As pharmaceutical companies have faced more heat for their pricing practices, they’ve found someone else to blame: “middlemen” who extract discounts from drugmakers. But in fact, if it weren’t for middlemen like wholesalers and pharmacy benefit managers, drug prices would be even higher.
When Donald Trump was running for President in 2016, he promised to rein in the high price of prescription drugs. “I’m going to bring down drug prices,” he told Time after he’d won the election. “I don’t like what has happened with drug prices.”
The pharmaceutical lobby developed a PR strategy in response to Trump’s promise: blame the middlemen. Pharmaceutical companies, they came to argue, were being forced to charge high prices for their medicines. This was because nefarious middlemen, like pharmacy benefit managers (PBMs), were demanding discounts and rebates from drugmakers. In turn, the drugmakers were “forced” to charge higher prices to maintain their profit margins.
To use a technical term, that’s balderdash. Nobody forces drug companies to charge high prices. Patients and consumers and taxpayers are removed from the price of the drugs they consume, and therefore don’t always understand how their insurance premiums and Medicare costs keep rising on account of rising drug prices. As a result, in the absence of competition, manufacturers frequently charge the highest prices they believe they can justify in the court of public opinion.
That’s not to say there aren’t ways to reform the way middlemen work when it comes to prescription drugs. Let me explain.
How the drug supply chain works
The price of a medication that you usually see in the newspaper is what’s called the list price, which is essentially the sticker price for a drug. Almost nobody pays the list price; the list price is kind of like when Delta says the price of a full-fare coach ticket from Atlanta to LaGuardia is $1,000. Nobody cares about that price, because the actual price for a non-refundable economy ticket is more like $250.
Drug companies manufacture their medicines, which are then purchased in bulk by wholesale distributors: a kind of middleman. These wholesalers use their purchasing power to get discounts off the list price, which average around 16 percent, according to the Iqvia Institute. The distributors add value to the consumer, by reducing effective prices in this way. The post-wholesaler price is often called the invoice price.
There are additional steps in the drug supply chain, before medicines get to the consumer. For patients who have prescription drug coverage, their insurance often covers much of the cost of branded medicines, with the patient paying a co-pay. Over time, insurers have developed what are called tiered formularies in which the insurer charges different co-pays depending on the cost-effectiveness of a drug.
For example, let’s say you have high cholesterol and your doctor has prescribed you a cholesterol-lowering drug. If you go with an effective off-patent, generic drug like atorvastatin (formerly Pfizer’s Lipitor), your co-pay might be $0 or $5. Hypothetically, if you use a costly, branded drug like Amgen’s Repatha, you might have a co-pay of $30. In this way, the insurer is hoping to give you an economic incentive to try the inexpensive but effective drug first, before trying the costlier, newer one. Such utilization management leads to lower health insurance premiums for everyone.
Over time, this complex function of drug utilization management has been taken over by another set of middlemen called pharmacy benefit managers, or PBMs. Insurers contract with PBMs, because PBMs have proven more effective than insurers at the complicated task of keeping abreast of all the clinical evidence and pricing data needed to create these tiered formularies. Insurers make more money if (1) their patients are healthy; (2) if their patients who are sick get the medicines they need at the lowest possible price. Hence, nearly all insurers contract with PBMs, because PBMs have proven to be the best at keeping drug prices lower than they otherwise would be.
Put another way: prescription drug prices, insurance premiums, and overall health spending would all be far higher if PBMs weren’t driving more market share to low-cost generic drugs.
