A trillion-dollar industry is in trouble and it is fighting back.
A Harvard-Politico poll taken after the 2018 elections showed that both Republican and Democrat voters cite prescription drug pricing as the top priority for this new Congress. A new Kaiser Family Foundation survey reveals that nearly one in three U.S. adults don’t take their medicines as prescribed at some point each year because of the cost. The same survey shows 80% of Americans agreeing that the price of medicines is unreasonable. Elected officials at the federal and state levels are reacting to this rising level of voter frustration by lining up to propose significant reforms.
But Big Pharma did not get big by rolling over when challenged. The industry that tops the lists for U.S. campaign contributions and lobbying dollars is aggressively countering the criticism with a classic tactic: a shell game designed to distract our attention elsewhere.
In this case, the shiny object we are supposed to pay attention to is the so-called “middleman” of the drug pricing process. Sometimes, the pharma industry tries to point our attention toward pharmacies or hospitals or insurance companies. But the usual target is pharmacy benefit managers, (PBMs), who act as buying networks for insurers and employers.
As the Wall Street Journal has recently reported, this “hey, look over there” approach by Big Pharma is the foundation of a thoroughly-planned, carefully-executed corporate disinformation strategy:
For years, drugmakers justified price increases by saying they needed to fund research and development of their products. But lately they have flipped the script. They say they don’t actually benefit much from list-price increases and their net prices are suffering, because they’re paying bigger rebates to pharmacy-benefit managers that negotiate prices in secret.
To be clear, PBMs are not blameless when it comes to rising drug prices. But they are relatively small-time contributors to a crisis created almost solely by the breathtaking greed of drug corporations.
Big Pharma’s gambit to deflect attention and blame is dishonest and inaccurate. But that does not mean it may not be successful. Already, that same Kaiser Family Foundation poll showed that a majority of Americans agree with the line that the PBMs are a “major factor” contributing to the prices of prescription drugs.
People who are outraged by skyrocketing drug prices, including the lawmakers who are looking to respond to the crisis, cannot afford to be fooled by this shell game. They can avoid the distractions if they focus on these three questions, which highlight the real problem.
One: Who is making the money? The goal of a shell game is to confuse the “mark” by showing a lot of rapid movement and bewildering options. The pharmaceutical industry puts out its own reports and videos depicting a convoluted drug pricing process and downplaying the companies’ role in it. The industry also spends millions of dollars funding patient “advocacy” groups that widely distribute their own versions of the self-labeled “complex” system.
Yet there are a few truths that are not that complex at all: First, the pharmaceutical industry is one of the most profitable sectors in modern capitalist history, annually earning surpluses that are double the Fortune 500 average. Some pharma companies have reported annual profits at an astounding margin of 40% and above.
Second, those enormous profits set the stage for pharma companies paying their CEOs and top executives staggering salaries, with compensation packages that average over $41 million per year. They spend hundreds of billions of windfall revenue on enriching stockholders — more than they spend on research and development.
How does Big Pharma create such large profits? In short, because they, not PBMs or any other player, are the primary beneficiaries of overpriced prescription medicines. Detailed analysis published last year in Health Affairs by Dr. Peter B. Bach, director of Memorial Sloan Kettering’s Center for Health Policy and Outcomes, showed that two-thirds of every dollar spent on prescription drugs in the United States is retained by the manufacturers. A subsequent analysis from the Pew Charitable Trusts showed the manufacturers retaining nearly ten times the amount PBMs make from prescription drug sales. Far from being the ones driving the high costs of medicines, PBMs and others in the distribution chain only ever fight over the scraps after Big Pharma has taken its share.
Two: Who is setting these high prices? The starting, or list, price of medicines is set by the drug companies alone. Not by PBMs. Not by insurance companies. And not by providers. Those list prices increase each year at amounts inflation. The list price of the same formula of insulin, for example, has jumped a staggering 1,000%-plus since the late 1990s. A vial of insulin that costs approximately $5 for a drug company to manufacture is now priced by those companies at nearly $300.
These pricing decisions have real world consequences. For the millions of Americans who are uninsured or have only a high-deductible plan, they must pay the manufacturers’ list price. That means there is no blaming PBMs or any other “middleman” for the suffering that results. For example, when 26-year-old Alec Smith of Minnesota died in 2017 after rationing the insulin he needed to survive, it was the company’s list price cost he could not afford to pay.
Ironically, list prices also matter because the drug companies’ desire for profit is what created the very middleman they seek to blame today. Writing in Forbes last year, policy editor Avik Roy pointed out that drug prices would often be even higher without the bargaining influence of PBMs.
Of the pharma industry claim that PBMs are to blame for high prices, Roy said, “To use a technical term, that’s balderdash. Nobody forces drug companies to charge high prices… The reason PBMs’ services are in demand is because drug companies charge high list prices.”
Yet a common pharma industry talking point is that, even while its list prices have skyrocketed, companies’ net profits have not risen much. The reason, they claim, is that the profits are being siphoned out of the system by the middleman. But, where is the transparency or evidence to support this claim? What are the industry’s net profits, and what percentage of total revenue is paid to other players in the system?
We don’t know the answers to those questions, because the pharmaceutical corporations have fiercely resisted the many attempts, especially at the level of state governments, to be transparent in their manufacturing, distribution, and marketing costs. Companies have created a shell to hide the truth under, and they are keeping their hand firmly over this shell.
These same companies want the public to trust their claim of relative poverty in the face of rising prices. When corporations give out limited, massaged numbers in their attempts to demonstrate their profits are not as high as the public might expect, there is reason to be skeptical. As one industry analyst told the Wall Street Journal, “The companies get very funky with that math.”
Three: Who is selling us this story? When the “blame the middleman” cry is being raised, it is important to check to see who is in fact crying. The industry, their lobbyists, and public relations teams are the obvious contenders. But they also recruit others to argue their case.
For example, the Trump administration’s laser focus on the role of PBMs is led by Health and Human Services Secretary Alex Azar. Is it a coincidence that Azar parrots the industry’s lines after coming to his government role after leading U.S. operations for the pharma company Eli Lilly? Similarly, new legislation to target PBMs was introduced in early March by U.S. Senator Mike Braun. Braun represents the state of Indiana, home state of Eli Lilly, which was also a generous contributor to his recent campaign.
And every shell game needs a shill, a seemingly disinterested outsider who endorses the claims of the trickster. Yet the shill is in on the game, too, and also takes a cut. When it comes to drug pricing, this is the role taken by some patient advocacy groups. Consider the American Diabetes Association and JDRF, both non-profit organisations that vigorously echo the industry’s efforts to blame PBMs for high drug prices. But interestingly, both organisations have received millions of dollars in donations from pharma corporations.
Multiple studies have confirmed what common sense already tell us: those pharma industry donations are money well spent. Time and again, grateful advocacy groups reliably line up to support their benefactors’ positions and priorities. By comparison, patient advocacy groups who refuse to take industry money, such as the Type 1 diabetes patient group T1International, insist on focusing on the role the manufacturers play in the shamefully high prices U.S. patients are having to pay.
These patients are right to hold the drug companies accountable. As these companies are aware, momentum is growing for a long-overdue fix to the broken medicines system. So it is imperative that the public and the lawmakers are not distracted by the elaborate Big Pharma shell game. When people’s right to health care and access to life saving medicines are placed at risk, this is a game we cannot afford to lose.