Nearly every time the pharmaceutical industry finds itself in the news, it’s accompanied by angry demands to fix the ever-increasing cost of drugs. But reforming the system is a herculean task, especially because there isn’t just one aspect to blame.
Unlike other products, drugs aren’t simply produced and then sold to consumers. Instead, they go through opaque layers of business, intermediaries and government before reaching consumers. The real question that reformers have to answer is how to break open the black box of drug pricing and introduce a much-needed level of transparency.
Over the past several months, we’ve seen a number of stories demonstrating how drug prices are out of control. Lawmakers such as Sen. Bernie Sanders (I-Vt.) have suggested that certain drug manufacturers are colluding to their keep their prices high, an accusation that also came up during the EpiPen firestorm that engulfed drug manufacturer Mylan this year. Yet while the finger-pointing is understandable, it’s important to look critically at the whole picture.
Most drug companies sell to health providers through middlemen called pharmacy benefit managers, or PBMs. These are massive organizations that use their size and influence to negotiate the best deal for their clients — mostly large self-insured employers, insurance companies and the government, who don’t have the expertise or resources to negotiate drug coverage themselves. When dealing with PBMs, drug manufacturers must compete against one another to try to offer the largest discounts or rebates possible. These end up being a major source of revenue for PBMs, which usually pocket a portion of the rebates.
You may remember Heather Bresch, chief executive of Mylan, arguing repeatedly in her testimony before Congress that her company rarely received the full $608 sticker price for EpiPens. That’s because of rebates for the injectors, which her company has increased in negotiations with PBMs over the course of a decade. Taking these discounts into account, according to Bresch’s testimony, Mylan received only about $275 from each pack of injectors.
She blamed PBMs and other distributors for creating a system that incentivizes rising prices, and she’s far from alone. But PBM representatives scoff at these claims, arguing that manufacturers aren’t forced to raise their sticker prices and adding that prices would be higher for consumers if rebates weren’t available.
This is one of the most frustrating aspects of the health-care system. Little information exists about how these rebates are negotiated, where they go or how they are carried over to consumers.
That said, if you need an EpiPen and you’re covered by good insurance, you will probably be responsible for only a manageable co-pay for the injectors. But if you’ve been pushed onto a high-deductible health insurance plan or have none at all, you face a dilemma: You can either pay large out-of-pocket deductibles to tap into insurance for the devices, or you can skip the deductible and pay the high list price for the injectors yourself.
This captures yet another part of the problem: Rarely do we ever actually have to pay the true price of our pharmaceutical products. The system is increasingly paid for by third-party insurance agencies, which are in turn subsidized by the government, adding layers of price distortion.
There are many other issues at play in the drug industry, but a disciplined conversation that fully examines the complicated distribution market is well overdue. Both pharmaceutical manufacturers and PBMs reject responsibility and blame each other for price inflation. What does this tell us about reforming the drug industry? Are consumers too far removed from drug pricing? Could greater transparency halt the rise in drug prices?
Over the next few days, we’ll hear from:
Jason Shafrin, senior research economist at Precision Health Economics