Congress Has no Clue About What's Driving up Drug Prices

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A coalition of think tanks and health care organizations – dubbed Lower Drug Prices Now – just launched a campaign to promote price controls on coronavirus treatments in development. Several Democratic House leaders want such language included in future stimulus packages.

Treatment affordability is certainly a laudable goal. But price controls aren't the right solution.

Currently there are over 70 clinical trials for new medicines for COVID-19, from vaccines to acute therapies for ICU patients. Companies are investing huge resources in hopes of succeeding and getting an adequate return on investment. They know that some won't succeed or will take a long time to prove effective, like Gilead's remdesivir.

Price control provisions will attack drug manufacturers and stifle innovation at a time when these new treatments are needed most. And they fail to address the primary reason why Americans feel so much pain at the pharmacy counter – middlemen in the drug supply chain.

The coronavirus pandemic comes at a time when patients are paying more than ever for their prescriptions. In 2018, Americans spent $440 billion at the pharmacy counter. That's up more than 60 percent from the $269 billion paid in 2013.

Most Americans blame drug makers for this increase in spending. Eight in 10 Americans say drug companies' profits are a major reason prescription costs are rising.

This sentiment is misguided. A new objective study from the Berkeley Research Group proves as much. According to the report, the slice of drug spending collected by drug manufacturers actually dropped by 12.5 percent between 2013 and 2018. Meanwhile, total annual drug industry revenues rose slightly below 3 percent, which is roughly on pace with inflation.

In other words, patients are paying more out-of-pocket, but drug industry revenues aren't rising.

So, where is all that money going?

According to the report, other entities – like health insurers and pharmacy benefit managers – absorb roughly $50 for every $100 of U.S. spending on drugs. And this share is up from just 33 percent in 2013. They've benefitted off the backs of the manufacturers without providing any of the cures.

Health insurers hire PBMs to do the nitty-gritty work of forming insurer drug formularies, or the list of drugs insurers will cover. PBMs work with drug manufacturers to secure massive rebates and discounts, often knocking 30 percent off a drug's initial list price.

Patients almost never see those discounts at the pharmacy counter, though. That's because PBMs keep a portion for themselves and funnel any remaining savings to insurers. While insurers use those savings to lower premiums – typically by a few dollars a month – that does little to cut out-of-pocket spending for patients. Between 2017 and 2018, average out-of-pocket costs increased by 12 percent.

To make matters worse, PBMs don't disclose the rebates they've secured. This allows insurers and PBMs to charge patients based on a drug's list price, not the negotiated discount they received. So, patients pay more than their fair share for vital prescriptions.

Sadly, this rebate system isn't the end of the supply chain subterfuge. The Berkeley study also found that hospitals have been profiting off the 340B program, which was intended to help poor patients afford drugs. In essence, 340B requires pharmaceutical firms to provide special rebates to hospitals serving low-income populations.

Those discounts often aren't making their way to patients either. The 340B program has become a cash cow for middlemen: hospitals purchase cheap drugs in bulk, charge patients the full price, and take home the difference. In fact, the Berkeley study found that provider margins for the 340B program have jumped ninefold between 2013 and 2018.

Congress has identified a real problem but the wrong villain. And policies stemming from that misperception – such as price controls – could have disastrous repercussions for patients.

The U.S. biopharmaceutical industry poured $97 billion into research and development in 2017 – double the federal government's annual investment.

The results of these investments have been miraculous. Cancer deaths have fallen by a third since the 1990s – a drop largely attributable to the creation of new medicines. And powerful new drug cocktails have turned HIV/AIDS from a death sentence to a manageable condition.

To deliver coronavirus treatments equitably, congress needs to focus on the true cause of patients' pain: PBMs, insurers and other middlemen siphoning away rebates intended for patients. There's no good reason one major PBM should have made $113 billion last year, a 12 percent increase. That's crazy.

Sandip Shah is founder and president of Market Access Solutions, which develops strategies to optimize patient access to life-changing therapies.

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