OxyContin dominated the sales of narcotic painkillers through 2014 despite competition from opioids released by Johnson & Johnson, Pfizer, Endo, and Janssen. None, however, offered therapeutic or dosing advantages significant enough to induce users to switch. While rivals tried breaking Oxy’s grip on the top selling spot, they did not compete on price. Comparable doses of all extended release prescription opioids were priced within a few cents of one another.1 Discounting would have likely increased a firm’s market share but at the expense of profits.
With the bulk of their sales in the United States, all the narcotic painkillers had robust profit margins. There was no more lucrative market than America, the world’s largest consumer of prescription drugs per capita. In 2013, prescription drugs accounted for 20 percent of American health care spending, about $850 per citizen, more than double the average of nineteen advanced industrialized nations.2 U.S. pharmacies dispensed the equivalent of seventy tons of pure oxycodone. Americans used 83 percent of the world’s supply.3 Most important, pharma companies charged significantly more for their drugs in the U.S. A thirty-day supply of OxyContin cost $265 on average in the U.S. The same prescription averaged $72 in Europe and even less in South America and Asia.4
By pricing its blockbuster at 400 percent more in the U.S. than what it charged elsewhere, Purdue was typical of all American pharma firms. A comparison in 2014 of the twenty top grossing drugs, which accounted for 15 percent of all global prescription spending, revealed U.S. prices were on average three times higher than Europe, six times higher than Brazil, and sixteen times higher than India, the lowest-priced nation.5
Selling drugs at high prices in America has been part of the industry’s DNA since the end of World War II. In 1959, Senator Estes Kefauver began his three-year investigation into why U.S. companies sold their drugs for “much lower prices in foreign countries than in the U.S.”6 The pharmaceutical industry had contended that its more expensive domestic research and development costs explained the pricing disparity. Kefauver’s subcommittee proved that wrong. The reason for the pricing inequality was easy to pinpoint: the U.S. was the only country that allowed pharma companies to set their own prices. Every other industrialized nation used price caps or indirect controls to limit prices.
The effects of the unfettered pricing discretion are magnified in the U.S. since it is also where patents provide the world’s longest sales monopoly. Mylan’s CEO, Heather Bresch, the daughter of West Virginia senator Joe Manchin, was remarkably candid in a 2016 CNBC interview when asked why the company’s best-selling EpiPen product sold for $608 in the U.S. but only $100 to $150 in Europe. “We [the United States] do subsidize the rest of the world, and as a country we’ve made a conscious decision to do that. And I think the world’s a better place for it.”7
Mylan had raised the price of EpiPen, a lifesaving autoinjector to counter severe allergic reactions, fifteen times since it bought the rights to the product in 2007 from a Pfizer subsidiary.8 Revenues over that time had jumped fivefold from $200 million to a billion dollars. EpiPen provided 40 percent of Mylan’s profits and its margins ballooned from 8 percent to 55 percent.9 Bresch’s salary tracked EpiPen’s accelerating price chart; it went from $2.5 million when Mylan bought EpiPen to $19.5 million in five years. Mylan eventually paid $465 million to settle charges it had bilked Medicaid by deliberately misbranding cheaper EpiPen versions as more expensive ones.10
Most Americans blame greedy drug manufacturers for the pricegouging. That is undoubtedly a key factor. In the year in which the Sacklers broke onto the Forbes list of wealthiest American families, pharmaceutical prices increased 12.2 percent, one of the fastest ever year-over-year escalations.11 The problem is more complicated, however, than industry executives setting high prices and counting profits as their products fly off pharmacy shelves. There are unique features of the U.S. drug distribution system that encourage artificially high and uncompetitive drug prices to flourish.
