As battles lines are drawn, who’s to blame for high drug prices?

Americans have spent the last year listening to virtually every interest group bemoan the high price of drugs and the sheer extortion exercised by some pharmaceutical companies. The worst offenders have been publicly shamed on editorial pages (but kept their jobs) and President Donald Trump has promised “to bring down the artificially high price of drugs and bring them down immediately.” 

This issue of rising drug prices has taken on on renewed urgency this past week as FDA Commissioner Scott Gottlieb signalled his plans to encourage competition among manufacturers and lower drug prices. 

To help deflect the negative press, the pharmaceutical lobby PhRMA has launched a new $100 million campaign to argue that high drug prices are not the fault of the drug manufacturers. “The ‘Share the Savings’ campaign will criticize health plans for frequently failing to pass on negotiated discounts to their customers,” Politico recently reported.  

The manufacturers aim to shift the blame to the pharmacy benefits managers who finance and manage the distribution of medicines from the manufacturer to the patient. The pharmaceutical companies argue that those who make the drugs are reaping less and less of the total revenue in the drug sector, while these various middlemen take more and more.

In response to this claim, the pharmacy benefit managers have created a campaign of their own, called Drug Benefit Solutions campaign, with daily advertisements in Politico Pro. Their message: America's pharmacy benefit managers protect consumers, employers, unions, and government programs from high drug prices by negotiating rebates and discounts from drug companies.

The manufacturers aim to shift the blame to the pharmacy benefits managers who finance and manage the distribution of medicines from the manufacturer to the patient. The pharmaceutical companies argue that those who make the drugs are reaping less and less of the total revenue in the drug sector, while these various middlemen take more and more.

With so many players to share the blame — not to mention the doctors who write too many prescriptions for high-cost drugs instead of generics, and the FDA that won’t let some drugs on the market, and Congress that won’t let Medicare negotiate with drug companies — how should reporters cover the issue? Are high drug costs a policy problem, a market failure, or one of those odd and inexplicable artifacts of American culture?

The answer, of course, is “Yes, all of the above.”

It’s useful to keep two distinct processes in mind: The manufacturer’s price and the changes to that price throughout the supply chain. At each step in this process, a business may add to the initial drug price, and may also be receiving rebates or discounts so that its net cost is lower than that initial price.

Both elements of the pricing process are important, and both are plagued with problems from a consumer and purchaser point of view. The “launch price” in the United States for many drugs is unrelated to the drug's actual value to the patient — in terms of extending or improving life — and totally out of whack with any international comparison. These prices appear to be set based on maximizing what the manufacturer can get without a public relations headache. Many of the independent assessments of the “value” of a new drug — based on how much the drug might extend life or improve quality of life — recommend much lower prices than those posted by the manufacturer for the U.S. market. For the arthritis drug Humira, for example (the highest-revenue drug in the world at $14 billion annually), a recent report found that the annual cost for taking the recommended treatment is about $40,000 per patient (including discounts and rebates), which would have to be lowered by an additional 55 to 69 percent to be in line with its value in enhancing quality of life. Humira is also vastly more expensive for U.S. patients than for any others around the world. In the U.S., each dose is priced at $2,669, while in England it’s $1,362 and in Switzerland $822. Note that Switzerland has about a 15 percent higher median household income than the U.S. and England’s is about 25 percent lower. The only reason the manufacturers charge so much more in the U.S. is because they can.

But the amount the consumer (and their employer) ultimately pays reflects the added costs and special interests of many business intermediaries, creating a final price that is even less related to the drug’s value to the individual patient. Each of those business interests makes sure it maximizes its revenue at its stage of the process, without concern about how it affects the ultimate cost to the patient or payer.

For instance, a pharmacy benefit manager might decide to put a drug on a “formulary” and so encourage more prescribing of that drug because they get a bigger kickback from the manufacturer for that drug over another — perhaps more effective or cheaper — alternative. The PBM may or may not pass those savings on to the purchaser or patient. In fact the patient is not likely to get the benefit of that particular discount, because the patient’s share of the drug’s cost (what the patient contributes as a co-pay at the time of purchase) is based on the manufacturer’s list price, not the final, post-rebate price.

What does this complex layering of business interests mean for the public discussion of high drug prices? And how reporters can dig into these issues? Here are a few key points to keep in mind:

• It’s not possible to know, in most cases, who is most responsible for high prices because none of the prices or mark-ups or discounts are made known — even to the people who pay the bills. But high prices are not due to the lack of transparency; they’re the result of invisible manipulation of the prices by so many intermediaries.

• High prices not only mean that many people cannot afford the drugs, they also signal that patients are sometimes being steered to the drugs that aren’t best suited to their needs. Instead, they’re often the ones someone can make more money on.

• The problems aren't just about a few greedy business people, though that's a problem. The system as a whole is following the wrong incentives, with inadequate controls.

• Competition is a good tool to manage prices, but only where there is meaningful competition and prescribers and patients have information about costs and outcomes, and insurers give them access to the most appropriate and cost-effective medications.

• Strategies to manage the total cost of drugs, like prior authorization and step therapy, are often reasonable steps to making sure we're taking the drugs we need and not wasting money. But the current system prevents these sensible practices from being used if dispensing a less expensive drug might jeopardize someone’s profit.

Finding ways into this urgent story

These are complex stories to tell. Journalists should reach out to the experts in this field, some of whom are academics affiliated with pharmacy and medical schools and some of whom are independent pharmacy consultants who make a business of analyzing individual drugs and their utilization, price, and accessibility. The experts can identify specific drugs now or in the pipeline that exemplify these pricing practices.

One approach is to tell the story of one of these revealing drugs (or drug classes) as it travels from the factory to the patient, looking not only at how its price changes but also whether the appropriate patients get affordable access to it.

Second, take a look at alternative supply chain or distribution approaches for the more interesting drugs. How does Kaiser Permanente or the Veterans Administration review new drugs and decide which ones to put on their formulary? And how is that different than how most commercial health plans operate? How does a patient in Germany or England get access to these drugs? Is their supply chain any different for the same medicine?

Third, there are policy issues that shape the behavior of these industry actors. How have manufacturers used patent law, the 340B program, and the special treatment afforded orphan drugs to generate higher revenues and avoid the kind of competitive pricing pressure seen in other industries?

Finally, consider this story through the eyes of each actor in the chain: How does a drug wholesaler decide its prices ? How does the pharmacy benefits manager or health plan evaluate various drugs, perhaps within a single class? How does the doctor ultimately describe what to prescribe? And how does a patient decide whether to purchase and keep taking a prescribed drug?

Tells human stories, and ask industry the hard questions

There are many solid human-interest stories to be told here — about people genuinely harmed by the costs of new drugs or inflated prices for established drugs. But there’s also a health system and business story. How we’ve allowed a series of business interests to get between the producer of a useful therapy and the person who needs it — without justifying their value or even making clear how they add to costs.

Journalists should be asking tough questions of manufacturers — why they set the prices they do, why they charge so much more in the U.S., why they raise prices instead of lower them, why they use shady tricks like coupons and rebates and discounts instead of just posting a real price. And we need to ask equally tough questions of pharmacy benefit managers, health insurance companies, pharmacies, and wholesalers and distributors. Are they using independent scientific evidence to decide which drugs to cover and what prices to charge? If effective competition doesn’t exist, why can’t we look to independent estimates of value to set prices? And, regardless of the data or the price, isn’t it time to let the patients and purchasers who are paying for all this get a look at the true costs of every step in the process?

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