How Our Pharmaceutical System Works

I have written several articles on the coronavirus and on masks and healthcare issues. A series of links have been provided at the bottom of this article for your convenience. This article will, however address a different aspect of the virus or on healthcare issues in general.

The pharmaceutical industry is the part of the healthcare sector that deals with medications. The industry comprises different subfields pertaining to the development, production, and marketing of medications. These more or less interdependent subfields consist of drug manufacturers, drug marketers, and biotechnology companies.

The main goal of the pharmaceutical industry is to provide drugs that prevent infections, maintain health, and cure diseases. This industry directly affects the global population, so a number of international regulatory bodies monitor things like drug safety, patents, quality, and pricing. Here are some of those regulatory entities:

  • World Health Organization (or WHO)
  • US Food and Drug Administration (or FDA)
  • Medicines and Healthcare Products Regulatory Agency (or MHRA)

What drives the pharmaceutical industry?

The pharmaceutical industry has made a great deal of progress over the last decade due to a research-oriented approach that has improved technologies, developed infrastructures, and increased research in the field of bioscience. Thanks to biotechnology, various formulations have been developed to cure or stop the growth of several major infections, including HIV and certain types of cancer.

The global pharmaceutical industry was worth an estimated $1 trillion in 2014. In 2013, global pharmaceutical markets generated revenues of $980.1 billion. That year, North America (the US and Canada) contributed 41% of sales, while Europe contributed 27.4%. More recently, in 2018, the global pharma industry stood at $1.2 trillion, and the IQVIA Institute for Human Data Science expects $1.5 trillion by 2023

Publicly traded pharma industry stocks and ETFs

In the drug manufacturing category, the major publicly traded companies include Johnson & Johnson , Novartis AG , Pfizer Inc. , Merck , Sanofi, and GlaxoSmithKline .

Gilead Sciences Inc., Amgen Inc. , Celgene Corporation , Biogen Idec Inc., and Regeneron Pharmaceuticals Inc. are the major publicly traded biotechnology companies.

Pharmaceutical ETFs include the PowerShares Dynamic Pharmaceuticals ETF (PJP), the SPDR S&P Pharmaceuticals ETF (XPH), the iShares US Pharmaceuticals ETF (IHE), the iShares NASDAQ Biotechnology ETF (IBB), and the VanEck Vectors Pharmaceutical ETF (PPH)

Supply chain

The supply chain of the pharmaceutical industry is similar to that of any other industry in the manufacturing sector. However, in the US, the pharmaceutical industry has only two drug distribution channels: prescription and OTC (over-the-counter). The US Food and Drug Administration regulates both of these channels.

Here is a typical pharma industry supply chain:

Because pharmaceuticals directly affect millions of people’s health, industry manufacturers are very strict about ensuring the safety and quality of drugs at each level of the supply chain. These companies use fixed, regulator-certified suppliers of raw materials. Companies also store the raw and packaging materials in separate warehouses.

After a company processes the raw materials, it makes the final drug at the manufacturing unit. A company that has a single manufacturing unit uses only one warehouse, while a company with multiple manufacturing units stores its drugs in central and regional warehouses.Next, distributors and super stockists receive the drugs and supply them to entities in the retail segment:

  • hospitals
  • pharmacy stores
  • health care centers
  • clinics

Then, retailers sell OTC drugs directly to consumers. A prescription drug purchase requires authorization from a qualified doctor. 

Supply chain importance for pharma companies

Pharmaceutical companies with large turnover place a particular emphasis on supply chain management. This is because any variation in the supply chain could lead to multiple disturbances in the system.

GlaxoSmithKline spends over $4.5 billion each year manufacturing and supplying products. Johnson & Johnson spends approximately $30 billion annually in leveraging its purchasing power to set sustainability expectations beyond its operations.

Similarly, companies like Teva Pharmaceuticals (TEVA), Pfizer (PFE), and Merck spend millions of dollars to ensure the safety and supply of their products, even though they have manufacturing units in multiple locations.

A number of ETFs focus on the pharmaceutical industry. One of them is the VanEck Vectors Pharmaceutical ETF (PPH). Over 58% of PPH’s investments are in large pharma companies.

Pharma industry regulations

There’s a web of regulations in the research-intensive, highly dynamic pharmaceutical sector. In fact, the industry regulates the entire drug life cycle, including the patent application, competition with generics, marketing approval, and patent expiration. Regulations also control all prescribing physicians, wholesalers, retailers, and manufacturers in the pharma industry.

Regulation objectives

Pharma industry regulators seek to monitor various drug-related concerns:

  • safety
  • quality
  • quantity
  • market flow
  • research and development incentives
  • pricing
  • patents

According to the FDA (US Food and Drug Administration), American consumers benefit from having access to the safest, most advanced pharmaceutical system in the world. The main consumer watchdog in this system is the FDA’s Center for Drug Evaluation and Research (or CDER), which assesses new drugs before they hit the market. The center ensures that brand-name and generic drugs work correctly and that their health benefits outweigh their known risks.

International regulatory bodies

International regulatory bodies for the pharma industry include the WHO (World Health Organization), the FDA, and the MHRA (Medicines and Healthcare Products Regulatory Agency). It is important for companies in the pharmaceutical industry to follow the policies set by these organizations. Regulatory bodies monitor not only manufacturers, but also drug sellers and prescribing physicians.

Subindustries: What makes the pharma industry different

The pharmaceutical industry functions just like any other industry. It has raw materials manufacturers, finished goods manufacturers, R&D (research and development) companies, marketing companies, and consumers. Yet, it’s far more regulated and capital-intensive than other industries.

Drug manufacturing

Drugmakers include API (active pharmaceutical ingredients) and formulations manufacturers. These companies make the following types of drugs:

  • APIs. These are the raw materials used to manufacture drugs. Generally, large setups make APIs because these capital-intensive materials require special environmental conditions.
  • Generic drugs. Companies sell these off-patented, cost-effective drugs at low prices using no specific brand name in order to serve the public. Abbott Laboratories (ABT), Allergan (AGN), and many other pharma companies make generics.
  • Patented drugs. Companies develop these drugs through in-house research or licenses from other firms and then manufacture the drugs under licenses from patent holders. Patented drugs have high profit margins. Pfizer Inc., Merck & Co. (MRK), Sanofi, GlaxoSmithKline, Teva Pharmaceutials (TEVA), and many others make patented drugs.
  • CRAMS (contract research and manufacturing services). Companies that provide these contract services conduct research and manufacture drugs under licenses from other companies.

Drug marketing

Marketing companies in the pharma industry help increase the market reach of drugs. At times, a manufacturing company can’t sell its product in a specific region because the company lacks a license or marketing network to do so. This is where drug marketing companies come in to facilitate sales.

Biotechnology and R&D

Pharmaceutical companies are either dependent on their in-house R&D centers, or they rely on biotechnology companies to provide them with licenses to manufacture patented products. Holdings of the PowerShares Dynamic Pharmaceuticals ETF (PJP) include drug manufacturers and biotechnology companies.

Questions about the pharma industry’s growth outlook

A number of questions arise when we think about the current state of the pharmaceutical industry:

  • Why is there an increasing need for pharmaceuticals?
  • Why have medications become so complex?
  • What factors have led to the growth of the pharmaceutical industry?

Below, we explore these questions.

Aging population

Worldwide, the average human life span has increased substantially over the last few decades. However, more infections and diseases have come along with this longevity growth. This has led to increased research on aging populations. The goals are to prevent infections and maintain health so that these populations can enjoy better lives.

Changing lifestyles

Hectic daily schedules have led to unhealthy eating habits, a lack of exercise, less sleep, and other problematic lifestyle choices. This has resulted in high obesity rates, poor digestion, hallucinations, breathing difficulties, and other physical problems. Health supplements have been introduced to remedy all of these issues, reduce the chance of getting sick, and meet daily nutritional needs through vitamins and minerals.

Increased income and chronic diseases

The middle class has been growing in both the emerging and developed markets. People in these markets have more disposable income and expect better healthcare solutions.

Chronic disease cases have risen in number. This has made people become more dependent on medications and health supplements.

Other economic trends

Globalization and urbanization have led to increased environmental disturbances. These are major driving forces in the growing demand for improved medication and health supplements for each age group and geographic location.

Industry players

Companies like Abbott Laboratories (ABT), Novartis AG (NVS), GlaxoSmithKline (GSK), and Teva Pharmaceutical Industries (TEVA) are constantly looking at consumer needs and upgrading drugs based on research and innovation. All four of these companies are part of the VanEck Vectors Pharmaceutical ETF (PPH).