A key element, and one about which the public knows little, is the role of pharmacy benefit managers (PBMs). They had begun as a tiny niche providing processing benefits and paperwork for medical insurance companies. McKesson, the industry’s largest drug distributor, bought the first PBM in 1970 and transformed it from a simple service provider into an independent powerhouse. As the number of PBMs proliferated during the 1970s and 1980s, they came to control drug formularies, negotiate discounts directly with manufacturers, and reimburse pharmacists. Drug companies, which had initially dismissed PBMs as mere paper pushers, came to see them as an emerging threat to their pricing hegemony.12 In the 1980s, Merck’s CEO, Roy Vagelos, noted the largest PBM, Medco, could on its own “shift market share within a class of drugs to their preferred product.”13 Drug manufacturers were forced to deal with the PBMs since they had become the middlemen between pharma and medical insurers. So Vagelos decided it might be better for Merck to own its own PBM. It bought Medco in 1993 for $6.6 billion. That kicked off a rush by rivals to buy their own pharmacy benefit manager. Eli Lilly scooped up the industry founder, PCS, for $4.1 billion. SmithKline Beecham spent $2.3 billion for Diversified Pharmaceutical Services. Bristol-Myers Squibb formed an alliance with Caremark and Pfizer did the same with ValueRx.14 There was a flurry of mergers and acquisitions among the remaining independent PBMs through the 1990s.15 Rite Aid in 1998 decided the fastest way to expand its presence in the HMO and managed care market was to buy its own PBM; it paid Lilly $1.5 billion for PCS.
In 1999, PBMs covered half of all insured Americans. That year, Bill Clinton proposed a prescription drug benefit for Medicare. It had been thirty years since an LBJ-appointed commission had recommended that prescription drug coverage be available to the nation’s seniors. Health care had been a priority in the Clinton administration. An ambitious effort at a quasi-national health insurance plan failed in 1993. Four years later the administration managed to pass the Children’s Health Insurance Program (CHIP) as part of the Balanced Budget Act. It expanded Medicaid assistance to “uninsured children up to age 19 in families with incomes too high to qualify them for Medicaid.”
The 1999 Clinton drug plan would pay half of the first $5,000 in medication costs and 100 percent of everything over that. As opposed to the extensive government control in the administration’s 1993 proposal, PBMs would manage in the new one. But it proved impossible to get any legislative momentum in the last year of Clinton’s presidency. It took another four years, and a dozen variations on a series of bills, before a Republican-led Congress got enough bipartisan support to pass George W. Bush’s Medicare Prescription Drug, Improvement, and Modernization Act.16
When the law went into effect in 2006 it was the first time prescription drug benefits were available to all the country’s 41 million seniors. Unfortunately, as with the Clinton plan, PBMs had a central role. The pharmaceutical industry lobbied to ensure that the legislation explicitly prevented the government from negotiating drug prices.17 I 18
Making drugs available to tens of millions of patients without empowering the government to negotiate or cap prices was a boon for companies that had a role in manufacturing, distributing, and selling prescription medications to Americans. The expanded coverage put the pharmacy benefit managers in a powerful position because they controlled the drug formularies. Only those medications on the lists were eligible for medical insurance reimbursement. What resulted was a complex and obscure scheme of “rebates” by which drug manufacturers paid PBMs to get their drugs on the formularies. The costlier the brand-name medication, the larger the rebate demanded by the PBM.
