Reports: Drug manufacturers and middlemen both responsible for rising consumer costs

Photo by John Moore/Getty Images.

The world of prescription drug pricing can be bewildering — intentionally so, some critics of the industry claim. 

Whether that’s true or not, several reports this year show that the supply chain’s alchemy of list prices, rebates and net prices hurts consumers. And a U.S. Senate report says drugmakers and middlemen share the blame.

The media often breathlessly report increases in list prices of more-expensive, brand-name drugs. “Big drugmakers just raised their prices on 500 prescription drugs,” read the headline of a January story by CBS News, for example.

But the story didn’t mention that government payers, insurance companies and the middlemen they hire usually pay far less than the list price. As Johnson & Johnson owner Janssen Pharmaceuticals reported, the net cost of its branded drugs actually fell by 14.4% since 2016.

That’s because big payers hire middlemen known as pharmacy benefit managers to handle drug transactions. Among their functions, they determine which drugs are covered and which of those will require low copayments from consumers or even no copayment at all. This, of course, gives consumers an incentive to ask doctors to prescribe those products.

Branded drugs are usually under patent, so it’s important for manufacturers to sell them at a premium while the drugs still have exclusivity so their makers can recoup research costs and turn a profit. In exchange for preferred insurance treatment, drugmakers offer pharmacy benefit managers steep rebates and other discounts off of their products.

And it’s not just Janssen that’s doing so, Adam Fein wrote last month in his influential publication, Drug Channels. Eli Lilly, GlaxoSmithKline, Novartis and Sanofi all saw drops in their net prices in 2020, Fein wrote. A sixth large manufacturer, Merck, saw an increase of less than 1%.

Without understanding how drug pricing works, it just seems logical to blame drug manufacturers for what seem like increasing costs. But that’s not the case, and Fein criticized those who should know better for not embracing the complexity of how prices are ultimately determined.

“Alas, many pharma industry perma-critics refuse to accept that brand-name drug prices are falling — or that they remain the only part of U.S. healthcare where prices have been declining,” he wrote. “That’s why they are drug-pricing flat-earthers (DPFE.) Consider today’s data deluge as my small contribution to making the world a slightly smarter and more fact-based place.”

Fein blames non-transparent pharmacy benefit managers and discounts mandated by government programs for the fact that their discounts on brand-name drugs run between 45% and 50% — and continue to inflate what Fein calls the “gross-to-net bubble.”

That bubble can be bad for consumers several ways.

First, more than 70% of a $450 billion marketplace is controlled by three pharmacy benefit managers, or PBMs: CVS Caremark, OptumRx and Express Scripts. 

Their systems of pricing and discounting are far from transparent. So those companies are able to use their clout to extract ever-greater discounts from drugmakers while it’s unclear how much of those savings they’re pocketing and how much they’re passing along to insurers. It’s anybody’s guess how much wind up in consumers’ pockets.

Secondly, as Biopharma Drive pointed out in March, consumer copayments can be based not on the discounted price the PBM is paying for the drug, but the much-higher list price. So as drugmakers inflate list prices to accommodate ever-bigger rebates and discounts, consumers can feel the bite at the pharmacy counter. 

Third, some of the most vulnerable can feel a much bigger bite. The uninsured and those who must have a certain, uninsured drug have to pay those full, ever-inflating list prices.

It’s no wonder that so many consumers believe drug costs are soaring.

It might seem as though PBMs are solely responsible for Fein’s gross-to-net bubble. And Sen. Chuck Grassley, R-Iowa, is part of a bipartisan push to investigate whether they and their parent companies are engaging in anticompetitive behavior.

But in January, while Grassley was still chairman of the Senate Finance Committee, it released a report that blamed manufacturers and middlemen for the high cost of insulin — a century-old drug that diabetics need to stay alive.

“The investigation found that insulin manufacturers aggressively raised the list price of their insulin products absent significant advances in the efficacy of the drugs,” the committee said in a press release, adding that two manufacturers, Sanofi and Novo Nordisk, hiked list prices “in lockstep.”

The two-year investigation uncovered internal documents showing that manufacturers anxious to keep their preferred treatment by PBMs protected middleman revenues by giving them ever-bigger rebates. 

In one case, “Novo Nordisk’s board of directors even voted down a proposed insulin price decrease due to financial downsides, risk of backlash from PBMs and payers, and expected pressure to take similar action on other products,” the committee said in a press release.

It added, “In other words, the drug makers were aware that higher list prices meant higher revenue for PBMs, and that lowering list prices could be viewed negatively by PBMs and health plans, even though it meant higher out-of-pocket costs for patients.”

Sen. Ron Wyden, D-Oregon, is now chairman of the finance committee. He summed up his conclusions from the insulin investigation.

It “makes clear that consumers are the only ones losing out in America’s broken drug pricing system, since every part of the pharmaceutical supply chain benefits from higher list prices,” he said. “Insulin manufacturers lit the fuse on skyrocketing prices by matching each other’s price increases step-for-step rather than competing to lower them, while PBMs, acting as middlemen for insurers, fanned the flames to take a bigger cut of the secret rebates and hidden fees they negotiate. Consolidation within the PBM industry has not improved the situation.”

Marty Schladen is a reporter for the Ohio Capital Journal, which first published this report.

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