Lives are saved by timely access to quality-assured, affordable, effective and safe pharmaceutical products and services that ensure their appropriate use. Medicines treat tuberculosis, preeclampsia, and diabetes; vaccines prevent the spread of measles and other infectious diseases; diagnostic testing detects disease and reduces the overuse of antibiotics; insecticide-treated bed nets protect against malaria; and condoms limit the spread of HIV. Without essential medicines and other health technologies, and pharmaceutical systems that regulate, supply, and promote their appropriate use, the health needs of a population cannot be met.

Strong pharmaceutical systems are necessary for high-quality health care, particularly for the most-vulnerable populations. Many poor families must pay for basic health products that are a major source of waste and are frequently mismanaged or administered and used in the wrong way. It is estimated that half of all medicines are prescribed, dispensed, sold, or taken inappropriately, and many are of poor quality, all of which accelerates development and spread of drug resistance.

Pharmaceutical systems are particularly vulnerable to corruption because of the high value of medical products. All parts of the supply chain can be compromised by weak pharmaceutical systems, including delayed selection of essential medicines; calculation of quantities to purchase; ability of hospitals and pharmacies to purchase medicines; and warehousing and distribution of medical products..

For more than 20 years, USAID has led efforts to improve pharmaceutical systems in developing countries with programs in pharmaceutical management(link is external), including supply chain management and medicines quality assurance(link is external) systems strengthening. These efforts have encompassed the development of innovative approaches and tools(link is external) (including open-source applications(link is external)) and addressed Agency disease programs (e.g., malaria, TB, child health) and cross-cutting (e.g., medicine safety/pharmacovigilance) issues.

Pharmaceutical systems strengthening is a key element in USAID’s Vision for Health Systems Strengthening 2015–2019. The Agency’s priority objectives in this area are to:

  1. Strengthen supply chain components to ensure the uninterrupted supply of quality-assured health commodities, including creating a supportive environment for commodity security.
  2. Strengthen regulatory capacity to protect the public from substandard and falsified products, and pharmaceutical sector governance to promote transparency and accountability through laws, regulations, policies, and standard operating procedures.
  3. Increase and enhance human and institutional capacity to manage pharmaceutical systems and services, including promoting evidence-based use of medications, assuring therapeutic efficacy, protecting patient safety, and slowing the emergence and spread of antimicrobial resistance.

A strong pharmaceutical system has established leadership and governance; effective regulation; robust financing for products and their management; a well-trained workforce and well-run organizations (from national institutions to local drug shops); reliable product and patient information; medical products and technologies available when and where needed; and services that promote rational use and protect patient safety.

The Agency conceptualizes this systems view in the following graphic:

Flowchart depicting the USAID Pharmaceutical System Strengthening Approach.

The past few decades have been especially profitable for the American pharmaceutical industry, even more so since the passage of the Affordable Care Act, also known as Obamacare. As of the spring of 2015, Obamacare had expanded insurance coverage to an additional 16.9 million Americans who were previously uninsured, reveals a RAND Corporation study. As a result, a much larger pool of people now has access to the medications they need for acute and chronic conditions, according to Aaron S. Kesselheim, M.D., J.D., M.P.H., Associate Professor of Medicine at Harvard Medical School and Director of the Program On Regulation, Therapeutics, And Law in the Division of Pharmacoepidemiology and Pharmacoeconomics at Brigham and Women’s Hospital. This growth in the insured population has contributed to increases in overall health care spending in the U.S., in part due to rapid increases in spending for prescription drugs. This paper explores the key factors contributing to these increases and looks at the role of the pharmaceutical industry within the broader health care field.

There will be a little redundancy in the next section, but I am doing this because some previously mentioned topics will be discussed more in depth, to give the reader a greater understanding of a complicated subject. As always you are welcome to cherry pick this article and read the parts that interest you the most.

The Role of the U.S. Pharmaceutical Market

The United States is the worldwide leader in per capita prescription drug spending, representing between 30 and 40 percent of the worldwide market. Many global pharmaceutical companies also have a presence in the U.S. Further, a paper written by Arthur Daemmrich for the Harvard Business School reports that in 2007, 40 percent of the worldwide total of approximately 6,500 drugs in clinical development were originated in the U.S. Yet while the nation has long been on the forefront of biomedical research, its foothold in this area has recently been weakening. In fact, a recent study published in JAMA reports that the rate of research funding growth in the U.S. has slowed, and research for new treatments has declined recently. In addition, the authors point out that in recent years the financial commitment made by the National Institutes of Health (NIH) to biomedical research to develop new treatments has been disappointing in scope due to budget cuts, inflationary losses, and increases in development costs. From FY 2003 to FY 2015, the NIH budget for research decreased by 22 percent. In FY 2016, Congress increased its commitment in this area slightly, adding an additional 5.9 percent, but most experts agree that more resources are needed. Therefore, if trends don’t continue to pick up in this area, the U.S. could be at risk for continuing to see a reduction in NIH-funded research output in the not-too-distant future.

In 2007, 40 percent of the worldwide total of approximately 6,500 drugs in clinical development were originated in the U.S.

This is a problem, according to a 2015 study published by Kesselheim and his co-authors in Health Affairs, because a majority of transformative pharmaceutical innovation emerges directly from publicly-funded science.

Pharmaceutical Distribution Chain

“The pharmaceutical supply process through which medications travel to patients is multi-faceted, involving a number of stakeholders,” says Elizabeth Seeley, MS, PhD, Adjunct Lecturer in Health Policy and Management at the Harvard T.H. Chan School of Public Health.

In addition to NIH research, pharmaceutical manufacturers and biotech companies play a significant role in the early phases of discovering new drugs. These companies then undertake the development and approval process with the Food and Drug Administration (FDA) to bring the medicine to the U.S. marketplace.

“Once the drug is approved, then begins the marketing process to make the drug available for patients,” Seeley says. The drugs move from manufacturers to wholesalers, the middlemen that provide the drug to the pharmacy or retailer who sells it to the end user.

In the U.S., the majority of the pharmaceutical wholesaler business is concentrated in a few companies that hold the majority of the market share.

Other key players in this distribution chain are the Pharmaceutical Benefit Managers, or PBMs. Health insurance companies such as Blue Cross and Blue Shield outsource the prescription benefit to PBMs to handle all of the details, such as creating the formularies, corresponding co-pay levels and discount and rebate arrangements.

Pricing Matters

“In the U.S., we allow price negotiations, discounts, and rebates,” Seeley says. What this means in layman’s terms is that there are different prices for the same drug, depending on who is paying the bill. These rebates and discounts are all confidential. “Everyone talks about the high price of drugs in the United States but there is little transparency on how much is really being paid by each purchaser,” she says. Further complicating matters is that, in order to secure the passage of the ACA, the Obama administration agreed that Medicare would not negotiate the price of drugs, and therefore reimburses at some of the highest prices. Since then, a number of politicians have proposed allowing Medicare to use its market power to negotiate lower drug prices, although Congress has yet to pass such a provision. Through the Medicaid Drug Rebate Program, state Medicaid agencies are entitled to rebates on medications for their beneficiaries. The Veterans Administration has even greater latitude to negotiate drug prices through the Federal Supply Schedule, although the covered population represents only one percent of the total population in the U.S.

In order to secure the passage of the ACA, the Obama administration agreed that Medicare would not negotiate the price of drugs, and therefore reimburses at some of the highest prices. Since then, a number of politicians have proposed allowing Medicare to use its market power to negotiate lower drug prices, although Congress has yet to pass such a provision.

The U.S. Pharmaceutical Industry’s Products

Specialty Drugs

There has been much focus in the past few years on specialty drugs in the U.S., which are drugs that are available in very limited supply, require special handling, and/or come with a very high price tag. Until recently, such specialty drugs were restricted to treatments for rare diseases like multiple sclerosis, so the extent of their usage, and the impact of the high price, was controlled. However, today the specialty drug designation also applies to new, and highly expensive, drugs available to treat common conditions like hepatitis C as well, thereby having a much larger impact on overall pharmaceutical spending.

Brand Name and Generic Drugs

Use of generic drugs has also increased in recent years. Brand-name drugs refer to drugs that are marketed by a pharmaceutical company (or companies in the case of co-branded drugs) that owns the patent. That company gets regulatory exclusivity from the FDA as well as 20-year patents, which both contribute to the drug’s market exclusivity, during which time the manufacturer can sell the drug at high prices to recoup their investment and make a profit. Estimates from industry-funded economists suggest that drug development may cost as much as$2.558 billion per drug, but these estimates are based on non-transparent data and use assumptions highly favorable to the industry, so the actual number is probably much smaller. Note that a study conducted by York University researchers found that pharmaceutical manufacturers in the U.S. spend nearly twice as much on marketing their products than they do on research and development. In addition, much research and development investment from large manufacturers are spent on incremental improvements to existing products.

