Conflicts-of-interest in the distribution of prescription drugs are driving health insurance costs higher in the US.
The Wall Street Journal analysis uses the example of the EpiPen, a drug used to counter life-threatening allergic reactions.
The example illustrates two points about prescription drug distribution in the US:
- Who the players are
- How the system misfires
The bottom line is that many consumers are being incentivized to use the more expensive brand name product rather than much less expensive generic version. Insurers are eating the costs of the brand name version, which in turn shows up in insurance rates for the following year.
To be clear, this is the private sector misfiring on its own, with tacit permission from Congress.
Pharmaceutical distribution in the US involves six players. The profit percentages are based on the EpiPen example and will vary for other drugs and insurance plans. In that example, at a list price of $300, the actual money changing hands with insurance is $220. (The consumer without insurance is out the full $300, but that’s another issue.)
- The consumer who buys the drug ($35 out of pocket)
- The plan sponsor or insurer who pays much of the cost of the drug ($185)
- The pharmacy, which earns 7% on the drug (in this case, $16)
- A wholesaler, which may take a 1% profit on the drug ($3)
- The drugmaker (62% or $137)
- The pharmacy benefit manager (PBM, 8% or $18)
(The numbers are approximately and don’t add up because of other markups, discounts and rebates involved in the prescription process.)
The benefit manager is the player with which most consumers are unfamiliar. His/her job is to design benefit plans and negotiate discounts and rebates with drugmakers that are distributed to pharmacies and wholesalers.
The benefit manager is potentially subject to a conflict of interest. In the EpiPen case, the Journal asserts that the benefit manager receives a higher fee for designing plans that promote the use of the more expensive brand name drug. Thus a plan may
- Feature the same out of pocket cost (copay) to the consumer for the brand name as for the generic, even though the actual cost of the two is quite different; or
- Offer a lower copay for the brand name.
An attentive pharmacist will recommend that the consumer buy whatever is less expensive — the pharmacist has no direct concern with what the insurer pays, and may not in fact know. CVS, for example, does not provide that information it its staff.
This isn’t the first time that analysts have flagged conflicts of interest with PBMs. The issue has arisen previously with regard to
- Major pharmacy chains having in-house PBMs
- PBMs owning mail order pharmacies.
In both cases, the PBM has an interest in maximizing its own revenue rather than minimizing costs to insurers, plan sponsors or consumers.
How can this happen? Pretty easily actually, if the plan sponsor or insurer is inattentive to what the benefit manager is doing. With the myriad of drugs on the market, this inattention is understandable if not excusable.
Interesting question: Who’s better at policing drug prices — traditional insurers or large companies running self-insured drug plans? Or is there a different?
What you need to consider:
- As a consumer, it’s in your interest to buy generic drugs even if the brand name has the same copay — if the brand name and copay are equally effective. Someone is paying the higher price for the brand name, and that extra cost will show up in insurance rate increases in your future.
- Drug companies may offer coupons for both brand name and generic products, but may only distribute the coupons for the brand name. You may have to ask to get the coupon for the generic.
- You always need to ask the pharmacist if a generic is available for any brand name prescription. Ignorance can hurt you.
- Jonathan Rockoff, “Behind the Push for High-Price EpiPen,” The Wall Street Journal, 7 August 2017, page B3.
- Applied Policy, “Concerns Regarding the Pharmacy Benefit Management Industry,” November 2015. http://www.ncpa.co/pdf/applied-policy-issue-brief.pdf
- Brian Friedman, “Big pharmacies are dismantling the industry that keeps US drug costs even sort-of under control,” Quartz, 17 March 2016. https://qz.com/636823/big-pharmacies-are-dismantling-the-industry-that-keeps-us-drug-costs-even-sort-of-under-control/