Faced with angry consumers and impending political reforms, the massive corporations that shape the way we pay for medicine are clamoring to preserve their public image, profit margins and political clout — often by pointing the finger of blame at each other. The poster child for the debate is insulin, a hormone replacement drug that many people with diabetes need to stay alive. As Truthout has reported, the market price of popular insulin products has skyrocketed in recent years. Some people with diabetes go broke paying for their medicine. Others have died while attempting to ration dosages.
Despite public outrage over insulin prices, three of the largest insulin manufacturers have refused to seek a settlement in a class action lawsuit filed against them on behalf of diabetes patients. The drug makers Eli Lilly, Novo Nordisk and Sanofi-Aventis asked a federal judge in New Jersey to dismiss the case and suggested that the plaintiffs turn their attention to insurance companies instead, according to briefs filed last Friday.
Court records show that plaintiff attorneys and advocates for people with diabetes have sparred over how to proceed with the case and whether to include insurance companies and their pharmacy benefit managers (who negotiate drug prices) as defendants in the lawsuit. Currently, only manufacturers are named as defendants.
Food and Drug Administration (FDA) Commissioner Scott Gottlieb has also put insurers on notice. In a speech before an insurance industry conference last Wednesday, Gottlieb said that current pharmaceutical pricing agreements between insurers and drug manufacturers have saddled people living with serious or long-term illnesses (such as diabetes) with the cost of keeping premiums lower for everyone else.
“But sick people aren’t supposed to be subsidizing the healthy,” Gottlieb said. “That’s exactly the opposite of what most people thought they were buying when they bought into the notion of having insurance.”
Gottlieb was referring to the system of “rebates” that currently controls the price of pharmaceuticals. Under this system, drug makers pay billions of dollars to insurance companies in order to sell drugs to people enrolled in health plans. It’s a system that benefits people who can afford expensive insurance coverage, but for many working people, this system is a total failure. To understand why, we must consider how the different industry players use the money that flows in from drug manufacturers.
Patient advocates say this system creates perverse incentives that push the price of drugs like insulin through the roof.
In his speech, Gottlieb applauded insurance giant UnitedHealth for announcing plans to pass savings secured by lavish rebates it receives from drug manufacturers directly to members when they buy drugs at the pharmacy, rather than using the money to pad its central coffers and lower premiums across the board.
These rebating agreements are at the center of the drug pricing system that a growing chorus of advocates and policy makers say must change.
High drug prices are usually blamed entirely on pharmaceutical companies because they make the drugs and set the prices. However, these manufacturers do not set prices in a vacuum: They say they shape prices around the costs of rebate payments they’re required to make to insurance companies in exchange for selling prescription drugs to their members.
Yes, this means that insurance companies are making secret deals with drug manufactures, and that’s why people with health coverage don’t pay full price for drugs at the pharmacy. These “kickbacks,” as advocates call them, raise an important question: Are insurance companies giving customers what they pay for?
The Sick Subsidizing the Healthy
Here’s how the system works: Pharmacy benefit managers (PBMs) work with insurers to decide which drugs will be covered by their health plans. This provides PBMs with considerable leverage over drug makers. In 2017, the three largest PBMs — Express Scripts, OptimaRx and CVS/Caremark — controlled access to about 72 percent of the drug market, according to the Drug Channels Institute. This explains why individual insurance plans cover certain types or brands of medicines and not others.
Using this leverage, PBMs make secret agreements with manufacturers like Novo Nordisk and Eli Lilly to place their drugs on health plans in exchange for large discounts and rebate payments. The PBM keeps a percentage of the rebate, and the insurance company takes the rest.
This gives drug companies access to millions of customers in exchange for billions of dollars in discounts and rebates that can significantly lower costs for people with health coverage, depending on how insurance companies share the savings. The Drug Channels Institute estimates that drug companies spent $127 billion on rebates, discounts and price concessions in 2016 alone.
PhRMA, the industry group representing major drug makers, estimates that one third of the original price of all brand name drugs is rebated back to insurers and other members of the supply chain. Some drugs are more heavily rebated than others. Insulin, for example, secures rebates for insurers at rates of up to 75 percent of the original market price of the drug, or “list price,” according to diabetes advocates.
Insurers and PBMs tend to include higher-priced drugs that bring bigger rebates on the list of drugs they cover, rather than including cheaper generics and biosimilars.
Patient advocates say this system creates perverse incentives that push the price of drugs like insulin through the roof. Insurers can use hefty rebates from commonly used drugs to lower premiums and attract new customers, and the demand for steeper rebates pushes manufacturers to set their list prices higher and higher. As result, many pharmacy benefit plans operate like “reverse insurance,” according to Drug Channel Institute CEO Adam Fein.
