Don’t Blame Drugmakers for Exorbitant Prices, Blame the Middlemen

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President Donald Trump recently complained that pharmaceutical companies have “rigged the system against American consumers” by keeping drug prices unfairly high.

He’s right that Americans often pay too much at the pharmacy counter for brand-name drugs. But he’s wrong to blame drug manufacturers. Insurers and other middlemen in the drug supply chain bear much of the responsibility for the exorbitant out-of-pocket expenses consumers pay.

The president isn’t the only one fed up with high drug costs. A Kaiser Family Foundation poll last March found that 80 percent of the country believes that prescription drug prices are unreasonable. But when consumers complain about the high cost of drugs, what they usually mean is they are paying too much out of their own pockets. That’s a different issue.

Drug spending in the United States is slowing. Retail prescription drugs represent just 10 percent of the $3.5 trillion the nation spent on health care in 2017, according the Centers for Medicare & Medicaid Services. That’s an increase of just 0.4 percent — much less than the still modest 2.3 percent increase in 2016.

One reason for the slowdown is that nearly 90 percent of prescriptions in the United States are less-expensive generic copies of brand-name drugs, according to the Congressional Research Service.

Another reason is that pharmaceutical companies provide large discounts off the list price of their drugs. Quintiles IMS (now Iqvia) reports these manufacturer discounts, rebates and other concessions have more than doubled in value over the last few years, rising from $59 billion in 2012 to $127 billion in 2016.

Even with manufacturer discounts, patients aren’t feeling relief at the pharmacy counter. That’s because insurance companies and middlemen in the drug supply chain have enjoyed the lion’s share of the savings.

Those middlemen are the pharmacy benefit managers. They extract considerable discounts from pharmaceutical firms and pass part of the savings to insurers that agree to add the discounted drug to their formulary, or the list of drugs they’ll cover.

Insurers could use their discounts to reduce the financial burden borne by patients. But they often profit from those discounts even as they find new avenues to charge beneficiaries at the pharmacy counter.

The growth of prescription drug tiers in many health plans is a prime example. Whereas insurance firms used to charge one co-pay for generics and a slightly larger one for all brand-name medications, they’ve added a third and even a fourth tier for some of the newest and most innovative drugs.

Last year, 83 percent of Americans insured by their employer had a plan with at least three prescription drug tiers, according to the Kaiser Foundation. The average co-pay for the highest tier was $110.

Co-insurance is another example. Under these arrangements, beneficiaries pay a fixed percentage of a drug’s price at the point of sale. Kaiser notes that for employer-based plans in 2017, average co-insurance was 17 percent for first-tier drugs, 25 percent for second-tier drugs, and 38 percent for the most expensive third-tier drugs.

These co-insurance rates are often based on a drug’s initial list price, not what the insurer actually pays after the rebates and discounts secured by pharmacy benefit managers.

And then there’s the “gag clause,” which prohibits pharmacists from telling customers that the out-of-pocket price for a drug is less than the person’s co-pay.

I ran into this personally a few years back. My co-pay for a generic drug would have been $15. Out of curiosity, I asked the pharmacist how much it would cost me if I paid out of pocket. “$11.50,” she replied. She was likely contractually prohibited from volunteering the information, but not from answering my question.

Fortunately, Congress recently passed legislation ending this practice. As he signed the law, Trump said, “These clauses prevent pharmacists from telling patients about more affordable options for prescription drugs. … Our citizens deserve to know the lowest price.”

That’s a great start, but there’s more to do.

If the president is serious about lowering out-of-pocket drug spending, he needs to shine a light on middlemen and insurer practices. They are the ones who decide what patients actually pay for the latest medicines.

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