Drug therapy is the most efficient way to treat many illnesses. Americans fill a prescription about 1 billion times a year. Prescription drugs account for only about 11% of health expenditures, compared to about 20% spent on doctors (often to get a prescription) and 32% on hospital care. The best deal in health care is over-the-counter drugs, sold directly to the public. About 1,000 of OTC drugs were once sold only by prescription. Prices for OTC drugs fall about 97% within several years after a drug is switch to OTC.
Yet, drugs can be expensive. Between 1% and 2% of drugs are considered specialty drugs, which account for half of all drug spending. By contrast, 91% of all drugs sold are generic and account for only 18% of drug spending. That leaves nearly one-third of drug spending on costly name brand drugs. Prescription drug spending is about $806 billion a year, while the cost net of manufacturers’ prices is about $487 billion. That suggests $319 billion of drug expenditures are going somewhere else besides drugmaker’s pockets.
In recent years (pharmacy benefit managers) PBMs have consolidated, increasing their market power. The three biggest PBMs control nearly 80% of the drug market. Two are owned by large health insurers. Health insurers once considered drug benefits a cost, but nowadays drug claims drive higher profits. The copay on a generic drug prescription, for example, may be more than the actual cost to procure the drugs. In that regard, PBMs and their drug benefits sponsor are essentially selling drugs to plan members at a profit.
Consider the popular weight-loss drugs, for example. In 2023 Ozempic (Semaglutide) had a list price of $936, while Mounjaro was $1,023. Yet the net price received by drugmakers after rebates and manufacturer’s coupons was $290 for Ozempic and $215 for Mounjaro. Ozempic and Mounjaro were in high demand by consumers wanting to lose weight, many of which had to pay out of pocket. However, consumers were not paying $290 and $215, respectively. Rather, they were likely paying much closer to the list price.
Consumers are especially price sensitive when they must pay out of pocket. PBMs have sufficient market power to extract huge discounts but also have enough market power to not pass all those discounts on to consumers or plan sponsors. As a result, drug companies are increasingly looking for ways to bypass PBMs and sell directly to consumers. While a huge PBM may demand a 50%, 60% or 70% discount, a consumer may be happy with a 40% or 50% discount. Or, if by giving consumers a 70% discount, sales may increase far more than by giving a BPM a 70% discount as more of the discount goes to end users of the drugs. The following is from WSJ:
Drugmakers are moving to sell their medicines directly to patients, abandoning the middlemen they have long relied on.
It is saving some patients hundreds of dollars off the cost of prescriptions because companies have been lowering the prices for drugs sold directly.
Meantime, drugmakers who have been rolling out the services in recent months see a big opportunity to boost sales, though they risk losing revenue if they don’t offset lower prices by selling to more patients.
This trend is especially pronounced in the market for weight-loss drugs. One likely reason is that compounding pharmacies are cutting into their sales by making compounded copies of patented products. One man interviewed by the WSJ said a drug he was taking cost $1050 at Costco. When he was offered the chance to buy directly from the manufacturer for $550, he switched. Drugmaker Eli Lilly sells about 30% of its Zepbound weight-loss drug directly to the public through its website.
Drugmakers are also considering collaborating with self-insured employers plans to provide access to some drugs. It was once the purpose of PBMs help clieints save on drugs. Yet, both drug companies and some employers see a benefit to cutting out the intermediaries when the middlemen became too powerful.
Much of the desire to bypass PBMs is due to the market consolidation of PBMs in recent years. Drugmakers see a significant amount of their sales revenue lining the pockets of PBMs rather than enhancing their own bottom line. Drugmakers have long complained one reason for the inflated cost of drugs is the fat rebates PBMs force them to pay. Anything that drugmakers, PBMs or pharmacies can do to benefit consumers is always good. A little competition among makers and sellers of drugs is a good thing.
Read more at WSJ: Drugmakers Are Ditching Middlemen to Sell Directly to Patients – WSJ