How Health Plans Profit—and Patients Lose—From Highly Rebated Brand-Name Drugs

My Wall Street Journal op-ed (Don’t Blame Drug Prices on ‘Big Pharma’) has received a lot of attention.

Especially notable was a letter to the editor from American Health Insurance Plans (AHIP). It claims that “the savings that insurance providers negotiate are returned directly to consumers through lower premiums and out-of-pocket costs."

Don’t believe this misleading half-truth. It distorts the primary argument of my WSJ op-ed: Patients often pay full price for drugs that are sold to insurers at deep discounts.

Below, to show you why, I follow the dollar for an expensive, highly rebated brand-name drug used by a consumer with a high-deductible health plan. As you will see, the consumer pays more than twice the true discounted price of the drug. Meanwhile, the health plan pockets a large rebate.

That's the uncomfortable reality of the gross-to-net bubble that AHIP wants to hide. Insurers may not use rebates to lower the out-of-pocket costs for the patient whose prescription generated the rebate. And at the same time, AHIP indignantly blames "the prices drugmakers set." We all deserve better.

AWKWARD ECONOMICS

Consider a prescription with the following characteristics:

• The drug’s list price is set by the manufacturer to be $450.

• A pharmacy benefit manager (PBM) has negotiated a 60% rebate from the list price. It has also negotiated a 4% admin fee for itself.

• The PBM passes 95% of the rebate and 50% of the admin fee back to the payer.

• The consumer has a high-deductible plan and must pay 100% of the pharmacy ingredient cost reimbursement while in the deductible period.

The table below traces the computations that determine the flow of funds between the manufacturer of a brand-name drug and the third-party payer. It is adapted from Section 9.3. of our forthcoming 2019 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. The sources for the specific figures are contained within the full report.

[Click to Enlarge]

Here are the crucial points:

• The consumer pays $446 out of pocket during the deductible phase. That’s very close to the list price of $450.

• The PBM earns about $25, which is the sum of the amounts shown under “PBM Administration Expense.”

• The payer receives $262 from this prescription. That’s because the net cost to the payer is the pharmacy reimbursement from the PBM plus the PBM administration expenses, less the portion paid by the consumer and the amounts received from the manufacturer that are passed through by the PBM.
  
  Here, the payer collects money from the prescription and pays nothing to offset the consumer’s costs. Hence, item [13] is shown as a negative number.

• The patient pays an astounding 243% of the true net cost to the payer (item [7] plus item [13]).
  
  If the full rebate and admin fee had been passed through to the point-of-sale, the consumer would have paid no more than $160 for this prescription. That’s the pharmacy ingredient cost reimbursement (item [3]) minus the rebate (60%) and admin fee (4%).

• The manufacturer receives less than $160, because it must also pay wholesaler fees and discounts. These are based on the $450 list price, not the net price after rebates and PBM admin fees.

Wacky, right?

The example above is illustrative, but it captures an essential aspect of today’s crazy drug channel.

Pharmacy benefit designs have shifted out-of-pocket spending for prescription drugs from copayments toward deductible and coinsurance spending. Today, more than half of all consumer out-of-pocket prescription costs are for coinsurance or spending in a deductible. (source) Those amounts are tied to the list price, not the post-rebate net cost.

That's what AHIP is trying to hide—and why insurers are already gearing up to oppose any reform of today’s broken rebate system. Its insurer members are addicted to the rebate dollars, which can be used to compete for business through lower premiums.

It’s also why UnitedHealth’s OptumRx reportedly demanded that manufacturers retain the absolute dollar value of rebate payments even if a drug’s list price drops.

Yes, you read that right.

Using the example above, OptumRx still wants to collect a rebate of $270—even if the manufacturer cuts the list price by 50%, to $225. Such demands make it essentially impossible for manufacturers to reduce prices.

The key issue remains: Patients are the ultimate victims of our current drug pricing system.