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Follow the money, part 3
The real mechanics of pharmaceutical discounting are disappointing.
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After finishing part 2 of “Follow the money” and thinking I was done, I had a chance to chat with a few of my friends in the pharmaceutical industry. We talked about how discounts between drug companies and pharmacy benefit managers (PBM) actually work. It was also helpful to have done a little bit of reading about the Express Scripts-Anthem legal battle over how the spoils of the process are divided. Now I have a much better understanding about why it is that our patients pay so much money for their medications.
As it turns out, my high price/deep discount explanation only scratches the surface. Yes, drug companies post an exorbitant list price in order to offer an equally ludicrous discount to the PBM. That part is correct. However, it does not really work like buying a deeply discounted Polo shirt at Marshalls. The PBM (or in the simpler version of the transaction, the insurance company) actually turns around and pays the drug company the full retail price for the drug. When we see topline revenue figures for a drug, they represent sales based on list prices.
What happens next blew me away: The drug company turns around and actually sends a real money rebate to the PBM. You heard that correctly. The actual money travels back and forth between the companies. In order to see this on a financial report, you have to look deeply into the expense side of the ledger. If we are looking at a $400 medicine with a 50% promotional discount, the drug company receives a payment of $400 and then turns right around and sends $200 back to the PBM.
Now it starts to become easier to see why our patients are paying such high prices for their medicine. Remember, what they pay is driven by the negotiated “price” of the medicine, and the price is essentially not negotiated at all; the PBM pays the list price. Many of our medicines have a 20% copay, even if they are tier 1 offerings. Hence, even with the “best coverage,” a medicine can be very expensive. Our $400 drug, for example, might carry an $80 copay.
We are not done yet. It gets worse. If you are like me, you have operated under the illusion that an insurance company or PBM makes its profit by taking in more money in premiums (and the investment money made on them) than it pays out for medical treatment such as medicine (and administrative expenses). You probably also think that more options for medicines in a particular space mean more competition, which would naturally drop the cost of treatment for your patient. That is why your 65-inch 4K TV is less expensive today than it was 2 years ago. In a perverse twist, up to a point, the more competition you get in a single treatment space, the more likely it is that you will not see reduced costs at the patient level.
Again, let us use dry eye as an example. As before, no names will be used in order to protect the innocent. Mostly me. Also, note that my education on this process occurred outside of eye care. What I am about to describe is now universal, and it is a very simplistic explanation of the underlying issue that prompted the lawsuit between Anthem and Express Scripts.
A truly new, breakthrough medication gives a drug company maximum leverage in negotiations with a PBM. A price is set, and for a time that is what gets paid. The second drug into the arena is typically priced within pennies of the first. When that second drug arrives, the game begins. Initial discounts can be huge — 70%, 80%, even 90% discounts are offered in an attempt to get onto the formulary in a priority position. As noted above, these discounts are not offered to your patient but to the PBM. A 90% discount on that $400 drug means that the PBM has effectively paid $40. Your patient, on the other hand, has paid $80 (or in many cases much more), most of which ends up back in the hands of the PBM.
Which has now actually made a profit on your prescription.
The actual grown-up accounting of how this all happens is naturally much more complex than what I have described, but in the end it all boils down to a couple of very simple things. First, the notion that an insurance company or PBM is negotiating discounts from anyone on behalf of the insured patient is a fantasy. A simple reading of the dispute between Anthem and Express Scripts over profit on covering medications makes this clear. Second, an insurance company or PBM will do whatever it takes to get you to prescribe the medication that brings it the most revenue, not necessarily the least cost. They are more than happy to have you pay staff members to suffer the process on behalf of your patients.
A truly competitive market in medications seems to require a minimum of four options considered by prescribers to be roughly equivalent before a simpler type of math (low price) kicks in. In eye care, think glaucoma and latanoprost, where we have four or five generic producers and the original, Xalatan (Pfizer), which we can think of as a “branded generic.” With the anticipation of two generic cyclosporine A formulations, a new branded cyclosporine A with a unique delivery system and what looks like a “branded generic,” we could have four cyclosporine A options in the mix as soon as the third quarter of 2018. (Note: There will be a lag between launch and the appearance of these on insurance companies’ formularies.)
What this means for our other “stand-alone” medications (Xiidra from Shire; whatever Kala calls its loteprednol for dry eye) remains to be seen. Will the drug companies be able to negotiate a place on the formulary? At what cost to the companies’ bottom line? Will they be sucked down in the undertow of the cyclosporine tsunami? To know what to expect in 2019 or 2020, I think you can look to latanoprost as an example, at least for cyclosporine A. We have only seen the beginning of the use of “step therapy” as a means to control your prescribing options. You will want to prepare your staff for more of that particular pain.
Even for a cynic like me, this is all rather tawdry and disappointing. After writing this, I need to take a shower.
- 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.