THE HIGH COST OF PHARMACEUTICALS in the United States is an embarrassment. Americans don’t consume more prescription medications than their counterparts in other developed countries but, on a per capita basis, we spend almost twice as much. The traditional rationale for this disparity is that we are more innovative and must pay up for pharmaceutical research. That argument is less persuasive as drugs, even old ones no longer protected by patents, are exploitatively priced. Even after absorbing the costs of development, the US market is by far the most profitable. This is becoming an important political topic as both Republican and Democratic politicians talk about doing something; pharmaceuticals are emerging as an issue in the 2020 campaign cycle.
The large corporations that dominate the industry are increasingly concerned about the emerging consensus for action to mitigate medication pricing. Such changes could have a negative impact on the financial performance of some of the country’s most lucrative and highly valued businesses. The resulting corporate anxiety has divided the companies into two broad categories and has produced public finger pointing about which group is to blame for the obviously inflated costs of drugs. Each side hopes that any financial consequences will impact the other guys.
On one side of the argument is the group of pharmaceutical companies that develop, produce, and sell medications. Generally known as Big Pharma, the group consists of foreign companies (e.g. Roche, Novartis, Bayer) as well as many US-based firms such as Johnson & Johnson, Pfizer, Merck, AbbVie, and Eli Lily. They are asserting that our extraordinarily high drug prices are not their fault. According to them, blame lies with the other group of companies that play a key role in this market.
That other group is made up of pharmacy benefit managers, or PBMs, who function as intermediaries between drug manufacturers and health insurers. The PBM field is dominated by three huge firms — Express Scripts, CVS, and Optum. This is an extremely complex world where the PBMs negotiate to get discounts and rebates from manufacturers who, as part of the process, often sell the drugs below their list prices. Those savings are sometimes shared with insurers but not with the individuals who are covered. The PBM world has gotten more complicated as the dominant firms have become enmeshed with health insurers. Express Scripts just merged with Cigna, CVS has acquired Aetna, and Optum is a subsidiary of UnitedHealth. Big Pharma is now claiming that the high cost of prescriptions in the US is the result of PBM companies keeping the discounts and rebates for their own profit without passing the savings on to retail customers.
The Trump administration is buying the argument that the cost problem is caused by PBMs rather than by Big Pharma. In January, Health and Human Services Secretary Alex Azar, former president of the US division of Eli Lily, proposed new regulations that would require any rebates negotiated by PBMs to be passed on to retail customers. Azar said that the new rules would “finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need.”
As with many Trump administration proposals, the prospective impact is unpredictable. There is no estimate of the actual financial benefit of the new rule for consumers. The PBM trade association criticized the proposal and claimed that it would not work. The announcement had no discernable impact on the stock market valuation of PBM-related shares. An equity analyst who follows the industry described the prospective impact as minimal. The chief medical officer of Express Scripts said that the company “would do just fine in a world without rebates.”
The Big Pharma lobby applauded the idea. It’s obvious that their enormous profitability will continue irrespective of who benefits from the discounts they already give to PBMs. An illustration is AbbVie, which sells Humira, one of the world’s most expensive and biggest selling drugs. Sales of Humira reached $20 billion last year, a substantial revenue increase over the previous year. In the fourth quarter alone, AbbVie’s profits were almost a half billion dollars higher than the same quarter a year earlier.
These numbers are remarkable because Humira’s international sales dropped significantly during the fourth quarter. That drop was caused by competitive drugs that were on the market in Europe during the last three months of the year. To make up for overseas competition, the company simply raised prices to US patients, increasing the domestic cost of Humira by 9.7 percent in 2018 and another 6.2 per cent just last month. The company will keep doing it as long as it can and the US system will pay even more to offset competition in foreign markets.
Humira is an egregious example of how the US drug market is abused but there are many others. One common experience is that Americans who suffer from diabetes have seen persistent increases in the cost of insulin over many years. For example, a vial of an insulin medication sold by Eli Lily increased in cost from $170 to $1,400 in recent decades. Several other types of insulin have increased by more than 500 percent. A recent study of Medicaid spending found that the three big companies that produce 90 percent of insulin increased prescription prices by a third between 2014 and 2017.
Because insulin was discovered in 1921, this hardly represents recoupment of research and development costs.
Our government’s inability to address the problem so far has prompted people to attempt unusual alternatives. Insulin medications are dramatically less expensive in Canada and Mexico, permitting some patients to buy them there. The Utah Public Employee Health Plan took this approach a step further and instituted a “Pharmacy Tourism Program” that pays for a state worker and a companion to fly to San Diego and drive to a well-regarded health center in Tijuana, Mexico, where they can purchase US-manufactured prescriptions, including Humira, for 40 to 60 percent less than the cost in Utah. Even subsidizing travel, the state saves money.
Last year Gov. Charlie Baker proposed to negotiate limits on covered drugs to help the Massachusetts Medicaid program control prescription costs. The required federal waiver was denied at the drug industry’s urging. This year he made a different proposal intended to initiate negotiations over high-priced drugs and to conduct public hearings if the manufacturers refuse to participate. The industry is fighting that proposal, too.
Big Pharma remains positioned to exploit the US market in a way that does not exist anywhere else in the world. The industry is trying to distract growing public anger by blaming others for their own financial abuse of patients. They may succeed for a while, but the emerging consensus is that our common interest is served by building a system that will reward innovation with reasonable profit while precluding exploitation of sick people.
Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Educational Facilities Authority. He recently retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.