Two Stories That Help Explain Runaway Drug Prices

June 30, 2017, 5:32 PM UTC

Having now decamped to their home sanctuaries for the Fourth of July weekend, Senate Republicans may get a momentary break from the pressure to have to vote on a Trumpcare bill their leadership wants, the President sort-of seems to want—and four-fifths of Americans appear to detest.


After the fireworks and festivals, the barbecues and backyard banquets, maybe they’ll get to curl up on their senatorial Barcaloungers in their well-appointed senatorial dens, and read.

They can start with a pair of articles that were published by Bloomberg this morning and yesterday.

This morning’s piece, by Robert Langreth, explores why the prices for many generic drugs—including essential cancer-fighting medicines—have risen, in some cases to an “extraordinary” degree, according to the Government Accountability Office. Prices for roughly 300 generic drugs at least doubled from 2010 to 2015.

In yesterday’s article, Langreth and Paul Barrett point to what some plaintiffs allege is a more scandalous behind-the-scenes arrangement that’s helping to drive drug costs ever higher: that drug makers raise their prices in part to allow middlemen known as pharmacy benefit managers, or PBMs, to demand fatter rebates on those drugs, which they then share with their clients (who are the companies ultimately paying the coverage bills and who hire the PBMs to lower their costs).

Got that?

“One of the main functions of PBMs,” explain Barrett and Langreth, “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.”

The drug at the heart of four lawsuits in New Jersey is insulin—“a century-old medicine that for most of its history cost $15 or less,” write Barrett and Langreth, but “whose list price has risen more than 270 percent over the past decade.”

Federal prosecutors, report the Bloomberg writers, “are also investigating relationships between PBMs and large drug companies” and the U.S. Attorney’s Office in Manhattan has ordered three makers of insulin to turn over documents regarding those relationships.

(“The three drug companies say they’re cooperating with the government’s document demands,” Bloomberg reports. “The same companies and the three PBMs say the private suits are meritless”—with one PBM CEO declaring: “It is a complete falsehood that we would prefer prices to go up.”)

The PBM clients, in any case, benefit from the rebates—though it’s hard to know how much because, as the Bloomberg writers point out, the after-rebate “net price” they ultimately pay is confidential. But others—notably the uninsured—are left to pay the higher list prices. And, as Barrett and Langreth write, drug makers often raise those list prices “to make up some of the lost revenue” from rebating.

FORTUNE contributor Katherine Eban dove into the murky PBM-client-drugmaker nexus back in 2013, in a classic feature entitled, “Painful Prescriptions.” And it would seem that little has changed since then.

Maybe the senators will, in their quiet time at home, absorb this thoughtful reporting—then come up with some good ideas to combat the outrageous surge in the price of medicines, and of healthcare in general. Maybe that’s a way for them to deliver on their promises to their constituents—who really just want some way to afford the medications their families need, not have their insurance taken away or their premiums surge.

Then, maybe next Independence Day, when they’re at their hometown fireworks display, some good soul might come over to hand them a cold beer—which is what big-hearted Americans do on the Fourth of July.


This essay appears in today’s edition of the Fortune Brainstorm Health Daily. Get it delivered straight to your inbox.

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