When the market exclusivity on a branded small-molecule drug (which refers to most traditional pharmaceutical drugs) ends, other companies may produce generic versions of the drug. Generic drugs contain the same active ingredients, strength, and dosage as the branded drug, and are approved by the FDA as bioequivalent to the brand-name version. Studies show that generic drugs are clinically equivalent to brand-name drugs. Generic drugs are usually also much less expensive than branded medications. In fact, once six or more generic manufacturers are in the market for a particular drug, that drug can cost 90 percent less than the original branded medication.Generic drugs currently account for 8 out of 10 prescriptions filled, and that number will likely continue to rise in the coming years as more patents on brand name drugs expire.

Over-the-Counter Medicines

There is also a large market in the U.S. for over-the-counter (OTC) medicines. Drugs for conditions like allergies and heartburn that required prescriptions in the past are now available for OTC sale. This makes them easier to access for consumers but also means that people often pay more for these medications, since OTC drugs are not covered by insurance, Seeley says. There can also be questions regarding dosing, how to use properly, and recommended length of time for use for best results when people self-medicate.

The Biotech Field

Biotechnology companies make up another sub-sector of the pharmaceutical industry that works to bring new treatments to the market. While traditional small-molecule drug companies use synthetic ingredients to create medications, biotechnology drugs are usually proteins manufactured in a living system, such as an animal or a plant. Biotechnology drugs are usually highly expensive. Generic versions of biotechnology drugs are not available, although in 2010 the U.S. developed a regulatory pathway to encourage production of so-called “biosimilar” drugs that should act in clinically equivalent ways to the original biotechnology drug. Dozens of biosimilar drugs are now in widespread use in Europe, leading to some cost-savings, although not nearly at the level of generic small-molecule drugs.

Personalized Medicines

One of the latest developments in the pharmaceutical field is its growing focus on using genetics and genomics in the biomedical sector to better understand the development of different diseases and individual risk factors, and to develop a more personalized approach to treatment for each patient, called targeted therapy. “At this point, the number of targeted therapies is growing but they are still a minority of treatments overall,” Kesselheim says. He and many other experts are hopeful that personalized treatments will become more prevalent in the next few years because they offer the hope of enhanced drug efficacy. In addition, advanced technological capacities are beginning to make it possible for companies to mine and analyze data on specific conditions, which may lead to new—and much needed—treatments in the future.

Challenges for Patients

The high cost of drugs in the U.S. poses some problems from the patient perspective; despite having increased access to prescription drug coverage, not everyone can afford the co-pays or co-insurance for their medicines today. As a result, medicine non-compliance is a serious problem in the nation.

“If there are high-cost prescriptions that people can’t afford, there could end up being a serious public health issue,” Kesselheim says. Some pharmaceutical companies try to head off this situation by offering programs that aim to make needed drugs accessible to low-income people, but these programs often do not reach a large audience and may have numerous eligibility requirements restricting entry.

Further complicating the relationship between the pharmaceutical industry and patients is the fact that drug manufacturers in the U.S. are allowed to market their products directly to patients, which can inform patients about available therapies but is also proven to contribute to over-prescribing of the advertised drugs. Such practices add to the overall amount of national drug spending, since many of these drugs can be quite expensive.

Public Opinion

Recent studies by the Kaiser Family Foundation (KFF) reveal that the U.S. public wants drug prices to be better controlled. For instance, three-quarters of respondents to a June 2015 Kaiser survey on this topic reported feeling that pharmaceutical companies cared more about profits than they did about patients, while close to 75 percent of the respondents said they felt prescription drugs are too expensive. While Democrats and Republicans are historically on different sides of the fence when it comes to policy preferences, many people from both parties today seem to agree on this issue: more price regulation or innovations in pharmaceutical payment will be important for the future of the health care field and for the well-being of patients. Further, there has been much talk about the fact that even as the health care organizations throughout the nation are rising to the pressures to tighten their costs, the pharmaceutical industry has not yet been touched by the growing move to adopt value-based care. Nonetheless, Seeley points out that small pockets of the pharmaceutical industry have begun to experiment with individual pay-for-outcome contracts.

Many people from both parties today seem to agree on this issue: more price regulation or innovations in pharmaceutical payment will be important for the future of the health care field and for the well-being of patients.

This trend is one that may continue, and may also increase, in the future, as the focus on value and quality in health care continues to expand, influencing pharmaceutical manufacturers to seek new ways to protect their territory within the continually changing field.

Distributors: The Vital Link Between Manufacturers, Healthcare Providers — and Ultimately Patients

Healthcare distributors are the backbone of the U.S. healthcare ecosystem, serving as the vital link connecting 1,400 pharmaceutical manufacturers to more than 180,000 individual pharmacies, hospitals, healthcare facilities and other sites of care.

An image of a patient inside a blue circle, surrounded by a gold circle  Patients Depend on Distributors for Lifesaving Treatments and CuresDistributors work behind the scenes to deliver treatments and cures to patients in U.S. and around the world — delivering 10 million products each business day.
     
  
An arrow around a 24 in a solid blue circle, surrounded by a gold circle  Delivery Within Hours, Not DaysWith operations continuously running, primary distributors can take orders made by 8:00 p.m. and deliver them to their end destination as soon as the next morning.
      
  
A hand and pharmacy logo with a money sign in it inside a blue solid circle, surrounded by a gold circle  Saving Billions of Healthcare DollarsThe pharmaceutical distribution industry saves the U.S. healthcare system between $33–$53 billion each year through investments in logistics solutions, supply chain expertise and technological advancements.

Our Role in the Supply Chain

Distributors manage a complex supply chain, harnessing innovative technologies to ensure safe, secure and efficient delivery, every time. The industry purchases prescription medicines and other medical products directly from pharmaceutical manufacturers for storage in warehouses and distribution centers across the country. State and federally licensed pharmacies, hospitals and healthcare providers place orders with distributors for the medicines and products they need, and distributors process and deliver the orders daily.

A chart of the healthcare distribution supply chain

Healthcare distributors deliver unmatched logistics expertise, technology solutions and support to providers treating patients on the frontlines, as well as those innovating to find the treatments and cures of tomorrow.

Safe, Secure and Efficient Delivery is Our Top Priority

As the healthcare system rapidly changes, distributors are constantly envisioning new ways to move and secure the nation’s medicines, all while protecting patient safety.

Distributors continuously monitor, protect and enhance the security of the pharmaceutical supply chain to ensure medicines are properly and securely handled, stored and delivered.

Without distributors, manufacturers would spend substantial financial, logistical and staff resources that could be used in other important ways. Thanks to distributors, the system is more efficient, reliable and secure.

Distributors’ Role in the Supply Chain

As logistics experts, distributors do not manufacture, prescribe or promote medicines. Distributors also do not make clinical decisions as to who should or should not receive a medicine or what medicine is best for a particular patient. Getting a medicine starts with a prescription, and distributors help make sure that what your healthcare provider prescribes gets to your hospital, pharmacy or other healthcare facility safely, securely and reliably.

US Pharmaceutical Pricing: An Overview

Pharmaceutical pricing is a topic rife with contradictions:

  • Pills that cost pennies to produce may cost thousands of dollars to purchase
  • Two pills with identical ingredients, but different names, may vary in price by a factor of five
  • In the United Stated, the price of the same drug may vary by two times or more compared to what it costs other countries

However, these bewildering characteristics of pharmacy prices are not unexplainable. Pharmaceutical pricing is a natural consequence of the way pharmaceutical products are researched, manufactured, and paid for. Understanding the details and complexities of this pricing is a necessary first step in supporting the creation of potential cost-saving approaches. This paper will briefly explore the structure of the pharmaceutical industry, investigate the layers of pricing between manufacturers and consumers, and highlight various approaches to managing drug prices in both the United States and throughout the world. Throughout the paper, the drug Lipitor will help illuminate the path of a drug from the laboratory to the pharmacy.

Pharmaceutical Profits

Two unique aspects of the pharmaceutical industry are (1) the amount of research and development (R&D) investment and (2) the patent system. In 2016, the top 10 largest pharmaceutical companies spent just over 17% of their revenue on research. This is compared to 3% in Aerospace and Defense, 9% in Computing and Electronics and 12% in Healthcare overall. This huge investment in R&D is necessary for a pharmaceutical company to be able to finance the development of future drugs. During the development process, many potential drugs have ineffective clinical outcomes or serious side effects. Including the cost of drugs that were not approved, the cost of developing a single FDA-approved medication was recently estimated at $2.87 billion dollars (in 2013 dollars). This large upfront outlay and considerable uncertainty in the drug development process means that a very high return is sought by investors in drug companies to compensate for these risks.

The pharmaceutical industry routinely appears at the top of “most profitable industry” lists. The large profits associated with the pharmaceutical industry are also related to the second unique aspect of this sector, the patents which protect drug discoveries. The major impetus driving research and development spending is the prospect of developing a blockbuster drug (i.e., an innovative drug that treats a serious condition with a large number of patients in economically-advanced countries). Such a drug recoups its large R&D expense many times over, which then funds less-successful drugs and provides profit to drive future investments. In 2015, 12 drugs had sales of over $5 billion a year. The two most successful had sales in excess of $10 billion. Patent protection ensures multiple years of exclusive access to market these medications to a large population.

