Today Mylan CEO Heather Bresch testifies before a Congressional committee about EpiPen costs.
I hope she is brutally honest and acknowledges that drug pricing is rigged by health plans, government programs and – above all – PBMs to extort as much money from drug companies and consumers as possible.
She should explain how and why the price people pay at the drug store has little to do with drug companies raising prices and more about how much insurers and the companies that administer the drug benefit – pharmacy benefit management companies (PBMs) such as Express Scripts and CVS -- want to charge and how much money they can make off of consumers.
The price charged to consumers is set by payors. And that price is set to increase the spread between net drug prices and retail prices as the chart below shows.
More precisely, the behavior of PBMs – often portrayed as a consumer friendly efforts to keep drugs affordable – fits the classic definition of a cartel and price fixing.
A cartel is an organization of sellers or buyers that agree to fix selling prices, purchase prices, or reduce production using a variety of tactics. The legal constructs of a cartel vary. However, the acid test of any cartel is whether all consumers are harmed or helped by the practices.
The PBM approach to pricing is more akin to a cartel than to a buying group that reduces the cost of the product or the production of the good in question.
Epipen is a great example.
Step One: Create a monopoly or limit competition
Last November Sanofi ($SNY) pulled the main competitor for EpiPen--Auvi-Q--from the market, a turn of events that at time looked as if it “should keep Mylan dominating the epinephrine injection field.”
Mylan already had 85 percent market share.
Then CVS and Express Scripts removed another competitor, Andrenaclick, from it’s formularies. Andrenclick retails at $141 while EpiPen retails at around $600.
Most people pay about $50 per Epipen pack. But increasingly other plans have decided to make consumers pay thousands of dollars out of pocket before covering them. Still others require consumers to pay up to half of the retail price of cost the product (About $600). Some pay less than $3 because they are on Medicaid.
Step 2. After eliminating competition, fix both the acquisition and retail price of the drug to maximize profit.
The PBMs then demanded higher rebates for giving Mylan privilege of being only covering EpiPens. They were current getting about $400 rebates per EpiPen pack.
When Mylan balked, CVS and Express Scripts moved EpiPen from the lowest cost sharing tier to the highest cost sharing tier most likely to pressure Mylan and to capitalize on that fact that people need the product to lead normal lives.
Step 3. Require patients to pay part of or all of the retail price in order and NOT not the rebated price of a drug to generate even more profit.
Indeed, here’s something Ms. Bresch should make clear: Consumer cost sharing for every other health care good or service is based on the discounted price insurers negotiate. Except for prescriptions drugs. On the contrary, we pay a share not of the rebated price of a drug, but the retail price.
Step 4. Force companies to cover the huge out of pocket costs of consumers based on the retail price.
On top of rebates Mylan, under pressure for the increase in out of pocket cost is increasing the amount of money going to patients directly to reduce out of pocket costs. Which means that Mylan is now forced to fork over rebates and cover the out of pocket cost of the drug, which also goes to the PBMs and insurers.
The Mylan episode is repeated millions of times every day. PBMs exclude drugs to create monopolies or cartels in exchange for more rebates. Indeed, 77 percent of the retail price increase in drugs goes to rebates. This means much of the price increase imposed on patients reflects the cost of rebates that PBMs and other claim make medicines ‘affordable’.
The Mylan sticker shock was due in part to the ability of PBMs to create monopolies, fix prices to maximize profit. Indeed, the price fixing takes place at both the wholesale and retail level. Such practices are designed to increase the amount of cash they can collect by drug companies that – after paying rebates – provide to consumers to reduce out of pocket costs.
Rebates are part of a rigged system that provide cash for big insurers, PBMs and hospital systems while patients wind up paying more, not less. Manipulation of the quantity, acquisition cost and fixing the sale and resale price of products are classic aspects of a cartel. Or at the very least, the rigged system is a series of “vertical price-fixing agreements, whereby a seller and a buyer agree with respect to the price at which the buyer will resell, have long been illegal per se. As is true with horizontal agreements, it does not matter how reasonable the agreed-upon price may be or how many good and sound reasons there are for the agreement. Nor does it matter whether the fixed price is a maximum rather than a minimum (although the per se rule against fixing maximum resale prices has encountered substantial criticism recently).
It’s time for a change. It’s time to end the rigged system which, in addition to the rebate ripoff includes the profits hospitals pocket when marking up and re-selling drugs that companies sell at a discount to help the poor.