Jim de Bree | The Bitter Pill of Drug Pricing
By James de Bree
Thursday, August 23rd, 2018

Our daughter has cystic fibrosis. Over the past 30-plus years the cost of our family’s health care has represented our largest expenditure other than taxes.

More than most families, we realize that our health care system is incredibly dysfunctional and is poorly understood.

Therefore, I took great interest in Bill Miranda’s recent column, “A Prescription for Fair Drug Prices” (Aug. 9).

Mr. Miranda did a terrific job of documenting the exorbitant pricing of certain prescription medications. He even alluded to a little-known fact that advertising is one of the principal drivers of pharmaceutical price increases.

In her book, “An American Sickness: How Healthcare Became Big Business and How You Can Take It Back,” Elisabeth Rosenthal thoroughly analyzed the workings of our health care system, discussing the drivers of health care costs.

One of the points made by Ms. Rosenthal is that advertising and marketing inflate the cost of bringing a new drug to market, and consequently, drive up the cost of prescriptions.

Clearly, how Americans purchase health care generally, and prescriptions in particular, is a byzantine process that is controlled by dueling oligopolies.

Over the past quarter century, pharmaceutical benefits managers (“PBMs”) have played an evolving role in the tensions between pharmaceutical companies and health insurers.

We are the only country that does not negotiate national pricing of prescription drugs. Other countries obtain volume discounts that we don’t receive because our purchasers are fragmented into segments that have diminished negotiating power. The problem is compounded because, due to anti-trust concerns, insurers are not allowed to compare prices they pay for prescription drugs.

To offset this disadvantage, insurers hire PBMs to manage costs and negotiate volume discounts. Since a single PBM represents multiple insurers, it has more clout and market knowledge than that of any individual insurer.

The PBMs make money in three ways. First, they charge a fee to the insurance company to manage its prescription drug costs. Second, they are paid a portion of the price reduction by the pharmaceutical company. Finally, when a patient is covered by an insurer who the PBM represents, the pharmacist rebates a portion of the prescription price from the pharmacist dispensing the drug. The pharmacist’s payment is called a “clawback.”

For a more detailed analysis of how this works please see https://assets.documentcloud.org/documents/3860989/Optuim-Complaint.pdf.

The PBMs are, themselves, an oligopoly because three enormous companies dominate the industry. All three are immensely profitable.

In his column, Mr. Miranda painted a rather benign picture of PBMs. He cited an industry study concluding that PBMs lowered spending on brand name treatments by 28 percent in 2016. He also stated that PBMs will save Medicare Part D $900 billion over the next decade.

If you read about PBMs, you will find that there are two sides of the coin. In her book, Ms. Rosenthal refers to PBMs as the “invisible robber barons.”

A lack of transparency surrounding the pricing arrangements between PBMs and pharmaceutical companies has caused critics of PBMs to claim that pharmaceutical manufacturers have responded to PBMs by inflating their list prices, so that the new “discounted price” results in a net amount approximating the original price before the PBM negotiated the discount. Critics argue that PBMs may claim they negotiate large discounts, but the consumer ends up paying about the same price. Since the PBMs’ fees are based on a percentage of the savings from list price and the PBMs do not share information about the amount of such savings, critics have intimated that the magnitude of the purported savings seen by the insurance companies and consumers may be somewhat illusory.

If you are like many who have a high-deductible insurance plan, you probably won’t meet your annual deductible and any prescriptions you fill are on your own dime. If you are in this situation, ask your pharmacist what he will charge using your plan. Your pharmacist will quote the price negotiated by your insurer’s PBM. (Remember, a portion of what you pay is clawed back by the PBM.)

Then ask your pharmacist what the price would be if you paid cash and did not go through your insurance company. When I did this, I found that the price of some of my prescriptions went down. (As I recently discovered, this won’t work if you are on Medicare.)

Five states, including three with Republican-controlled legislatures, have passed laws prohibiting clawbacks paid by pharmacists to PBMs.

If PBMs are as benevolent as Mr. Miranda suggests, why did these states pass laws forbidding certain PBM practices?

The reality of our health care dilemma is that the product delivery chain is convoluted and too many large players surreptitiously exploit the current system. The economic opacity in which PBMs operate makes it difficult to objectively assess whether they are really saving consumers as much as they claim or whether they might even contribute to the increasing costs faced by consumers.

We really do not know whether PBMs are indeed a prescription for fair drug prices.

Jim de Bree is a semi-retired CPA who resides in Valencia.