Rebates are legal but controversial. They ensure that many drugs on the formularies are not chosen for the best interests of the patients or keeping a cap on health care costs. Rebates foster a system riddled with conflicts of interest. The “pay for listing” system serves as an incentive for pharma to raise list prices so it can offer larger rebates to the PBMs.II
PBMs are the only unregulated part of the pharmaceutical supply chain. There are no requirements for public transparency. Nor do they have any legal obligation to disclose to anyone the rebates they received from pharma companies. PBMs do not use those rebates to offset retail drug prices or lower the cost of patient insurance premiums. Studies demonstrate that pharma rebates to PBMs increase the average costs on many popular medications by about one third.19 Yet patients filling prescriptions at retail pharmacies are in the dark. They are clueless that undisclosed rebates are often why PBMs direct them to a costlier brand-name drug instead of one better suited and cheaper. Sometimes, pharmacy benefit managers switch patients to different brands than the ones prescribed by the physician. Other times they make it more difficult to get a drug by requiring a “letter of medical necessity” from the dispensing physician.20 A “gag clause” prevents pharmacists from telling patients if there is a comparable and cheaper drug available (in 2018, President Trump signed two bills passed by Congress that were supposed to eliminate the gag clause. The legislation did not, however, require pharmacists to inform patients about lower-priced drugs. Patients have to ask).21
The Obama administration’s 2010 Affordable Care Act (ACA) was the first time in U.S. history that prescription drug coverage was defined by statute as “an essential health benefit.” All medical insurance companies were required to offer drug coverage in order to be ACA compliant. Before the ACA, Medicaid covered drugs for Americans at or below the federal poverty line ($31,721 for a family of four). The ACA expanded Medicaid eligibility by raising the income level to 133 percent of the poverty line. That translated into another 10 million people eligible for Medicaid (71.2 million total). The ACA also increased the scope of drug coverage for those in the Children’s Health Insurance Program, adding another two million. And the Affordable Care Act reduced the so-called donut hole in Medicare’s prescription drug plan; that is a coverage gap that required seniors to pay some drug costs out of pocket beyond their deductibles or co-insurance.22 It also expanded Medicare’s “Low-Income Subsidy” that offers additional coverage for the thirteen million who barely missed qualifying for Medicaid.23 The federal government is legally required in all its drug benefit programs to cover every FDA-approved drug, whether a prescription was written for an inexpensive generic or an exorbitantly priced biologic.24 III 25
It is unlikely that anyone who drafted the Affordable Care Act intended to help the pharmaceutical industry increase its revenues and profits. That was the result, however, of expanding drug coverage without also establishing more restrictive formularies or empowering the government to somehow control prescription pricing. Little wonder that pharma companies greeted the ACA as an unintended gift.
Prescription drug spending increased dramatically in the wake of the Affordable Care Act. In Medicaid alone it rose over two years by 25 percent to $40 billion. More than 90 percent of Medicaid’s drug expenditures by 2015 were for brand names instead of generics.26 From 2006, when Medicare’s prescription drug plan went into effect, through 2010, Medicare spending on prescription medications ranged between 2 percent and 5 percent of the total U.S. spending on drugs. After the ACA, from 2011 through 2017, Medicare’s share of all national expenditures on prescriptions soared to 30 percent. It is now the second-largest contributor to drug spending after private insurance companies.27 When Medicaid and other government drug benefit programs are included, the federal government pays a remarkable 45 percent annually of all the retail prescription costs in the U.S.28
The combination of high prices and ever-expanding insurance coverage is reflected in the number of billion-dollar-selling drugs. There had been only eight such drugs in the history of the industry before 2000. Since then, there have been more than a hundred, with a handful regularly selling between $10 and $15 billion annually.29
Pharmacy benefit managers have also become more influential, a $250-billion-annually sector of the pharmaceutical industry. PBM drug plans now cover 253 million Americans, 95 percent of the country’s eligible population. The big three—Express Scripts, United Health’s OptumRx, and CVS’s Caremark—are listed in the top twenty of the Fortune 500. Those three alone have about 180 million customers.30
Pharmacy benefit managers are in a powerful position since they are the only segment of the drug distribution system that knows what everyone else is paying and getting paid. They have separate contracts with their own clients—HMOs, large corporations, and government aid programs—as well as with independent drugstores and pharmacy chains. Those contracts are complex and obtuse, making it difficult to know the precise amount of their administrative fees and considerable “incidental costs.” It also has given them an opportunity to squeeze more profits through another legal yet controversial scheme.31 PBMs bill for prescriptions filled by patients. They also control the amount reimbursed to retail pharmacies that dispense the drugs. Advanced software scans millions of prescription orders for so-called spread pricing. That is when PBMs bill the insurers more than they reimburse pharmacists. The PBMs pocket the difference.32 Opportunities for spread pricing are most common with generics sold to government agencies. Bloomberg analyzed the ninety most dispensed generic medications in Medicaid in 2017: PBMs took $1.3 billion in spread pricing out of the $4.2 billion Medicaid insurers spent.33 Spread pricing is possible for the same reason that rebates flourish: there is no federal oversight of pharmacy benefit managers.
