The Crazy Math Behind Drug Prices

The Crazy Math Behind Drug Prices
July 05 10:00 2017

David Hernandez, a 44-year-old restaurant worker and Type 1 diabetic, didn’t have insurance from 2011 through 2014 and often couldn’t afford insulin—a workhorse drug whose list price has risen more than 270 percent over the past decade. As a result of his skimping on dosages, Hernandez in 2011 suffered permanent blindness in his left eye, and three years later he experienced kidney failure. He’s since received a lifesaving kidney transplant covered by Medicare and has drug coverage under a New Jersey program for the disabled. But Hernandez’s eligibility expires next January, at which time he’ll have to pay about $300 a month out of pocket for insulin. “I don’t really have that kind of money,” he says.

That Hernandez is struggling to deal with big price hikes for insulin, a century-old medicine that for most of its history cost $15 a month or less, speaks volumes about America’s failing battle to control drug prices. Key combatants are the secretive drug industry middlemen called pharmacy benefit managers (PBMs), who are hired by insurers, employers, and unions to negotiate discounts from drugmakers. Hernandez is a plaintiff in a lawsuit seeking to prove that dealings between those middlemen and drug companies instead have contributed to the cost of insulin rising, in part to make sure fees to the middlemen keep going up. The same interaction inflates the prices of dozens of name-brand drugs, says Steven Berman, the Seattle-based plaintiffs’ attorney who filed the suit in February in federal court in Trenton, N.J. “It’s perverse,” he says, “but that’s the way it works.”

Other plaintiffs’ law firms have followed in Berman’s wake, all of them alleging conspiracies in which the dominant insulin makers—Eli Lilly, Novo Nordisk, and Sanofi—continually raise list prices to curry favor with the largest PBMs: Express Scripts Holding, CVS Health, and OptumRx, a unit of UnitedHealth Group. The four cases pending in New Jersey, which are likely to be consolidated, constitute a threat of massive damages for Big Pharma—and could topple the branded-drug pricing system used in the U.S.

Federal prosecutors are also investigating relationships between PBMs and large drug companies. The U.S. Attorney’s Office in Manhattan has ordered Lilly, Novo, and Sanofi to turn over documents regarding those relationships.

The three drug companies say they’re cooperating with the government’s document demands. The same companies and the three PBMs say the private suits are meritless. “It is a complete falsehood that we would prefer prices to go up,” says Timothy Wentworth, chief executive officer of Express Scripts Holding Co. “We conduct business in a manner that ensures compliance with all applicable laws, and we adhere to the highest ethical standards,” Eli Lilly & Co. said in a statement.

One of the main functions of PBMs is to elicit rebates from drug manufacturers on behalf of health plans. The incentive—or threat—is that if drug companies fail to pay rebates, they might not win spots on a list of preferred medications that the PBMs maintain. Absence from the list, known as a formulary, means that health plans won’t cover the drugs in question, which would cut into the manufacturers’ sales…

Full story at Bloomberg

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