Thursday, March 15, 2018
By Mike Ludwig,
Truthout | Report
Faced with angry consumers and
impending political reforms, the massive corporations that shape the way we pay
for medicine are clamoring to preserve their public image, profit margins and
political clout -- often by pointing the finger of blame at each other. The
poster child for the debate is insulin, a hormone replacement drug that many
people with diabetes need to stay alive. As Truthout has reported, the market
price of popular insulin products has skyrocketed in recent years. Some people with diabetes
go broke paying for their medicine. Others have died while attempting to ration dosages.
Despite public outrage over
insulin prices, three of the largest insulin manufacturers have refused to seek
a settlement in a class action lawsuit filed against them on behalf of diabetes
patients. The drug makers Eli Lilly, Novo Nordisk and Sanofi-Aventis asked a
federal judge in New Jersey to dismiss the case and suggested that the
plaintiffs turn their attention to insurance companies instead, according to
briefs filed last Friday.
Court records show that
plaintiff attorneys and advocates for people with diabetes have sparred over
how to proceed with the case and whether to include insurance companies and
their pharmacy benefit managers (who negotiate drug prices) as defendants in
the lawsuit. Currently, only manufacturers are named as defendants.
Food and Drug Administration
(FDA) Commissioner Scott Gottlieb has also put insurers on notice. In a speech
before an insurance industry conference last Wednesday, Gottlieb said that
current pharmaceutical pricing agreements between insurers and drug
manufacturers have saddled people living with serious or long-term illnesses
(such as diabetes) with the cost of keeping premiums lower for everyone else.
"But sick people aren't
supposed to be subsidizing the healthy," Gottlieb said. "That's
exactly the opposite of what most people thought they were buying when they
bought into the notion of having insurance."
Gottlieb was referring to the
system of "rebates" that currently controls the price of
pharmaceuticals. Under this system, drug makers pay billions of dollars to
insurance companies in order to sell drugs to people enrolled in health plans.
It's a system that benefits people who can afford expensive insurance coverage,
but for many working people, this system is a total failure. To understand why,
we must consider how the different industry players use the money that flows in
from drug manufacturers.
Patient advocates say this
system creates perverse incentives that push the price of drugs like insulin
through the roof.
In his speech, Gottlieb
applauded insurance giant UnitedHealth for announcing plans to pass savings secured by lavish
rebates it receives from drug manufacturers directly to members when they buy
drugs at the pharmacy, rather than using the money to pad its central coffers
and lower premiums across the board.
These rebating agreements are
at the center of the drug pricing system that a growing chorus of advocates and
policy makers say must change.
High drug prices are usually
blamed entirely on pharmaceutical companies because they make the drugs and set
the prices. However, these manufacturers do not set prices in a vacuum: They
say they shape prices around the costs of rebate payments they're required to
make to insurance companies in exchange for selling prescription drugs to their
members.
Yes, this means that insurance
companies are making secret deals with drug manufactures, and that's why people
with health coverage don't pay full price for drugs at the pharmacy. These
"kickbacks," as advocates call them, raise an important question: Are
insurance companies giving customers what they pay for?
The Sick Subsidizing the
Healthy
Here's how the system works:
Pharmacy benefit managers (PBMs) work with insurers to decide which drugs will
be covered by their health plans. This provides PBMs with considerable leverage
over drug makers. In 2017, the three largest PBMs -- Express Scripts, OptimaRx
and CVS/Caremark -- controlled access to about 72 percent of the drug market,
according to the Drug Channels Institute. This explains why individual
insurance plans cover certain types or brands of medicines and not others.
Using this leverage, PBMs make
secret agreements with manufacturers like Novo Nordisk and Eli Lilly to place
their drugs on health plans in exchange for large discounts and rebate
payments. The PBM keeps a percentage of the rebate, and the insurance company
takes the rest.
This gives drug companies
access to millions of customers in exchange for billions of dollars in discounts and rebates that can
significantly lower costs for people with health coverage, depending on how
insurance companies share the savings. The Drug Channels Institute estimates
that drug companies spent $127 billion on rebates, discounts and price
concessions in 2016 alone.
PhRMA, the industry group
representing major drug makers, estimates that one third of the original price of all
brand name drugs is rebated back to insurers and other members of the supply
chain. Some drugs are more heavily rebated than others. Insulin, for example,
secures rebates for insurers at rates of up to 75 percent of the original
market price of the drug, or "list price," according to diabetes advocates.
Insurers and PBMs tend to
include higher-priced drugs that bring bigger rebates on the list of drugs they
cover, rather than including cheaper generics and biosimilars.
Patient advocates say this
system creates perverse incentives that push the price of drugs like insulin
through the roof. Insurers can use hefty rebates from commonly used drugs
to lower premiums and attract new customers, and the demand for steeper rebates
pushes manufacturers to set their list prices higher and higher. As result,
many pharmacy benefit plans operate like "reverse insurance,"
according to Drug Channel Institute CEO Adam Fein.
