In the never-ending discussion of healthcare policy, there is a trend, mostly with “democratic socialist” politicians, to demonize any industry that makes a profit while providing a good or service, despite all the facts on the ground. Not too long ago it was HMOs, then it was the “fee for service” insurers, then it was the “hospital industrial complex.” In just about every case, a politician seeking to expand government control finds a convenient boogieman, gins up outrage, and then proposes new policies that neither appropriately address the problem nor promote a market-centered approach to governing.
Wash. Rinse. Repeat.
That conversation is now centered around drug pricing – and it’s well past time for all of us to have a difficult, but necessary, conversation. We all want to access and afford the life-saving advancements that drug manufacturers provide. As we hear the tales of the Epi-Pen or insulin prices or the actions of price gougers like Martin Shkreli, it might be the path of least resistance to blame the “big bad corporations” for a host of things they have absolutely nothing to do with.
Let’s pull back the layers.
The thought that a drug manufacturer invents a new drug and then ratchets up the price to enrich a CEO or shareholder while innocent people perish is nothing but a canard. First – there is the research and development process, which on average can take at least ten years with clinical trials alone taking six to seven years on average. Then the approval process, a maze of government spaghetti that can bring the cost of bringing a drug to market to more than $2.6 billion. All before a single patient has heard about a new drug.
From approval, new drugs must make their way into insurance plans, Medicare and Medicaid, and pharmacies around the country. This is where the fleecing often happens. Buried in the supply chain is a little-known middleman called a Pharmacy Benefit Manager, or PBM, tasked with negotiating discounts off the list price of drugs offered in plans. PBMs have taken a process that could provide efficiency and turned it on its head – to the tune of $283 billion a year. The idea is simple – negotiate the savings, and rather than passing along the savings to patients — pocket it.
The competition among drug manufacturers to ensure that their drugs are included on PBM formularies has led to rising list prices – the higher the list price the bigger the discount, and the more money in the pocket of the PBM. This battle has gone on for close to 10 years – and patients are the ones hurt the most.
Just last year, the State of Ohio found that it had paid more than $223 million in inflated fees, just from PBMs’ unnecessary “work” for the state’s Medicaid plan. Figures like this have led the Trump Administration HHS to draft proposals to require PBMs to pass along rebates to consumers or risk losing their “safe harbor” exemption that allows them to accept rebates. Several states – including Ohio, Kentucky, Minnesota – are weighing substantive policy to rein in the practice and level the field for patients and manufacturers.
We all want patients to have access to affordable innovations brought forth by drug manufacturers. We also want to ensure that those innovations continue. In a complex arena like pharmaceutical pricing, let’s make certain we keep our eyes on market-centered reforms and avoid trying to blame the “monster in the closet” that really isn’t there.
Sal Nuzzo is the Vice President of Policy at The James Madison Institute.