Lipitor, the cholesterol medication, is an example of a blockbuster drug. It dominated drug sales between its release in 1996 till the end of its patent protection in 2011. While Lipitor started early clinical trials in 1985, it wasn’t available commercially until 1996.

Lipitor, the cholesterol medication, is an example of a blockbuster drug. It dominated drug sales between its release in 1996 till the end of its patent protection in 2011.5 While Lipitor started early clinical trials in 1985, it wasn’t available commercially until 1996.

Patent protection is a central driver of pharmaceutical industry economics. In drug production, there are high initial costs to develop a unique medication, but often very low marginal manufacturing costs after the medication has been developed. In the absence of any patents, manufacturers would inexpensively produce any invented drug and prices would approach the costs of production. In the long run, the lack of patents would remove the incentive for pharmaceutical companies to invest in research and development and we would be limited to public funding of research and the existing drug catalog.

The generic version of Lipitor is Atorvastatin. While manufacturing of Lipitor was controlled by Pfizer, Atorvastatin is currently manufactured by hundreds of companies worldwide.

The generic version of Lipitor is Atorvastatin. While manufacturing of Lipitor was controlled by Pfizer, Atorvastatin is currently manufactured by hundreds of companies worldwide.

The current pharmaceutical market structure is a combination of patent-protected brand-name drugs, where manufacturing is controlled by the firm holding the patent, and generic drugs, where the exclusive patent has expired and any manufacturer meeting minimum requirements may produce the drug. Over time, the number of generic medications has increased as more and more popular brand name drugs lose their patent protection. The following graph shows the rapid increase in the percent of prescriptions filled with generic drugs over time.

Pharmaceutical Pricing Life Cycle

In discussing the structure of the pharmaceutical industry above, frequent reference is made to drug prices, suggesting that there is a single “price” for a drug that is known by all participants. The reality of drug pricing is that there are many different prices depending on who is buying, who is selling, and when and where the transaction takes place. The range of different prices paid in the market helps identify the many players beyond the manufacturer and final consumer.

The major purchasers of drugs from manufacturers are not patients or pharmacies but wholesalers. While major pharmaceutical companies are often well-known brands (Johnson & Johnson, Pfizer, Merck) the biggest wholesalers are rarely known by the public (AmerisourceBergen, Cardinal Health, etc.). Wholesalers account for 85% to 90% of drug manufacturer revenues and purchase drugs directly from the manufacturers for sale to pharmacies, hospitals, physician offices and stand-alone clinic. The price wholesalers pay to purchase drugs from manufacturers is called the Average Manufacturer Price (AMP) or Wholesale Acquisition Cost (WAC).

The next stage in the drug distribution pipeline is the sale of pharmaceuticals from wholesalers to retailers. Focusing on pharmacies that sell directly to consumers, the price that retailers pay is often known as the Actual Acquisition Cost (AAC). The AAC is typically based on the WAC plus a markup (often 10-15% on branded drugs and higher on generics). Average Wholesale Price (AWP) is another benchmark for the price pharmacies pay wholesalers. AWP is a universal standard in pharmaceutical pricing and is typically collected and published by companies who collate drug pricing data.

The last step is getting medications into the hands of consumers. This is handled through several chain and local retail pharmacies as well as an increasing number of mail and specialty pharmacies. The retail pharmacy market in the US is largely dominated by chain pharmacies;. In 2014 the top three pharmacy chains (Walgreens, CVS Health and Rite Aid) accounted for over 75% of the market share. An increasing volume of drugs are being dispensed through the mail order channel, especially with the expansion of specialty drug utilization. The price of retail medications to consumers is the “Usual and Customary” (U&C) price, which includes the cost of the drug (AAC) plus the pharmacy’s markup, the pharmacy typically also receives a dispensing fee of $1-$3 per prescription. The image to the right shows the various prices encountered between the manufacturer and the final consumer.

The Role of Insurers and Pharmacy Benefit Managers

An area of pharmacy pricing not addressed above is the role of insurers and pharmacy benefit managers (PBMs) in drug purchasing and pricing. Typically, consumers who have pharmacy insurance coverage pay a copay or a percent of a drug’s cost and the remainder is covered by their insurance. The proportion of pharmacy costs covered by insurance is often lower than for other medical services, but it has risen in recent years, especially for costly specialty medications. Insurers entered the pharmaceutical market to use their market power to reduce the prices they pay for drugs. Over time, though, many insurers have outsourced this role to PBMs, which negotiate drug prices on behalf of insurers and large employers.

PBMs work on behalf of their clients to lower the prices paid for pharmaceuticals. They interact in the pharmaceutical market through two primary paths: price negotiation and formulary design. The first part of price negotiation is reducing the prices paid at the pharmacy through discounts. PBMs aggregate the purchasing power of multiple insurers and payers to negotiate better discounts with pharmacies than insurers could achieve on their own. The PBMs may also own or contract with mail-order pharmacies that offer even deeper discounts.

Pricing Example – BrandPricing Example – Generic
Lipitor (Bottle of 30, 10mg, circa 2011)Atorvastatin (Bottle of 30, 10mg, circa 2016)
AWP$120AWP$100
Brand Discount20%Generic Discount80%
Dispensing Fee$2Dispensing Fee$2
Cost at Pharmacy$120 * (1-20%) +
$2 = $98
Cost at Pharmacy$100 * (1-80%) +
$2 = $22
Member Copay$30Member Copay$5
Rebate$12Rebate$0
Cost to Insurer$98 – $30 – $12 = $56Cost to Insurer$22 – $5 – $0 = $17

While discounts reduce the initial price paid at the pharmacy, rebates earn money back after drugs have been sold and consumed. Drug rebates are negotiated directly with manufacturers on brand medications by PBMs. They often total 10% or more of the price of branded drugs. Manufacturers pay rebates to earn access and to reward volume. Access means that a PBM lists a medication on their formulary as a “preferred” brand drug, meaning it costs less to the consumer and will be more likely to be prescribed by physicians. Volume rebates are additional rebates paid by the manufacturer if a PBM sells more of their brand drug than similar alternatives. A decade ago many PBMs provided their services for a nominal fee and earned most of their money through rebates., Today, most PBMs charge higher upfront fees and pass-thru rebate payments to the insurer.

Insurers and PBMs offer a range of services beyond price negotiations. They also work on formulary design (the list of drugs covered by an insurance plan) and cost saving programs. Programs include compliance programs to ensure pills are taken regularly and prescriptions filled promptly, generic substitution to recommend generic versions of brand drugs, and polypharmacy, which focuses on safety for patients taking a large number of medications.

Pharmaceutical Pricing Abroad

The pharmaceutical industry is a truly international industry with drug research and development, manufacturing, and distribution occurring across national borders. The US drug market is far and away the most valuable in terms of revenues due to the US’s large population and high per-capita GDP. The following table shows the value of the top 10 pharmaceutical markets, measured by revenues in US dollars (USD) for 2015. The relative size of drug markets also reflects different healthcare practices and drug price controls in each country.

In the United States, the FDA is responsible for approving new medications. Pharmaceutical companies must submit extensive documentation and research supporting safety and efficacy to have a drug approved. The FDA does not, however, consider whether a drug is reasonably priced compared to drugs in the same therapeutic class or existing medical treatments. In many European countries, drug approval is a two-step process, with initial approval based on safety and efficacy and a second step that considers the drug’s cost effectiveness compared to other available medications and treatments.

When appraising the landscape for drug sales, manufacturers consider not only where to set prices in each country, but the size of markets and prices across the entire world. Drug manufacturing requires huge upfront research costs and relatively low marginal production costs. Manufacturing firms need to make enough money, in aggregate, to cover initial research costs, but the marginal cost they charge only needs to be enough to cover production. This means that lower income countries can often purchase drugs for 1/10th or less of the cost of high income countries. This is a boon for many countries in South America or Africa, where the level of incomes is insufficient to support high drug prices, but leads manufacturers to price discriminate across markets and may lead to a sense that some markets are subsidizing others.

