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High drug prices: Who's really to blame?

There's a whole lot of finger pointing among feds, providers, payers, PBMs, big pharma, in what Azar calls "dirty, little secret of drug pricing."

Susan Morse, Senior Editor

Providers, payers, pharmacists, pharmacy benefit managers, drug manufacturers and consumers all have a stake in the recent proposal by the Department of Health and Human Services to lower the cost of prescription drugs by taking away kickback protections on rebates.

Reaction to the proposal has varied. America's Health Insurance Plans and pharmacy benefit managers say it's the drug manufacturers that set the prices, and it's hard not to point the blame at pharmaceutical companies when prices for orphan drugs to treat rare diseases have sometimes increased by thousands of dollars, for no obviously perceivable reason.

But the reality is not that simple, and there are opposing viewpoints about whom, and what, is truly to blame for the already high and still rising prices.

A 'shadowy player' between patients and pharmacists

In an opinion piece "Don't Blame Drug Prices on Big Pharma" published February 3 in The Wall Street Journal, Drug Channels Institute CEO Adam Fein takes issue with the accepted mantra that prescription drug costs are skyrocketing. In fact, sale prices for brand-name drugs increased only 1.5 percent last year, Fein said.

America's Health Insurance Plans responded to Fein's opinion piece on its website. "Big Pharma wants to shift the blame to health insurance providers, who fight for consumers every day, using their bargaining power to negotiate lower prices. But casting blame for high drug prices on insurance providers, pharmacy benefit managers (PBM), or others is the definition of fake news," AHIP said. "Let's be clear--the savings insurance providers negotiate are returned directly to consumers through lower premiums and out-of-pocket costs." 

An independent pharmacist, at least one provider interviewed and HHS Secretary Alex Azar, put the blame on pharmacy benefit managers as the middlemen who negotiate drug prices and rebates.

"There is a shadowy third player in the transaction ­between patients and their pharmacists: middlemen who have taken a big kickback from the drug manufacturer, which may or may not be reflected in patients' out-of-pocket costs," Azar said Thursday in a statement published in the New York Post.

More PBMs are at the top of the Fortune 500 list than drug manufacturers because most make more revenue, according to Drug Channels.

Express Scripts is ranked in the Fortune 500 because it has the tools and resources that are in demand and highly valued, responded Brian Henry, vice president of Corporate Communications.

Drugs are a heavy burden on hospitals

Prescription drugs are the number one utilized health insurance benefit by plan members, outpacing their doctor visits.

The price of drugs is seen as the reason why healthcare costs can't be brought in-line.

Hospitals bear a heavy financial burden when the cost to buy drugs increases. Not only in the purchase price, but in patients ending up in the hospital when they cannot afford their medications.

Providers dealing with higher costs must make cuts elsewhere, according to a study released by the American Hospital Association and others. Twenty-five percent of those responding to the study said they had cut staff and 17 percent said they had cut services.

Health plans have become increasingly intertwined with their PBMs to better compete, realize cost savings and to produce efficiencies.

The largest, UnitedHealthcare, is connected to OptumRx through parent company UnitedHealth Group; Cigna closed on its $67 billion purchase of Express Scripts in December; CVS Health and Aetna also merged late last year in a $69 billion deal; and Anthem is ready for an early launch of of its in-house pharmacy benefit manager, IngenioRx.

Cigna's stock dropped 2.9 percent on February 1 after HHS proposed the new rule aimed at lowering prescription drug prices, according to Barron's.

What's needed

Ending the confidential agreements between PBMs and manufacturers would go a long way towards reducing costs, or would at least shine a light on drug prices.

President Trump, in his State of the Union address Tuesday night, called out for better price transparency, asking Congress to require drug makers, insurers and hospitals to disclose "real prices."

Hospitals are already under a mandate to disclose prices.

But wading into the details on price leads to the murky waters of  whether officials are talking about the list, or net price.

"What Americans pay at the pharmacy counter is determined by a complex, opaque third-party payment system for prescriptions," Fein wrote in the WSJ. "By focusing only on list prices, politicians ignore the huge rebates and discounts drug companies give to multiple parties involved in distributing their products: wholesalers, hospitals, physicians, pharmacies and pharmacy-benefit managers, the third-party companies that purchase drugs and treatments on behalf of employer health plans. These rebates and discounts mean drugs almost always sell far below their list prices."

Rheumatologist Dr. Robert Levin contends that while others get the benefit of these discounts, consumers pay their copay off of the list price, not the net price realized after the rebates.

"It limits access to care, it hurts our practices," said Levin, who practices in the Tampa Bay area and is president of Alliance for Transparent and Affordable Prescriptions. "There's also front-end discounts offered and fees. The fees are the money that the PBMs keep."

While rebates are about 5-8 percent off the list price, that's not the whole story, according to Levin. The total discount off the list is about 35-50 percent of the price of the drug, Levin added.

