No Simple Answers for Lowering Drug Costs

Although there is a persistent need for lower prescription drug costs, this simple concept is complicated by multiple factors. In our free market and health care system, we seem to be locked into an endless cycle of discounts and rebates. The federal government has its own Medicaid rebate system and several discounted purchasing programs for agencies such as the US Department of Veterans Affairs. The same is true in the public sector, in which large businesses receive volume purchase discounts.

One of the first questions to ask is, what are we really paying for these products? In general, our current system uses several entities, such as health plans and insurance programs, to pay for health care, many of which subcontract to pharmacy benefit managers (PBMs) to administer drug benefits. Through this process, a drug passes through numerous parties before the insured sees its cost. In considering this issue, we should likely start by asking what is the real benchmark for the drug pricing discussion. Typically, pricing has been based on a single unit; however, there have been multiple-unit purchase prices that are significantly lower than a single unit.

We have frequently seen prices drop significantly when a provider purchases multiple units of a product. Although this has been the norm in drug purchasing, the benchmark for the cost has always been based on the single unit. Corporate sales for drugs have traditionally been calculated on the purchase price paid, so what is the true price and what benchmark are we talking about in lowering the price? Are we discussing the pricing benchmark utilized by third party payers, such as PBMs, or the purchase price at the point of distribution to the patient? Although PBMs negotiate rebates and Medicaid receives a mandatory amount, these are postpayment discounts that technically affect the prices of drugs as they impact the net cost to payers.

We must consider how our current system affects the cost and whether products such as generics have actually lowered or increased drug prices. We also must address the following questions:
  • What actual analysis on the effects of generics has been performed and was there bias in how the review was done?
  • We all know that PBMs tout generic drug savings and their ability to negotiate rebates, so where and how do we measure the cost?
  • Do rebates result in increased costs for uninsured patients who face higher reported drug prices that are used to offset rebate liabilities?
  • How does our free-market system compare with other counties, and is there a need for a fundamental change in our system?
  • How would a new system be implemented, and what impact could it have on research and development?
Another and equally important point of discussion is the compensation rate for pharmacy services and what would have to change in that function. Our payment for services has multiple components that factor in the cost of the product, the cost to dispense it to the patient, and the requirements associated with that process.

The essential element lacking here is an allowance for profit on the pharmacy level. Today, Medicaid fee-for-service is the only system that attempts to get to a true cost model. Businesses must make a profit to stay in business and grow, so if they don’t make a profit, they won’t contribute to funding government by paying taxes. We have to think about all of the dynamics as we evaluate the entire drug cost and payment system. This discussion appears to focus on cost, one of the essential elements, but fails to address the rest of the issues that affect what consumers actually pay. I cannot think of a single business that buys health coverage but does not believe it is entitled to make a profit, even if you think about the government, which must have an income dependent on some sort of tax.

All of this leads me to believe that the question of drug costs and payments needs a complete review. The entities with the greatest knowledge unfortunately have the most to gain by maintaining the current system. Pharmaceutical manufacturers must make a profit and are under great pressure to meet both Wall Street analyst projections and stockholder expectations. They are tasked with offering discounts in the form of rebates to multiple stakeholders in the current US system while facing regulated pricing methods in other countries. Therefore, controlling cost while supporting innovation and allowing for some type of profit that can be taxed in some manner is extremely challenging.

I think the short answer is to first determine whether the cost of a drug or the systems we use create the elevated cost. Second, we must consider whether the system of rebates and negotiated discounts results in elevated drug cost reporting. Should we look to other countries and determine what we can learn from their payment systems and practices? If the government were to annually determine what the pharmacy dispensing fee would be and set a drug’s price, what would that do the PBM industry and all of the individuals who work in that industry?

In essence, we do not know what we do not know and most of the rhetoric and finger pointing is done by individuals and entities highly vested in the current system. Do we have the desire to change how we do business in health care or are we just going to be happy to complain and blame each other?

The last point to consider is that the current system of discounts is not unique to pharmaceuticals. Just look at your explanation of benefits for any physician or hospital visit. It seems that nobody ever pays what is billed, only what is allowed. Do we have the wherewithal for a fundamental change to our health care system in which we know what the cost is and we have predetermined the amount of profits that are allowed from it?

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