“The sickest people taking medicines for chronic illnesses generate the majority of manufacturer rebate payments,” Fein wrote last week at Drug Channels, his oft-cited blog. “Today, these funds are used to subsidize the premiums for healthier plan members.”
People who can afford robust insurance plans may not notice the price increases, but those buying medicine with cheaper plans do. Insurance companies often calculate coinsurance and deductibles with the original list price of a drug, not the after-rebate “net price” they actually pay. That means cheaper health plans with high out-of-pocket costs require patients to pay all or part of the inflated list price until deductibles are paid off. In the case of insulin, that list price could be hundreds of dollars higher than what the insurer pays after rebates.
High out-of-pocket costs are a leading reason why patients don’t take their medication, which can lead to medical problems that increase the cost of health care for everyone, according to Steven Knievel, an access to medicines advocate at Public Citizen.
“The practice of raising the list price [to increase the size of rebates] benefits the drug companies and the PBMs. Both come out winners,” Knievel said. “But the consumer is the loser.”
Meanwhile, insurers and PBMs tend to include higher-priced drugs that bring bigger rebates on the list of drugs they cover, rather than including cheaper generics and biosimilars. (The FDA is currently promoting generics as competitive solutions to high drug prices, but that solution seems unlikely to take hold without serious changes to the pricing system.) Major PBMs are increasingly merging with insurance companies, a sign that their interests have long been aligned.
“Patients shouldn’t be penalized by their biology if they need a drug that isn’t on formulary,” Gottlieb said, referring to a health plan’s list of covered drugs. “Patients shouldn’t face exorbitant out-of-pocket costs and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries, or is used to buy down the premium costs for everyone else.”
It’s a system of profit built on the backs of sick people. Faced with lawsuits from insulin users, proposed rebating reforms for Medicare and angry members of Congress, the major players in the drug supply chain have consistently blamed each other for it.
“The manufacturers point the finger at the PBMs and say, ‘The rebates that you are demanding are so large that we have to raise our prices to maintain a reasonable rate of returns,'” said Patricia Danzon, a professor of health care management at the University of Pennsylvania, in an interview. “The PBMs say the drug companies are the ones that set the prices, and we are only trying to get the best prices for our customers.”
The Court of Public Opinion
The result is an opaque blend of public relations messaging and raw economics. For example, manufacturers claim to be unfairly singled out by a growing number of state-level drug-pricing transparency laws, and they are eagerly promoting research suggesting that insurers are not passing savings from drug rebates on to their customers.
If lawmakers agree, they may pass transparency legislation requiring insurers to report the rebates they receive, or at least disclose the actual net cost of prescriptions to their customers. Once this information is disclosed, it’s only a matter of time before consumers demand insurers pass the rebate savings on to them directly.
“The manufacturers could in theory benefit from the pass-through of the rebates to patients through co-payments,” Danzon said. “This could make rebates visible. In theory, if manufacturers in any industry know how much their competitors are rebating, this visibility makes it easier for them to keep their prices in line without illegally colluding with each other.”
PBMs and insurers, however, argue that rebates must remain secret in order to maintain the negotiating advantage and competitive bidding that brings prices down. Plus, if two manufacturers of a specialty drug know each other’s price, they can tacitly collude to raise it. Danzon said this is why the Congressional Budget Office (CBO) has assumed in their analysis of legislative proposals that making rebates fully transparent could increase costs for programs like Medicare.
“The argument for transparency is very intuitive, people understand that, but the fact the CBO has consistently come out against full transparency — that has economic argument behind it,” Danzon said.
Meanwhile, Ben Wakana, executive director of Patients for Affordable Drugs, told Truthout that consumers would benefit from more transparency in the rebating system — if not a different system altogether — but rebates are not the only factors pushing up drug prices. In the United States, drug manufacturers enjoy patent exclusivity on new drugs for years, allowing them to charge monopoly prices. They also spend huge amounts of money on advertising and influencing politicians.
“Drug companies can claim they have to raise drug prices to pay PBM rebates, but … they could take those terrible ads off the air and stop paying their CEOs a hundred million dollars,” Wakana said. “It’s a murky system and patients need to know where their money is going, but drug corporations have to lower their prices.”
Wakana supports allowing the government to negotiate drug prices with the buying power generated by millions of Medicare members, a proposal supported by progressives in Congress. Perhaps if drug prices came down, then insurers would not be so reliant on rebates to control costs. Still, the question of whether consumers are getting what they pay for from insurance providers remains, and that’s exactly how drug makers like it.
There are profiteers standing on all sides of the drug pricing equation. Consumers are stuck in the middle, shelling out monthly premiums along with rising out-of-pocket costs at the pharmacy. However, the more light we shine on this system, the more we see it beginning to crumble under its own weight — and the weight of public opinion.
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