A study of drug price differences across nations carried out by Kanavos and Vandoros in 2011 found that brand drug prices did appear higher in the United States than in European countries, but that the difference was lower than that found in prior studies. In most other countries with socialized health insurance systems, there is some level of drug price negotiation at the national level. Germany allows drug companies to set their own initial prices but may set maximum prices for patent-protected drugs, use references prices for drugs in a therapeutic class, require initial use of alternate treatments or deny reimbursement of “inefficient drugs”. In the United Kingdom, the National Institute for Health and Care Excellence (NICE) determines both the clinical value of a drug and its cost effectiveness. Only drugs meeting minimum cost effectiveness requirements are reimbursed by the National Health System, meaning drugs that don’t meet this requirement are essentially unavailable to the public. In Canada, a range of price management tools are available. Drugs are initially categorized as “Category 1: a new drug product that is an extension of existing or comparable dosage form of an existing medicine; Category 2: the first drug to effectively treat a particular illness or that provides a substantial improvement over existing drug products; Category 3: a new drug or dosage form of an existing drug that provides moderate, little, or not improvement over existing drugs.” Drugs are then assessed as to whether their prices are “excessive”, existing drugs are limited to an annual CPI (Consumer Price Index) increase, new drugs in categories 1 and 3 must be within the range of existing drug prices in their therapeutic class and the price of breakthrough drugs is based on a reference to the price in other countries.

Controlling Prices in the US: Options

How can the US decrease drug prices? One frequently-cited idea is to allow importation of inexpensive drugs from Canada. Many individuals have driven over the border to purchase cheaper drugs in Canada and even made online purchases from Canadian pharmacies. In individual cases, this certainly saves money, but as a national strategy it would be difficult for the United States to process its drug purchases through a country 1/9th the size. The likely response by drug manufacturers would be to limit drug production and sales to Canada or to raise prices in Canada to make up for the lost revenue. Either case would likely hurt Canadian consumers and could lead to the passage of laws in Canada outlawing the exportation of drugs to the United States.

What if the United States instituted its own Canada-style drug price controls at a national level? With almost 50% of the international market, the US could certainly lower drug prices by leveraging its market power. As the largest market and a relatively high-priced market, the US likely supplies even more than 50% of total pharmaceutical profits. As these profits are reduced through drug negotiations, the long-term return to drug research and development would decrease leading to corresponding decreases in investment. This would reduce the rate of new drug breakthroughs throughout the entire world.

What should the US do? How can payers control drug prices over time without the US shouldering an outsize portion of the cost of drug development and without decreasing investment in drug breakthroughs? The first issue is to assess the size of the problem, while recent drug trends have been higher than medical trends, in the long run the proportion of US health spending dedicated to pharmaceuticals has remained relatively constant (see chart below).

To search for effective methods to control pharmaceutical costs we should look at what has found success in other countries and the methods successful PBMs are currently pursuing:

  • Encouraging/mandating generic substitution.
  • Tying the cost of new drugs in existing therapeutic classes to the drugs already being sold (referencing pricing).
  • Comparing the cost of novel drugs to the cost of existing medical treatments for those conditions.
  • Negotiating rebates or agreements from manufacturers that limit the growth rate of drug prices over time.
  • Establishing a pathway for effective biosimilars to be approved as specialty drugs lose patent protection.
  • Investigating outcomes-based payment arrangements for costly specialty drugs.
  • Boosting competition for generic drug production.

What is a Pharmacy Benefit Manager (PBM) and how Does a PBM Impact the Pharmacy Benefits Ecosystem?

I am going to discuss PBMs more in depth, because this seems to be the area where the most profit is made in the drug market. In the book I read “The Price We Pay” the mark up by the PBMs is outrageous, which drives the price up. Everybody blames big pharma, but apparently they alone are not responsible for the high prices of pharmaceuticals in the US.

Pharmacy Benefits Managers, also referred to as PBMs, are, in essence, the intermediaries of almost every aspect of the pharmacy benefits marketplace. Many people assume that pharmacy benefits come directly from the health insurance provider when, in reality, PBMs are doing the bulk of the work for over 80% of employers in the U.S.

PBMs are hired by corporate employers, health plans, labor unions, and other organizations, to interface with drug manufacturers and process prescription-related claims. In short, PBMs are the connectors between employers, members, drug wholesalers, pharmacies, and drug companies, working to facilitate the best possible health outcomes at the best possible costs. Having an effective pharmacy benefit strategy, and selecting the right PBM to meet an employer’s needs, is critical to ensuring the success of a benefits plan, optimizing spend, and protecting the well-being of employees.

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What exactly do PBMs do?

PBMs have two main objectives: to curate pharmacy prescription benefits plan options; and to help patients achieve better health outcomes through greater access to appropriate medications.

To do this, PBMs work with drug manufacturers, wholesalers, pharmacies, and plan sponsors.

Reduce Spend

PBMs negotiate pricing with a large network of retail or mail pharmacies and are able to offer patients and employers greater access to medications across multiple retail chains at competitive pricing.

PBMs offer extensive clinical programs including quantity edits, step therapy, and prior authorizations, to help benefits plan administrators ensure appropriate medication usage, safety precautions, and savings opportunities.

PBMs often serve as advisors for employers by providing advice and recommendations on different plan designs, clinical programs, and more.

Increase Access to Medication

PBMs increase a patient’s access to medications by negotiating directly with drug manufacturers or wholesalers. PBMs negotiate discounts from Wholesale Acquisition Cost (WAC) for quantity discounts that they are able to pass on to their clients. They also negotiate payments based on adherence programs.

PBMs mitigate rising prescription costs and ensure that drugs are administered effectively and achieve the best result for the health and wellness of the patient. By establishing a large network of retail or mail pharmacies, PBMs are able to offer patients and employers greater access to medications across multiple retail chains.

It’s fair to think of the relationship between the PBM, the pharmaceutical manufacturer, and the employer, a little bit like a game of tug-of-war. The PBM is in the middle, connected between the manufacturer and the employer, and is being pulled in both directions — with the goal of getting both parties a fair deal and offering solutions to minimize prescription benefit costs.

How do PBMs work with Pharmaceutical Manufacturers?

The relationship between PBMs and pharmaceutical manufacturers is complicated. There are a number of financially-driven challenges that make interactions between drug companies and PBMs difficult to navigate and understand.

As an intermediary between pharmaceutical companies and patients, PBMs are responsible for determining the affordability of a drug and putting programs in place to help patients access medications and use the most effective treatments. These programs include:

Rebate Programs

PBMs negotiate with pharmaceutical companies to determine the level of rebates the company will offer for certain drugs — rebates are paid to the PBM. Depending on the contract between the PBM and employer, or plan sponsor, the PBM will pass all, some, or none of the rebate to the employer or plan sponsor.

Formulary Coverage

A formulary is a list of drugs, both branded and generic, that are covered within a certain plan. The list is determined by PBMs with the assistance of physicians and other clinical experts to include the drugs that will be most effective and affordable. Given the volume of medications that go through a PBM, when a drug is covered on the formulary, it’s much more likely to be prescribed by a physician. Ideally, a drug company wants to make sure their drugs are covered in order to reach the patients that need them.

Step Therapy Programs

Step Therapy programs are a type of prior authorization that applies to both traditional and specialty drugs. The program is designed to make sure that patients have at least tried a less expensive drug that’s proven effective for a specific condition, before moving onto a more expensive drug.

Prior Authorization Programs

Prior Authorization is a cost-savings feature that helps ensure the appropriate use of prescription drugs. Prior Authorizations are designed to prevent improper prescribing or the improper use of certain drugs.

PBMs are also responsible for implementing other important programs designed to improve health outcomes such as: reducing waste and increasing adherence, managing high cost and high complexity specialty medications, and clinical drug management.

How do PBMs work with Employers?

When an employer signs a contract with a PBM to design and maintain a prescription benefits plan, they typically contract for a three-year relationship. During the initial discovery phase, both parties work together, and in some cases with brokers and industry experts, to build their ideal pharmacy benefit plan by choosing from different deductibles, co-payments, co-insurances, and clinical programs.

After the plan is designed, the employer relies on the PBM to correctly administer their prescription benefits, and to educate their employees about their coverage. PBMs typically offer call centers for member support and can answer questions about the in-network pharmacies or different co-payments for different drugs. Most PBMs also offer websites or apps that offer easy access to information about eligibility, refills, pricing, and coverage rules.

Throughout the contract, PBMs are responsible for four main components of the agreement:

Claims Processing

PBMs are responsible for processing and paying prescription drug claims within a prescription benefits plan.

Rebate Reimbursement

As previously noted, PBMs negotiate rebate programs with pharmaceutical companies. There are many complicated models for rebate programs but, basically, the PBM is in charge of administering these rebates. Depending on the contract between the PBM and the employer or plan sponsor, all, some, or none of the rebate amount goes back to the employer.

Clinical Programs

Clinical programs are designed to encourage the best clinical outcomes for members within a prescription benefits plan. PBMs review data and monitor drug usage on an ongoing basis to determine what adjustments should be made to achieve the overall goal: maintaining, or improving, health benefits while reducing costs.

Clinical programs include: prior authorization, quantity limits, and step therapy, and are all instituted to ensure the highest quality of care is delivered to the patient in the most appropriate setting.

