High Drug Prices? Don’t Fall for ‘Fake News’ Blaming the Middleman

The tab for Americans’ prescription drugs is rising. High drug prices have not escaped notice by politicians, from Bernie Sanders to Senator Ted Cruz — including President Trump. Not all drug prices are outrageous, it’s really just a handful of over-priced drugs that have given the rest a bad name. Most of the drugs Americans take are affordable, but prices for a few drugs exceed the average mortgage payment.

Most Americans belong to a drug plan that manages drug benefits on their behalf. Patients themselves pay for only about 16 percent of their drug costs out of pocket. The ultimate buyers for 84 percent of all prescription drugs are insurers, employers and drug plans. According to industry data, nearly one-fourth of retail prescriptions are fully covered by insurers and require no copayment by the patient. An additional one-third only cost the patient $5 or less. Just over three-fourths cost the patient $10 or less. Less than 8 percent of prescriptions require a copay of more than $30; while just over 2 percent of prescriptions require copays of $70 or above. That’s the good news. The bad news is perhaps 1 percent of drugs come with a price tag that costs a small fortune.

Drug makers are free to establish whatever price they believe the market will bear. Depending on the number of competitors, some drugs have significant pricing power. Drug prices can be especially outrageous when there are only one, two or three patented drugs that exist within a given therapeutic class.

Americans take a lot of low-cost generic drugs — accounting for about 88 percent of prescriptions filled, but only represent 28 percent of drug spending. Generic drugs are inexpensive because they are no longer protected by patents and various manufacturers compete on price. Yet, drugs whose patents have not yet expired can sometimes be very expensive — especially recently approved drugs and biologics derived from living material. Traditional brand drugs constitute 11 percent of drug scripts and 39 percent of drug expenditures. The remaining 1 percent of prescriptions are for specialty drugs and account for more than one-third of drug spending. In other words, nearly 75 percent of all drug spending is on a mere 12 percent of the drugs Americans take. These are the over-priced drugs that give the rest a bad name. Your drug bills are low if you’re among the 88 percent taking a generic drug, but if you’re part of the 12 percent taking a branded product, you may be paying a lot.

Rising insurance deductibles have made it more difficult for drug makers to disguise high prices by passing them on to insurers. In response to the increasing public scrutiny, some drug companies began peddling fake news stories that claim high drug prices are due to “the middleman.” The middleman is an old boogeyman. If a retailer wants to convince consumers its products are cheaper than competitors, it often claims “we’ve cut out the middleman.” However, the term “middleman” does not apply to the drug supply chain the way it did historically in consumer markets.

Blaming high drug prices on consumers’ drug plans is a tactic designed to obscure high prices. Pharmaceutical benefit managers (PBMs) are not middlemen in the traditional sense. They are drug plan administrators. Insurers and employers hire PBMs to manage drug benefits and adjudicate drug claims for plan members. PBMs clients are employers, insurers, state Medicaid programs and Medicare Part D drug plans — not drug makers. With multiple clients, large national PBMs can negotiate lower prices from manufacturers, and therefore possess far more bargaining power than individual firms. PBMs’ bargaining power occasionally makes them unpopular with pharmacy owners — and drug makers.

The primary reason some patients experience outrageous drug bills is the escalating price of a few drugs whose prices are… outrageous. However, to a significant degree, over-priced drugs are a problem exacerbated by the regulatory regime at the U.S. Food and Drug Administration. One way to rein-in high drug prices is to inject more competition into the drug market. Costly drugs would face numerous competitors if it did not require $1 billion or more, on average, to bring new products to market. With more competition, it would be difficult for drug makers to maintain high prices. President Trump has announced plans to do just that. Let’s hope he succeeds.

Comments (8)

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  1. Jimbino says:

    One way to rein-in high drug prices is to inject more competition into the drug market

    Why don’t you spell it out: The simplest way to inject more competition into the drug market would be to force all drug suppliers to publish their prices online.