About the author

James de Bree

James de Bree

Jim de Bree | The Bitter Pill of Drug Pricing

Our daughter has cystic fibrosis. Over the past 30-plus years the cost of our family’s health care has represented our largest expenditure other than taxes.

More than most families, we realize that our health care system is incredibly dysfunctional and is poorly understood.

Therefore, I took great interest in Bill Miranda’s recent column, “A Prescription for Fair Drug Prices” (Aug. 9).

Mr. Miranda did a terrific job of documenting the exorbitant pricing of certain prescription medications. He even alluded to a little-known fact that advertising is one of the principal drivers of pharmaceutical price increases.

In her book, “An American Sickness: How Healthcare Became Big Business and How You Can Take It Back,” Elisabeth Rosenthal thoroughly analyzed the workings of our health care system, discussing the drivers of health care costs.

One of the points made by Ms. Rosenthal is that advertising and marketing inflate the cost of bringing a new drug to market, and consequently, drive up the cost of prescriptions.

Clearly, how Americans purchase health care generally, and prescriptions in particular, is a byzantine process that is controlled by dueling oligopolies.

Over the past quarter century, pharmaceutical benefits managers (“PBMs”) have played an evolving role in the tensions between pharmaceutical companies and health insurers.

We are the only country that does not negotiate national pricing of prescription drugs. Other countries obtain volume discounts that we don’t receive because our purchasers are fragmented into segments that have diminished negotiating power. The problem is compounded because, due to anti-trust concerns, insurers are not allowed to compare prices they pay for prescription drugs.

To offset this disadvantage, insurers hire PBMs to manage costs and negotiate volume discounts. Since a single PBM represents multiple insurers, it has more clout and market knowledge than that of any individual insurer.

The PBMs make money in three ways. First, they charge a fee to the insurance company to manage its prescription drug costs. Second, they are paid a portion of the price reduction by the pharmaceutical company. Finally, when a patient is covered by an insurer who the PBM represents, the pharmacist rebates a portion of the prescription price from the pharmacist dispensing the drug. The pharmacist’s payment is called a “clawback.”

For a more detailed analysis of how this works please see https://assets.documentcloud.org/documents/3860989/Optuim-Complaint.pdf.

The PBMs are, themselves, an oligopoly because three enormous companies dominate the industry. All three are immensely profitable.

In his column, Mr. Miranda painted a rather benign picture of PBMs. He cited an industry study concluding that PBMs lowered spending on brand name treatments by 28 percent in 2016. He also stated that PBMs will save Medicare Part D $900 billion over the next decade.

If you read about PBMs, you will find that there are two sides of the coin. In her book, Ms. Rosenthal refers to PBMs as the “invisible robber barons.”

A lack of transparency surrounding the pricing arrangements between PBMs and pharmaceutical companies has caused critics of PBMs to claim that pharmaceutical manufacturers have responded to PBMs by inflating their list prices, so that the new “discounted price” results in a net amount approximating the original price before the PBM negotiated the discount. Critics argue that PBMs may claim they negotiate large discounts, but the consumer ends up paying about the same price. Since the PBMs’ fees are based on a percentage of the savings from list price and the PBMs do not share information about the amount of such savings, critics have intimated that the magnitude of the purported savings seen by the insurance companies and consumers may be somewhat illusory.

If you are like many who have a high-deductible insurance plan, you probably won’t meet your annual deductible and any prescriptions you fill are on your own dime. If you are in this situation, ask your pharmacist what he will charge using your plan. Your pharmacist will quote the price negotiated by your insurer’s PBM. (Remember, a portion of what you pay is clawed back by the PBM.)

Then ask your pharmacist what the price would be if you paid cash and did not go through your insurance company. When I did this, I found that the price of some of my prescriptions went down. (As I recently discovered, this won’t work if you are on Medicare.)

Five states, including three with Republican-controlled legislatures, have passed laws prohibiting clawbacks paid by pharmacists to PBMs.

If PBMs are as benevolent as Mr. Miranda suggests, why did these states pass laws forbidding certain PBM practices?

The reality of our health care dilemma is that the product delivery chain is convoluted and too many large players surreptitiously exploit the current system. The economic opacity in which PBMs operate makes it difficult to objectively assess whether they are really saving consumers as much as they claim or whether they might even contribute to the increasing costs faced by consumers.

We really do not know whether PBMs are indeed a prescription for fair drug prices.

Jim de Bree is a semi-retired CPA who resides in Valencia.