How the Pharma Mafia Fixes Prices
The Mafia of Pharma Pricing: A Deep Dive into Pharmacy Benefit Managers and Their Impact on Healthcare Costs
Last updated
The Mafia of Pharma Pricing: A Deep Dive into Pharmacy Benefit Managers and Their Impact on Healthcare Costs
Last updated
4% of all the money in America flows through a few mafia-like health care conglomerates. The FTC just released a ground-breaking report on how they operate. And it is gearing up to sue.
In recent years, the escalating costs of healthcare in America have been a topic of intense debate and concern. At the heart of this issue lies the complex and often opaque world of pharmaceutical pricing, dominated by a few powerful middlemen known as Pharmacy Benefit Managers (PBMs).
These entities, which began as clerical agents, have evolved into major players in the healthcare system, significantly impacting drug prices and accessibility. This essay explores the intricate role of PBMs, their influence on drug pricing, and the potential implications of recent findings by the Federal Trade Commission (FTC) on the future of pharmaceutical pricing and healthcare costs.
The Evolution of Pharmacy Benefit Managers
Pharmacy Benefit Managers originated in the 1960s as intermediaries between insurers and pharmacies, facilitating the process of drug dispensing and reimbursement. Initially, their role was straightforward: they processed claims, issued insurance cards, and ensured pharmacies received payments. However, over the decades, PBMs underwent significant transformations due to industry consolidation and regulatory changes.
From the 1980s to the 2000s, the PBM industry saw a wave of mergers and acquisitions, leading to a high concentration of market power among a few large players. Today, three PBMs—Caremark (owned by CVS), Express Scripts (owned by Cigna), and OptumRx (owned by UnitedHealth Group)—dominate the market. These entities not only manage drug benefits but also own retail and mail-order pharmacies, creating potential conflicts of interest and opportunities for price manipulation.
The core issue with PBMs lies in their control over drug formularies and pricing mechanisms. Formularies are lists of drugs that insurers will cover, and PBMs have significant discretion in determining which drugs make the list and at what price. This control allows PBMs to negotiate rebates with pharmaceutical manufacturers in exchange for favorable placement on formularies, a practice that can lead to inflated drug prices.
One striking example is the case of Gleevec, a cancer drug whose acquisition cost plummeted by 99% after its patent expired. However, despite the drop in acquisition cost, the price paid by insurers and patients remained exorbitantly high due to PBM practices. PBMs have been known to steer patients towards more expensive drugs, sometimes owned by their parent companies, and away from cheaper generics, exacerbating healthcare costs.
The drug Gleevec, which when it was approved in 2001, was a miracle treatment for blood cancer. “For a lot of people, Gleevec was simply too good to be true. But these once-dying patients were getting out of bed, dancing, going hiking, doing yoga. The drug was amazing,” said the researcher who discovered the chemical compound behind the drug, Brian Druker.
Gleevec was also expensive, at $26,000/year when it launched. By 2015, when the patent ran out, it was priced at $132,000/year, bringing in $4.7 billion for Novartis that year alone.
But like all drugs, its patent expired, and soon it faced generic competition. As more companies entered the market, the cost of this drug, according to a pricing metric used by pharmacies called the National Average Drug Acquisition Cost (NADAC), fell by 99%.
This kind of pricing change is a tremendous policy success, it’s the idea behind American patent policy, and how that was implemented in pharmaceuticals through the Hatch-Waxman Act of 1984, which allowed for a period of tremendous profit for the creator of a drug, and then fostered a path for generics to bring the price down after the patent ran out.
But then, something odd happened. Though the acquisition cost of Gleevec collapsed, in some places, the cost to the payer did not. Here, for instance, is what happened in Ohio.
Most patients didn’t front the full cost, paying co-payments, but Medicaid systems and companies using certain insurers had to cover it on the back end. Such costs are one reason that health care costs keep going up far above the rate of inflation.
Why was there such a big spread between the cost of buying the drug and the price being paid by payers? It wasn’t what most people expected, that the pharmaceutical company Novartis, had found a way to maintain its patents. The answer, according to a new Federal Trade Commission report, is that a small group of middlemen were inflating the price.
That's because three PBMs now control the pricing of pharmaceuticals in America, and are redirecting vast amounts of money to themselves.
Regulatory and Legal Developments
The FTC's recent report sheds light on the problematic practices of PBMs and their detrimental impact on drug prices. The report highlights how PBMs inflate prices through complex rebate schemes and secretive pricing practices. It also points to the vertical integration of PBMs with insurers and pharmacies as a significant factor contributing to high drug costs.
The FTC, under the leadership of Chair Lina Khan, is gearing up to take legal action against PBMs, particularly focusing on their role in inflating insulin prices. Such litigation could potentially overhaul the drug pricing system and bring much-needed transparency and fairness to pharmaceutical markets.
Challenges and Future Directions
Despite the promising developments, significant challenges remain in addressing the issues posed by PBMs. The sheer size and influence of these entities make regulatory and legal interventions complex and resource-intensive. Moreover, PBMs have been resistant to providing the necessary data for thorough investigations, further complicating regulatory efforts.
However, the tide seems to be turning. Employers, lawmakers, and consumer advocates are increasingly aware of the need for reform in the PBM sector. Initiatives like Mark Cuban's Cost Plus Drugs and state-level actions to curb PBM abuses indicate a growing momentum towards change.
