A pharmacy manager retrieves a a medication. Credit: Joe Raedle/Getty Images.
The health care system is supposed to incentivize the development of wonder drugs and then apply market forces to squeeze prices to a minimum. But a new report shows how at least for one drug, incentivizing is working a lot better than price-squeezing.
At least when insurance is involved.
For example, Blueberry Pharmacy in the Pittsburgh area opted out of the traditional insurance system. It can offer versions of a new generic for $25 a month, while programs connected with middlemen and insurance companies are offering it for $75 in the best instance and often for more than $1,000.
The example illustrates how prices of most generic drugs are wildly inflated in a bewildering system of insurers and the middlemen they use to handle the transactions, Blueberry owner Kyle McCormick said.
And, he added, they do so when prices for the vast majority of generics are so low that the expense doesn’t need to be insured against the way you would against having to buy a new car or house or to get a heart transplant.
“Most generic medications are less than a bottle of Tylenol,” McCormick said. “We don’t need to pay for insurance to cover a bottle of Tylenol.”
Here’s how the system’s supposed to work: Drugmakers are granted patents so they have exclusive rights to sell new medicines and charge high prices for a period. That way they can recoup their research costs and turn a profit.
The profits the high prices bring give drugmakers a reason to go looking for the next new drug. And the next.
The way the system’s supposed to work, as patents expire, so does the drugmaker’s exclusive right to produce it. Other manufacturers can swoop in with their own generic versions and ruthlessly undercut one another until the price of the drug is as cheap as possible while still being profitable for a company to make.
But the great majority of those paying for generic Truvada are unlikely to see anything close to those minimum prices even though its patent expired in late 2020 and 11 generic versions subsequently swarmed into the marketplace, 46brooklyn Research, a nonprofit drug analysis firm, wrote in a report that was published Tuesday.
It analyzed Truvada, an antiviral drug that greatly reduces the risk of contracting Human Immunodeficiency Virus — which causes AIDS — and can slow the progress of the disease in those who have contracted it when combined with other medications.
There was keen interest in producing generic versions of brand-name Truvada, with eight companies bringing products to market on the last two days of March alone. Increased competition cut the cost for pharmacies to buy generic Truvada by 90% off of the $1,800 for the brand-name version of the drug, the report said.
That might seem like the invisible hand of the market doing its stuff.
“However, this announcement, while welcomed, may miss a key point: Will patients actually see these generic savings at the pharmacy counter?” the analysis asked, suggesting that middlemen involved with insurers would ensure they won’t.
There is a tangled web of reasons why most customers at the drug counter won’t see that 90% price drop, according to the report’s authors.
One is that pharmacists working with insurers don’t see it as in their interest to pass the discount along.
Insurance companies that provide prescription benefits hire pharmacy benefit managers to administer them. The middlemen contract with networks of pharmacies, negotiate with drugmakers, decide which drugs are covered and determine how much to reimburse pharmacies for the drugs they dispense.
The pharmacy benefit managers, or PBMs, have enormous leverage over the other players in the drug supply chain. Three — CVS Caremark, OptumRx and Express Scripts — control more than 70% of the market, Ohio Attorney General Dave Yost said recently in a lawsuit.
That means that if drugmakers and pharmacies want access to PBMs’ millions of clients, or “covered lives,” they have to do business with those three companies.
Insurers, too, want access to the bargaining power of the big three PBMs, although each now belongs to a corporation that also owns a big insurer. CVS owns Aetna. OptumRx is owned by UnitedHealth. And Express Scripts is owned by Cigna.
The PBMs typically reimburse pharmacies based on the lesser of two, seemingly arbitrary numbers: the “usual and customary” charge — or “cash” price — determined by the pharmacy and the “maximum allowable cost” determined by the PBM.
Ohio community pharmacists have for years been saying that the big PBMs use a non-transparent set of cost lists to cut reimbursements to the bone, in some instances not even covering their cost to dispense a drug. Those low reimbursements give pharmacies an incentive to keep cash prices high in non-insured transactions so they can make up for low PBM reimbursements, the 46brooklyn report said.
So if you go to pharmacies that rely on business with insurers and PBMs and ask for the cash price of generic Truvada, it’s likely to be much, much more than the $25 or so it would cost on the open market, the report said.
What your insurance company and government programs like Medicare and Medicaid are paying is likely to be a lot higher, too.
PBM reimbursement data are confidential, but one window onto how much more might be seen through the aggregator GoodRx. It groups patients not using insurance to cover their drugs and contracts with the PBMs to get pharmacies in their networks to discount their “cash” prices.
When 46brooklyn shopped GoodRx on May 17, the lowest retail pharmacy price it could find for generic Truvada was $112 — more than four times what it would cost a pharmacy working outside the insurance-PBM system to buy and dispense.
For mail order, the lowest price on GoodRx was $75. That’s about three times the price that Blueberry Pharmacy, which opted completely out of the insurance-PBM system, can sell it for.
The big PBMs have set up their own, GoodRx-like networks and their prices were almost as high as brand-name Truvada: $1,606 for OptumRx’s Optum Perks and $1,105 for Express Scripts’ Inside Rx, the report said.
And Amazon, that great disruptor that’s supposed to be reintroducing market forces to drug pricing? It’s charging $1,566 — or 8,000% — of what Blueberry’s McCormick says he can sell the drug for.
Greg Lopes is a spokesman for the Pharmaceutical Care Management Association, an industry group that represents PBMs. He said the group’s members save consumers money on generics as well as more-expensive brand-name and specialty drugs.
“America’s pharmacy benefit managers, PBMs, have a long history of supporting generic drugs to lower prescription drug costs for patients,” Lopes said in an email. “The key to lowering prescription drug costs is through enhanced competition among brand-name drugs from generic and biosimilar medications.”
However, the 46brooklyn analysis described another way American system of pricing drugs drives costs to consumers up instead of down.
When PBMs negotiate with manufacturers for discounts on generic drugs, they ask for a big cut off of the “average wholesale price” set by the manufacturer.
These can be discounts in excess of 80%, so that gives manufacturers an incentive to set an inflated average wholesale price. That way, the manufacturer will get 20% of a bigger number.
In the case of generic Truvada, the average wholesale price the 11 manufacturers came up with was indeed inflated. At $2,100, it was more than 15% higher than the cost of brand-name Truvada before the patent expired — and 84 times as much as Blueberry Pharmacy can sell it for.
So much for generic competition bringing down list prices.
“There’s some rent-seeking going on,” McCormick said. “There’s no way you can use insurance and not see prices go up.”
If, as the 46brooklyn report asserts, “cash” and wholesale prices for generics in the insurance-PBM system are artificially and wildly inflated, those prices might seem to be just that: artificial. But with most insured Americans now on high-deductible plans and for 33 million more without any insurance, that inflation can mean much higher generic costs at the pharmacy counter.
As with Pittsburgh’s Blueberry, Columbus-area pharmacist Nate Hux decided to take a big step out of that system, opening Freedom Pharmacy in December. He’s still operating his Pickerington Pharmacy under the PBM-insurance system the same way the vast majority of American pharmacies do.
But he decided that for most generic medications, that system just doesn’t make sense.
“People have been brainwashed for so long to believe that these (insurance) cards bring value, but they really don’t,” he said. “They only make the rich richer and keep everybody else poor.”
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