The United States spends more money on healthcare per
capita than any other nation. A little
study leads to the conclusion that there is too much profit-taking in our
system. Who makes too much profit? Everyone it seems. The pricing of pharmaceutical medicines has
received the most attention of late.
Just when one thinks the system of pricing can be explained by simple
greed, one learns that nothing is simple in healthcare; it’s a collective
system where components collaborate to ensure that profits get widely shared.
The most recent “stunning revelation” appeared in an
article by Paul Barrett and Robert Langreth in Bloomberg Businessweek: The Crazy Math Behind Drug Prices. The presumed new villains in this case are
the pharmacy benefit managers (PBMs) who are hired to act as intermediaries
between institutional healthcare providers and drug companies in order to
negotiate lower drug prices and save the providers money. These PBMs also have leverage over the drug
companies by having control over the list of drugs that are considered “preferred
medications.” If a company’s product
does not make that list, then it will lose sales revenue—perhaps a lot. What the PBMs do is not negotiate the list
price of a drug, but the discount price that a given provider will pay for the
drug. The PBMs take a percentage of the
savings to the providers as their profit.
People not in one of the provider’s plans will end up paying the full
list price. The insightful reader will
have already become suspicious about this system.
The authors of the
article use the example of David Hernandez to illustrate some issues associated
with these practices.
“David Hernandez, a 44-year-old
restaurant worker and Type 1 diabetic, didn’t have insurance from 2011 through
2014 and often couldn’t afford insulin—a workhorse drug whose list price has
risen more than 270 percent over the past decade. As a result of his skimping
on dosages, Hernandez in 2011 suffered permanent blindness in his left eye, and
three years later he experienced kidney failure. He’s since received a
lifesaving kidney transplant covered by Medicare and has drug coverage under a
New Jersey program for the disabled. But Hernandez’s eligibility expires next
January, at which time he’ll have to pay about $300 a month out of pocket for
insulin. ‘I don’t really have that kind of money,’ he says.”
“That Hernandez is struggling to
deal with big price hikes for insulin, a century-old medicine that for most of
its history cost $15 a month or less, speaks volumes about America’s failing
battle to control drug prices.”
Legal action has been initiated in Hernandez’s name by
Steven Berman claiming that the interactions between the PBMs and the drug companies
are causing the price of drugs to increase rather than decrease—not just for
insulin but for many other drugs as well.
“Other plaintiffs’ law firms
have followed in Berman’s wake, all of them alleging conspiracies in which the
dominant insulin makers—Eli Lilly, Novo Nordisk, and Sanofi—continually raise
list prices to curry favor with the largest PBMs: Express Scripts Holding, CVS Health,
and OptumRx, a unit of UnitedHealth Group. The four cases pending in New
Jersey, which are likely to be consolidated, constitute a threat of massive
damages for Big Pharma—and could topple the branded-drug pricing system used in
the U.S.”
“Federal prosecutors are also
investigating relationships between PBMs and large drug companies. The U.S.
Attorney’s Office in Manhattan has ordered Lilly, Novo, and Sanofi to turn over
documents regarding those relationships.”
The authors use the history of the drug Humalog to
illustrate a pricing system that is out of control.
“When Lilly introduced its
diabetes medicine Humalog in 1996, it cost $21 a vial. Today the same vial
lists for $275. Patients often use two vials a month. Annual insulin sales
worldwide exceed $20 billion.”
Consider the perverse set of incentives operating in the
negotiation between PBMs and drug companies.
If two companies have equivalent drugs and one is cheaper than the
other, the PBM can make more money from dealing with the more expensive
product. The cheaper drug company
recognizes this factor and concludes that it is in its best interest to raise
the price of its drug to match or even exceed that of the competitor. This type of competition can easily lead to
competitors frequently raising prices in lockstep.
The drug companies have admitted that this profit motive
on the part of PBMs is a real consideration.
“Speaking at an investment
conference in June 2016, Lilly’s then-CEO John Lechleiter referred to ‘the
weird way the payment system can work in this country.’ He asserted that ‘higher
rebates can be an incentive for a payer [PBM] to stick with essentially a
higher-priced product’.”
“Lars Fruergaard Jorgensen, CEO
of Novo Nordisk A/S, the world’s biggest maker of insulin drugs, says list
prices are meant to be only the starting point for rebate negotiations with
PBMs. ‘It was never the intention that individual patients should end up paying
the list price,’ he says.”
The PBM can use the higher price to provide greater
discounts to the healthcare providers. Consequently,
the providers may not be too much bothered by this scam, but this is far from a
victimless crime. We end up with two
prices for drugs: the inflated list prices and the negotiated discount
prices. The problem that arises is that
people like Hernandez end up being required to pay the artificially high list price. People without medical coverage, the least
likely to be able to pay, will face the list price. People with a healthcare plan but with a high
deductible will be required to pay the full list price until the deductible is
met. The Medicare system is not allowed
to negotiate prices with drug companies so the taxpayers are getting gouged, as
well as the elderly who use a lot of medications.
The drug companies make out like the bandits they
are. They make a decent profit from the
discounted rates they negotiate and make an outrageous profit from the poor
souls who must try to pay the list price.
Those bringing the lawsuits have a clear picture of what
is going on here.
“All of the lawsuits describe
the relationships between drug companies and PBMs as unlawful ‘enterprises’
operating in violation of the Racketeer Influenced and Corrupt Organizations
Act.”
Who could argue with that?
The interested reader might find the following articles
informative:
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