Politicians typically blame drug companies for soaring pharmacy prices. But insurers, pharmacies, and other middlemen are the real driving force behind rising drug spending.
These groups are incentivized to push for high sticker prices, as they're often able to keep the rebates and discounts they negotiate. Until political leaders address this perverse incentive, America's sickest patients will continue struggling to afford their medicines.
Americans spent almost $440 billion on brand-name drugs in 2018, up from around $269 billion in 2013. That's a 64 percent increase.
But those extra billions didn't all, or even mostly, flow to research companies or their shareholders. The share of spending on branded medicines that ended up in drug companies' coffers dropped by 12.5 percentage points between 2013 and 2018.
So where is the money going? To other entities in the pharmaceutical supply chain.
Insurers take a big chunk. Another portion flows to pharmacy benefit managers, the companies hired by insurers to design and administer their drug benefits. Together, these and other third-party groups pocket about half of all brand-name spending. PBMs decide which drugs an insurance plan will -- and won't -- cover. This negotiating leverage enables them to extract hefty
discounts from drug makers. Pharmaceutical companies offered up $166 billion in rebates and discounts in 2018. Patients rarely receive these rebates, at least not directly. PBMs pocket a small share of the rebates, and pass the rest along to the insurers that hired them.
Insurers use these savings to offer cheaper monthly premiums to all beneficiaries.
Lower premiums are a good thing, of course. But spread across tens of millions of people, these massive discounts only translate into a few dollars per beneficiary per month.
That's little help to patients with chronic conditions, many of whom rely on multiple prescriptions to stay healthy. In addition to their monthly premiums, these patients owe a co-pay or co-insurance fee every time they pick up or refill a prescription. And insurers base these cost-sharing payments on a drug's inflated sticker price, not the heavily discounted price secured by PBMs.
In other words, the status quo burdens the sickest patients with high out-of-pocket costs while slightly reducing monthly premiums for healthier beneficiaries.
This arrangement is counterproductive. Close to half of Americans in fair or poor health struggle to afford their medicines. Roughly three in 10 don't take their medicines as prescribed for financial reasons. That needs to change. If insurers and PBMs passed along all rebates to patients through lower co-pays and co-insurance, individuals with diabetes could save $3.7 billion each year on insulin alone. That's close to $800 per patient.
Lawmakers from both parties want to reduce patients' pharmacy bills. It's time for Washington to turn its attention to the real source of high drug costs.
Kenneth E. Thorpe is a professor of health policy at Emory University and chairman of the Partnership to Fight Chronic Disease.