The Drug Price Problem

April 30, 2018          About this Blog Click here

The Drug Price Problem

Sharply rising drug prices are a big problem.  If you take prescriptions, you may realize this when you go to the pharmacy.  If you don’t, then you’ve heard about it in the news.

The average price of brand name drugs jumped 18% each year for the past 8 years.  Insulin prices increased three-fold from 2002 to 2013, to about $300 per month per patient.

Some outrageous examples of price gouging have made big news, such the EpiPen scandal, with the price of a two-pack increasing over seven years, from $100 to $600, purely to make a gigantic profit.

Why are prescription drug prices so high, and rising so fast?

There are several parts to the answer, so let’s break it down:

Role of the middlemen

A large cut is taken by middlemen who purchase drugs from the manufacturers and make the arrangements for you to get them at your pharmacy.

One of these, the Wholesale Distributors, makes perfect sense. They handle the logistics to get the meds from the factories in the right amounts and at the right time, to pharmacies.

This is physical work and it is necessary.  But, the wholesalers are not making fat profit margins. Their expense is around 2% of the total price for medications.

A second kind of middleman is the Insurance Companies.  They don’t physically handle your meds, but they arrange the prices:  What the drug company gets paid, what the wholesaler gets paid, what the pharmacy gets paid, and finally: What you pay out of your pocket.

Formulary:  The special list

Most insurance companies which provide drug coverage use a formulary.  It’s a list of the drugs that it will pay for.  There are often a few tiers of different co-pays for you to pay.  The formulary is supposed to include at least one drug for each medical condition (or almost all conditions).

In theory, the insurance companies get drug manufacturers with a similar drug to bid against each other, in order to get a lower price.  Those become the “preferred” drugs on the formulary, with little or no co-pay.

Drugs that are not preferred have bigger co-pays, and sometimes no coverage at all.

Behind the scenes, the insurance companies take rebates – many of them secret – from the drug companies.  That’s how drug companies get newer, pricier drugs put on a formulary:  They give the insurance company an extra profit to do so.

That drives which drugs end up on the list.  If the insurance company pays more for those drugs, it  simply raises your monthly premiums as a result.

Pharmacy Benefit Managers (PBMs)

PBMs are an extra, unique form of middleman.  In theory, they bargain with the drug companies and pharmacies, on behalf of insurance companies and big employers, to get the best prices for you.

The reality, once again, is something different.  The PBMs don’t really act in the best interest of the public.  And, over 85% of all drug prices are managed by just three massive PBMs.

One of them is owned by the CVS pharmacy chain; one by the United Health Care insurance giant; and Cigna insurance is in process of buying the third.

PBMs do most of the work for insurance companies in deciding what prices will be paid to the drug companies.  PBMs also extract fees from pharmacies, reducing what the pharmacy gets paid.

All these transactions are secret, which makes it very easy for PBMs to rack up huge profits.

Why are drug prices so high in the first place?

We are the only advanced country which does not regulate drug prices. Drug prices in other advanced countries are usually 40% to 60% less than US prices.  The drug companies can get away with charging more here, so they do.

Why not just import prescription drugs, with their lower prices, from other countries?  That makes perfect sense, and it fits the goal of free trade.  However, the federal Food and Drug Administration (FDA) forbids pharmacies from buying from other countries.

Role of the FDA:

The FDA approves patents for new drugs, but it doesn’t care whether the new drug works better than existing, older, cheaper drugs. The patents last for 20 years before a cheaper generic can be sold — and those are often delayed by pay-offs.

The FDA bans imports, even from countries with very high standards like Canada and the UK,   FDA   pretends that it can’t vouch for the safety of the product, which is absurd.

And guess what:  A large portion of FDA’s funding comes from fees paid by the drug manufacturers….

Where does the drug companies’ money go?

The big drug companies typically make immense profits of 20% to 30%.  The money spent on actual research is less than the cost of their ever-present TV ads.  The ad money is in turn dwarfed by the money spent “convincing” doctors to prescribe the latest, most expensive drugs.

PHARMA, the drug companies’ big lobbying group, is one of the strongest around, with over 800 lobbyists bending the ears of Congress.  Drug companies are also huge funders of political elections.

That’s why we don’t have price regulation, or freedom to import.

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