Drug Utilization Review

It’s not always about money — PBMs play an important safety role within prescription benefits plans, too. Drug Utilization Review is a life-saving program that calls for the review of a drug to determine effectiveness, potential dangers, potential drug interactions, and mitigate other safety concerns. Since PBMs oversee their own pharmacy networks, they have access to a patient’s prescription history and can alert patients or physicians to potential negative drug interactions that could occur by mixing different prescriptions.

The PBM also sets specific criteria that has to be in place before certain drugs can be administered. Criteria could include: verifying the diagnosis; determining if there’s a genetic component involved; making sure the right testing is done; and instituting a specialist during treatment. This is all in an effort to make sure a patient is taking the proper steps for treatment, isn’t exceeding the quantity needed, and is actually responding to the medication.

On the back end, employers rely heavily on PBMs to bring them trends and information regarding the performance of their plan and how to make improvements. It’s critical for employers to maintain an ongoing dialogue with their PBMs to ensure that their members are always receiving the best possible care at the lowest possible cost.

Pharmacy benefit managers (PBMs), once just administrators created to ease claims processing, have grown to a position of power that comes with conflicts of interest aplenty, said a panel at Patient-Centered Oncology Care® 2020.

Pharmacy benefit managers (PBMs), once just administrators created to ease claims processing, have grown to a position of power that comes with conflicts of interest aplenty.

Today, pharmacies and consumers alike encounter pitfalls, such as spread pricing, the use of rebate aggregators, and threats of drugs being removed from formularies. All this makes dealing with PBMs an unfortunate reality for drug manufacturers and pharmacies, and for patients who depend on the drugs that PBMs control, said a panel of experts at Patient-Centered Oncology Care® 2020.

The discussion was moderated by meeting Cochair Joseph Alvarnas, MD, vice president of government affairs, senior medical director for employer strategy, and clinical professor, City of Hope, and editor-in-chief, Evidence-Based Oncology™. The panel included Ray Bailey, BPharm, RPh, vice president of pharmacy, Florida Cancer Specialists; Antonio Ciaccia, chief strategy officer at 3 Axis Advisors; Jonathan E. Levitt, JD, attorney and founding partner at Frier Levitt; and Denise Giambalvo, MS, vice president of Midwest Business Group on Health.

The root of the problem with PBMs, Ciaccia explained at the start of the discussion, is the way their role has shifted. At first, their purpose was to allow health care benefits providers to leverage better drug prices. Now, he said, PBMs have essentially become the pharmacies themselves rather than just the middleman.

This then leads to the question of whether PBMs have any incentive to control drug costs when they have become part of that cost. And with the way things are going, it has become apparent that they lack any cost-control incentive, at least as far as the panelists can see. PBM practices, including spread pricing and demanding bigger rebates from manufacturers to keep their products on formulary, actually drive up drug prices, an issue that affects the entire health care system.

“[PBMs] have a profit incentive to keep the prices high, and work to discount off that price. So, if prices were low, we wouldn’t really need the PBMs as much as we need them today,” Ciaccia said. “Plan sponsors, big and small, all need somebody to come in and knock down those prices. So, [PBMs] are basically the arsonist and the firefighter into one.”

One way that PBMs have capitalized on their position is spread pricing, in which they keep a portion of the amount billed to health plans for prescription drugs instead of passing that money on to the pharmacies.

Ciaccia recalled a situation in which pharmacies within the Ohio Medicaid managed care plan saw a 60% to 80% decrease in their gross margins. The state auditor later discovered that there was $244 million in spread pricing by PBMs, and the spread had been growing over time.

Levitt raised the issue of language in contracts. Plan sponsors get rebate checks according to their agreements with PBMs, but clever wording can allow PBMs to withhold extra manufacturer rebate money.

Giambalvo explained that for employers and plan sponsors to protect themselves, there needs to be specific, clear contract language. “You can’t just say ‘rebates’—you have to say, ‘all administrative fees received from the manufacturer,’” she stressed. “Go back to the employer, so that everything is incorporated.”

Another problem Levitt raised is rebate aggregators, which PBMs sometimes hire to collect the rebates they get from manufacturers for including their drugs in the PBM’s formulary. The issue is that many rebate aggregators are owned by or affiliated with the very PBMs that employ them.

A Medicare plan retained by Levitt’s firm audited a PBM suspected of keeping extra money, and this issue was brought to light.

“What the plan didn’t know was that the PBM owned a rebate aggregator,” Levitt explained. “That rebate aggregator collected all the dollars, and it only gave about 40% of those dollars to the PBM. The PBM [contract] said, ‘We’re going to give you 90%, and we’re going to keep 10%.’ But what they failed to reveal was that the PBM rebate aggregator had sucked 62% of the money out the system.”

Self-insured employers also have rights that they need to know and take advantage of to avoid running into similar issues, according to Giambalvo. These employers can carve out pieces and create their own pharmacy network that they can direct-contract with, she said.

“Another really important piece is using an independent pharmacy and therapeutics committee, so that the [formulary] decisions are not being influenced by the rebates that are received,” Giambalvo noted. Oncology drugs that are not showing good outcomes have no place in formularies, so it’s important for employers or plan sponsors to know what they are paying for. In the long run, using more effective drugs will reduce total spending, she said.

Giambalvo and Levitt stated the importance of having consultants with a high level of expertise look over contracts, and both stressed that consultants should be independent. Employers and payers should be aware that many consultants are paid by PBMs. As Alvarnas pointed out, jumping through hoops to get fair deals from the payer and pharmacy perspectives should not be necessary, and it points to a system in need of an overhaul.

Providers see direct effects on patients that arise from working in a system with PBMs. In oncology, where drugs are constantly evolving and are very expensive, Bailey sees patients face barriers to care due to rising prices and cost shifts to higher co-pays and deductibles for patients.

“We try every day to keep up with all the changes in oncology and all the new drugs, but our patients face immense financial toxicities with drugs that are run through this pharmacy benefits space,” Bailey said. He noted that especially with oral therapies, the first adjudication of a $10,000- or $15,000-per-month drug will typically hit the deductible side of a medical plan.

Bailey’s medically integrated pharmacy at Florida Cancer Specialists mitigates high costs for patients by using value-based models in which it takes on risk for oral drugs the same way it does with intravenous drugs. The pharmacy also keep tabs on in-home supplies to avoid prescribing drugs that will go to waste.

Overall, panelists concluded that change needs to happen. But what that change is remains to be seen. Payers and employers working to better understand contracts, actively calling for audits of PBMs, working toward public policy that fosters transparency, and challenging abusive tactics from PBMs are all steps that could lead to progress.

“We talk a lot in health care about the desired move to value-based care, which is paying a good price for quality care for a patient,” Ciaccia said. “But I challenge people to ask themselves, how can you pay for value if you don’t know what you bought, whether or not it was done at a fair price, or really what the price was in the first place?”

Invisible Middlemen Are Slowing Down American Health Care

Lynn Lear finished her final round of chemotherapy for breast cancer in December. To help keep the cancer from coming back, Lear’s doctor told her about a new medication she could take called Nerlynx. Lear, who is 46, wanted to do everything she could to remain healthy, so she asked her doctor to order the drug for her.

Unlike, say, an antibiotic or an antidepressant, a Nerlynx prescription can’t be filled at a neighborhood CVS or Walgreens. Instead, Nerlynx is dispensed either through certain doctors’ offices or through specialty pharmacies, which exist specifically to process expensive drugs for difficult conditions and often deliver medications by mail. On December 18, 2018, Cheri Bateman, a nurse in Lear’s doctor’s office near Virginia Beach, Virginia, sent the prescription to Accredo, the specialty pharmacy that worked with Lear’s insurance.

So began Lear’s Kafkaesque journey to getting this life-saving drug, which she wouldn’t be able to start taking until nearly two months later. Accredo had a prior-authorization process, in which companies called pharmacy benefit managers ask questions of doctors before they will release medications to patients. Accredo’s pharmacy benefit manager is called Express Scripts. Like all pharmacy benefit managers, Express Scripts negotiates drug prices with drug manufacturers on behalf of insurance plans, determines which drugs are covered, and conducts the prior-authorization process for certain cancer drugs.

The problems began with an error on Bateman’s end. During the prior authorization for Lear’s Nerlynx, Bateman accidentally answered a question wrong—she thought the person on the phone was asking whether Lear had ever been on an antiemetic medicine rather than an antidiarrheal—and Express Scripts promptly denied approval for the drug. The very same day, Bateman appealed the denial and provided the correct information, but she had to wait nearly a month before the medication was finally approved, according to clinical notes she provided to The Atlantic.

