To Lower Drug Costs, Control the Middlemen
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The worst inflation in 40 years is hammering American families. The price of gasoline soared 49.6% from December 2020 to December 2021, according to a recent analysis from the Bureau of Labor Statistics. Used car prices jumped 37.3%, meat prices increased 12.5%, and electricity prices surged 6.3%.
In fact, out of the 31 categories of goods and services measured, only one didn’t get more expensive: prescription drugs.
That fact will surely shock most Hoosiers, who — along with the rest of the country — feel like medicines are constantly getting tougher and tougher to afford. And in a very real sense, they’re right. Patients assume medicines are getting more expensive because they’re forking over bigger copays and coinsurance at pharmacy counters.
But that extra cash isn’t going to drug companies. It’s being gobbled up by middlemen in the drug supply chain, who are cleverly — but secretly — pushing costs onto patients.
By cutting these middlemen down to size, policymakers here in Indiana and in our nation’s capital could make medicines less expensive for patients — without deterring drug companies from researching the next generation of treatments and cures.
Let’s unpack the problem.
Like any other industry, the pharmaceutical sector has a host of middlemen involved in getting pills from factories to patients’ medicine cabinets.
There’s nothing inherently wrong with middlemen. It’d be inefficient for a diabetes patient to roll up to Lilly’s Indianapolis factory every time she needs more insulin — just as it’d be inefficient for shoppers to drive out to a farm every time they need to purchase produce or meat, rather than visiting a grocery store.
But unlike grocery stores, which famously have profit margins of just 1% to 3%, the middlemen in the pharmaceutical supply chain are reaping outsized profits. A recent report by the Berkeley Research Group found that 2020 marked “the first year on record where non-manufacturer stakeholders” — including insurance companies and pharmacy benefit managers — pocketed more than half of total spending on brand-name medicines. That revenue normally comes in the form of rebates that insurers and especially “pharmacy benefit managers” — the secretive companies that help insurers administer drug plans — extract
from drug companies. These PBMs decide which drugs to include on insurers’ plans, which gives them immense leverage to negotiate huge rebates — averaging about 30% for most drugs, but up to 70% for many insulins.
In theory, these rebates ought to save patients money. But in practice, they don’t — at least not when patients go the pharmacy.
That’s because PBMs don’t disclose the value of these rebates. So if patients show up at the pharmacy, and their insurance plan says they owe a 25% coinsurance payment on a medicine, they have to fork over a quarter of the drug’s full, pre-rebate cost.
For instance, let’s say a supply of insulin nominally retails for $400. Patients with that 25% coinsurance requirement would have to fork over $100 at the pharmacy.
But if the PBM actually negotiated a 70% rebate, that means the insulin really only cost $120 total. Patients wind up paying nearly all of the drug’s true cost — with PBMs and insurers barely lifting a finger.
If those patients could instead base their coinsurance payments on the true, post-rebate price of drugs, they’d be on the hook for just $30 — a massive savings.
Imposing transparency requirements on PBMs, and obliging them by law to share some of the rebates with patients at the pharmacy, should be a top priority. Fortunately, the Indiana legislature is already considering a bill that would compel PBMs to pass on a greater portion of their savings to patients.
PBMs, insurers, and other middlemen are the reason that medicines often feel so expensive — even though the data show that prescription drugs are one of the few goods and services escaping the current inflationary crisis. Cutting these middlemen down to size would bring immense relief to many households, here in Indiana and across the country.