The Patriot Post® · Why Prescription Drug Prices Are Soaring

Americans outraged by the high cost of prescription drugs have aimed their rage directly at pharmaceutical companies. They might be the wrong target.

We begin with pharmacy benefit managers (PBMs). PBMs are people hired by health insurance companies to administer drug programs for company clients. Those clients include federal and state governments, and employers who provide drug coverage as part of their Medicare and Medicaid managed-care plans.

In order to secure better coverage terms, PBMs negotiate rebates from the drug manufacturers that often result in lower copays of brand name drugs for customers, making those drugs more attractive to policyholders than one produced by a competitor.

The catch? PBMs keep a portion of those rebates for themselves.

“The rebate figures are eye-popping,” explains columnist Tami Luhby. “Insurers received $89 billion in rebates, reducing their spending on prescription drugs to $279 billion in 2016, according to estimates from Altarum, a research and consulting firm. This doesn’t include the portion of the rebate that pharmacy benefit managers keep, which isn’t disclosed.”

Neuro-otologist Dr. Gerard Gianoli agrees. “PBMs have enjoyed public obscurity thanks to their inherent complexity and help from media members and legislators who pin the blame of rising drug prices on drug manufacturers,” he writes. And while he notes that politicians like Bernie Sanders insist drug company greed is behind the price hikes, he notes that “exploring the topic just a little further suggests PBMs are a chief culprit.”

Gianoli explains the dynamic, noting that some of the biggest price hikes have been for drugs such as insulin and epinephrine, which are generic drugs. Generic drugs don’t have the patent protection that would theoretically drive greed-induced price gouging. Thus, they should face the same price constraints as any provider trying to maintain its consumer market share against other providers.

Instead, PBMs “have turned the drug distribution chain into a pay-to-play operation,” Gianoli reveals. “They demand enormous kickbacks known as ‘rebates’ from drug manufacturers in return for access to health insurers’ formularies (the lists of drugs that insurers will cover). Manufacturers that can’t pay these kickbacks are shut out. Hence higher prices and widespread drug shortages.”

Yet even the term “rebate” is misleading. “Pharmaceutical rebates are similar to the type that you get when you buy a toaster — discounts that are redeemed after the transaction has taken place,” The New York Times explains. “Except with the toaster, you get to keep the money. With drug rebates, it’s the insurer or employers who usually reap the benefit.”

The Times further notes that PBMs remained below the radar until 2011 when CVS, which operates one of the nation’s largest PBMs, announced it was excluding 34 drugs from its national formulary. “The rebate then became a potent negotiating tool, pitting drug companies against each other in an effort to secure a place on the formulary,” which in turn “led to an escalating game, where drug companies raise their list prices to maintain their profits and to offer bigger rebates,” the Times reveals.

Nonetheless, PBMs have their defenders. “The reason PBMs’ services are in demand is because drug companies charge high list prices,” insists columnist Avik Roy. “Drugmakers don’t pay those rebates to PBMs out of the goodness of their hearts; they do so because it is in their economic interests to do so — or, put another way, because they will make more money by offering rebates than by not doing so.”

Roy also insists government is part of the problem because it drives up the costs of research and development that get passed to the consumers. “But when it comes down to it, most of the time, drugmakers charge high prices because they can, not because they have to,” he adds.

That would be charges to Americans, which illuminates another critical factor driving price increases: compulsory licensing. “Compulsory licensing is when a government allows someone else to produce a patented product or process without the consent of the patent owner or plans to use the patent-protected invention itself,” states the World Trade Organization.

As a result, nations all over the world “are free-riding on the back of American medical innovators,” columnist Jerry Rogers explains. “European countries and Canada — our trading allies — impede access and set artificially low prices for prescription medicines. If U.S. companies refuse to acquiesce on prices, these foreign governments threaten to steal their patents by using compulsory licensing.”

With regard to reining in PBMs, the Trump administration proposed a rule to encourage manufacturers to pass discounts directly to patients. How? A U.S. Department of Health and Human Services proposal “would expressly exclude from safe harbor protection under the Anti-Kickback Statute rebates on prescription drugs paid by manufacturers to pharmacy benefit managers (PBMs), Part D plans and Medicaid managed care organizations,” the HHS website explains.

Safe harbor protection insulates PBMs from federal anti-trust rules and other regulations under the theory that doing so allows them to drive a hard bargain with regard to extracting rebates.

With regard to compulsory licensing, the administration is looking to forge trade agreements whereby foreign governments open up their markets to American drug companies without forcing them to sell at government price-controlled levels in those markets, which effectively forces Americans to subsidize them. In other words, in terms of intellectual property protection — and perhaps more critically in terms of research and development — Trump intends to see to it that America’s trading partners pay their “fair share” by leveraging trade agreements to do so.

The downsides? With regard to PBMs, the Trump administration can directly kick back drug rebates to the public from government programs like Medicare, but forcing private insurers to do so will take an act of Congress.

With regard to compulsory licensing, allowing foreign nations to sell here would impose their price controls on our markets, stifling innovation. That dynamic could also further increase the level of drug counterfeiting that has exploded over the last 10 years. “America’s opioid crisis is largely driven by drug dealers targeting American patients — particularly those suffering from cancer,” Rogers reveals. “There are enormous amounts of counterfeit fentanyl and other imposter medications flooding across our southern border. Importation would only make the crisis worse.”

Is there a third way to address this crisis? In 2016, the National Academy for State Health Policy (NAHSP) released a paper with a number of ideas, the most intriguing of which is to treat drug companies like public utilities. This would require those companies to report their costs and justify price increases at open hearings before a government board.

The paper suggests this model could be imposed at the state level. Yet a nationwide system would be far more effective, as it would prevent drug companies from refusing to do business in states with less “buying power.” Perhaps as a compromise, the utility model could be restricted to live-saving or life-altering drugs.

Regardless, the system as it currently exists is broken. Trump has promised to do something about it, and as far as Congress is concerned, this has “bipartisan cooperation” written all over it.

A price-battered American public deserves no less.