Laura Marston seems like your regular 36-year-old American, apart from the fact that she had to sell her flat, her retirement fund, her car, her furniture and her dog just to keep herself alive. You wouldn’t be alone if you thought Laura was on the run from some kind of criminal gang, or she had some extremely rare disease, but Laura’s disease isn’t rare. In fact, 7 million people in the US alone share her condition, type 1 diabetes.
Insulin is an essential hormone that controls blood-sugar levels. People with diabetes do not produce, or are resistant to insulin, meaning they have to purchase little vials of the hormone from their local pharmacies every so often to avoid unconsciousness, organ failure and death. But it is not that easy, for one little vial costs $275 for Laura; an increase of 1210% from the price she paid for the exact same vial in 1996. She now has to pay $2880 a month just to survive, which is more than she makes working 50 hours a week. And drug prices are forever increasing. Many Americans find themselves having to travel to Canada and Mexico to buy insulin and in 2017, 26-year-old Alec Smith died after not being able to pay the $1000 dollars a month for it, despite working full time at more than the minimum wage. And this isn’t only happening with insulin, but for most drugs in the US; prices of over 600 name brand drugs have increased by 159% when adjusted for inflation. But why are prices so high and increasing for something that is essential for many people to live?
The media and the public are often quick to point the finger at the big, bad pharmaceutical industry. But are they really to blame? Could it be the insurance companies and pharmacy benefit managers who should be held accountable? To find out, we must dig deeper into the US’s insurance-based healthcare system and look more closely at the supply chain of drugs and the not-always-morally-correct interactions between each stage in the complicated, controversial maze that is the US drug pricing system.
The regular supply chain for a loaf of bread is simply the manufacturer, who sends the bread to retailer, who then sells it the customer. For drug prices, this is a lot more complicated. The Pharma corporation produces the drug and create a list price, which is the base price that the Pharma company sets without any insurance or discounts. The drug is then sold to the wholesaler who transport the drugs and sells it to the pharmacy. The consumer at the pharmacy doesn’t want to pay the full list price, so they use their insurance company, and now the customer only has to pay a portion of the list price called the co-pay to the pharmacy, and the rest is covered by the insurance company. The patient has their drugs, the distributors (the pharmacy and the wholesaler) have their money, the pharma company has its profits. Sounds simple enough, be we are leaving out one crucial, relatively unknown link between the insurance companies and the pharmaceutical company.
We must remember that Insurance companies exist to make a profit, not to provide free service, and therefore need some kind of payment to compensate for the money they spent on the drug, in addition to the insurance fees from consumers to make a profit. This is where Pharmacy Benefit Managers come In. Pharmacy Benefit Managers (or PBMs for short) are hired by insurance companies or sometimes governments to negotiate a rebate for each drug they cover, allowing insurance companies to keep paying more money for drugs. The PBM pockets a portion of the rebate for themselves, and gives the rest to the insurance company they are employed by. Insurance companies often portray PBMs as heroes, whose sole aim is to bring down drug prices for consumers, while pharmaceutical companies and politicians refer to them as middlemen and portray them as cunning tricksters. I think it is fair to say there is no simple judgement to make.
