Politics, like nature, abhors a vacuum. Witness how the pharmaceutical industry has succeeded in taking advantage of President Donald Trump's failure to do something—anything—about high drug prices.
Trump rode into office promising to challenge "outrageous" drug company prices. Give consumers the right to import drugs from Canada and other countries? He'd allow it. Give Medicare the right to negotiate prices? He was all for it.
And since taking office? After a single meeting in January with drug company executives, the president denounced regulations inhibiting "smaller, younger companies" from bringing new drugs to market and accused Medicare, "the biggest dog in the market," of "price-fixing."
That didn't get very good press. So, at a Louisville, Ky., rally in mid-March, he put off addressing the issue until "Obamacare has been repealed." Drug prices are still outrageous, he told the crowd. "You know why? Campaign contributions."
His vacillations provided the Pharmaceutical Research and Manufacturers of America, the industry's leading trade group, with the opening it needed to successfully conclude a yearlong campaign to deflect attention from its members' price-gouging. It started with public denunciations of rogue players such as Marathon, Mylan, Turing and Valeant, which had gamed the rules of the generic market to charge exorbitant prices for long off-patent drugs.
Their dramatic increases for must-have items such as the EpiPen and the heart drugs Isuprel and Nitropress were outrageous, of course. But while nearly 90% of prescriptions are for generics, they still account for less than 30% of drug spending.
The 1 in 10 prescriptions for patented brand-name medicines, on the other hand, rake in over 70% of total drug spending, which is rapidly approaching $400 billion a year. There's where the real problem lies.
To justify rapidly rising prices, the industry trade group and its member companies hired academic consultants and research firms to author cost-effectiveness reports. These studies were used to justify drug prices of $10,000 a month or more, even when the drug is only marginally more effective than an existing therapy.
It represented a strange twist on the concept of adding "value" to healthcare. Many of these studies use questionable economics such as claiming the benefits of a new drug are equal to the net present value of all future health improvements from its use. Imagine what an aspirin would cost if makers of over-the-counter pills could do the same thing.
Finally, PhRMA's lobbyists launched a full-throated attack on the drug supply chain, including pharmacy benefit managers and wholesalers. Sadly, that wing of the industry, especially the PBMs, was vulnerable.
While its margins are narrow—about 6% on average for the three major PBMs—those profits rise in tandem with drug industry prices. That means when prices are escalating, its incentives are misaligned with its primary customers: the employers and insurers that are looking for the lowest price possible for their members' prescriptions.
But being a beneficiary of high prices doesn't make one the primary culprit. Only 15% of the money spent on brand-name drugs goes to middlemen, according to an investment banker quoted in a recent Bloomberg article. The rest goes to you know who.
Follow the money. The three dominant PBMs—Express Scripts, CVS Health and UnitedHealth's OptumRx—reported before-tax profits of $17.4 billion in 2016 on revenue of $280 billion, most of which immediately goes out in payments to drug companies. By comparison, hepatitis C drugmaker Gilead Sciences alone racked up $17.6 billion in pre-tax profits last year on just $30.4 billion in sales. With no help coming from Washington, insurers are turning on their erstwhile partners, the PBMs. This week, Anthem canceled its contract with Express Scripts, figuring, like a number of Fortune 500 companies that self-insure and have done the same thing, that it makes more sense to manage their own drug spend.
That may provide some short-term financial relief. But it isn't going to solve the core problem.