"Yes, they'll pass that 5 percent to the health plan," he said, "but the majority is kept by the PBMs. They classify most of this money as fees."

The system has manufacturers over a barrel, Levin said. The manufacturers are compelled to pay these rebates so they can maintain their position on formularies. If not, the patients will have zero access to their drugs. To cover their cost, manufactures increase their list price.

"The PBMs have actually created a system that has driven up list prices," Levin said. "It's all confidential, it's all gagged. Transparency is the key."

Levin called the rebates "disgusting" and "absolutely extortion," but said there's plenty of blame to go around.

"I want to make it clear, I don't think manufacturers should be left off the hook."

Extortion and dark secrets

"It's not rebates, it's an extortion scheme to put a manufacturer's drug on the formulary," said Jeff, an independent pharmacist who said he would only go by his first name for fear of retaliation by his PBM.  "Everything with PBM is a deep, dark secret."

Jeff operates in Queens, New York and is a member of the Pharmacists Society for the State of New York. PBMs should be paid like a credit card company, based on each transaction, he said.

The new rule really won't help the independent pharmacist who gets squeezed by the larger companies, he said, but it's a beginning for the government to see where the problem is.

"But they still don't get it," he said.

Asked if the new rebate rule would help the consumer, Jeff said, "Once we get to the bottom of what will help the consumer, it will help independent pharmacists."

The rule shaking up the current system

Azar has said the proposed rule is to "replace backdoor rebates with upfront discounts at the pharmacy counter." The rebate system has created a perverse incentive to increase list prices to get higher rebates, he said.

Under the rule, HHS would remove anti-kickback protection called safe harbor from rebates paid to PBMs, and would instead create a new safe harbor for discounts offered at the point of sale at the pharmacy counter for consumers.

Manufacturers offer rebates to pharmacy benefit managers which are then passed on to health plans. Insurers use the rebates to lower premiums for all beneficiaries. When controversy arose over this practice last year, some insurers, including Aetna, said they would pass the rebates directly to consumers at the pharmacy counter.

Current safe harbor protection protect rebates from anti-kickback restrictions. If finalized, the rule means PBMs could be charged with kickback fraud for their current practices. But PBMs would retain safe harbor for their fees.

Pharmacy benefit managers respond

"Despite what the powerful pharmaceutical lobby would have you believe, PBMs retain a fraction of negotiated rebates. In fact, CVS Caremark passes along 98 percent of negotiated rebates to clients, and in Medicare Part D, we effectively pass along 100 percent of rebates," said CVS Caremark spokesperson Christine Cramer. "Drug manufacturers raise list prices over and over again because they can. While PBMs have become a convenient target in the fight against skyrocketing drug costs, in reality they serve as a last line of defense for the consumer."

Pharmaceutical Care Management Association President and CEO JC Scott said in a January 31 statement that PBMs are part of the solution to high cost prescription drugs.

Drugmakers alone set and raise prices, independent of rebates, Scott said.

"Any proposals to eliminate PBM-negotiated rebates must consider the impact it will have on Medicare beneficiaries' access to affordable prescription drugs," Scott said.

This is because rebates reduced Part D costs by $34.9 billion in 2018. Eliminating them would have increased premiums by 52 percent, he said.

"The people say pharmaceutical companies are responsible for setting the price of drugs are correct," Express Scripts spokesperson Brian Henry said.

Removing the rebate, which is essentially a discount, won't lower drug prices, he said.

"Rebates don't raise prices, pharmaceutical companies raise prices," Henry said.

Express Scripts passed through to clients 95 percent of the value of the rebate. The clients decide what to do with the rebate money. Over 95 percent use it to offset premiums, he said.

"We negotiate with pharmacies to lower the overall cost to clients," Henry said.

Through these negotiations, Express Scripts has reduced prescription drug costs by $45 billion, he said. The rule taking away the rebate would cause a significant increase in the cost of prescriptions in Medicare Part D, an estimated $200 billion over 10 years.

The larger debate

"The biggest issue in this is that everybody is pointing the finger at each other, said Mike Strazzella, practice leader, federal government relations at Buchanan Ingersoll and Rooney in D.C. "It's a larger debate. The overall goal of this rule is transparency, and less actors taking a piece of the pie in a transparent way, will drive down cost. How anyone can blame one actor around price increases is inappropriate."

The problem is regulations that keep drug manufacturers from selling directly to the consumer, said Dr. David Friend, managing director and chief transformation officer of The BDO Center for Healthcare Excellence & Innovation. This causes the necessity for PBMs.

"The price of the drug is what the factory is getting. In the complex world of PBMs, there's five intermediaries between the factory and you."

Overseas, manufacturers have direct negotiation with governments.

"Drug pricing is a really big political issue," Friend said. "I think it's the issue Democrats and Republicans agree on."

Twitter: @SusanJMorse
Email the writer: susan.morse@himssmedia.com

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