The country’s 22,000 community pharmacists, who dispense about 40 percent of America’s retail prescriptions, are the most vocal PBM critics. Pharmacists feel left out of the industry gravy train. PBMs regularly push pharmacy reimbursements as low as possible to increase their own profits. Sometimes PBMs force pharmacies to forgo any reimbursement by threatening abusive audits or penalizing druggists for minor typos on insurance claims. Independent pharmacists have lobbied, without much headway thus far, for legislation requiring that PBMs report all financial data. That would stop spread pricing. It would also either end secret rebates or put pressure on the PBMs to pass them back to health plans, reducing the overall cost of individual medical insurance policies.34
The Pharmaceutical Care Management Association, the leading PBM trade group, claims that in the coming decade PBMs will save Americans half a billion dollars because of streamlined methods for delivering drugs and cutting red tape. Saving patients money was the promise of the pharmacy benefit managers when they entered the industry in 1970. That promise remains unfilled. Prescription drugs are the single fastest rising component of American health care costs. They have soared 1,100 percent during the quarter century starting when PBMs began wielding measurable influence.35
In the last five years, during a period of historically low inflation, drug costs for Medicare and Medicaid rose between 10 percent and 15 percent annually.36 Over that same period, the adjusted profit per prescription for the nation’s largest PBM, Express Scripts, rose by 500 percent ($3.87 to $5.16). Its closest competitors, OptumRx and Caremark, had comparable jumps in per-prescription profits.37 Internal documents from Express Scripts reveal the company was well aware its profit ratios far outstripped those in other industries. The list prices for the nation’s top brand-name medications increased 127 percent over those five years, compared to an 11 percent rise in a basket of common household goods.38
When Mylan’s CEO Heather Bresch was on the defensive in 2016 over her company’s 600 percent price increase on its lifesaving product, EpiPen, the House Oversight and Government Reform Committee grilled her. One important aspect of her testimony was mostly overlooked. A chart presented into evidence broke down EpiPen’s $608 list price. Just over half went to pharmacy benefit managers, insurers, retailers, and other wholesalers. Buddy Carter, the only congressman who was also a pharmacist, asked Bresch if she knew how much the PBM received of the EpiPen list price.
“I don’t specifically know the breakdown,” admitted Bresch.
“Nor do I,” replied Carter. “And I’m the pharmacist.… That’s the problem, nobody knows.”39
Journalist David Dayen, in writing about pharmacy benefit managers, called them “a black box understood by almost no one.” Pharma’s byzantine pricing bureaucracy, with multiple levels of red tape regulated only by PBMs, pharmacies, drug companies, and insurance providers, allows each to blame the other when pressed on why prices are so much higher in America than elsewhere.
Richard Sackler, in a 2015 deposition in the lawsuit filed against Purdue by the Commonwealth of Kentucky, was asked about OxyContin.
“What are the gross sales?” It seemed a straightforward enough query given that Oxy accounted for 90 percent of Purdue’s revenue.