So how do the PBMs negotiate the rebate? This is done using something called the formulary. A formulary is the list of drugs that the insurance company covers; it is arranged in tiers based on what proportion of the list price the consumer pays as a co-pay (the rest is paid by the insurance company). The highest tier would be the drug with the lowest co-pay, the lowest tier would be the drug with the highest co-pay. All pharmaceutical companies want their drugs be as high as possible on the formulary, because they know that a higher tier means consumers have to pay less of the price, which means that they will buy more. Increasing sales while still keeping the same list price, leading to an overall increase in profits. Pharmaceutical companies take advantage of this and agree to pay a higher rebate in exchange for a higher tier. Essentially, rebates serve as a sort of bribe. As the pharmaceutical companies are being put under pressure, the high rebates are squeeze their profits to such an extent that they cannot sustain their current levels of production, leading to an increase in the list price
For example, let us say hypothetically that the company Eli Lilly is selling their insulin shot, Humalog for a list price of $100, with a cost of $10 to produce. To keep it simple, we can assume that this is the same price the pharmacy sells it for. Eli Lilly makes a profit of $90. Of course, Laura doesn’t want to pay $100 for it, so she uses her insurance company, UnitedHealth. UnitedHealth wants to make a profit, so they get their Pharmacy Benefit Managers to negotiate a rebate of $50. $10 of this rebate is pocketed by the PBM, the other $40 is given to UnitedHealth. United uses this $40 to cover $40 of Laura’s bill, leaving Laura having to pay only $60 out of her pocket. United health now makes a profit from Laura’s insurance fees. However, after Eli Lilly pays the rebate of $50, they are only making $40 of profit compared to the original £90 they would have made if Laura had paid the $100 herself. A $40 profit happens to not be enough to make up for Eli Lilly’s research costs for a new drug, so now the list price is raised by $50 to make up for the rebates. Humalog now has a list price of $150, the cost of production is still $10, the rebate is still $50, and Eli Lilly now makes a profit $90 again. The insurance company is still only receiving $40 from the rebate of $50 even after the price hike, therefore they are only able to cover $40 of the list price, so when Laura walks into the pharmacy next month, she sees that the price of the drug is now $150, Laura with a hefty co-pay of $110, when the only reason she had used insurance last time was to avoid having to pay $100.
You may be wondering why the pharmacists can’t just tell their customers to pay cash instead? This is because until 2018, pharmacists were under contract with the insurance companies and PBMs, prohibiting them to let customers in on their secret unless they specifically asked. Pharmacists call these Gag clauses. How did these insurance companies have enough power to do this to enforce these gag clauses for so long? It is a good example of the sheer influence over the laws and governing of the USA that Pharmaceutical companies and insurance providers acquire from lobbying, a concept which we will dig deeper into later.
So, who are the real winners here? An easier question would be who the real losers are, because that is obviously the consumers. The Pharma companies are happy as increasing the price means that they have more of a leeway to pay a big rebate to the PBM so that it can be covered on the formulary. The Pharmacy Benefit Managers are happy as they get to keep a portion of the large rebate for themselves. The insurance company is happy as they have a hefty rebate, and the distributors are happy because they make a profit.
This is where the paradox is created. If you go out for dinner with friends on one night and get separate checks to pay for your own meal, and on the second night you decide to split the bill evenly amongst you, on which night are you likely to spend more? The second night of course; after all, why not get an extra drink or appetizer because you are only spending a fraction of the cost. As a result, everybody gets stuck to a higher bill. Welcome to healthcare, where 85% of your cost is being covered by insurance, but we actually end up paying more. Because such a large portion is being paid for by somebody else, people don’t shop around for the cheapest blood test or MRI scan.
“We consume without thinking because someone else pays.” “By insuring so much of our healthcare, we are ensuring that we are blind to the cost of the very thing we were trying to save money on”
John Stossel, No, they can’t
This is the reason why the US spends more on healthcare than any other country in the world, even when their healthcare isn’t the best in the world.
Who is at fault for this? Former lobbyist turned health and human services secretary, Alex Azar, pins the blame on PBMs, saying they essentially threaten pharmaceutical companies to pay a higher rebate, squeezing them until they are forced to increase prices. Azar believes that Pharmaceutical companies want to lower prices for consumers because they have patients at their best interest but are unable to because of the ruthless tactics of Pharmacy Benefit Managers. After all, PBMs make a healthy salary of anywhere between $55 to $144k, so they are consistently benefitting from high drug prices. However, they would argue that it is them in fact who have patients in their best interests.
It is easy to blame the ‘big players’, but in reality, the main cause of this is the system in itself. This is the result when the consumer is completely taken out of the buying process. The capitalistic, profit-centred system is what creates this effect. Every time the insurance company is successful, the pharmaceutical company feels the adverse effect, and vice versa.
This results in a cycle of increasing drug prices and the creation of one of the most lucrative markets in the world, at the expense of sick people.
