TO THE READER: In the bold, black font below, you see parts of a paper provided by Rep. Frank Pallone, Jr. (D-NJ, 3rd District), in anticipation of hearings held on May 9, 2019, by the Committee on Energy & Commerce of the U. S. House of Representatives. Rep. Pallone chairs the committee. The subject of the hearing? “Lowering Prescription Drug Prices: Deconstructing the Drug Supply Chain.”
In the bold, green font (with blue embedded links to sources), you see our comments on elements of the paper, and most particularly on points of fact that were omitted. Those omissions are telling. They reveal not only how politicians are beholden to very powerful lobbying interests inside the drug supply chain, but also the politicians’ lack of seriousness in fighting to reduce America’s disgraceful annual wastage of dollars spent on healthcare. CLICK HERE FOR PDF FILE OF DOCUMENT WITH COMMENTS.
There are fighters, and then there are the faux fighters. The latter will choose the photo op and optics over substance every time. It’s what they do. It’s who they are.
Here is the lineup for the panels in the hearings of May 9 as found in the paper provided by Rep. Pallone.
Justin McCarthy, Senior Vice President, Patient & Health Impact Group (Pfizer)
Kave Niksefat, Vice President, Value and Access (Amgen)
Jeffrey Hessekiel, Executive Vice President & General Counsel (Exelixis)
Amy Bricker, Senior Vice President, Supply Chain (Express Scripts)
Brent Eberle, Chief Pharmacy Officer (Navitus Health Solutions)
Estay Greene, Vice President of Pharmacy Services (Blue Cross Blue Shield of North Carolina)
Lynn Eshenbacher, Chief Pharmacy Officer (Ascension)
Jack Resneck, M.D., Chair, Board of Trustees (American Medical Association)
Richard Ashworth, President of Pharmacy (Walgreens)
Leigh Purvis, Director of Health Services Research (AARP)
I. THE DRUG SUPPLY CHAIN
A. Pharmaceutical Manufacturers
Pharmaceutical manufacturers research, develop, and produce drugs. Once the Food and Drug Administration (FDA) approves a drug for purposes of marketing, the pharmaceutical manufacturer establishes a list price (also known as the wholesale acquisition cost). The list price could be determined by a number of factors such as research and development costs, demand, market competition, and manufacturing and marketing costs. Notwithstanding these factors, manufacturers may set any price they choose.
Manufacturers earn revenue when pharmacies, hospitals, and other health care entities purchase their drugs. For 2017, drug manufacturers earned about $324 billion in net revenues.
In his first sentence above, Rep. Pallone has identified who really does the serious work in the drug supply chain. All of the rest are middlemen, third-party payers, prescribers, dispensers, or consumers, none of whom are involved in research, development, or production.
The figure for total net revenues in the industry averages out to $1.7 billion for the over 190 pharmaceutical companies in the United States, which are responsible for 4.8 million American jobs, jobs that have been among the best in the country for years, attracting high achievers from the schools of the relevant sciences.
The U.S. is the preeminent manufacturer in the worldwide pharmaceutical market by a wide margin over its nearest competitor. We are also the largest market for pharmaceutical products. In short, the American pharmaceutical industry is indispensable. It’s where the most-serious work in the drug supply chain is done.
What is glaringly omitted from the “factors” that Rep. Pallone identifies as influencing a drug’s list price? The kickbacks (euphemized as “rebates”) that middlemen in the supply chain—the Pharmacy Benefit Managers (PBMs) and Group Purchasing Organizations (GPOs)—are allowed to accept without fear of prosecution.
The type of drug affects the manufacturer’s costs, as well as the revenue a company earns. Generally, small molecule drugs and their bioequivalent competitors, generic drugs, are cheaper to develop and have a lower list price than biologics. Biologics are made from living organisms and are used to treat serious diseases such as cancer, rheumatoid arthritis, and multiple sclerosis. Biologics often launch at very high prices, with annual list prices reaching tens of thousands of dollars. In addition, unlike the small molecule drug market, many biologics still do not face competition from biosimilar or interchangeable biological products. In 2017, biologics represented two percent of all U.S. prescriptions, but 37 percent of net drug spending. Generic drugs represent nearly 90 percent of all U.S. prescriptions, but only 23 percent of net drug spending.
In 2017, total retail drug spending was $333.4 billion, 6 which was a 0.4 percent year over-year increase from 2016. The key drivers of the slower growth in spending were a continued shift to lower-cost generic drugs and slower sales volume growth in some high-cost drugs.
