High Drug Prices: How We Got Here and How We Achieve Affordability

Affordability in drug pricing can be addressed by bringing the manufacturer and plan sponsor to negotiate costs and determine fair compensation for product and service providers in the supply chain.

The current state of the pharmacy system is challenged by rising list prices, the affordability of new brand and specialty products coming to market, and intermediaries whose interests are not always aligned with their clients. The blame lies across a variety of players. The problem is complex, which creates confusion among lawmakers, regulators, and the public, with a resolution to this issue seeming elusive.

Complex problems often require simple solutions, which is applicable to today's pharmacy industry. The industry needs to come together to break the model and take risks to resolve this crisis. We can achieve affordability in the market by bringing the buyer and seller of the product (the manufacturer and plan sponsor) to negotiate costs and determine fair compensation for product and service providers in the supply chain.

To address this problem, we must understand how we got here. Three factors account for a large part of where we are today.

1. Consolidated Purchasing Power Across a Fragmented Set of Buyers

In the commercial market, employers fund the majority of drug costs. Employees and their dependents generate consolidated purchasing power through pooling premium dollars across all members enrolled in that employer's health plan.

This creates a scenario in which individuals have access to drugs that otherwise would be unaffordable if the individual had to bear the entire financial burden. At the same time, employers negotiate individual contracts for pharmacy benefits creating a fragmented purchasing market in which plan sponsors rarely have direct access to manufacturers.

This fragmented model is complicated further because most people are funding the drug costs of the minority. In 2019, specialty drugs represented just under 2% of the prescriptions, but nearly 40% of spending in the same channels. Today, specialty drug pricing is expected to keep growing by more than 4% in 2022, driven by anticipated approval of new drug therapies, according to a new Vizient Pharmacy Market Outlook.

This practice creates the perfect scenario for manufacturers to set prices beyond the reach of most consumers and avoid negotiating prices with the plan sponsors since the sponsors do not have the purchasing power to move the market. This model leaves drug pricing largely unchecked by any traditional market forces.

2. Brand Drug Patent Model

The branded pharmaceutical market provides a manufacturer exclusivity after their product goes through an extensive approval process. The motive behind this exclusivity period is to incentivize pharmaceutical companies to invest in research and development.

Traditionally, free markets rely on competition to drive down the cost of goods for consumers. As a result, manufacturers can determine the price of the drug without market competition. The exception to this is when there are alternative drugs in a therapeutic class, which creates competition and prices fall. The impact in pricing can sometimes be seen through a reduction in list cost, but it is often seen through rebates.

3. Middlemen Charging Discounts, Fees, and Rebates

Throughout the product's life cycle, the drug changes ownership and possession across multiple entities, including a manufacturer, wholesaler, pharmacy, and pharmacy benefit manager (PBM), before the plan sponsor and member finally pay the drug.

Each time the drug changes possession and ownership in advance of the final payment, the acquiring entity makes a profit. For branded pharmaceuticals, the profit is traditionally derived as a percentage of the drug cost in the form of a discount, fee, or rebate. These costs are built into the overall cost set by the manufacturer.

The plan sponsor and member eventually pay for the services provided throughout the supply chain. Although the plan sponsor and member fund these services, they have limited visibility inside how the supply chain works and the fees being paid for services.

There is a point in the supply chain in which the PBM negotiates with the manufacturer for a rebate in return for preferred placement on a drug list. Although this negotiation can create competition among manufacturers, it is only effective when clinically appropriate products are available to generate competition among manufacturers.

Rebates also create misaligned incentives for PBMs as they can be used to increase PBM profits or make one PBM's financial offer appear better than a competing PBM during the procurement process (i.e., higher rebates).

How Do We Fix This?

The issue we face today is that the entities funding most of the cost of drugs in the commercial market—the plan sponsors—don't have a seat at the negotiation table. The only option that is presented to the plan sponsor is working with a PBM to develop their prescription drug programs, often with a lack of transparency, little control, and no insight into the financial arrangements of the supply chain.

The players across the supply chain claim that providing transparency is not in the employer's best interest because it will negatively impact their ability to negotiate. The idea of plan sponsors becoming part of the negotiation seems so far-fetched that it is often not discussed.

The time is now for plan sponsors to demand that if they are going to continue to fund this entire process, they require a seat at the table. The plan sponsor is the only entity that can address the affordability issues that the market faces today to develop real change and sustainable solutions. Plan sponsors need to be part of negotiating affordable drug prices and determining a fair market value and compensation for the services along the way.

The model is broken. The time for tweaks and minor adjustments to create news headlines or appease regulators is over.

If we are going to fix this model, we need to break it and start over. The starting point is to provide the groups that are funding the cost of drugs with a long overdue lead role in the negotiating process.

Models such as the pharmacy benefits optimizer (PBO) are already disrupting the status quo and initiating this process. These different types of models employ pharmacy experts who operate independently of big pharma to help benefit consultants and their self-insured employer clients negotiate more transparent contracts, competitive rates and rebates, and customized formularies, and ensure their plan is insulated against future drivers of trend, such as specialty medications.

More steps across the entire industry are needed, however. It will take a full effort across the industry— including consultants, pharma, regulatory bodies, and plan sponsors—to make this much-needed shift.

About the Author

Thatcher Sloan, Vice President, Practice Leader, RxBenefits has worked with employers and health plans across multiple geographic regions and lines of business. This experience allows him to bring actionable solutions tailored to meet his client's specific needs based on industry best practices. Thatcher's expertise is at the cross-section of strategy and operations, enabling him to develop solutions that are operationally sound, align and work inside the clients' entire healthcare program. His clients have included Fortune 500 corporations, commercial businesses, Medicaid plans, and large and small employers. In September 2020, Confidio joined forces with RxBenefits, the employee benefits industry’s first and only technology-enabled pharmacy benefits optimizer (PBO),fueling innovation within the pharmacy benefits industry.