The Mafia of Pharma Pricing

I worked at a PBM back in the late-90s/early-2000s. It was where I was introduced to the value of customer data and the strange world of lawyers, all in a single corporate meeting:

- The company is launching a new service. We already sell customer drug-prescription data to drug companies, and the drug companies analyze this data to understand where/when/why/to-whom their drugs are being prescribed. Now we're going to help the drug companies advise doctors on where/when/why/to-whom they prescribe drugs.

- Sounds great. Where do we come in?

- The new service will act as a middleman, processing payments from drug companies to doctors.

- So, a service to manage kickbacks?

[Meeting room full of suits goes silent.]

- The payments aren't "kickbacks". They're "rebates".

- Is there a difference?

- Absolutely. [silence]

- So...what's the difference?

- Please be sure to only use the term "rebate" in all communications, especially email. Never use the term "kickback".

And that was pretty much it. The company processed prescriptions for pharmacies, then sold that data to drug companies, who in turn used that data to provide kickbacks to doctors for pushing their drugs over a competitor. And it was all legal, thanks to the lawyers and their select word usage. Oh, and I think we weren't supposed to use the term "middleman", either.

Several years ago, I worked as a data scientist for Express Scripts, before it was acquired by Cigna. I can't much speak to the macroeconomics of PBMs, but I can say that they were the worst technical organization I ever worked for. They were built out of mergers on top of mergers on top of acquisitions, so their IT systems were what you get when you duct tape a dozen legacy systems together.

I worked in the "Innovation Lab", which had been designed to look like an ad agency's idea of Innovation -- brushed metal, Edison lightbulbs, that kind of thing. They'd bring clients through on tours to show off how much Innovation was going on. Meanwhile, I didn't really have that much to do, and no one seemed very concerned about that. Soon I realized I was also part of the decoration - a genuine Data Scientist, hard at work Innovating.

Our group produced approximately nothing. Our boss's boss was evaluated mostly based on how much he was able to sell people's medical data for.

And people say that public ownership is "less efficient" than private industry, and less efficient than regulated private industry.

Well.. I don't buy it. Access to drugs and efficient pricing and rationing (because that is what it is) is not working well. It's a massively distorted market.

The public good here would be better served by another model.

Even the "we need these prices to recover our massive sunk costs" part of the argument is bogus. Much good drug design and research is done on the tertiary education and research budget worldwide.

There is absolutely no single-process need to do drug IPR based models, the profit motive is not the only model.

I look to the modern mRNA drug emergence to lead to radical shake up in the cost of production of novel treatments. We're seeing some signs of this, along with other changes in drug models: injectable hypertension treatment is in test. Imagine the impact on the cost basis of a pill-per-day model!

While I have mixed feelings about The New York Times's coverage of certain topics these days, this is one topic where their reporting has (positively) shaped events. They had a big investigative piece earlier in the summer about pharmacy benefit managers: https://www.nytimes.com/2024/06/21/business/prescription-dru... And that likely led to the recent FTC announcements.

I work in biotech. It’s a long, difficult, and expensive process to develop a new therapeutic. It is immensely discouraging to see middlemen riding on the back of biomedical innovation and enriching themselves at the expense of the scientist toiling in the lab all the way to the patient in the hospital.

"If you went to Costco, he went on to say, the cost was $97, so the plan didn’t recommend patients go there. If a patient went to Walgreens, which the plan did recommend, it was $9000. And if a patient chose home delivery via the PBMs own mail order pharmacy, it was $19,200."

They must be joking right?

Like most mainstream media reports it misses a lot. I worked in the industry and The NY Times article misses key points.

There is no “price” for a drug, there are several prices - list, net, Medicaid, AMP, ASP.

So yes, while the list price for Gleevec has gone up, the actual price paid is very different.

It’s the same for insulin - the price that manufacturers have received has gone down 41% from 2014-2020, while the list price has gone up 140%.

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh...

If people want to really understand how it all works, I recommend the Drug Channel blog by Adam Fein. He does a great job of digging into details, pulling data and showing what prices are actually doing.

https://www.drugchannels.net/?m=1

“PBMs consolidated both horizontally and vertically, so each big PBM is now owned by a major healthcare conglomerate.

…

In 1987, Congress passed an exemption to a Medicare Anti-Kickback statute, which created a safe harbor for group buying entities to accept payment from drug manufacturers in the form of rebates, with certain guardrails in place.

…

PBMs get large secret rebates in return for allocating market shares…it’s virtually impossible to get any clear pricing on most drugs, because there is no one price.”

