- [Presenter] You might think
the process that determines
how much you pay for something
is pretty straightforward,
and it often is.
For example, here's the
supply chain for a beverage
you might buy at the
drugstore, say, a Pepsi.
Pepsi Co. Manufactures
the soda and sends it
to a retailer, who sells it to a customer.
The customer pays the retailer,
and the retailer pays Pepsi Co.
Simple, right?
Well, that is not the
case for the products
behind the pharmacy counter.
The drugs.
Here's a typical supply of
chain for prescription drugs.
It looks really different.
That's because the way
that drugs are priced
is not at all a straightforward process.
Experts and politicians argue
that the very complexity
of this chain is part of why drug prices
have grown so high for customers.
- Everyone involved in the broken system,
the drug makers, insurance companies,
distributors, pharmacy benefit managers,
and many others contribute to the problem.
- [Presenter] To understand this debate,
first, you should understand
the flow of drugs and money
within this chain.
Let's start here with the
pharmaceutical companies.
They are the ones who develop
a drug and set a price,
known as the list price.
This isn't a straightforward
as it might look,
which I'll explain in a moment.
Next you have the wholesalers
who transport the drugs
and sell them to the pharmacies.
The patient pays the copay
and the pharmacy sends out
a bill that gets paid by
the insurance company.
That's simple enough,
but we're missing a link.
The link that manages
this transaction and adds
a lot of complexity to the chain.
Meet the pharmacy benefit managers or PBS.
They are who the drug
companies and some politicians
are talking about when
they refer to middle men.
They work for insurance companies,
big employers, and government agencies.
And a big part of their
job is to bring down
the cost of drugs for their employers.
They do this by negotiating
with pharmaceutical companies for rebates.
Yup, for many of the drugs a
pharmaceutical company sells,
it pays a rebate to the PBM.
The PBM sometimes pockets
a portion of the rebate
and passes another portion on
to the insurance company or employer.
Why the pharmaceutical
company pays these rebates
is the source of a lot of controversy.
What happens is the drug
company gets moved up
on something called a formulary.
So what's a formulary?
It's the list of drugs that
the insurance company covers.
And it's grouped in tiers.
Each tier represents what
portion of the list price
the patient pays and what
portion of the list price
the insurance company pays.
The highest tier in the
formulary is the lowest copay
for the patient.
And the lowest tier is the
highest copay for the patient.
When the pharmaceutical
company pays a higher rebate,
the PBM will move the
drug up on the formulary.
Pharmaceutical companies
want high placement
on the formulary.
That's because patients are
more likely to take the drug
that's most affordable.
And that usually means higher sales
for the pharmaceutical company.
If the patient wants to take
a drug that's lowered down
on the formulary or not on it at all,
they have to pay higher copays
or even the full list price
of the drug.
If this seems confusing,
that's because it is.
Let's take another walk
through that transaction,
this time with an example.
Say a hypothetical drug costs $100.
A PBM negotiates a $50 rebate,
$10 of which they pocket,
and $40 of which they pass on
to the insurance company or employer.
In return for that rebate,
the PBM moves the drug
to a better spot on the
formulary making it cheaper
for the patient to buy the drug.
This transaction is important
because the pharmaceutical
companies say it's a big reason
they keep raising the price of drugs.
You've probably seen a
chart like this before.
It's the rise in the
price of a drug in the US,
in this case, Humalog, according
to its maker Eli Lilly.
Th pharmaceutical company say
they have raise less prices
to protect their sales and
profits from the demands
of these higher rebates.
Here's the CEO of the
pharmaceutical company Merck
at a hearing on drug prices.
- If you bring a product to the
market with a low list price
in this system, you get
punished financially
and you get no uptake because
everyone in the supply chain
makes money as a result
of a higher list price.
- [Presenter] And here's
that Humalog chart again
this time with a net price,
where the average revenue that Eli Lilly
says they take in under this system.
For their part, the PBM
say that drug companies
don't have to raise prices
to boost their bottom lines
and that rebates reduce the cost of drugs,
not inflates them.
They say rebates reduce the
real cost of prescription drugs
because they lower the price
that insurance companies pay.
That helps the insurers lower the premiums
that the patients have
to pay for their plans.
Here's Derica Rice, an
executive vice president
at CVS Caremark, one of the
pharmacy benefit managers.
- Our job is to work with
the employers, unions,
and government programs
who serve to ensure that
when their members get
to the pharmacy counter,
they get the medicines that they need
at the lowest possible cost.
- [Presenter] So what
does all of this mean
for the patient back at
the pharmacy counter?
That the heart of all this
is what the patient pays
is often based on the list price,
not the price the insurance
company is responsible for
after the rebates.
And patients who don't have
insurance or coinsurance
or who have really high deductibles
sometimes pay the entire list price.
It's important to know that
the details surrounding rebates
are shrouded in mystery.
Pharmaceutical companies
and PBMs don't release
their rebate data saying it's proprietary.
But it's clear that different
people and different
insurance companies pay different prices
for the same drugs.
As you can see, the way
that prices work behind
the counter is totally different
from how they work in front.
(calm techno music)
