Is Big Pharma Really the Enemy?
One of the most prominent issues creeping into the modern political debate is the price of prescription drugs. As a pharmacist, I play the presumed role as gatekeeper to medicine. On a daily basis, patients weigh the possible benefits of prescribed medications to the financial risks associated with said medications. It is truly an unfortunate situation and represents a system that certainly needs disruption through innovation. However, the promise to eliminate high drug prices through solutions that include various methods to confront pharmaceutical companies illustrate a genuine lack of understanding to the overall pharmaceutical supply chain.
Prior to diving into the weeds of complex system, I think there is a general misconception of what insurance actually is. A better understanding of the entire health insurance landscape should make one question why pharmaceuticals absorb all the political attention when they only account for about 15% of total healthcare spending in the United States.
From the perspective of a consumer, insurance provides a means to hedge against uncertain losses. In terms of health insurance, the overall cost of providing care does not change with insurance. Instead, insurance companies pool client payments to finance these costs. Ideally, many of the individuals with insurance will not need it and therefore the low risk individuals subsidize the high-risk individuals to reduce their costs. In other words, health insurance provides a method to alleviate the risks and anxieties associated with unknown medical costs. Health insurance costs more for an individual that smokes because smoking is associated with increased risk, higher risk patients pay more as they are expected to utilize more. Still, some of their cost is offset by lower risk patients which reduce total individual out-of-pocket expenses but the overall total cost of delivering care to all patient’s remains the same.
When it comes to the cost a patient pays at the pharmacy counter, the copay or cost-sharing amount the patient will be responsible for at point of sale is determined by the insurance, not the pharmaceutical company. Following the journey of both pills and payments in the overall supply chain show an alarming trend in which high-risk patients are actually subsidizing the low-risk patients through plan mismanagement.
The following chart shows the complex payment system for prescription drugs. From the pill perspective, it is pretty simple, manufacturer to wholesaler to pharmacy to patient. When considering payment perspective, through financial flow and contractual relationship, the opaqueness emerges. To start, health plans often outsource administration of prescription benefits to a pharmacy benefit manager (PBM). This is why many plans provide a separate card to be used at the pharmacy which causes much confusion. Health plans (third-party payer) hire PBMs to reduce the overall cost through rebates negotiated with pharmaceutical companies facilitated by their purchasing power. What does that mean? There are few PBMs that handle the large majority of drug purchases for health plans. Therefore, manufacturers give rebates and discounts to PBMs in exchange for formulary preference. Higher manufacturer list prices result in higher rebates, making the pharmaceutical companies list price very misleading since they are prices prior to rebates. In fact, after accounting for rebates and discounts, we see that pharmaceutical companies’ prices for many of their drugs actually decline.
So PBMs negotiate rebates and discounts with pharmaceutical companies to greatly reduce the purchase price relative to the list price. According to an article in the Wall Street Journal, “last year manufacturers paid $166 billion in rebates and discounts, amounting to a 40% reduction in prices for off-brand drugs.” These rebates go from the manufacturer to the PBM to the third-party payer to reduce premiums for patients. The size of these rebates incentivizes the selection of more expensive medications for formulary preference to generate higher discounts.
One would assume these rebates would be used to reduce premiums of the patients that need it most. Instead, these rebates are used to reduce the price of average plans to drive competition for lower risk patients. The sickest patients require more expensive medications and facilitate higher rebates that are then applied to lower costs of average plans or kept for profit.
We can wag our fingers at pharmaceutical companies for outrageous list prices all we want. However, simply reducing list price of medications may accomplish nothing more than reducing rebate dollars these medications generate thus increasing costs incurred by the end patient. There is no question pharmaceutical companies profit greatly from the sale of their medications but they would argue much of their profits are reinvested to research and development for future innovations. The point is, the healthcare industry is primed for much disruption through innovation. There needs to be an optimal balance of cost-sharing to maximize benefit and minimize waste. In other words, an approach that includes zero out-of-pocket expenses at point of care seems like nothing more than an effective catalyst to increase waste rather than an optimal balance of risk and reward.
One thing is clear, reducing the overall cost of delivering healthcare will reduce out-of-pocket expenses. The common talking point is one in four diabetics cannot afford their insulin and for type I diabetics exogenous insulin is required to sustain life as their body does not produce it. However, according to the CDC, only about 5% of diabetics have type I. For type II diabetics, disease progression to the point of requiring insulin is a very poor prognosis. Maybe policies focusing on ways to curb the type II diabetes epidemic in our country would be a better approach to actually improve the quality of life for Americans. Before we call big Pharma the enemy, we must truly understand our healthcare systems.