply, and then seven to 10 days later, a nurse at a specialty pharmacy the university uses to dispense such drugs calls to ask how the patient feels.

If he or she reports a serious side effect, the nurse tells the patient to stop taking the drug, then contacts the patient’s physician to discuss a dosing adjustment or alternative drug. If the patient is tolerating the medicine, the nurse authorizes the next two-week supply.

During the split-fill period, the patient faces no copay. After three months, the patient begins receiving the pills in monthly supplies, but also with a $10 copay.

Amy Monahan, a law professor on the benefits advisory committee, said some members worried the system could be burdensome because a patient has to keep going back to the pharmacy, “and this is someone obviously dealing with a very serious illness and you want to make sure you’re not imposing this horrible burden on someone.” Patients can pick drugs up at a pharmacy or have them delivered to their homes.

Samith Kochuparambil, a Minneapolis oncologist, said he agreed with the concept in principle but had practical concerns, such as that outside pharmacy nurses wouldn’t know a patient’s health history well and might mistake a patient’s pre-existing health condition for a drug side effect.

Since the program began in February, a small number of patients have had prescriptions filled this way, with no complaints so far, said Mr. Horstman, the benefits director. It is too soon to know if it is saving money, but it has done so elsewhere. Diplomat Specialty Pharmacy in Flint, Mich., installed a split-fill program for employer and insurer clients in 2010 and found they could save about 19% on the targeted drugs, said Atheer Kaddis, a senior vice president.

Given the trend in drug prices, said Dr. Schondelmeyer, “At some point, we can’t keep writing blank checks.”