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Under Threat of Regulation, Profiteers Blame Each Other for High Drug Prices

Congress has yet to take meaningful action.

(Photo: Digicomphoto / Getty Images)

Insurance companies receive steep rebates from pharmaceutical companies that are pushing up the price of prescription drugs. However, insurers are not passing the savings down to their customers in the form of lower premiums and out-of-pocket costs.

At least, that’s what the drug manufacturing industry claims. If you ask the insurance industry, it’s drug manufacturers that are to blame for the sky-high drug prices that have enraged the public — and forced insurers to raise premiums and deductibles in recent years.

Congress has so far failed to take meaningful action to rein in prescription drug prices, but constituents are demanding relief.

Drug costs in the US are higher than in many European countries, and manufacturers are under increasing public scrutiny for raising the price of specialty medicines like insulin year after year. However, the backroom negotiations that determine the prices insurance plans actually pay for prescription drugs are as confidential as the prices themselves, allowing both sides to accuse the other of gouging customers.

The drug-pricing blame game is on full display in Congress again this week as lawmakers grilled representatives of insurers, manufacturers and their middlemen during a House Committee on Energy and Commerce hearing on Wednesday. Congress has so far failed to take meaningful action to rein in prescription drug prices, but lawmakers told industry witnesses on the panel that their constituents are demanding relief.

“We’re going to reform, we need to reform,” said Rep. Anna Eshoo, a Democrat from California. “We have to answer to constituents, we have to answer to what the costs are in the system that we oversee.”

Polls consistently show that a majority of voters think drug prices are too high and lowering them should be a priority for Congress and President Trump. Efforts to bring transparency to the system are already on the move in several states, including Eshoo’s home state of California.

What exactly reforms will look like is still up for debate, and the three big industry players that have benefited from rising pharmaceutical prices — drug manufacturers, insurance companies and middlemen known as pharmacy benefit managers — are now pointing fingers at each other as they jostle for the best position to protect their individual profit margins.

Representatives from all three industries testified before the committee on Wednesday, and their stories did not add up.

“Prices are set by drug companies with zero input from everybody else in the supply chain, including pharmacy benefit managers,” said Mark Merritt of the Pharmaceutical Care Management Association, a trade group that represents pharmacy benefit managers.

Pharmacy benefit managers give manufacturers access to millions of customers by deciding what drugs are available on insurance plans, and they use this leverage to negotiate hefty reimbursements or “rebates” for insurers. Insurers depend on these payments to raise revenue and lower premiums.

That’s not how insurance is supposed to work — we’re not supposed to rob Peter who buys insulin, so we can modestly reduce Paul’s premium.

“So, when drug prices go up, insurance premiums go up, and that’s an economic reality,” said Matt Eyles, senior vice president of regulatory affairs at the insurance industry trade group America’s Health Insurance Plans (AHIP), at the hearing.

Lori Reilly, the vice president of policy, research and membership at the powerful drug manufacturing trade group PhRMA, told a different story. She said manufacturers do not set drug prices “in a vacuum” and the other players’ preferences “matter significantly.” The nation’s three largest pharmacy benefit managers — Express Scripts, CVSHealth and OptumRx — control about 70 percent of prescriptions filled in the United States, giving them substantial leverage over drug costs.

Reilly said pharmacy benefit managers even prefer that drug companies set high prices for drugs, because high prices translate to deeper rebate payments for their insurer clients.

“Unfortunately, they are not sharing those rebates and discounts back with patients as they do when a patient ends up in the hospital or uses a physician,” Reilly said. “And that’s what needs to change.”

Merritt shot right back at Reilly, arguing that antitrust laws prevent pharmacy benefit managers from having a say in the list prices set by manufacturers.

However, a series of lawsuits filed earlier this year by people with diabetes allege that antitrust laws are indeed being violated. They claim collusion between manufacturers and pharmacy benefit managers (working on behalf of insurers) to drive up list prices and rebate payments for insulin and other medications has put life-sustaining drugs out of reach for many patients.

As Truthout has reported, there are actually two prices of many brand-name and specialty drugs used to treat conditions ranging from cancer to diabetes: the original “list price” set by manufacturers, and a secret “net price” paid by insurance companies after negotiating hefty rebates through pharmacy benefit managers.

While these rebates can lower the price of a drug like insulin by 50 to 70 percent, insurance plans require patients to pay a list price that is hundreds of dollars more until they meet their deductibles. While patients with robust coverage are shielded from rising drug prices created by this system of “kickbacks,” those with high deductibles or no insurance at all pay more for drugs like insulin than insurance companies do.

“Obviously, that’s not how insurance is supposed to work — we’re not supposed to rob Peter who buys insulin, so we can modestly reduce Paul’s premium,” said Charles Fournier, the legal director of the Type 1 Diabetes Defense Foundation.

The controversy over high drug prices and the political battle to bring them down is just beginning.

Steven Knievel, an advocate with Public Citizen’s Access to Medicines campaign, said insurance companies have been raising deductibles and copays in order to keep premiums down, which are what customers pay the most attention to when shopping for plans.

“This has been their response to higher drug prices generally, to hold down premiums as far as getting more customers to buy insurance,” Knievel told Truthout in an interview.

Knievel suggested that lawmakers focus their reform efforts on the manufacturers that set the high drug prices in the first place. The most popular and well-known proposal would allow Medicare’s drug program to negotiate prices directly with manufacturers. The federal government is the largest buyer of health care services in the country and could use that leverage to benefit everyone.

Other proposals currently before Congress would punish companies for sudden price spikes, promote generic drug competition and require drug companies to report the amount of revenue they reinvest into research and development. Lawmakers routinely rail against high drug prices, but these bills have hardly budged in a Republican Congress focused on taxes and repealing the Affordable Care Act (ACA).

Some policymakers also want to shine a light on rebate schemes. Several members of the House committee pushed for drug manufacturers to disclose their rebate negotiations with pharmacy benefit managers, and state and federal investigators have demanded the same in probes of insulin price-fixing allegations. New laws in California and Nevada aim to increase pricing transparency as well.

Fournier said one potential target of reforms is missing from the conversation: insurance companies. Insurers often calculate cost-sharing benefits based on the list price of a drug, not the net price they pay after rebates — a practice experts want Congress to outlaw. Insurers also do not report the actual net cost they pay for drugs to their customers, lest those with high deductibles discover how much they are being gouged.

Up until now, Fournier said, insurers successfully focused blame on manufacturers, all while misleading the public to believe they pay the same high list prices for prescription drugs as a patient without insurance.

If insurers are not being honest with their customers about the prices they pay for drugs, why hasn’t it come up in congressional hearings? Both the insurance and pharmaceutical industry hold considerable influence in Congress, but Fournier suggested that lawmakers may owe insurers political favors for cooperating on Medicare’s popular drug program and efforts to stabilize insurance markets under the ACA. Democrats may also remember that AHIP was critical of Republican efforts to repeal the ACA.

“No one on either side of the political aisle wants suddenly, in a live-streamed hearing in December of 2017, to draw public attention to the reality: Congress has looked the other way on consumer fraud for a decade in order to obtain private insurer cooperation in two successive public-private partnerships, Medicare Part D and the ACA,” Fournier said.

The controversy over high drug prices and the political battle to bring them down is just beginning. The public is demanding change, and the industry is fighting a pitched battle over who will pay for it.

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