Biologics received extended patent protection as part of a deal to grease Congress’s passage of the Affordable Care Act (detailed on pages 99-102 and 132-133 in America’s Bitter Pill, by Stephen Brill, an outcome for which Amgen alone spent $38 million on lobbying. NOTE: Amgen is represented in the panel testifying on May 9 before the House’s Committee on Energy & Commerce). And, yes, the makers of biologics enjoy large profits; the politicians who extended the period of patent protection to gain support for the ACA saw to that. There’s more than a little irony on display when we see politicians who supported the ACA vigorously (did they have to pass it to find out what was in it?) now pointing at BIG PHARMA as a notable culprit in the search for excessive cost in the drug supply chain. The top biologic, Humira, pulled in over $18 billion in revenues in 2017.
B. Pharmacy Benefits Managers (PBMs)
Pharmacy Benefit Managers (PBMs) are third-party firms hired by insurers, federal health programs, and plan sponsors to manage and administer the prescription drug benefits of health insurance coverage. This includes negotiating the prices of drugs to create formularies, as well as deciding which pharmacies are included in a plan’s network. Formularies developed by PBMs play a role in determining the cost of a prescription drug. The formulary is used to negotiate rebates and discounts with manufacturers, but it is also used to manage prescription drug use and spending by plan members. For example, cost-sharing, drug coverage, prior authorization, and member cost are all determined through a formulary. PBMs also negotiate fees and services with pharmacies, fees that may be based on each filled prescription.
PBMs mostly earn revenue by charging fees to the plans, pharmacies, and drug manufacturers, as well as by keeping a portion of the rebate they negotiate with the drug manufacturers. Increasingly, the large PBMs also earn revenue through the ownership of other parts of the supply chain including insurers and specialty pharmacies. Three companies cover about 70 percent of all prescription claims in the United States: CVS Health, Express Scripts, and UnitedHealth Group. According to one study, the PBM industry had an estimated gross profit of $23 billion in 2016.
The top PBMs have annual revenues in excess of $100 billion. This is astonishing. As of 2003, by grant of the Health and Human Services secretary at the time, these middlemen were granted a “safe harbor” from prosecution for receiving money (again, kickbacks) from drug manufacturers. In turn, the middlemen then identify the drugs that go into the formularies of the insurance companies. This is the very definition of a pay-to-play arrangement.
The arithmetic is breathtaking—the middlemen have revenues nearly 100 times as large as the companies that actually do the research and make the drugs.
When it comes to deconstructing the drug supply chain and figuring out where high and unreasonable costs are being injected into the chain, wouldn’t it make sense to mention this obvious fact when passing out white hats and black hats?
Health plans assume the financial risk for the cost of drugs their customers receive as part of offering a prescription drug benefit. Insurers such as Medicare, Medicaid, private insurance companies, and self-insured large employers reimburse pharmacies, hospitals, and other healthcare entities for the amount paid to purchase the drug and related fees. The actual amount paid by the healthcare entities is confidential; therefore, insurers generally can only estimate the reimbursement amount.
Plans manage the prescription drug benefit by contracting with an external PBM, operating their own PBMs, or by purchasing drugs directly from manufacturers and dispensing the medication to consumers at their own pharmacies.
Plans earn revenue when the premiums they charge exceed the health care claims they pay. Plans use a range of strategies to hold down their drug costs, including through:
- Formulary tiers (varying cost-sharing to encourage preferred or low-cost generic drugs);
- Prior authorization (a physician must obtain approval from the insurer prior to prescribing a particular medication);
- Step-therapy (a physician must begin treatment using the most cost-effective drug therapy before moving to more costly therapies if necessary); and
- Cost-sharing and copayments (when a patient must pay a portion of health care costs not covered by the health insurance plan).
D. Hospitals and Physicians
Hospitals and physicians will often purchase large volumes of drugs from manufacturers or wholesalers through Group Purchasing Organizations (GPOs). GPOs help hospitals and physicians aggregate purchasing volume to negotiate discounts with manufacturers and distributors. If the physician or a hospital administers a drug to a patient, then the physician or hospital will use a buy-and-bill model, meaning that they will purchase the drug from a manufacturer first (sometimes with the help of a GPO), and then bill for it after it is administered.
Physicians and hospitals earn revenue if they are reimbursed at a higher rate than what it costs them to purchase and administer the drug.
The reader may have noticed that one type of middleman, the GPO, has been omitted from the drug supply chain. Did Chairman Pallone think that no one would spot that detail?
