The cost of pharmaceutical drugs in the United States seem out of control. Between 2013 and 2017, estimates of US drug spending increased by more than a third. In 2017 spending on prescription medicines in the US was more than $300bn.
The difference compared to Europe is stark. Most analyses show that even when prices go down in the European Union, they still go up in America.
Ask politicians and experts why this is so, and there will be a lot of different answers.
Europe’s Negotiating Clout
US President Donald J. Trump says it is because European governments “extort” lower prices from the pharmaceutical companies, forcing the US to pay more to help cover the costs of new (and failed) drug development.
This martyr mentality seems to be a core piece of Trump’s character. He seems to see the United Nations, NATO, and every international organisation or alliance to which the US is a member of or a signatory to as another instance of the US being taken advantage of by other countries, even (or maybe especially) traditional allies such as Britain, France, and Germany.
To be charitable, he presumably means that EU nations, almost all of which have some form of government-run universal health care, negotiate drug prices with the drug companies for the nation as a whole, giving them more clout than the US is legally allowed to have.
(Really, the US is forbidden from doing this on behalf of its citizens. It might turn them into socialists.)
Instead, the US requires each insurance company or employer to negotiate individually, giving each of them much less clout. One commentator suggests that this system works better, that in the one area where the US does bargain as a whole Medicaid—state and federal insurance for the poor—anticipated savings never materialised, but competition among Medicare Part D—federal insurance for the elderly—sponsors reduced costs 57% below anticipated levels.
Big Pharma Greed
Trump also accused Big Pharma of just being greedy. In May Trump predicted the pharmaceutical companies would announce “massive drops in prices” within two weeks. Instead in June Pfizer announced increases on about 40 of its products, some by more than 9%.
In July Trump accused Pfizer of raising prices year “for no reason” and threatened unspecified retaliation, whereupon Pfizer backed down until at least January 2019.
Pfizer initially had barely bothered to respond to Trump’s charges, other than to say the drugs are worth it because they reduce other medical health care costs, and besides list prices do not reflect the price most consumers or insurance companies actually pay.
In 2015, list prices rose 12%, but the actual price insurers and employees paid went up less than 3%, according to research by IMS Health. That is true because of negotiated discounts and rebates. No doubt those list prices are raised to take into account those discounts and rebates, and reasonable, guileless individuals might wonder why prices are not lowered overall in the first place.
Pharmacy Benefit Managers
The key word is “negotiated”, and who does the negotiations. That brings up a third bogeyman, and one both Trump and Big Pharma blame for the high costs of drugs: pharmacy benefit managers (PBMs).
Pharmacy benefit managers are middlemen hired by health insurance plan sponsors to negotiate with Big Pharma on behalf of patients. They establish formularies or lists of approved drugs—as well as exclusion lists—which the pharmaceutical manufacturers are anxious to be on. In return for inclusion on the list, they offer discounts and rebates on the list price of the drugs, some of which goes to the patients, some of which the PBMs keep as a fee.
Three PBMs currently control 80% of US “health plan-related drug purchases”: Caremark (formerly CVS Health), Express Scripts, and OptumRx, a subsidiary of UnitedHealthcare. The entire PBM market’s annual revenues are almost $300bn.
Depending on to whom you listen, PBMs are either saints who save the elderly money on drugs, or villains who drive drug prices higher for profit (and the profit of Big Pharma, with whom they are in collusion). It is hard to tell who is right because there is a lack of transparency and no government oversight.
Who Profits and How Much?
How much of these rebates go to the consumer and how much goes to the PBMs is not public knowledge. PBMs claim they pass almost all—90%—of the negotiated savings to the consumers, but that cannot be confirmed.
What is known is the final list price and the amount the patient or consumer ends up paying, the insurance co-pay. That is usually a percentage of the list price, not the pharmacy’s cost. PBM fees also are based on a percentage of the list price. This creates a perverse incentive to make the list price high.
It also creates an incentive for PBMs to encourage the use of a more expensive proprietary drug than a cheaper generic. In 2014, a PBM partnered with Pfizer to make sure that Lipitor had a lower co-pay than the generic atorvastatin. This is not what is intended by free-market capitalism (well, not officially, anyway).
Sometimes the patient’s co-pay is greater than the list price, despite the PBM’s vaunted negotiation skills. This is called a clawback. One lawsuit alleges that a woman paid $50 for contraceptive meds although the pharmacy’s cost was less than $12. The excess $38 went back to the PBM.
Of course, she could have bought the medication outside of insurance, but she probably did not know that at the time because many PBMs impose a gag clause of pharmacies preventing them from volunteering that information.
The California state legislature considered a bill that would end such gag clauses, but it failed to come up for a vote.
Not Necessarily the Best Drug
One complaint is that PBMs only list drugs for which they get the best price, not necessarily the best or right drugs for patients.
In one recorded instance, when a woman with fibromyalgia changed jobs and insurance companies, her new PBM wanted her to switch from a pain-control patch containing buprenorphine to one containing fentanyl, or it would not pay. Without insurance contributing, her costs rose from $130 a month to $800.
Fentanyl and buprenorphine are both opioids—morphine-like drugs—but buprenorphine is a low-strength opioid often used for maintenance during opioid addiction treatment, while fentanyl is a much stronger and addictive opioid responsible for many of the opioid overdose deaths in recent years.
The risk of dependence is worse for chronic pain sufferers because they need the drug indefinitely.
Despite that, the PBM claimed that the fentanyl patch had “better clinical options”. Others contradicted that opinion but noted that the fentanyl patch was less expensive. (Maybe the PBM thinks skydiving or BASE jumping is a good clinical option for Xanax addiction treatment.)
The woman ended up paying for her preferred patch until the PBM came around, but she only had that option because she knew about it.
Whenever everybody gangs up on one player, especially when it conveniently takes the spotlight or bull’s eye off themselves, one should stop and consider where the guilt really lies. PBMs have avoided transparency, making it at least appear that they have something to hide. They are not the only ones who benefit from high drug prices, however.
It is always popular to blame the middleman for high prices, and PBMs seem to be part of the problem and an easy target.
- The government is against them. Not only has Trump attacked PBMs, but Alex Azar, Trump’s new director of Health and Human Services—who recently worked for the Big Pharma firm of Eli Lilly—now says it may be counterproductive for PBMs to be in effect paid by the entities they are supposed to negotiate against.
- Big Pharma is against them. Even Pfizer’s chief executive said it would be “healthy for the system” to stop paying PBM rebates.
- The employers are against them. Some large companies—including Coca-Cola IBM, and Verizon—have banded together as the Health Transformation Alliance (HTA) to try to provide better healthcare and drug pricing to their employees. (HTA also supports the recent move by Jamie Dimon of JP Morgan, Jeff Bezos of Amazon, and Warren Buffet of Berkshire Hathaway to form a healthcare venture for their 1.2 million employees and reduce healthcare costs.)
- Even Amazon is against them. The online retailer’s other healthcare venture, moving into online pharmacies, is seen by commentator Larry Ramer as a bigger threat to PBMs than pharmacies, and so to PBM stocks.
Whether or not they deserve all the acrimony, pharmacy benefit managers need to get their ducks in a row before they become roadkill on the healthcare superhighway.
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