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Follow the money, part 1
Understanding how the 'cost of medication' happens.
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Jasmine is the SkyVision Centers medication coverage specialist. The bane of her professional existence is the cost of medications, or more specifically what it costs our patients to acquire the medicines that SkyVision doctors prescribe. All of our technicians and surgical counselors take part in this tawdry odyssey; Jasmine just happens to be really good at it. If you practice in the United States, it is very likely that you, too, have a Jasmine in your midst.
Trying to figure out why it is that our patients suffer such frequent indignities at the hands of the intermediaries that have taken money in return for “covering” a patient’s health care is to descend into a Dante-like labyrinth of despair. Despite the protestations of social media-savvy pharma and device company CEOs, the production and sale of medicines are little more than a modern-day Silk Road where profit is taken at outlandish rates along the way. With few exceptions, the process is devoid of any sense of shame.
To have any chance whatsoever to offer support to meaningful change in how our patients “buy” the medicines and devices we prescribe, it would be useful to understand what the landscape looks like today. For this purpose, I offer a primer on the economics of selling a drug in the United States today. Because I am an ophthalmologist, I will use examples from the world of eye care, but the general concepts apply across all of medicine, at least in the U.S.
The medication process
Pharmaceutical companies either develop or acquire a medication. A new medication, one that is somehow different from any other medication available, is granted market exclusivity for a period of time. This exclusivity is usually tied to the duration of a patent on the underlying active ingredient, although the FDA can extend this period beyond the end date of the patent. The company that owns the medicine very often attempts to extend the branded lifespan of it by layering additional patents on top of the original one or by creating newer versions (eg, extended-release formulations) that have a newer patent to prolong that period of exclusivity.
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Companies have traditionally rationalized high initial prices of new medications by noting either their own internal development costs or the cost of purchasing a drug asset from another company. Once upon a time, the highest price a medicine could command was its launch price. One clear change in medicine pricing in the last 10 years is annual price increases as standard operating procedure. Indeed, we see companies and their executives lavished with praise not for pledging to hold the line on prices or, heaven forbid, lower prices, but rather for pledging to cap price increases. This is particularly curious when it is clear that any and all development costs, as well as the costs to develop many other medications, have long since been recaptured.
Pharmaceutical companies take profit out on the front end of the food chain.
Right about now you almost certainly have a nagging little question bubbling up in the back of your brain: What about generics? Well, I am glad you asked. Generic (non-branded) versions of medications both great (insulin) and small (topical antihistamines) have been a boon to patients and the doctors who care for them. Historically, the appearance of a generic version of a brand medication meant a significant decrease in its cost, especially if multiple manufacturers entered the field. Timolol and latanoprost are shining examples of this in eye care. Generic manufacturers made a profit by duplicating a medicine whose development costs were borne by someone else and were therefore able to do so at a lower price point. This is so powerful that brand manufacturers try to delay a new generic by paying the generic maker to delay its entry into the market.
It does not really feel like that is working so well anymore, does it? One only needs to look at the topical steroid prednisolone to understand how the wheels have come off. Remember Pred Forte (Allergan)? It was a brilliant new medicine that forever changed the relatively rare (iritis) and commonplace (cataract surgery) by addressing a previously untreatable problem: intraocular inflammation. Have you prescribed generic prednisolone lately? The price is astronomical. A combination of consolidation of producers and the FDA shutdown of at least one remaining competitor has unleashed the immutable power of “supply and demand” on a vulnerable population. Generic prednisolone often costs more than Pred Forte.
As bad as this may be, the same exact thing has occurred with insulin. Can you imagine? Insulin! Patients with type 1 diabetes are being priced out of their insulin.
Changes in buying medication
Buying medication in days of yore was a pretty simple proposition. Only two intervening steps were present: a wholesale outfit sold the drug to a pharmacy, and then the pharmacy sold it to your patient. This was the case for both branded and generic drugs. Just like buying a bottle of wine, there were just three profit-producing steps in the journey. Things started to get sticky with the introduction of insurance. Insurance companies “paid” for at least a portion of the price of medicine at the counter, and these insurance companies extracted profit by negotiating a discount from both the pharmaceutical company as well as the pharmacy. The illusion of low point-of-purchase cost hid price increases from the patient.
As an aside, there is no more cynical phrase in all of economics than “health insurance.” They call medical expenses incurred while improving health “medical losses.”
For those of you keeping score at home, we are now up to four points of profit taking in the pharma food chain. Companies that make the medicine get a cut when they sell to a wholesaler, which then ups the price so that it can profit when it sells to the retailer. An insurance company contracts to pay for some part of the medicine’s cost, and it takes its profit from any discount negotiated with anyone upstream from the final purchaser, your patient, who triggers the final sale and profit.
It all sounds so straightforward. Why, then, has there been such a massive increase in medication prices and costs, along with a concomitant decrease in access and choice? The blame rests with a newer player, the pharmacy benefit manager, and the veritable weaponization of discounting and exclusive contracts. Tune in next month when I will use the treatment of dry eye disease to illustrate how this affects the cost of your patients’ care.
- For more information:
- Darrell E. White, MD, can be reached at SkyVision Centers, 2237 Crocker Road, Suite 100, Westlake, OH 44145; email: dwhite@healio.com.
Disclosure: White reports he is a consultant to Allergan, Shire, Sun, Kala, Ocular Science, Rendia, TearLab, Eyevance and Omeros; is a speaker for Shire, Allergan, Omeros and Sun; and has an ownership interest in Ocular Science and Eyevance.