Prescription drug costs are 2.5 times higher in the United States than anywhere else in the world. Who is to blame?
Adobe.com
Prescription drug costs are 2.5 times higher in the U.S. than anywhere else in the world. So, it’s no wonder that health care costs top Americans’ health care concerns, and they want the government to do something about it.
Common sense says drug makers are to blame for the prices they set for their drugs. And that’s right. But the pharmaceutical companies are playing “hide the ball” and telling lawmakers that someone else is to blame for their high drug prices: pharmacy benefit managers.
Pharmacy benefit managers administer prescription drug coverage programs for insurance companies, governments, unions and large employers, and they negotiate drug discounts from pharmaceutical companies on behalf of their clients.
Drug companies with drugs that are on patent have an effective monopoly, but pharmacy benefit managers amass market power by representing numerous buyers, which gives them the power to negotiate better deals. Drug companies don’t want to have to negotiate with benefit managers, so they lobby the government to restrict their tools.
Independent pharmacists also dislike pharmacy benefit managers because they often implement home delivery for their clients’ patients, which saves money and improves health outcomes — fewer people forget to take their drugs if they arrive in their mailbox every month — but it cuts them out of the loop, which may cost them money but is right for patients.
Pharmacy benefit managers offer a variety of pricing plans to their customers, and a popular one among small employers is the cost predictability model (sometimes called spread pricing). It allows the employer to pay a flat rate for every drug that gets prescribed to their employees, regardless of where the drug is dispensed.
The math is pretty simple: An employer and a pharmacy benefit manager agree that for a specific pharmaceutical, the employer pays $10. If an employee goes to a pharmacy where the drug costs $15, the employer saves $5. However, if an employee visits another pharmacy which lists the drug’s price below $10, the pharmacy benefit managers will collect $10 regardless, and the difference helps fund the benefit manager’s cost of doing business.
This model creates a financial incentive for pharmacy benefit managers to save money and keep their own cost of doing business low, since the amount the employer will pay them won’t change. This type of contracting is common in other segments of health care, including the pharmacies themselves.
Moreover, the cost predictability model helps insulate companies from drug list-price inflation that might occur over the course of their contract with a pharmacy benefit manager. Given that inflation remains above 5% per annum, this is a very real concern.
However, the other pricing model is the fee-for-service plan, where pharmacy benefit managers charge a simple administrative fee in addition to paying whatever the pharmacy charges for the medicine in question. By its nature, this plan is riskier, placing the responsibility on the employees to find lower-cost pharmacies.
Big businesses can choose fee-for-service plans because they can absorb the risk, whereas small businesses may not be able to afford the potential surprises inherent in a fee-for-service model. For example, if one employee in a company of 500 has a horrible, crippling medical problem, the cost is shared by all employees in the pool.
Due to the fact that the cost predictability model chosen by small employers is costing pharmacies and manufacturers money, there is a huge lobbying push to ban it. SB127 — which fortunately neither Utah Sens. Mitt Romney nor Mike Lee supports — would destroy this opportunity.
Similarly, there is federal legislation that would ban state Medicaid plans from choosing spread pricing contracting agreements.
Such a prohibition would be a mistake: Small businesses should be able to choose for themselves which contractual agreement they would like to sign with pharmacy benefit managers. What’s more, banning the cost predictability model or spread pricing will increase costs. The status quo lowers drug costs because it gives pharmacy benefit managers and pharmacies a financial incentive to negotiate the best price possible for drugs.
As federal lawmakers in the U.S. Senate consider banning spread pricing in the commercial market, our pro-business champions in the Senate, Lee and Romney, should stand up to protect employer choice. These are basic free-market principles. Policies that would increase prices, reduce price certainty, and help Big Pharma make very little sense indeed.
Jared Whitley is a former staff member in the White House and the U.S. Senate. He has an MBA from Hult business school in Dubai.