Then there was a new complication. Bateman called Accredo, the specialty pharmacy, which agreed to set up the delivery of Lear’s medication, Bateman says. But after more than a week of phone tag, neither Bateman nor Lear had heard from the pharmacy. Bateman realized there might be an issue with Lear’s insurance, which had changed on January 1. Bateman called the new insurer, Optima Health, who said the prescription had been transferred to a different specialty pharmacy, Proprium—though according to Bateman, she had never been notified about this. An Optima representative gave Bateman a new number to pass on to Lear so that Lear could set up the delivery of the Nerlynx.

Bateman was a busy nurse at a busy practice just trying to get one tiny thing taken care of. At this point, in her clinical notes, Bateman spewed a frustrated, punctuation-free stream: “[Lear] called me back at 4:40 pm and stated that Proprium pharmacy stated to her that the medication needed a prior authorization …” Bateman had already been told that a prior authorization would not be necessary, she says. When she called to clarify, Optima told her she was right, but there was yet another problem: The medication had a bank-breaking $1,367 co-pay.

Bateman usually encounters some hurdles in getting cancer medications to her patients, but she told me this was one of the worst cases she’d ever had. At the end of her note on January 22, Bateman wrote that she had spent more than 16 hours on the phone attempting to get Lear her medication. And Lear still didn’t have it. The way Lear was ultimately able to secure it and avoid the high co-pay was by canceling her primary insurance, making her secondary plan her primary one, and filling the prescription with Accredo after all. On February 6, she was finally able to start taking Nerlynx.

Citing patient privacy, Express Scripts declined to comment on Lear’s specific case. In an emailed statement, a spokesperson told me that “sometimes patients have primary and a secondary benefit plans. The differences in those plans, and the timing of plan-year changes, can lead to confusing situations.” They said that in cases where Accredo is an in-network pharmacy, patients are generally able to get their medications.

Lear told me she initially blamed herself for the delays. “As a cancer survivor, you wonder every day if it’s gonna come back,” she said, breaking into sobs. “It’s difficult to feel like I don’t have that control and power to use every tool possible to help me stay healthy, and to help me not have to go through all of this again.”


In the sea of America’s health-care system, pharmacy benefit managers tend to be seen as destructive leviathans. Invisible to everyday patients, PBMs lurk beneath health-insurance companies and swim through nearly every prescription-drug transaction. They squeeze rebates out of drug manufacturers, pass most—but not all—of those rebates on to health insurers, pay the pharmacy for the drugs, and collect payments from the insurer. In doing so, they subtly shape the currents of American health care.

Because of their outsize influence, pretty much everyone in the health-care system who isn’t a PBM likes to blame PBMs for high drug prices. The fact that some of them own specialty pharmacies—like Express Scripts does with Accredo—has not done much to improve their image. Recently, policy makers have taken aim at PBMs in an attempt to rein in drug prices. Draft rules announced by the Department of Health and Human Services earlier this year, if finalized, would make it so that drugmakers can no longer offer rebates to PBMs working for government insurance plans. The Senate Finance Committee has also set its sights on PBMs, dragging them before the committee for the latest in a series of hearings that aim to get to the bottom of why Americans pay so much for their drugs. The heads of five PBMs will testify on Capitol Hill about high drug prices this week.

Ted Okon, the executive director of the Community Oncology Alliance, a group of community-based cancer doctors, hates pharmacy benefit managers. COA is one of several doctors’ groups that accuse these middlemen of causing delays like the one Lear experienced and of driving up drug prices. Okon, whose group introduced me to Lear and the other patients and doctors in this article, claims that high prices are in PBMs’ financial interest: They get rebates from the drug companies and fees from pharmacies as a percentage of list prices, so the higher the drug’s price, the larger their payout. (PBMs have argued that their rebates don’t affect drug prices.)

Beyond raising prices, COA says that PBMs hinder the treatment of patients with complicated ailments such as cancer. PBMs gum up the process, they argue, through prior authorizations and the use of inaccessible specialty pharmacies. COA loathes the PBMs’ practice of using what’s called step therapy—forcing patients to try and fail at using cheaper drugs first—which COA says can lead to even further delays. Okon thinks the problem will only get worse now that insurers are buying up PBMs in order to have more control over drug prices. For instance, Cigna, a major insurer, recently bought Express Scripts.

“Would you trust your doctor to make the decision about your chemotherapy, or a corporation?” Okon told me indignantly between bites of arugula pizza recently. “It’s just not acceptable when a cancer patient, especially someone who is in dire need of treatment, doesn’t understand why they can’t get the drug.”

Okon thinks—“as crazy as this sounds”—that PBMs actually delay sending medication to patients in order to save money, since they are rewarded by insurers for controlling drug costs. And because PBMs are such a hidden part of the process—most patients don’t even know they exist—no one, ultimately, gets held responsible.

Specialty pharmacies, Okon and others say, are part of the problem. Okon told me stories of hemophilia patients having to be admitted into the hospital because a specialty pharmacy wouldn’t dispense the drugs the patients needed in time. Since some specialty pharmacies don’t have storefronts, they often deliver directly to patients. If a patient is at work when a $10,000 medication is dropped off, it could be stolen. Or, COA says, patients might be asked to spell the names of their medications by phone before they will be delivered—a near-impossible task, in the case of drugs such as Alemtuzumab and Tisagenlecleucel.

PBMs “earn a higher profit when they go to a specialty pharmacy,” says Gerard Anderson, a professor at the Johns Hopkins Bloomberg School of Public Health. “But if you need that drug on a Saturday or Sunday, you’re probably not going to get it.”

Accredo does not have any retail locations, but in a statement, the National Association of Specialty Pharmacy, the specialty pharmacy’s trade group, claimed that “there are retail locations and store fronts affiliated with most specialty pharmacies.” However, a spokeswoman added, patients usually prefer to have medications sent directly to their home. The group says that speciality pharmacies coordinate the delivery window with patients, and that they would already have the name and spelling of the drug prescribed on file “at the time of the initial contact with the patient.” The group also countered that restrictions imposed by insurance companies might be what’s impeding medication delivery on weekends, but that specialty pharmacies do routinely deliver medications on Saturdays.

Still, some patients do fall through the cracks of this system. Cindy Adams, who lives in Benton, Arkansas, found herself writhing in pain after some injections she needs to take in tandem with her chemotherapy were delayed for three weeks. As she slipped in and out of consciousness, “I was begging for God to take me,” she told me. Her doctor, Fred Divers, claims the delay was caused by an issue with the specialty pharmacy and PBM. “This kind of thing happens all day, every day,” he says.

The doctors I spoke with said that they have full-time employees whose job it is to do daily battle with PBMs and specialty pharmacies. David Oubre, the managing physician of the Pontchartrain Cancer Center in Louisiana, gave me the clinical notes of one woman whose breast-cancer drug was delayed by nearly a month because of what the office says is a misunderstanding of the patient’s diagnosis by the PBM, as well as by a long exchange of faxes, some of which were simply “blank pages.” “If you have swimmer’s ear, you can pick up the script on your way home and start the medicine,” Oubre told me. “Why do we have to wait four or six weeks?”

These delays might be happening because “there’s no downside” for PBMs in reducing the number of expensive medications sent to patients, says Kevin Schulman, a professor of medicine at Stanford University. “They’re not responsible for the poor care the patient is getting.”


The argument for PBMs is that some drugs are so expensive—Nerlynx has an average co-pay that starts at $3,600—that PBMs must ensure they aren’t going to patients who won’t benefit from them. You don’t need a PBM for aspirin, because aspirin costs pennies. The cancer drug Kymriah costs nearly half a million dollars.

In response to the criticisms of PBMs, a spokesperson for the Pharmaceutical Care Management Association, the national PBM association, said that they provide a crucial check on drugmakers’ prices. “When more affordable, clinically appropriate, treatment options are available, employers, unions and public programs choose to use prior authorization to lower costs and improve patient safety,” the spokesperson said.

To make matters more complicated, pharmaceutical companies have joined some doctors’ groups in blaming high drug prices on PBMs, which creates a potential conflict of interest. COA has pharmaceutical companies as corporate members, which give money to the group, and on the PBM issue, at least, COA appears to be aligning with the message of its corporate sponsors—something it has been accused of doing in the past. The two COA-affiliated doctors, Divers and Oubre, have both received money from drug and device companies, according to the CMS Open Payments Database. (Both Divers and Oubre said pharma payments do not influence their stance on PBMs.) In our interview, Okon denied the suggestion that COA is toeing the party line of its corporate sponsors. He claimed that if the PBM rebates go away, he will turn his ire on pharmaceutical companies if they don’t lower drug prices in turn. “I’ll be the first in line basically damning pharma,” he told me.

COA might also oppose step therapy—the practice of trying and failing at cheaper drugs—because oncologists stand to benefit from prescribing more expensive drugs, Anderson says. Okon denies this, and says that the drugs PBMs pick are often not even the cheapest drugs.

