Opinion: Middlemen cause rising drug prices

Sandip Shah

Democrats and Republicans alike are lining up to criticize pharmaceutical companies for gouging customers and stranding sick patients. 

President Donald Trump this summer tweeted that drug companies "should be ashamed that they have raised drug prices for no reason." Senator Dick Durbin, an Illinois Democrat who disagrees with the President on virtually everything else, is leading a charge to clamp down on drug prices, which he claims are the “#1 driver for increases in premiums” for health insurance.   

These concerns are justified, but the blame is misplaced. Many patients do indeed face high prices at the pharmacy, but that’s not because of drug company predation. The problem: the middlemen sitting between manufacturers and patients.

Pharmaceutical companies regularly negotiate substantial discounts with wholesalers, insurers, pharmacy benefit managers, and other supply chain players. These discounts shave down the price of the average brand-name drug by about a third. 

This May 31, 2018 photo shows capsules of dronabinol in Chicago. The pharmaceutical, which is already being used to treat the side effects of chemotherapy, showed potential as a treatment for sleep apnea in a small study published earlier this year. The medication contains THC, the active ingredient in marijuana.

Discounts have kept drug prices in check. Last year, the average cost of brand-name pharmaceuticals increased just 2 percent -- a percent increase well below that of doctor’s visits, hospital stays, and other vital parts of the healthcare sector.  

Generic drugs have also curbed costs. Generics are much cheaper than the brand-name drugs they're copied from. Over the last decade, generic drugs have reduced patient health care costs by an estimated $1.67 trillion. And they’re expected to save Americans another $100 billion by 2022. 

By preventing disease, patients don’t develop conditions requiring more invasive, expensive treatments down the road. Every dollar spent on drugs could save up to $10 in avoided ER visits and hospitalizations for patients with congestive heart failure, high blood pressure, diabetes, and more.  

But then, the mystery: Given the heavy discounts on brand name products and the prevalence of low-cost generics, why do so many patients still face high prices when they go to fill their prescriptions?

Because health insurers and other middlemen have steadily ratcheted up their cost-sharing requirements. The product price holds steady, but patients are forced to bare an increasingly large slice of the cost. Indeed, since 2006, insurance deductibles have increased by 350 percent and co-insurance has jumped 89 percent.  

Instead of passing along the discounts to patients, insurers pocket them. More than half of the out-of-pocket requirements for brand name drugs in commercial health insurance are based on the full list price of the drug. 

In other words, insurers act as if those discounts don’t exist.

This abuse fuels an odd phenomenon: for some patients, buying a drug with insurance actually costs more than paying for it directly out-of-pocket. Roughly 40 percent of brand name drugs are more expensive if patients use insurance, according to one New York Times – ProPublica investigation.  

The New York Times recently profiled a UnitedHealthcare customer who went to fill his prescription for a generic cholesterol drug. Once there, he was told he owed $84. That patient later searched online and found the exact same drug for sale for just $45.

This mismatch happens all the time. 

Voters and their elected officials have ample reason to be angry about sky-high drug prices, but pointing fingers at drug manufacturers isn't helpful. Drug manufacturers have kept prices in check with substantial discounts and low-cost generics. 

Sandip Shah is the founder and president of Market Access Solutions, a global market access consultancy.