For a change the solutions seem simple:

1. Prohibit integration between doctors and insurers, on one hand, and pharmacies and pharmacy-benefit managers, on the other hand;

2. Repeal §§ d and f from the kickback exemptions [1]; and

3. Require public filing of insurers’, PBMs’ and pharmacies’ price lists. (Not disclosure: the binding price list is the public one.)

[1] https://www.law.cornell.edu/cfr/text/42/1001.952

You cannot talk about the problems with pharma pricing without talking about enclosures [1]. Consider:

1. Health care providers are largely banned from importing drugs [2];

2. Medicare is largely banned from negotiating drug prices [3]

3. The VA was allowed under Obama to negotiate drug prices, something which was promised but never delivered for Medicare. The GAO shows this has reduced costs [4];

4. Pharma companies will tell you R&D is expensive. It is but it's the government paying for it. Basically all new novel drugs relied on public research funds [5];

5. Pharma companies generally spend more on marketing than R&D [6];

6. What R&D pharma companies actually do is typically patent extension [7].

The true "innovation" of capitalism is simply building layers and layers of enclosures.

[1]: https://en.wikipedia.org/wiki/Enclosure

[2]: https://journalofethics.ama-assn.org/article/what-should-pre...

[3]: https://www.healthaffairs.org/content/forefront/politics-med...

[4]: https://www.gao.gov/products/gao-21-111

[5]: https://www.cbc.ca/news/health/drugs-government-funded-scien...

[6]: https://marylandmatters.org/2024/01/19/report-finds-some-dru...

[7]: https://prospect.org/health/2023-06-06-how-big-pharma-rigged...

"Most people think of high pharmaceutical prices, and blame the companies you'd expect in Big Pharma. These firms, with storied names like Merck, Pfizer, Novartis, Genentech, etc, are powerful, and they are in the business of developing and selling drugs. But this other group, corporations you haven't heard of, composed entirely of middlemen, price and handle payment for pharmaceuticals between doctors, pharmacies, and patients, are perhaps equally important, if not more so. And unlike pharmaceutical companies, who actually employ doctors and scientists, PBMs don't do anything difficult. They keep lists."

Big Pharma has been permitted to own PBMs.

https://www.ftc.gov/news-events/news/press-releases/1998/08/...

"Intellectual property", specifically patents are the elephant in the room. Even if the mafia would want to have a healthy market, there won't be one because you can't when there is monopolies in place.

Societies can research, speculate, mitigate and regulate until the end of times for as long as the underlying fundamentals of the problems are never addressed.

Reading this 4% Pharma conglomerate flow figure, I'm indirectly struck that increasing all-cause cancer likely raises GDP, particularly this segment of GDP. My main consolation in this moment is that lead exposure probably doesn't.

I don’t really understand why this is possible or if the information in this article is fully true. It doesn’t make sense why we can’t just go around the pbms.

Setting aside what happens for the uninsured (which is important, I'm just trying to simplify for my own understanding), isn't this mostly the levying of costs of very expensive drugs onto the insurance providers, rather than the patient? Meaning the "victim" of the price gouging is the insurance company?

If you have insurance with a yearly out of pocket max of say $8,000 and the drug you're taking has a very veiled and seemingly dubious cost of $80,000 - does that effect the patient?

I assume it does somewhat directly in the form of higher monthly payments (for the patient and other customers of the insurance)? Can the insurance company deny access due to the high cost?

If this is somewhat the case, I would sort of expect insurance companies to be lobbying for the system to be changed, and they seem to have the capital to actually make a difference in that "fight"?

Maybe I'm misunderstanding something though.. it was an interesting article but it really just gave me even more insight into how confusing the US healthcare system is, even beyond what patients actually interact with.

Wouldn't the equivalent of pharmacy benefit managers in China, should they be caught devising such extreme pricing shenanigans, be executed?

This is a great article, weel researched. Filled with information as many links to sources. I'd like to extend a big thank you to the author for writing this.

When it comes to remedies One solution is for our legislature to create laws that specific species some of those practices as illegal. It would probaby be hard to get it passed due to all the corruption in our legislative and executive branches.

General philosophizing: Is it possible there's an important economic difference between public price discrimination versus secret price discrimination?

I mean there's a spectrum between "acceptable" price discrimination and "abusive". Nobody bats an eye at lower rates for bulk purchases or movie theaters offerering half price for kids.

It may not be a panacea, but sunlight is still a pretty good [civic] disinfectant.