The American prescription crisis is no longer coming. It’s here. And we need to focus on how to address it.
According to a study published in the Journal of the American Medical Association in August, for each person in the U.S., $858 is spent annually on prescription drugs, compared with an average of $400 per person across 19 other industrialized nations. Prescription medications now compose an estimated 17% of overall healthcare expenses.
How did we get here and who is to blame: the manufacturer of the drugs or the American drug distribution channel? Both parties are pointing their fingers at one another, with the flames being fanned by the media and government. Who should the consumer believe?
Unless you are living in a cave, you have heard or read about the EpiPen pricing scandal. The manufacturers’ CEO, Heather Bresch, claims that more than half of the new $608 list price is absorbed by the distribution channel. She says the huge price increases are not her company’s fault and attempts to justify the increased price. Is she right, or is she trying to pin the blame elsewhere for her pricing decisions?
Drug manufacturers, in general, complain that their net incomes continue to remain flat or even decline. They show their financials as evidence and complain about the ratio of the list price of their drugs vs. the realized price, a figure known as “gross-to-net.” When rebates paid by the manufacturer outpace the price increases by the same manufacturer, it is easy to understand why the figure remains flat or even declines.
The pharmacy benefits manager (PBM) serves as the largest component of the manufacturers’ distribution channel, charging a margin/fee as well as collecting a rebate for their services. Somehow, they have redefined the laws of nature by figuring out how to consistently convince their clients that they are saving money, while showing Wall Street steady revenue growth.
The crisis is here, and as an employer you should be up at night wondering how this crisis of prescription costs affects you. The numbers don’t add up, and you are paying for the deficit.
Drug manufacturers can’t catch a break, but are they the real culprit?
Sure, we could wave our finger at Heather Bresch, CEO of Mylan, but didn’t we just do this to Martin Shkreli from Turing Pharmaceuticals and Michael Pearson from Valeant? The key question isn’t, who’s the offender du jour? Instead, it’s why do these pricing “scandals” keep happening, and is our best offensive strategy public shaming?
Complaining about Mylan is pointless because, as a publicly traded company, it is doing exactly what we would expect it to do to meet the profit and growth expectations of investors. Why is it Mylan’s responsibility to compete against itself? If this were the financial services industry, Bresch would be hailed as a genius.
The real issue here is market failure because of the lack of effective competition. Until we solve this underlying market dysfunction, we’ll just experience the same event again and again, much like Bill Murray in Groundhog Day, just with different names and companies. Maybe the best way to explain the real problem is, “It’s the system, stupid.”
So, what’s the hubbub about?
The EpiPen is a decades-old technology first developed for the U.S. military and paid for by the American people. An EpiPen is a branded auto-injector that delivers a metered dose of epinephrine, a cheap and generic lifesaving drug that has been in use for more than a century. A single dose vial can be purchased for less than $2. Assume another couple of dollars for the auto-injector, add some enormous margins and, voilà, the selling price is $635. This is profitable capitalism — effectively a monopoly.
A monopoly for an inexpensive generic drug encased in plastic? Really?
A fair and competitive market requires three things: 1) real supply options, 2) the freedom to choose any of these options and 3) regulations that prevent monopolies and promote the public good. Let’s analyze how the EpiPen fares on each.
First, supply options. Are there alternatives to Mylan’s version of an epinephrine auto-injector? Yes. Two pharmaceutical companies, Amedra and Lineage, manufacture less expensive, directly competitive products.
Next, how easy is it for us to choose these EpiPen alternatives? This is where the friction starts. Unfortunately, most physicians aren’t aware of the available options because most pharmacy benefit managers (PBM) and health plan formularies exclude them, making choice virtually impossible. To understand why, let’s consider who really makes drug-purchasing decisions. A drug purchase starts with a prescription written by a physician. So are physicians responsible for the EpiPen monopoly? Partially. Rather than prescribing EpiPens, physicians should prescribe epinephrine auto-injectors, of which there are multiple options in the market.
What’s the consumer’s and taxpayer’s next line of defense? Wasn’t this why an intermediary, such as a plan or a PBM, was hired in the first place? Yes. Then, why does our advocate, the intermediary, steer us in the direction of the highest-cost option?
Unfortunately, the financial incentives don’t work the way we think they do. Intermediaries don’t make decisions based on what is best for the actual payer. Rather, they participate with manufacturers in complex rebate schemes (really kickbacks, even if they don’t meet the legal definition), allowing them to collect steep profits on brand drugs.
Bresch states that Mylan pays rebates in excess of $300 to intermediaries who aren’t passing them back to the payer. This isn’t altruism; instead, all drug manufacturers know the intermediaries keep large portions of their rebates. This profit incentive is the mechanism that kicks competing drugs out of PBM and plan formularies, locks out competitors, drives market share and creates monopoly (or near-monopoly) conditions.
Let’s review how drug purchases are made in today’s dysfunctional system:
Consumer: Follows the physician’s choice as long as someone else is paying for it.
Physician: Prescribes what she is familiar with. She’s not paying for it, so what does she care?
Manufacturer: Designs incentives to maximize market share and profitability—and gets a monopoly if all works as planned.
Intermediary: Steers consumers to drugs that maximize their profit.
Payer: Stuck without data about what works, out-of-control drug spending and no real options.
As John Quelch from Harvard Business School & T.H. Chan School of Public Health, puts it, “Monopolistic pricing is a political issue, especially in healthcare. If the industry cannot self-regulate, increasingly empowered consumers will have their elected officials do the job for them.”
I believe breaking significant healthcare monopolies is not only legal, it’s a regulatory obligation. While policymakers have responded, their strategy unfortunately seems to rely heavily on public shaming. A more useful role for them would be to break existing significant monopolies and create legislation to prevent the formation of new ones. The healthcare industry isn’t going to fix itself. Long-lasting, effective change will only occur when external economic and regulatory pressure mandates it.
After we get past the completely understandable anger of millions of Americans, healthcare is no different than many other industries once driven by dysfunctional systems that resulted in similar monopolistic behavior. In fact, our path forward could be easier because of successful precedents in our recent past.
Not too long ago, the travel and financial services industries were also plagued by a dearth of information available to the consumer, a lack of choice to real buying options and lax regulatory oversight. Not only was the fix possible; it happened a lot faster than anyone expected!
Imagine a world where: we have a functional market because we reward companies that have innovative solutions; the people who actually pay for these products and services have true control; and the ugly veil on pricing and business model opacity is finally lifted.
We need to ensure the dollars we spend directly (and through taxes) are used to solve these problems rather exacerbate them. As Quelch points out, we are either going to have to solve this problem or the government will step in. I believe it’s better we fight to fix it instead of relying on the government to make our healthcare decisions for us. The government needs to ensure a level playing field exists for all, and we need to innovate and offer better solutions for less.
As much fun as it is to shame Mylan, a much better way to punish the company would be to buy the lower-cost alternatives from Lineage and Amedra. That is how a real market system works.