Drugmaker on rising prices: Don’t look at us

A subsidiary of a leading U.S. drugmaker is reporting that the net cost of its products has been falling. If that’s true, it would appear that drug middlemen and insurers are driving increases in the overall cost of medicine and in consumers’ out-of-pocket costs at the counter.

The report, by Johnson & Johnson subsidiary Janssen Pharmaceuticals, looks at 2020. It’s the fourth annual “transparency report,” which the company says is an attempt to shine a light on what’s forcing up drug costs in the United States.

At first glance, it looks like those prices are rising. An analysis released earlier this year by the Rand Corp. indicated that in 2018, list prices for drugs in the U.S. were 2.56 times as high as in 32 other countries.

But that’s far from the whole story, the Janssen report said, because “list” prices are very often not what is paid for drugs in the United States. 

The Rand report doesn’t consider discounted rates that Janssen and other manufacturers provide to large payers. Janssen said its discounts have been rapidly increasing since 2016 — leading to a 14.4% decrease in costs in net costs for branded drugs.

To understand, you need to know a little bit about the convoluted, opaque way that class of drugs is priced in the United States. Other classes are priced under different, but equally convoluted and opaque, schemes.

Brand-name drugs, often those still under patent, aren’t prescribed as often as generics. But because they tend to be substantially more expensive, they make up a big portion of overall drug spending.

As they develop new drugs, manufacturers maneuver to make sure they’re covered by insurance and, if they can, to get preferential treatment in the form of lowered or eliminated out-of-pocket costs to patients. 

The lists of covered drugs and the tiers of preference are typically determined by drug middlemen — pharmacy benefit managers — hired by insurance companies and government payers such as Medicare and Medicaid.

The lists of drugs are called “formularies.” You might think that the sole consideration when they’re created is whether they provide the most effective health outcome at the cheapest cost. 

But some critics say you’d be mistaken. They contend that after drugmakers spend millions developing products, they’re eager to sell them. So they offer big discounts to the big pharmacy benefit managers, or PBMs, in exchange for prime spots on the PBMs’ formularies.

The system of discounts — some of which are called “rebates” — is opaque, so it’s hard to know who is getting how much from the transactions. But Janssen said that in 2020, it awarded payers nearly $7 billion in rebates, discounts and fees.

“Since 2016, the first year covered by a Janssen U.S. Transparency Report, the rebates and discounts we provide have nearly tripled, reflecting payers’ growing negotiating power,” the report said. “Three PBMs currently cover 256 million Americans — more than two-thirds of the U.S. population — and handle 74% of all prescriptions processed in the U.S. Further, the number of unique medicines not covered (that is, placed on ‘exclusion lists’) nearly quadrupled, growing from 209 in 2016 to 846 in 2020.”

Health — not profit — is the prime consideration in formulary management, said Greg Lopes, spokesman for a PBM industry group, the Pharmaceutical Care Management Association. 

“Formulary design is a clinical-first approach, to ensure there are clinically appropriate options for patients in each therapy class,” he said in an email. “Drugs may be excluded when therapeutic alternatives exist and are significantly more cost-effective.”

One takeaway from the Janssen report might be to take breathless reporting about increasing prices of branded drugs with a grain of salt. 

Drugmakers say they raise list prices, or the “wholesale acquisition costs,” of brand-name drugs in response to the demand from payers such as PBMs for ever-greater discounts off of those prices. If insurers and consumers aren’t seeing those discounts, that’s a question for the companies that collected them, PBM critics have said.

Lopes said the system is saving consumers money.

“Prescription drug rebates are a cost-savings tool,” he said. “While drug manufacturers alone set drug prices, PBMs leverage competition across manufacturers to reduce premiums and lower costs consumers pay for their prescriptions. In fact, PBMs are the only member of the prescription drug supply and payment chain working to lower drug costs.”

Even if drugmakers are not, as Janssen is claiming, the primary culprits for prescription-drug inflation, the system of increasing list prices while offering ever bigger discounts hurts a vulnerable population: the uninsured. Since those people are not wholesalers or direct buyers of drugs, they’re not eligible for the discounts. They have to pay the full, constantly inflating list price for branded drugs.

That, along with increasing out-of-pocket costs required by insurers, is harming many Americans’ health, the Janssen report said.

“Well before the COVID-19 pandemic, one in four adults in the U.S. reported difficulty affording their medication,” it said. “Even for families with insurance, many could not afford needed medical care or medicines. This is happening despite declining net prices to payers, pharmacy benefit managers (PBMs) and government programs.”