Sackler, however, said “I don’t know.” The reason, he claimed, was that in the drug industry, “a lot of money is inherently rebated back to purchasers, insurance companies, hospitals, et cetera, through wholesalers, in rebate agreements, which are negotiated.”40
Brand-name drugs are not the only ones with upward price pressure. A 2016 Government Accountability Office report revealed that more than three hundred generic drugs had price increases in the previous twenty-four months. More than half had at least doubled. Ten percent had increased more than 1,000 percent. Three widely prescribed hypertension medications on the market for more than fifty years were suddenly 2,500 percent higher.41
The spike in the prices of generics hit the United States harder than other countries since they account for 90 percent of all drugs dispensed in America (versus 70 percent in the U.K. and closer to 60 percent in the rest of Europe).42 It would not be a crisis were generics not on average far more expensive in the U.S.43
Pharmaceutical companies fight every effort to make it simpler for patients to compare prices when they fill prescriptions. A Trump administration regulation that ordered drugmakers to include their list prices in television ads was struck down by a federal judge in July 2019. Pharma firms prevailed on the argument that Health and Human Services did not have the authority to issue a decree and that, in any case, it violated their First Amendment rights.44
When Estes Kefauver had investigated the drug industry seventy years ago, he discovered that five leading firms conspired to keep their tetracycline prices identical even though they all had different manufacturing and distribution costs. In May 2019, history repeated itself. Forty state attorneys general filed a five-hundred-page lawsuit against the largest generic drugmakers, charging a multiyear, systematic conspiracy that resulted in substantially higher drug prices that had cost consumers billions of dollars. The suit listed 1,215 generic drugs whose prices had jumped on average more than 400 percent in the previous year. Included were some lifesaving drugs. One for severe asthma had soared 4,000 percent.45
When the state attorneys general filed their lawsuits, the pharmaceutical companies seemed to pull some stock replies from their archives. There was no truth to the charges. Prices went up because in some cases, like insulin, there were drug shortages. In other instances, market forces were responsible. One of the attorneys general who had filed the price-fixing lawsuit, Connecticut’s William Tong, knew personally about how soaring drug costs made it unaffordable for many patients. He took a medication for a skin condition. It had jumped in a single year over 8,000 percent, from $20 to $1,820 a bottle. When told of how the pharma industry brushed off the charges, Tong became heated in a 60 Minutes interview. “It’s a $100 billion market. We’re talking about the drugs that America takes every day to live. And they’re profiteering off of that in a highly illegal way. They’re just taking advantage.… It wasn’t about product shortages. It was about profit. It was about cold, hard greed.”IV46
I. Federal statute prohibits the secretary of Health and Human Services from negotiating prescription drug prices. Only Congress can change that. However, even if the government had the authority to negotiate prices, it would be unlikely that alone would result in substantial discounts. The pharmaceutical industry would have no incentive to lower prices unless the government also had the power to remove certain drugs from its approved formulary or to cap prices at a certain amount.
II. According to Linda Cahn, an attorney who helps health insurers negotiate with PBMs: “Let’s say there are two drugs in the same therapeutic category—one for $500 and one for $350. Which manufacturer can promise more rebates? Obviously the one with the $500 drug.” A larger rebate from the more expensive drug would get it listed on the formulary at the same time its rival’s cheaper medication was delisted. Medical insurance carriers and patients with copays would pay more based on the artificially high list prices of the rebated drug.
III. For most of its aid programs, the federal government buys drugs at 20 percent to 22 percent off list price. The ACA also established a complicated formula for reducing the share of drug costs the government paid in the future. And it opened the door to states creating and fine-tuning drug formularies.
IV. High drug prices are one of the leading topics in the 2020 presidential race. Every Democratic candidate has a plan. Some want the federal government to manufacture generics and sell them at cost. Others allow Americans to buy cheaper drugs from foreign countries. Elizabeth Warren and Bernie Sanders proposed eliminating all private insurance and making the government subsidize expensive drugs.
In December 2019, the House of Representatives passed a drug plan sponsored by California congresswoman Nancy Pelosi. STAT, the leading medicine and pharmaceutical online journal, described it as “dramatically more aggressive than expected.” Under the Pelosi plan, Medicare would negotiate directly with drug firms on prices for 250 medications that do not have competition from at least two generics or biosimilars. No drug in America could be more than 1.2 times the average price of the same medication in Japan, Germany, France, Canada, Australia, and the U.K. Failure to comply would result in a punitive tax of 75 percent on a company’s gross sales. The provision that was most unsettling for pharma was that the federal government would have the power to claw back profits earned from drug price hikes since 2016 in cases in which those increases were greater than the rate of inflation. That translates into potentially hundreds of billions in profits. It was, according to one commentator, “déjà vu” for what Estes Kefauver had tried to do sixty years ago.
The Pelosi bill is expected to stall in the Republican Senate. There, bipartisan support has built for a bill that caps out-of-pocket drug costs for Medicare at $3,100 annually.