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Devon Herrick, PhD, is a health economist and former hospital accountant. He has researched and written about health economics for many years.
Our policy analyst weighs in on a new drug industry PR campaign that attempts to shift the blame for high drug costs.
A drug industry public relations campaign spearheaded by Pharmaceutical Research and Manufacturers of America attempts to cast some of the blame for high drug prices on the “middlemen”-other stakeholders in the drug supply chain.
Recently, in another example of an attempt to shift blame, the CEO of Mylan defended the price of its EpiPen during a hearing before congress, arguing drug plan administrators are partly responsible for the high price.
Manufacturers of name-branded drugs tend to have high list prices that nobody actually pays. Pharmacy Benefit Managers (PBMs) manage drug plans and negotiate discounts in the form of rebates that lower the net price of the drugs, in some cases up to 30% depending on the size of the drug plan. The precise rebates a drug plan receives are proprietary; no insurer, drug plan administrator (or manufacturer for that matter) wants competitors to know what each other has to pay.
Because it’s not public knowledge, some drugmakers have accused PBMs of not passing along enough of manufacturers’ rebates to their clients (employers and insurers)-supposedly making consumers pay too much.
The accusation rings hollow; if the makers of brand drugs didn’t like rebates, it would presumably be within their power to negotiate net prices rather than rebates off high list prices.
Is mandated price transparency the answer?
A bill recently introduced Sen. Ron Wyden (D-OR) hints that pharmaceutical rebates are jacking up the price of drugs. It would force a statutory percentage of rebates to be passed back to plan sponsors. A bill in the House makes a similar claim.
If regulatory changes rendered old agreements less profitable, the contracting firms would obviously have to renegotiate agreements and shift business practices. I’m not convinced by the argument that forcing net prices (versus gross prices with a rebate) would necessarily benefit consumers in the long run.
Rebates are used in various industries to price-discriminate-to give volume discounts to large wholesale buyers who do the most business with the manufacturer. Consumers benefit from retail price transparency; mandating wholesale price transparency would not have the same effect.
Moreover, the U.S. Federal Trade Commission (FTC) and even the actuarial consulting firm Milliman, Inc. are rather skeptical of the argument that exposing rebates will lower drug prices. The FTC is concerned that mandating price disclosure will remove a bargaining tool used by some firms to compete with others. The loss of proprietary pricing information could reduce aggressive bargaining or potentially encourage price collusion among manufacturers.
Not all drugs are costly. A back-of-the envelope estimate of perhaps only 5% can break the bank, while 88% are cheap generics. PBMs and drug plans have been so successful steering plan members to cheap generic drugs that branded medications now only have a 12% market share.
It costs more than a billion dollars to develop a new drug. Once approved, new drugs often only have from 10 to 12 years left on their 20 year patents. After spending a billion dollars, drugmakers have to recover their investments, cover the costs of failed products and eke out a profit in less than a dozen years.
This likely explains why some drugmakers are aggressively testing the price levels the market will bear. However, the organizations most responsible for high drug costs are the ones who set prices. Playing the blame game won’t make them any cheaper.