When the latest version of the iPhone comes out, customers can judge whether the price is "worth it" to them. In other words, consumers make decisions whether, from their perspective, price and value are aligned. The conditions for an efficiently operating market are met. There's competition, a free flow of information regarding the product, and transparency regarding pricing. Not so with prescription drugs.
Broadly, drug pricing follows a script in which drug manufacturers set a list price and payers and pharmacy benefit managers express a willingness to pay at that price or some other. Usually, negotiations ensue, resulting in a transaction price lower than the list price. The key operative term here is "rebating"—a process by which drugmakers give PBMs a percentage off of a drug's list price in exchange for increased market share. PBMs can increase their market share by granting certain drugs a preferred status on the formulary.Precisely how much of a discount drugmakers provide, and also how much of the rebate is passed through to the end-user, remain a carefully guarded trade secret.
The mutually agreed upon transaction prices (post rebate) could be considered "value-based" to the extent that they reflect how much purchasers may be willing to pay for a drug. Yet, several key assumptions underlying an efficiently functioning competitive market do not hold, which causes a deviation between the market price and the value of a drug.
First, drugs are patented as branded monopoly products for a limited time without generic competition. This implies that in therapeutic classes with few or no competitors drug manufacturers can more or less dictate the price in the market. Second, third-party health insurance patients from the actual cost of prescription drugs. Third, the asymmetry in information between suppliers and purchasers, as well as between physicians and patients, distorts the market.
Furthermore, rebating is not necessarily value-based from the perspective of clinical or cost effectiveness. To illustrate, based on a recent study of PBM exclusion lists, it appears PBMs are not necessarily making value-based reimbursement decisions to determine which drugs to cover. Products that are superior in terms of clinical use and cost-effectiveness are often excluded from coverage, while products that are inferior are often included.
Aside from profit-making, if the goals of PBMs are to lower overall prescription drug cost growth and to reduce patients' out-of-pocket spending, then they have not been especially successful. Growth in prescription drug spending continues to outpace overall inflation and spending in other healthcare sectors. And in recent years the typical insured patient appears to experience only rising drug prices, cost-sharing and insurance premiums.
Amazon's potential entrance into the prescription drug market, either as a direct-to-consumer seller or as a healthcare company together with Berkshire Hathaway and JP Morgan, could disrupt the prescription drug chain, which features layers of middlemen whose rebates, markups and fees Amazon would seek to undercut. Similarly, other recent moves in the industry, such as the proposed CVS-Aetna merger, Cigna's acquisition of Express Scripts, and Walmart's possible acquisition of Humana, would seek to reshape pharmaceutical care delivery in a way that is more patient-centric and transcends middlemen.
In mid-April Amazon put on hold the idea of selling drugs directly to hospitals. However, it is likely to pursue direct-to-consumer sales of prescription drugs. Amazon already sells over-the-counter drugs through its exclusive Perrigo line of products. As a market hub, Amazon could list prescription drug prices at different pharmacies on its website, similar to GoodRx, only with greater capacity. Likewise, Walmart could expand its pharmacy services, which already include several thousand pharmacies. Both Amazon and Walmart would be able to disseminate information on price, effectiveness, safety and side effects—by drug and therapeutic class—affording consumers readily available access to data to inform their decisions.
For markets to work effectively, consumers need to know the actual prices and comparative usefulness of competing products. Until now, patients and healthcare providers have not had access to accurate, real-time, comparative prices at different retailers for prescription drugs. More transparency and fewer layers of middlemen would help make the prescription drug market more efficient, allowing for a better alignment of price and value.
Joshua P. Cohen is an independent health economist with over 20 years of experience analyzing patient access to biopharmaceuticals, health reform initiatives, use of clinical and cost-effectiveness in clinical practice guidelines, ethics and distribution of healthcare resources. Until June 2017 he was an academic at the Tufts University Center for the Study of Drug Development.