"The sickest people
taking medicines for chronic illnesses generate the majority of manufacturer
rebate payments," Fein wrote last week at Drug Channels, his oft-cited blog.
"Today, these funds are used to subsidize the premiums for healthier plan
members."
People who can afford robust
insurance plans may not notice the price increases, but those buying medicine
with cheaper plans do. Insurance companies often calculate coinsurance and deductibles with the
original list price of a drug, not the after-rebate "net price" they
actually pay. That means cheaper health plans with high out-of-pocket costs
require patients to pay all or part of the inflated list price until
deductibles are paid off. In the case of insulin, that list price could be
hundreds of dollars higher than what the insurer pays after rebates.
High out-of-pocket costs are a
leading reason why patients don't take their medication, which can lead to
medical problems that increase the cost of health care for everyone, according
to Steven Knievel, an access to medicines advocate at Public Citizen.
"The practice of raising
the list price [to increase the size of rebates] benefits the drug companies
and the PBMs. Both come out winners," Knievel said. "But the consumer
is the loser."
Meanwhile, insurers and
PBMs tend to include higher-priced drugs that bring bigger rebates on the list
of drugs they cover, rather than including cheaper generics and biosimilars.
(The FDA is currently promoting generics as competitive
solutions to high drug prices, but that solution seems unlikely to take hold
without serious changes to the pricing system.) Major PBMs are increasingly merging with insurance companies, a sign
that their interests have long been aligned.
"Patients shouldn't be
penalized by their biology if they need a drug that isn't on formulary," Gottlieb
said, referring to a health plan's list of covered drugs. "Patients
shouldn't face exorbitant out-of-pocket costs and pay money where the primary
purpose is to help subsidize rebates paid to a long list of supply chain
intermediaries, or is used to buy down the premium costs for everyone
else."
It's a system of profit built
on the backs of sick people. Faced with lawsuits from insulin users, proposed rebating reforms for Medicare and angry
members of Congress, the major players in the drug supply chain have consistently blamed each other for it.
"The manufacturers point
the finger at the PBMs and say, 'The rebates that you are demanding are so
large that we have to raise our prices to maintain a reasonable rate of
returns,'" said Patricia Danzon, a professor of health care management at
the University of Pennsylvania, in an interview. "The PBMs say the drug
companies are the ones that set the prices, and we are only trying to get the
best prices for our customers."
The Court of Public Opinion
The result is an opaque blend
of public relations messaging and raw economics. For example, manufacturers
claim to be unfairly singled out by a growing number of state-level drug-pricing transparency laws, and they are
eagerly promoting research suggesting that insurers are not passing
savings from drug rebates on to their customers.
If lawmakers agree, they may
pass transparency legislation requiring insurers to report the rebates they
receive, or at least disclose the actual net cost of prescriptions to their
customers. Once this information is disclosed, it's only a matter of time
before consumers demand insurers pass the rebate savings on to them directly.
"The
manufacturers could in theory benefit from the pass-through of the
rebates to patients through co-payments," Danzon said. "This
could make rebates visible. In theory, if manufacturers in any
industry know how much their competitors are rebating, this
visibility makes it easier for them to keep their prices in line without
illegally colluding with each other."
PBMs and insurers, however,
argue that rebates must remain secret in order to maintain the negotiating
advantage and competitive bidding that brings prices down. Plus, if two
manufacturers of a specialty drug know each other's price, they can tacitly
collude to raise it. Danzon said this is why the Congressional Budget Office
(CBO) has assumed in their analysis of legislative proposals that making
rebates fully transparent could increase costs for programs like Medicare.
"The argument for
transparency is very intuitive, people understand that, but the fact the CBO
has consistently come out against full transparency -- that has economic
argument behind it," Danzon said.
Meanwhile, Ben Wakana,
executive director of Patients for Affordable Drugs, told Truthout that
consumers would benefit from more transparency in the rebating system -- if not
a different system altogether -- but rebates are not the only factors pushing
up drug prices. In the United States, drug manufacturers enjoy patent
exclusivity on new drugs for years, allowing them to charge monopoly prices.
They also spend huge amounts of money on advertising and influencing
politicians.
"Drug companies can claim
they have to raise drug prices to pay PBM rebates, but ... they could take
those terrible ads off the air and stop paying their CEOs a hundred million
dollars," Wakana said. "It's a murky system and patients need to know
where their money is going, but drug corporations have to lower their prices."
Wakana supports allowing the
government to negotiate drug prices with the buying power generated by millions
of Medicare members, a proposal supported by progressives in Congress. Perhaps
if drug prices came down, then insurers would not be so reliant on rebates to
control costs. Still, the question of whether consumers are getting what they
pay for from insurance providers remains, and that's exactly how drug makers
like it.
There are profiteers standing
on all sides of the drug pricing equation. Consumers are stuck in the middle,
shelling out monthly premiums along with rising out-of-pocket costs at the
pharmacy. However, the more light we shine on this system, the more we see it
beginning to crumble under its own weight -- and the weight of public opinion.
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