Senate Hearing Marks a Big Step to Real Drug Price Reforms

Last week, the Senate Finance Committee held another hearing on rising prescription drug prices. While this is the third in a series of hearings on the topic, it's the first that chiefly addressed one of the biggest drivers of drug prices: pharmacy benefit managers (PBMs). 

CEOs from five of the biggest PBMs, which are the middlemen between drug manufacturers and insurers, testified about their role in the prescription drug supply chain and rising prescription drug prices. 

PBMs have enjoyed public obscurity thanks to their inherent complexity and help from media members and legislators who pin the blame of rising drug prices on drug manufacturers. "Pharmaceutical corporate greed is literally killing people," claims Sen. Bernie Sanders. Yet exploring the topic just a little further suggests PBMs are a chief culprit. 

Consider: Many of the drugs that have seen the biggest recent price spikes, including insulin and epinephrine, are generics that do not enjoy the patent protection that theoretically could allow for greed-induced price hikes. As a result, generic manufacturers should face the same market constraints in trying to raise prices as bakers trying to dramatically increase the price of bread. Namely, they'd lose their market share to competitors who offer the product at a cheaper price. 

The substantial price increases of some generic drugs over the past several years suggests that a different dynamic than manufacturer greed is at play. Enter PBMs, which have turned the drug supply chain into a cartel by restricting market access to competing drugmakers that can offer the same product at a lower cost. 

PBMs have turned the drug distribution chain into a pay-to-play operation. They demand enormous kickbacks known as "rebates" from drug manufacturers in return for access to health insurers' formularies (the lists of drugs that insurers will cover). Manufacturers that can't pay these kickbacks are shut out. Hence higher prices and widespread drug shortages.

On average, rebates make up more than one-quarter of a drug's list price -- over $150 billion annually. For some off-brand drugs like insulin, the rebates can come close to or exceed half their total cost, meaning that if a drug cots $100 for a one month supply, $50 is going to the PBM. While rebates are shared with insurers to lower overall premium costs, they also drive up list prices and, since they are not required to be shared with the patients, hurt those with serious or chronic diseases. 

Here's a fact you probably don't know: Net drug prices (list prices minus rebates) have actually fallen or remained flat in recent years. SSR Health finds that net prices -- the prices that are ultimately paid to drug companies -- actually fell by more than 5 percent last year. 

According to disclosures by CVS Health, the list prices of brand name prescription drugs increased by 37 percent between 2011 and 2017. But at the same time, net prices increased by a mere 9 percent, or about 1 percent a year. The drug manufacturer Eli Lilly recently released a detailed transparency report revealing that its average list price increase in 2018 was 5.5%, yet its average net price declined by 0.5%. According to Health and Human Services, manufacturers cited increasing rebate costs as the cause for nearly all their list price increases this year. 

Look at the price of insulin, whose price increases have legitimately received a lot of media attention given that the drug has been around for a century and is vital to millions of Americans. According to Eli Lilly's transparency report, over the past five years (2014-2018), the list price of its insulin medication Humalog increased by an eye-watering 52%. But its net price declined by 8%. The Wall Street Journal independently reported a similar list-to-net insulin pricing spread in 2016.

So why not just scrap PBMs altogether and direct the kickback dollars to the patients to lower drug costs? This is essentially what the Trump Administration is doing for Medicare patients. Earlier this year Health and Human Services issued a new rule to direct rebate dollars to the patients at the prescription counter. But to do the same for the private insurance market takes an act of Congress. Hopefully last week's Senate hearing is a big step in that direction. 

Dr. Gerard Gianoli is a neuro-otologist in private practice at the Ear and Balance Institute in Covington, Lousiana, and is a clinical associate professor at Tulane University School of Medicine.