Drugmakers Blame Middlemen for High Prices But Still Make Huge Profits

February 5, 2019, 1:59 PM UTC

With drug prices climbing far faster than inflation, the cost of prescription medicine has become a big issue in the U.S. They are the third highest expense in the U.S. health care system and 9.5% of the total cost, according to figures from the Centers for Medicare & Medicaid Services.

There’s heat from politicians and drugmakers don’t like it. In the past, pharmaceutical companies argued that high prices were necessary to fund of research. Now they’re pointing at drug middlemen, as the Wall Street Journal reported.

“As you know, unfortunately, the current pharmaceutical supply chain includes various misaligned incentives that serve to support middlemen while often neglecting patients,” said Merck CEO Ken Frazier in an earnings call on Friday.

The rationale is that middlemen demand high rebates. Drug companies raise prices to end up with what they want to make but middlemen don’t pass all the savings along.

However, the math is fuzzy. If the combination of higher prices and discounts keeps the actual payments to the drug companies the same, nothing has ultimately changed.

The Trump administration proposed in January ending the rebate plans.

Even with the rebates, drugmakers do well. According to profit data on more than 100 business sectors compiled by Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, the pharmaceutical industry has the tenth highest average after-tax profit levels, at 22.8% of income. The average across all industries is 10.3%.