Drug prices are complex - Brownsville Herald: Letters To The Editor

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Drug prices are complex

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Posted: Tuesday, March 19, 2019 12:33 am

It seems like there’s only one public policy issue that receives bipartisan support in today’s politically polarized climate: action on prescription drug prices. That’s certainly the impression from a recent series of Capitol Hill prescription drug price hearings, including one last month featuring the heads of seven drug companies.

Such action on prescription drug prices is welcome. Like many doctors, I see the negative impact that high prescription drug costs have on my patients’ physical and financial well-being almost every day.

Yet policymakers and the public should resist the temptation to oversimplify the problem as solely the result of greedy drug companies, a caricature that has become a cliché. The bigger — if more complicated — culprit for rising drug prices is the opaque supply chain, which exists nowhere else in the economy.

To understand the impact that the supply chain has on raising drug prices, let’s talk about monopolies — or more specifically, “monopsonies.” Whereas monopolies feature a single seller, monopsonies exist when there is only one buyer. Both raise prices for consumers as a result of lack of competition. The prescription drug market is characterized by a monopsony.

Specifically, drug channels feature pharmacy benefit managers, who control the prescription drug supply chain as sole purchasers. In addition to being the only buyers of prescription drugs, PBMs are merely middlemen between manufacturers and insurers. As a prerequisite for purchase, PBMs require massive payments known as rebates from drug manufacturers in return for placing their drugs on insurance plans. The Department of Health and Human Services estimates that these rebates make up somewhere between one-quarter and one-third of total drug costs.

If these rebate dollars are subtracted, drug prices have essentially remained flat over the past several years. According to SSR Health, net drug prices (list prices minus rebates) actually fell by more than 5 percent last year.

Another analysis finds that while list prices have risen by 37 percent since 2011, net prices have only risen by about 1 percent per year. Virtually all list price increases made by manufacturers this year are in order to pay for increasing rebates.

PBM control of the supply chain explains why even the list prices of generic medicines like insulin have skyrocketed in recent years. Potential generic drug competitors can’t access the market — not because of patents but because they can’t afford the rebate entry costs. The Wall Street Journal reports that while insulin prices have doubled over the past several years, revenues to insulin drug makers have remained flat because of growing rebates.

These rebates aren’t merely taken by PBMs as profit. In fact, they are mostly passed on to insurers, which generally use them to lower overall insurance premium costs. The problem is that this dynamic reduces premium costs for healthy people while sticking sick people — whose conditions are responsible for generating the rebates in the first place — with the tab.

Cutting through this tangled web of hidden supply chain distortions while removing the PBM gatekeeper is the key to reducing drug prices. There are encouraging signs that policymakers are beginning to understand this. Earlier this year, the Department of Health and Human Services announced a new rule that would redirect rebate dollars to directly offset drug costs at the pharmacy counter for Medicare recipients. Lawmakers should follow suit and pass legislation to extend these savings to the private market as well.

The role that monopsonies play in driving drug prices is more complicated than merely attacking drug companies. But the public should beware of simple solutions to the drug pricing problem. They are also simplistic.

Dr. Dara Grieger, M.D., M.P.H. is a preventive medicine physician in McAllen.

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