  2. Barry Carol says:

    PBM’s negotiate volume based rebates on behalf of payers — insurers and self-funded employers primarily. In many cases, the rebate can be 50% of the list price and the rebate is typically a percentage of the list price so when the list price is raised, the rebate is automatically raised too. The problem is that the increasing number of people with high deductible drug plans or health insurance plans expose them to paying the full list price as pharmacies do not benefit from rebates. Payers do.

    This was the issue with the controversy surrounding Epi-Pen. Mylan Labs, the manufacturer, claimed it only collected about $274 of the $608 list price for an Epi-Pen two-pack. That’s because of a large rebate negotiated by PBM’s on behalf of payers. The poor soul with a high deductible insurance plan or no insurance at all had to pay the full list price. Then Mylan introduced an authorized generic priced at $300 but with no rebate. So, it actually collected somewhat more than before while providing significant relief to patients who had to pay the full list price. It’s a system that looks increasingly problematic to me.

    Jimbino — Patients can already learn pharmacy list prices for all drugs on apps like Good-Rx. These can vary quite a lot, especially for generics. For brand name and specialty drugs, not so much.

  3. Paul Nelson says:

    Remember that PHARMA has an unusual business model to fund the risks involved in bringing any new product to market ($1 Billion): 40% of cash income annually is allocated to profit and promotion. The annual expense for pharmaceutical advertising is second only to the beer industry, historically. Over-all the prices for generic medication within our nation are the lowest among the developed nations and the trade name products are the highest among these same nations. The low generic prices are driven by large pharmacy networks, e.g., Walmart. The rebate processes are maintained to perpetuate this situation in odd ways but, bottom line, sustain the fundamental business model as well. Like so much of our nation’s healthcare industry, Paradigm Paralysis prevails.
    As a Primary Physician, its very unusual that a trade name product is necessary (my judgement). As Chairman for a multi-Hospital Formulary Committee for 20 years, the level of collaboration, transparency and trust needed to mold the prescribing habits of a physician is profound. The governance of most hospital institutions makes it very difficult to sustain this commitment. And now, the level of shortages, unexpected non-availability, for medications further worsens that problem.
    Bottom line: the level of social responsibility exhibited within the top levels of governance of our nation’s healthcare industry has lost its connection to community HEALTH. The continuing worsening of our nation’s maternal mortality ratio is the most egregious measure of this, for more than 20 years.

    • No business “allocates” income to profit. Profit is allocated by the market to the business. With respect to advertising: Ad spend is positively correlated with R&D spend.

      • Paul Nelson says:

        Accrual accounting you are correct; the basic idea is the same. Before the days of PBMs, a neighborhood pharmacy could tell me which “drug rep” had been seen on a given day by prescriptions that came in during the following week. And, these were all trade name products.

  4. PLM says:

    Generics are inexpensive because of competition. Has nothing to do with PBM bargaining power. Single source brands are expensive because they are under patent and because of regulatory constraints. Manufacturers are arguing that PBMs have done nothing to reduce the net price of brands. PBMs have simply inflated the gross price by negotiating larger and larger rebates. Only a fraction of these rebates make their way to the plan and or consumer. End result, rebates increase the net price to both the plan and the consumer while leaving the manufacturer untouched. High deductible plans are exposing PBMs for what they actually are: rebate hoarders.

    • Devon Herrick says:

      Rebates are nothing more than a mechanism to price discriminate, charging small buyers more than large, volume purchasers. Automakers have done this for years; all dealers pays the same wholesale price but the dealers later get a rebate based on volume.

      With respect to PBMs, sometimes 100% of the rebate passes through, but the client pays a management fee. Other times, the PBM contracts to keep a portion of the rebate as its management fee. Some clients negotiate a combination of the two. In any case, research I’ve seen posted at Drug Channels suggests about 90% of the rebates pass through to the client one way or another. I raise this issue because it’s a red herring to blame PBMs for high drug prices when drug companies set gross and net prices.

      • Paul Nelson says:

        I know of many rebates that go directly to a health system’s income stream, based on Formulary decision processes.