How the secrecy of middlemen inflates drug prices

Most Americans believe that drugs are too expensive and that big drug companies are to blame. That strong political sentiment underpins Medicare’s new powers. negotiate price Work directly with manufacturers. The negotiations could reduce revenue for drug companies, but also jeopardize future drug development.

There are better solutions. It is about forcing transparency into the pharmaceutical supply chain and releasing market power to intermediaries who generate excessive profits through hidden transactions. They contribute nothing to the development of new drugs, yet they siphon billions of dollars from taxpayers, employers, and patients.

As health policy researchers, we have seen how this plays out in secret.meanwhile drug spending While prices based on manufacturers’ list prices (public) have more than doubled over the past decade, the amount collected by manufacturers based on their net prices (confidential) has only increased by 15%. For example, in the insulin market, the proportion of spending by intermediaries has increased. grew by 155% over five years, but the share attributable to manufacturers fell by 33%.

Most people and organizations that purchase pharmaceuticals, like self-insured employers, have no idea how much of a difference there is between what they are paying and what drug companies are receiving. yeah.Research by our organization, the Schaefer Center at USC, shows that intermediaries in the system Achieve higher profit margins than the average S&P 500 company After considering the risks of investing in various industries.

If market forces are allowed to pursue these profits, drug costs could be lowered, but first everyone needs to know what is being charged, by whom, and to whom. Policymakers also need that information to fully understand how the system is going wrong.

The main concealers are pharmacy benefit managers and large corporations across the supply chain. They manage drug benefits for health insurance companies, employers, labor unions, and government agencies and contract with pharmacies to deliver drugs to consumers.

Pharmacy benefit managers earn a profit from each prescription by setting prices based on fictitious benchmarks rather than fixed amounts. For example, a typical employer’s contract with a pharmacy benefits manager does not state that a 30-day prescription for a drug will cost him $5. Instead, they may guarantee a certain discount from a benchmark such as average wholesale price (also known as Ain’t What’s Paid). manipulated.

As a result, employers do not know in advance how much they will pay to purchase drugs on behalf of their workers and are unable to determine whether the prices offered are competitive. Pharmacies are also unclear about exactly what compensation they will receive from pharmacy benefit managers. Given this situation, it’s no surprise that consumers don’t know how much they’ll be charged to fill a new prescription.

bipartisan bill The commission, from three House committees and two Senate committees, aims to reform drug distribution by reining in pharmacy benefit managers. To ensure market transparency, the final bill includes a simple requirement that the government collect actual transaction prices between insurers, pharmacy benefit managers, and pharmacies and publish real benchmarks based on real prices. should be included.

For example, pharmacy benefit managers must report to the government the price they charge employers for each drug and the reimbursement they pay to pharmacies. Similarly, pharmacies report the cost of obtaining medications from wholesalers and reimbursements received from pharmacy benefit managers. From these data, the government can calculate and publish an average based on the actual transaction price for each drug across all sales at each transaction point.

With that information, contracts between employers and pharmacy benefit managers can be based on actual price benchmarks rather than fictitious price benchmarks. Employers can shop around for a better price on a pharmacy benefits manager contract by comparing it to the published average prices received by other employers. Similarly, pharmacies can compare the reimbursement provided by running the same script to the average of all pharmacies.

You can also use real-world benchmarks to estimate gross margins for each segment of your supply chain. If profits are growing rapidly in one area, new competitors may be drawn to enter. If new entrants do not materialize, the government could investigate anticompetitive conduct by companies that dominate these sectors.

Needless to say, pharmacy benefits managers are opposed to shining a light on their corner. They argue that in order to wrest discounts from manufacturers, they need to protect pricing from public disclosure. They argue that transparency undermines negotiating leverage and opens the door to collusion among drug companies.

But that’s not happening with Medicaid, the federal-state public health program for low-income people. As a useful precedent, and a possible model for other pricing benchmarks, the government surveys and determines pharmacies weekly. National average drug acquisition cost, published and used to calculate Medicaid reimbursement to pharmacies. As a result, piece-rate Medicaid plans now offer affordable prescription drugs.

Congress cannot rely solely on price negotiations to get the job done to keep drug costs down for Americans. Even if Medicare secures an improved deal, intermediaries will continue to siphon billions of dollars away unless their practices are addressed. Transparency is essential to allow market forces to sanitize supply chains and clean up confusion in drug prices.

Neeraj Sood is a senior fellow at the USC Schaefer Center for Health Policy and Economics and a professor at the USC Price School of Public Policy. Karen Van Nuys is a senior fellow and executive director of Value of Life Sciences Innovation at the Schaeffer Center.