In stories about PBMs, the word shadowy comes up, as does cockamamie. They don’t disclose publicly how much they profit from rebates, and there are so many players in any given health transaction that the buck is very easily passed on to someone else. The health-care sea is treacherous in other ways, after all, so vanquishing PBMs might not end cancer-medication delays. But the problems these patients experienced nevertheless point to a common pattern when it comes to American health care: Companies charge exorbitantly high prices, mysterious intermediaries stand to benefit, and patients are caught in the cross fire. In some cases, families are left wondering what, exactly, went horribly wrong with a relative’s care.

On April 17 of last year, Oubre’s office issued a prescription for Verzenio, a breast-cancer medication, for a 55-year-old patient named Jamie Spada. Spada was a cheerful mom who volunteered at the Red Cross and ran charity drives for children. Knowing her time might be short, she took 30 vacations in four years until doctors told her she could no longer travel.

More than a month after the medication was ordered, the specialty pharmacy informed Oubre’s office that they could not fill the prescription, and that it would have to be sent to a different pharmacy. The new pharmacy said it required a prior authorization.

On May 24, Spada’s patient notes suggested a confused nurse trying to determine whether a prior authorization was required or not: “Received letter saying no auth was needed. Called to see when it would be dispensed was told by Rachel that an auth is needed.” Two days later, the medication finally arrived at Spada’s home. But it was too late. Spada was too far gone for the medication to do any good, and she had already been admitted to the hospital.

“She lost six weeks or so of time that she could have been taking medication. Maybe her quality of life would have been better,” Spada’s daughter, Gabriella Burst, told me. As for the reason for the delay, Burst said, “we never got a true explanation.”

On June 25, Oubre’s office made a final note in Spada’s file: “Patient expired.”

In some areas in the country concerned individuals are fighting back against the PBMs. One city government in Georgia negotiated new PBM contracts and was able to drive the prices down. It is hoped that corporations will stat to do the same thing. Because the PBMs have been scamming the Medicaid program. State auditors in Ohio in 2018, discovered the spreads of the PBM being paid with taxpayer money cost the state $224 million. Pharmacists have been bound by gag rules from divulging this information. The Ohio Pharmacy association when released from these gag rules spoke out about the unfair practices of these PBMs. The Ohio auditor report stunned the industry. Other states have begun to protect themselves from these predatory PBMs, like Texas.

What businesses can do is get a second opinion on their pharmacy benefits contract from independent consultants. Consultants who are not being paid a kickback from a PBM or health insurance company. Ask them if they subscribe to the Health Rosetta code of ethics. Insist on a PBM contract where the businesses are paying a $2.75 to $4.00 administrative fee per prescription above the price paid by the PBM. And they need to demand full transparency in rebates and discounts. Employers can disrupt the PBM industry by refusing to sign up for PBMs that gag pharmacists or have a mail order requirements. Employers should refuse to be a part of any PBM that sends auto-refill requests to doctors’ offices without a request from the patient. Greater awareness about the unscrupulous activities of PBMs can empower employers to reward ethical PBMs.

How can individual patients protect themselves from unscrupulous PBMs? Consumer Reports recommends three steps to shop around: (1) Use Online discounts, like GoodRx, Blink Health and EWeRx.org. These sites show what you can expect to pay for various drugs at different locations. They also have discount coupons or vouchers that they can use. (2) Don’t always shop at the same old places. HealthWarehouse.com is an online pharmacy and has some of the lowest prices. Costco and Sam’s Club also consistently have good prices. Independent pharmacies and grocery store pharmacies also have some of the best prices. (3) Push the pharmacy to honor online discount coupons. The Consumer Report Shoppers have found out that they will almost always honor them, provided that the shopper was persistent. Pharmacies will also almost always run the prescription through a patient’s insurance. In-store discounts may also exist but won’t be applied unless the patient asks for them directly. It is also recommended that you request that your state governments audit the PBMs of government health plans regularly. I have included a table of the spreads of some of the more common meds in the Addendum section.

Conclusion

Managing drug costs over time is a complex task that touches issues that run the gamut from increasing drug prices, generic drug shortages, long-term research and development, and national drug pricing policy. Any approach to improving the value of health expenditures spent on medications must consider the structure of the pharmaceutical industry, the history of health insurance in the US and the international market for drug development and manufacturing. Focusing on methods that have been effective internationally and within US markets may help control drug prices in the US and ensure a robust pharmaceutical market for the future. There is an obvious collusion between the insurance companies and the PBMs, as a matter of fact many of the insurance companies are actually affiliated with the PBMs. It has been proposed that insurance companies intentionally make their insurance policies indecipherable so as to make it more difficult for the purchaser to discover unethical practices. When did medicine become a battle between them and us?

Resources

“The Price We Pay; What Broke American Health Care – And How To Fix It”, By Marty Makary, MD; usaid.com, “STRENGTHENING PHARMACEUTICAL SYSTEMS;” hsph.harvard.edu, “Snapshot of the American Pharmaceutical Industry,” By Lisa Ellis; marketrealist.com, “An Easier Way to Understand the Pharma Industry,” BY SYBIL PROWSE; hda.org, “Distributors: The Vital Link Between Manufacturers, Healthcare Providers — and Ultimately Patients;” axenehp.com, “US Pharmaceutical Pricing: An Overview;” http://phrma-docs.phrma.org/files/dmfile/Follow-the-Dollar-Report.pdf; truveris.com, “What is a Pharmacy Benefit Manager (PBM) and how Does a PBM Impact the Pharmacy Benefits Ecosystem?;” ajmc.com, “In Drug Pricing, PBMs Called the “Arsonist and the Firefighter in One”, By Rose McNulty; theatlanic.com, “Invisible Middlemen Are Slowing Down American Health Care,” By Olga Khazan;

Addendum

Follow the Dollar
Understanding How the Pharmaceutical
Distribution and Payment System
Shapes the Prices of Brand Medicines

covid-19 and Healthcare Postings
https://common-sense-in-america.com/2020/10/14/why-is-the-coronavirus-so-confusing/
https://common-sense-in-america.com/2020/06/08/mask-or-no-mask-for-covid-19/
https://common-sense-in-america.com/2020/10/14/why-is-the-coronavirus-so-confusing/
https://common-sense-in-america.com/2020/10/09/masks-how-they-work/
https://common-sense-in-america.com/2020/10/01/medicaid-for-all/
https://common-sense-in-america.com/2020/10/08/the-covid-19-vaccine-safe-or-unsafe/
https://common-sense-in-america.com/2020/10/01/is-dr-fauci-a-devil-or-an-angel/
https://common-sense-in-america.com/2020/09/16/covid-19-manufactured-or-altered-that-is-the-question/
https://common-sense-in-america.com/2020/09/04/the-flu-bug-does-it-go-on-vacation-in-the-summer/
https://common-sense-in-america.com/2020/09/10/president-trump-acted-appropriately-and-in-a-timely-manner-with-regards-to-covid-19-part-1-of-2/
https://common-sense-in-america.com/2020/09/10/president-trump-acted-appropriately-and-in-a-timely-manner-with-regards-to-covid-19-part-2-of-2/
https://common-sense-in-america.com/2021/01/10/no-hazard-pay-for-covid-19-front-line-medical-professionals-while-hospitals-get-rescue-money/
https://common-sense-in-america.com/2020/07/18/covid-19-just-the-facts-please/
https://common-sense-in-america.com/2020/07/13/releasing-prisoners-early-for-covid-considerations-sets-a-bad-precedent/
https://common-sense-in-america.com/2020/06/16/hydroxychloroquine-is-it-the-medication-of-the-devil/
https://common-sense-in-america.com/2020/06/10/how-covid-19-is-spread-who-needs-who/
https://common-sense-in-america.com/2020/11/01/what-is-the-coronavirus-lockdown-doing-to-the-u-s/
https://common-sense-in-america.com/2020/11/05/did-the-appointment-of-dr-atlas-to-the-coronavirus-task-force-spell-the-end-of-the-task-force/
https://common-sense-in-america.com/2020/07/21/medical-care-in-our-hospitals-is-color-blind/
https://common-sense-in-america.com/2021/01/08/are-late-term-abortions-used-for-organ-harvesting/
https://common-sense-in-america.com/2021/03/21/herd-immunity-exposed/
https://common-sense-in-america.com/2021/03/26/pandemics-in-history/
https://common-sense-in-america.com/2021/05/10/the-corona-virus-exposed/
https://common-sense-in-america.com/2021/05/10/the-coronavirus-exposed-part-2-addendum/
https://common-sense-in-america.com/2021/06/25/why-did-india-have-a-massive-spike-in-covid-19-cases/
https://common-sense-in-america.com/2021/07/27/why-are-people-afraid-of-vaccines/
https://common-sense-in-america.com/2021/08/10/are-we-our-own-worst-enemy/
https://common-sense-in-america.com/2021/08/13/how-our-pharmaceutical-system-works/