This does not let big pharmaceutical companies off the hook. There are many unethical practices carried out by pharmaceutical companies such as lobbying, which we mentioned earlier. Lobbying is a $3.5 billion industry with the intention of lawfully attempting to influence the actions and policy decisions of government officials. It involves hiring a lawyer called lobbyist, who helps their employer influence a politician or lawmaker in a way that benefits them. Lobbying firms can charge as much as $50,000 per month, and because they are unlikely to see results very quickly, this cost is likely to add up. This is why ‘Big Pharma’ spent $230 million dollars on it in 2014, more than any other industry. An example of this was in 2003, when they successfully lobbied congress to deny Medicare (a federal healthcare program which provides health insurance for over 65s or people with disabilities) the right to negotiate drug prices. In addition, Medicare is the largest purchaser of drugs in the US so it is expected that they should be able to negotiate drug prices. In fact, the industry is so lucrative that companies like Pfizer (the firm that co-produced a COVID-19 vaccine) can easily afford to pay billions in fines for promoting drugs that have not been approved as safe: in 2013, they paid $2.3 billion in fines.
As well as this, many of the CEOs of Big Pharma companies are often seen as greedy and arrogant in the public sphere. An example of this being Martin Shkreli, who’s company bought the HIV and cancer drug, Daraprim in 2015 and immediately hiked up the price by 5000% for now, an apparent reason other than to make money; something which is allowed because the FDA has no regulations against price hikes. This resulted in a huge backlash, with social media erupting, and celebrities and politicians denouncing his practises, forcing many people to believe that he was the most hated man on earth. Ironically, even Donald Trump called him a spoilt brat. He argued that the price wasn’t actually that expensive, and that there have been much bigger price increases by other larger companies and that as a small company, he was looking to make a profit in order to fund new development projects in the future. He also argued that 60-70% percent of people could get it for free if they wanted to.
Martin Shkreli thought that focusing on making a profit was a good thing because it allows the company to focus more on research and development for new drugs in the long term, and that profit was needed for the corporate existence of a company. However, R&D doesn’t seem to be the top priority for some Pharma companies. Johnson and Johnson spent $17.5 billion on marketing, and only $8.2 billion on R&D in 2013. The actual chemicals used to manufacture drugs are often very inexpensive, and most Pharmaceutical companies actually make their drugs for dirt-cheap in places like India and China. It is the testing, getting the drug past all of the FDA’s regulations so that it can be sold on the market along with advertising, R&D and lobbying that takes up the majority of the costs. You may be wondering why introducing more competition into drug markets isn’t used as a solution to rising prices, because competition leads to firms fighting for market share, and therefore decreases in price to attract customers to their product as opposed to the many others they have to choose from. This is because they sometimes take advantage of Patents. Patents are intended as a force for good, meant as a way to reward Pharmaceutical corporations and to incentivise them to continue research and development. However, Pharma companies sometimes exploit this by patenting a lot of the equipment they use to produce their drugs in such a way that no other companies can produce the same, leading to decreased competition and drug monopolies and oligopolies such as the market for insulin, which is controlled by 3 companies. This lack of competition means a lack of choice for the consumer, and the fact that drugs are essential means that they have to buy them regardless of the cost. This means that firms can easily control drug prices.
Another example of this is Marijn Dekkers, the CEO of pharmaceutical company Bayer. Bayer was selling a drug called Nexavar to treat some types of liver and Kidney cancers for $69,000. India has a law where if they believe a drug produced by an overseas company is too expensive, a different company is allowed to take out a patent to create the same drug for a cheaper price, so an Indian court granted a local company a patent to produce and sell the Nexavar at a more reasonable price of $177 as opposed to $69,000, which for a full year of treatment would have costed 43x the country’s annual per capita income of $1574. Dekkers was not happy with this, stating in an interview that he “did not develop this medicine for Indians … we developed it for western patients who can afford it”. This seems like a perfect example of when profit comes before peoples’ lives
What are the solutions to this problem? Many people are advocating for more government regulation on the drug industry, and that an essentially free market economy is not beneficial for the healthcare of a nation. Many politicians such as President Elect Joe Biden and Senator Bernie Sanders have campaigned for stricter government regulation, but it is believed by some, including the Allergan CEO, that the industry is just too large for any politician to have a profound impact. It is widely believed that essential biological molecules like insulin should have price caps; after all other things like water and electric bills which are deemed essential do. Or should this system just be scrapped in general? And what would that mean for the health insurance and big pharma industry that makes up such a large portion of the US’s economy? Is this just what happens when capitalism and healthcare meet?
