The U.S. pharma industry is under attack by executive order, with the latest salvo designed to ensure the Medicare Part B program pays the same price for drugs as similarly developed nations pay. That order joins others issued this summer, all aimed at high U.S. drug prices.

These orders – all variants of previous orders and policies – are unlikely to see much action by Congress this year. Yet all highlight legitimate issues that lead to high and opaque pricing of drugs in the U.S. The House Ways and Means Committee found that U.S. citizens pay on average four times more for their medications than citizens of other countries do. Other studies have found prices in the U.S. may range from 30% higher to as much as 7,000% higher for the same drug available in other countries.

Consumers are angry about these drug prices, and they have increasing exposure to and control over their healthcare spending. The growing power of healthcare consumers, plus stirrings of disruptive business models from companies like GoodRx, Amazon and Walmart, should spur pharma companies to address issues with U.S. drug pricing. It’s time to build a more transparent pharma ecosystem in which the consumer – who is the ultimate customer for the product – can understand what a drug actually costs.

Increasing Transparency, Lowering Drug Prices

The pharma industry can do this by taking two important actions:

  1. End prescription drug rebates. One of the executive orders calls for ending drug rebates that apply to Medicare Part D. These rebates add to the murkiness of U.S. drug pricing and often inflate prices for plan members, the Centers for Medicare & Medicaid Services (CMS) and, ultimately, taxpayers.

    Here’s how the rebates work – and why they ultimately don’t. Health insurance payers contract with pharmacy benefit managers (PBM) to manage the prescription drug components of health plans. One of the key services PBMs provide is to develop formularies: lists of recommended drugs a health plan will cover. Because pharma companies want their drugs listed on the formulary, they negotiate price concessions or rebates with PBMs. Yet regardless of the rebate amount, the health plan member’s coinsurance is based on the full list price of a drug, not on the negotiated price. Consumers don’t get a share of the savings.  

    The adverse impact of this model is especially pronounced within the specialty drug category, where a month’s supply of drugs for conditions such as rheumatoid arthritis and multiple sclerosis can reach the five-figure range. For Medicare recipients taking a specialty medication, paying co-insurance based on the list price can accelerate them through the donut hole into catastrophic coverage. Medicare Part D recipients paid $16.5 billion in out-of-pocket costs in 2019, up 27% since 2014.  Similarly, Medicare’s financial exposure is increasing, which is why CMS is scrutinizing rebate practices.

    Drug list prices, on which rebates and co-pays are based, are continually inflating, and there’s a huge gap between those prices and the net to pharma companies. According to the IQVIA Institute, global gross (list) spending on pharma was $955 billion in 2019, while pharma companies netted $660 billion. The $295 billion difference is largely attributed to the U.S. because our use of rebates and discounts is unique. That gap could exceed $400 billion by 2024.

    The $295 billion to $400 billion gap makes it hard to understand actual drug costs. Drug companies say rebates keep prices (and their profits) down. Health plans and PBMs say the rebates reduce overall health insurance premiums. There’s not enough transparency in the system to evaluate these claims. If drug prices and/or health premiums did increase if rebates were eliminated, then we’d know the true source of higher costs, which is the key to launching meaningful efforts to reduce them.

    Dismantling the rebate system’s complex structures will not be simple, but tweaking them will only lead to more complexity. Any rebates that do remain should be completely transparent to consumers, both in terms of the list price and the amount of the rebate. The PBM should use that published information to justify a reasonable margin or service fee or, alternatively, share the savings with the consumer.   

  1. Contract directly with consumers. Another executive order addresses the costs of insulin (used by approximately 7.4 million Americans) and epinephrine, though only for patients of federally qualified health centers (FQHC) that purchase these drugs in the federal 340B program. There’s an opportunity here for disruption that would accelerate competitive pricing without an executive order.

    In the last two years, several PBMs or their parent organizations have created group purchasing organizations (GPO). GPOs generally exist to buy goods in bulk at lower prices. It would be disruptive if Amazon or Walmart went this route to create a direct-to-consumer pipeline for commonly used drugs. Right now, a vial of insulin that costs $320 in the U.S. is just $30 in Canada, according to Reuters. Imagine Amazon making reasonably priced insulin available via PillPack and its pharmacy licenses to its millions of Amazon Prime members.

    Pharma companies could create a program that allows consumers to contract directly with them to purchase certain medications after a physician has written a prescription. While developing a pharma business-to-consumer model may sound ambitious, focusing just on the specialty medications makes it viable. Some pharma companies may have some of this infrastructure already in place through patient assistance programs. Also, while specialty medicines make up the majority of branded (i.e., non-generic) medications, they are just a fraction of the volume – estimated at 2% – but as much as 50% of total prescription drug spending this year. 

A Time for Action

With COVID-19 case numbers still rising in many areas of the U.S., actions to curtail drug prices may not be top-of-mind. The November elections are injecting an additional element of uncertainty into what the current presidential edicts will hold. Yet U.S. lawmakers already have introduced measures to prevent price gouging on COVID-19 vaccines, a harbinger that suggests concerns are still substantial about drug prices.

Employers and consumers are increasingly aware of and dissatisfied with the U.S.’s current drug pricing system. Especially with new entrants hoping to disrupt the status quo, it is time for current players, payers, PBMs and pharmas to rethink the current model. There’s still time to be part of the solution instead of being forced into a reactive, defensive posture.

Jodie Thellin Skyberg

Jodie Thellin Skyberg

Jodie Thellin Skyberg is the PBM and Pharmacy Practice Leader for Cognizant Consulting Healthcare Practice.  She has over 20 years of experience... Read more