The Inflation Reduction Act (IRA) and the American Rescue Plan Act (ARPA) includes provisions to force down the price of medications paid for by Medicaid, Medicare and consumers. The mechanisms to force down drug prices are convoluted as one would expect, as are the strategies by drug companies, drug plan managers and health insurers to prevent losing profits. According to the Wall Street Journal:
Starting Jan. 1, drugmakers that have raised prices significantly face stiff new penalties that require them to essentially pay Medicaid for patients to use their drugs.
Drugmakers including Eli Lilly, Novo Nordisk and Sanofi are cutting prices of some insulin products by 70% or more on New Year’s Day. GlaxoSmithKline plans to cut prices for three products including its asthma and emphysema medication Advair Diskus, according to pricing data reviewed by The Wall Street Journal and confirmed by a Glaxo spokeswoman.
Glaxo also had another strategy in mind. It decided to withdraw one of its popular nasal inhalers from the market and substitute a generic one at a 35% discount. That’s a better deal for consumers and the generic version would not be subject to Medicaid penalties. A price reduction of about one-third would be a nice discount for a name-brand drug. However, pharmacy benefit managers (PBMs), the firms that manage drug benefits, cried foul. PBMs claimed a generic drug selling at two-thirds of the name brand price was outrageous.
Between drug makers and health plans and consumers there are middlemen known as PBMs. They design and manage drug benefits for health plans. PBMs have consolidated in recent years to the point where the top three control 89% of the drug market. The top three are also owned by health insurers. Where once drug claims were an expense for health insurers, they’ve become a profit center. Where once health insurers wanted to keep drug prices down, now they often profit off high priced drugs. The real reason PBMs refused to cover the generic is because generic drugs don’t generally pay rebates and PBMs are all about rebates. PBMs like high-priced drugs with fat rebates more than lower-priced, generic drugs with no rebate. PBMs have balked at covering cheaper drugs in the past but it was usually after drug makers threatened to withhold rebates if their portfolio of high-priced drugs were not given priority.
More from WSJ:
The fallout from Flovent HFA being pulled off the market is another indication of how hard it can be to lower drug prices and the unintended consequences of government policies designed to promote lower costs.
The Wall Street Journal writer is not entirely correct. The fallout is also a result of a health care system where rebates are allowed to be a significant portion of revenue for some stakeholders. The market for hospital supplies functions in a similar way. In both examples large, legacy suppliers use rebates to keep out smaller, cheaper competitors.
This is how WSJ explains it:
Drugmakers have nearly unbridled pricing power for products with patent protection. But to get insurers to cover their drugs, companies often have to concede discounts to the PBMs that manage drug benefits via rebates, creating a gulf between list prices and net revenue.
PBMs said they return virtually all the rebates to their clients, such as employers, unions and insurers. But politicians and health-policy researchers said the rebates boost profits for insurers and pharmacy-benefit managers and undermine their incentive to keep down drug prices.
Under increasing scrutiny from legislators, some drugmakers have offered cheaper nonbranded versions of drugs whose list prices have risen significantly to account for high rebates. But many PBMs continue to cover the higher-priced branded versions of the same drugs because they prefer higher rebates and fees, drugmakers contend. PBMs said they aim to achieve the lowest net price for their clients, often through rebates.
PBM’s main priority is not cheap drugs for consumers. Their priority is profits for their owners. The system is rife with perverse incentives to keep consumers’ drug costs high because that generates more profits for all stakeholders. Flovent HFA is a great example of what’s wrong with health care. A high-priced drug with a fat rebate is preferable to a cheap drug with no rebate that benefits consumers.