Professor Martin Makary, M.D. and Professor of Surgery at Johns Hopkins, has written in the Journal of the AMA, about the kickbacks that GPOs receive as the root cause of the over 150 FDA-documented drug and solution shortages that jeopardize the lives of Americas who are most in need of these medicines. Those shortages drive skyrocketing costs to patients, and increase costs to hospitals as both physicians and bedside nurses “MacGyver” their way around the shortages. We sure hope that the AMA board chair on the panel acknowledges the GPO role in juicing up the cost to the patient and gives Dr. Makary credit for speaking an uncomfortable truth. Dr. Resnick should also reveal what the AMA knows about the kickbacks and when they knew it.
Even pharmaceutical companies who make injectable drugs and solutions make it clear that their access to the market and attainment of market share hangs on their relationships with GPOs. This quote comes from the website of Amphastar Pharmaceuticals: “We currently produce approximately 15 injectable products while we continue to develop a portfolio of generic and branded products that target large markets with high technical barriers to entry. Amphastar’s long-standing relationship with the major group purchasing organizations and drug wholesalers in the U.S. enables it to establish significant market share upon the introduction of its new products.” Amphistar makes injectable Narcan (naloxone), which has recently been unavailable due to shortage.
To name just a very few, the following are among the drugs/solutions in short supply: epinephrine, saline solution, Pitocin, chemotherapy drugs, and insulin.
Philip Zweig has written about this very subject in the Wall Street Journal.
Multiple governmental panels have pointed to kickback to the GPOs as the root cause of these shortages and the related upward pressure on costs.
In a classic instance of the fox-in-the-henhouse paradox, Todd Ebert, the head of the GPOs’ lobbyist, the Healthcare Supply Chain Association, was a panelist on a FDA/Duke Margolis Center event to get to the bottom of the shortages. At the end of the hearings, Mr. Ebert declared that HHS can ask at any time to review the contracts between the GPOs and manufacturers of drugs that are or have been in shortage. During the symposium on shortages, attendees heard again and again that to get to the bottom of the shortages, transparency was key, and that the shortages were driven by economics.
Given that Congress in 1987 provided to the GPOs the “safe harbor” from prosecution for requiring and receiving “rebates” (again, kickbacks), reasonable people may get the impression that the Congress OWES the American people the effort of overseeing the contracts between the GPOs and pharmaceutical companies. They can make a modest gesture toward discharging that duty by calling upon HHS now to demand to see those contracts A few thousand government employees ought to be able to handle the job of reviewing the contracts.
Furthermore, those with financial acumen, but without conflicts of interest, should be present when those contracts are reviewed.
Anything less is staged faux fighting over the financial foolery embedded in the American healthcare system.
Pharmacies dispense prescription drugs to individual patients. There are retail, mail, long-term care, and specialty pharmacies.
Pharmacies negotiate with manufacturers or wholesale distributors and purchase drugs at a confidential price. They will also negotiate with PBMs to be included in a PBM’s network and for reimbursement from the PBM, as well as other types of government and private payers. In addition to reimbursement for the cost of the drug, pharmacies will also receive a dispensing fee, which varies based on the payer. Total prescription dispensing revenues reached $423.7 billion in 2018.
Patients depend on prescription Rx drugs to manage chronic conditions, prevent, treat, or cure diseases, and reduce side effects from diseases or conditions. When patients purchase a drug, the price they pay may depend in part on how much of the cost their health plan covers. Patients are increasingly exposed to the list price of their prescriptions, either through their deductible or through a coinsurance percentage.
If the patient is not enrolled in a health plan, then they typically pay the full list price of a drug. Patients may access patient assistance programs and discount cards from manufacturers to lower the price they pay for a particular drug depending on criteria that is set by either the program or the manufacturer.
A recent poll found that a quarter of people who take prescription drugs say it is difficult for them to afford their medications. People are more likely to have difficulty affording their medications if they have monthly drug costs of $100 or more, are in fair or poor health, have annual incomes of less than $40,000, or take at least four drugs monthly. Three in ten 50-64 year olds report problems affording their drugs.
Comment: The saddest part of what appears to be another faux fight in the battle to help Americans have affordable accessible healthcare, is that Chairman Pallone, D-NJ, puts the patients last and the chosen panel is chock full of financial conflicts of interest. Who is speaking for the patients? We hope committee members ask pointed questions revealing who is making the big money and denying access to healthcare. Americans deserve the real truth and not another staged moment in American politics.