Pick a Number, Any Number
An insider explains how U.S. prescription drug prices are set
THE U.S. SPENDS more than any other highincome country on health care, and prescription drugs account for about 17 percent of all health care spending. President Donald Trump has vowed to lower drug prices but has not yet proposed any concrete approach for doing so. There was no mention of the issue in the American Health Care Act proposed by House Republicans in March.
More than $370 billion per year is spent on prescription drugs in the United States, exceeding all other countries. Pharmaceutical companies often justify the cost of drugs as necessary to support the research and development—the R&d—of innovative treatments. If we want cures for devastating diseases, they say, we have to pay for them. But that explanation is disputed.
Research by the Tufts Center for the Study of Drug Development put the cost of developing a new drug at $2.6 billion. That research was supported by the pharmaceutical industry, however, and the estimate has been questioned.
Shefali Shah has spent more than 15 years helping pharmaceutical companies navigate issues surrounding the cost of new medications. To pinpoint the magic dollar amount for a given medication, she has worked with biotech giants like Genentech, small biotechs bringing their first products to market and external consulting companies. Now an independent adviser, Shah spoke with Newsweek about drug prices: where they come from, who negotiates them and how they got so incredibly complicated.
NEWSWEEK: What is the difference between pricing and reimbursement?
SHAH: Pricing and reimbursement are entangled to some extent. Drugs may ultimately have several different prices, but the first one is the list price, which comes from the manufacturer. The list price is not necessarily the price that most people pay. In some cases, hardly anyone pays it. But the list price serves as the basis for many subsequent calculations.
Reimbursement is the amount the insurer pays for the drug, whether it’s a private insurer, Medicare or Medicaid. Typically, depending on the type of drug, the insurer pays the physician directly, the drug manufacturer or an intermediary, such as a pharmacy benefit manager.
The PBM pays a heavily discounted price. Physicians buying the drug directly also receive a discount. So do wholesalers. None of these entities pays the list price.
What drugs do physicians purchase, and from whom do they purchase?
Typically, the drugs purchased by physicians are those that must be given by infusion. But physicians usually make these purchases through an intermediary—a PBM or a wholesaler such as Mckesson or Cardinal Health. These companies buy the drugs from the manufacturer, and the physician buys it from the intermediary. The physician then administers the drug to the patient in the office, bills the insurer and is then reimbursed by the insurer.
That sounds very complicated.
It’s really complicated. Purchasing prescription drugs is different from other kinds of purchasing. When you buy a car, you are the decision-maker. You are the customer, you choose what car you want, and it’s up to you whether or not you want to pay whatever it costs. You go to a dealership and buy a car. With pharmaceuticals, the customer—the patient—is rarely the decision-maker. Usually, the physician makes the decisions. And the patient doesn’t pay the cost directly either. The patients aren’t usually writing the check. There may be a copay or coinsurance, but the majority of the cost is usually covered by the insurer.
Unless the individual has an insurance plan with a high deductible on prescription drugs or no insurance coverage at all.
Correct.
How does a pharmaceutical company determine an appropriate list price for a drug?
Before diving into this explanation, I think it’s important to emphasize that there are a lot of good actors in the pharmaceutical industry. In my experience, most people in this field want to innovate and create drugs that benefit patients. And there are bad actors, which we have heard a great deal about recently. Drug prices are increasing astronomically without explanation. List prices are set extraordinarily high. I’m going to be focusing on the good actors.
Determining the price of a new drug is both science and art. So many different elements must be considered, and there’s no formula. All the different factors must be weighed. The clinical value is the most important aspect. Is this drug helping people live longer? Is it helping them live better? Also, how does it compare to competitors? Are there competitors? Will payers pay for the drug? Can patients afford the copay? What is the average copay for a patient? What are other drugs priced at? How much will the company have to give in government-mandated discounts, such as the 340B clause in Medicaid?
DETERMING THE PRICE OF A NEW DRUG IS BOTH SCIENCE AND ART.
What are the cost-of-doing-business discounts to PBMS or wholesalers?
We often hear about the cost of development, and that is an important part of the story. But I think these expenses are considered very early on, when a company is first deciding whether or not to develop a drug.
Does everyone pay a discounted price?
Usually, a PBM is the entity buying from the drug company, and the insurer reimburses the PBM. In a flow chart of this chain, the pharmaceutical company would be at the top. That company sells the drug to a wholesaler or PBM, and the PBM sells to the physician, if the drug is infused, or, if the drug is oral, it may be shipped directly to the patient.
Do PBMS serve a purpose?
PBMS do serve some purpose in the pharmaceutical supply chain. I am not an expert in this specific area, but I believe that some of these companies have value-added services beyond transporting drugs from the manufacturer to the physician or other end user. Sometimes they contribute to disease management by ensuring patients adhere to their prescriptions, for example. But they don’t all do this, and I don’t know if they are delivering enough of a benefit to justify the cut they’re taking.
Does the extent of the discount vary?
Yes. The more mass-market drugs, such as statins and other commonly used medications, are usually more discounted for PBMS. Some of the more niche drugs won’t be assigned as big a discount.
Every disease is treated very differently. Whether the drug is oral or intravenous makes a big difference because they are reimbursed totally differently. Intravenous drugs are reimbursed to physicians, whereas oral drugs are reimbursed to the point of sale, such as the local retail pharmacy where the patient picked up the prescription.
It is. I’m helping my mother figure out Medicare, and if this weren’t my job, I don’t know how I would help her navigate all this.
Let’s say the list price is $10. How might the pricing structure for the different entities follow?
In this example, the PBM might pay $6. Because the PBM wants to make a profit, it charges the insurer $8. The insurer won’t necessarily shell out all $8; instead, that entity will pay $6 and the patient will have a copay of $2.
In this example, the pharmaceutical company would not be taking a loss at $6.
No. Figuring out profit is complicated. A pill is relatively inexpensive to make. The chemicals might cost just 50 cents, but that doesn’t account for the money that went into the development.
Do you agree that drug prices are too high?
I think there is a way to bring more of a valuebased system into pricing and reimbursement. Right now, our reimbursement system imposes a lot of limitations on how creative we can get with pricing. If prices could be based more on value, I think that would address the problem to some extent.
What would that look like?
The really expensive drugs are usually the infused products. These tend to be large molecules that can’t fit in a pill. These are the more novel drugs. They are more expensive to develop, more expensive to make and more expensive to buy.
Currently, the way these are reimbursed is the physician buys the drug from an intermediary, administers the drug to the patient, bills the insurer, and the insurer has a set percentage it will reimburse.
Sometimes, a drug may be used in two different cancer types. In one type, the patient may live six months longer with a great quality of life, justifying the $100,000 price tag. But in the other cancer, the benefit is not as great. But the price for the second disease cannot be changed without also changing the price for the first disease. That’s a big dilemma for companies.
“DRUG PRICES ARE INCREASED ASTRONOMICALLY WITHOUT EXPLANATION. LIST PRICES ARE SET EXTRAORDINARILY HIGH.”