
Drug Pricing System Used by Middlemen - refurb
https://www.bloomberg.com/graphics/2018-drug-spread-pricing/
======
maxxxxx
The number one thing the US needs to do is to mandate transparent pricing of
all things medical. Wherever you look there is opaque pricing that's
intentionally hiding information from other market participants. No market can
function without the participants having information.

~~~
bluGill
Your [large] employer benefits from the system and wants it to stay.

You cannot get a better deal on health insurance on your own than through your
employer. If you want to take a summer off the amount of money you would have
to save up to pay for that is much higher. If you are thinking about changing
jobs for more money you have to not only compare salaries, but also a complex
benefit system that isn't really explained in the job offer.

If you want to see transparent pricing get the employer out. Buy your
insurance directly from whoever you want (or maybe from the agent you like).
Of course it will take years for things to change after this, don't expect
things overnight.

Edit: as others have pointed out, it is the large companies who benefit at the
expense of small companies and employees.

~~~
e40
As a small employer (< 50 people), I can tell you I hate that it is on me to
find and provide insurance to my employees.

It's only huge companies that want this system to remain.

~~~
nradov
Huge companies don't necessarily want this system to remain any more. Costs
have increased to the point that it's now impacting their ability to compete
internationally. Their competitors based in other countries can undercut their
pricing due to lower employee healthcare costs.

------
dhnsmakala
I once had to pay a pharmacy a higher copay for a drug than their list price
for it.

Once they found I had insurance, they said I couldn't just buy it without
using my insurance (probably a lie). Is it the pharmacy ripping me off and
getting double paid, or is insurance getting a kickback on the copay? I think
the first explanation is more likely.

Apparently, this is a common thing, but I found it to be puzzling.

Just another anecdote of how screwed up our medical system is here in the US.
Imagine going to a store and paying higher than retail for an item...

~~~
sjg007
The only reason to pay the copay is that it will reduce your remaining
deductible. So you have to weigh the longer term option vs immediate savings.

~~~
pessimizer
This isn't weighing present-value and future-value of money, this is gambling;
gambling whether you're likely to get through your deductible or not.

~~~
sjg007
It’s not gambling. Some people schedule medical procedures accordingly. Some
people have complex medical situations etc... insurance isn’t a gamble and not
everything is emergent.

------
shimon
This article criticizes the spread that Pharmacy Benefit Managers (PBMs) make
- the difference between the price they charge a payer (state program,
employer, or insurer) and what they pay a pharmacy for a drug.

But this spread exists as a powerful incentive for PBMs to push down profits
at pharmacies, which is exactly why payers work with PBMs rather than
reimbursing pharmacies directly. It's also why the major PBMs mentioned in the
article are all owned by huge insurers and pharmacies; when PBMs first started
to grab margin away from those businesses, the companies bought or built their
own PBMs. CVS' proposed acquisition of Aetna would create a PBM integrated at
both ends.

The existence of PBMs is most painful for independent pharmacies, which are
forced to work with PBMs in order to get paid and will thus continue to get
squeezed. As much as I'd like to support neighborhood pharmacies, the reality
is they are probably incapable of the major efficiencies in procurement and
distribution that the giant corps can do, and over time they'll be pushed into
a model that is more like uber - small providers of a storefront and licensed
pill-packing services, built on a network that captures most of the value.

In theory, competition among PBMs for the business of payers like the jail
mentioned in the article would drive lower costs for payers. Is there a
failure of competition among PBMs? Are payers like this jail simply incapable
of selecting a good PBM or are there barriers that could be solved, like
monopolies or information asymmetries?

~~~
apeace
> In theory, competition among PBMs for the business of payers like the jail
> mentioned in the article would drive lower costs for payers.

I noticed that all of the spread graphs in the article were going down and to
the right. Even though the spread was increasing, it seemed that prices were
going down over time.

~~~
shimon
The key examples of massive spread chosen for this article are all in novel
generics. These drugs are going to have massive price volatility because
multiple generic vendors are entering the market at the same time, and they're
flowing through various distributors to pharmacies that have varying inventory
of the drugs. So of course the spread is significant, and it's likely that
both pharmacies and PBMs are pocketing higher margins on these products
between the time that generics initially become available and the time that
suppliers and prices stabilize.

Seems plausible that if you looked at non-PBM pricing for these drugs over the
same period you might find that the PBMs do in fact reduce volatility and
accelerate price stabilization, i.e. they are doing their jobs. Or maybe
they're not. But the fact that underlying price volatility implies higher
spread seems like something you'd just expect with a PBM model.

------
calvinbhai
Unfortunately, there's no fair market for medical services, surgery,
diagnosis, scans, tests and medicines in the US. It is so damn opaque, that I
get to know the total out of pocket expenses a month after a visit to the
doctor. with extreme regulations, often stifling competition, Americans are
getting ripped off every day with convoluted billing mechanisms.

An example is my Echo cardiogram experience in a span of 3 months:

USA: $700 out of pocket, with a blue cross blue shield insurance by an
employer with dependent (premium is ~$400 per month). Insurance company paid
for the echo: $2000

3 weeks: Total time taken from Cardiologist suggesting echo, to getting echo
done, to cardiologist receiving reports and sharing diagnosis.

India: Without insurance or any other bs, cost of echo, was ₹1200 (less than
$20), which I was informed upfront. Total cost with doctor charges was ₹ 2200
(~$30). When they mentioned the echo cardiogram cost, I had to double check to
make sure I didn't hear it wrong.

3 hours: Total time taken, including one hour wait even though I was on time
for appointment, Cardiologist has an echo cardiogram machine in the same room.
Echo taken 15 mins before cardiologist arrives, and Cardiologist gives me the
diagnosis.

If only there was a portal between US and India, that competition to cheaper
access to healthcare would improve the costs in the USA.

~~~
epmaybe
Not discounting your anecdote, because it's something I too have been
incredibly frustrated with. However, how would you possibly know the full out
of pocket cost for a visit until billing is complete? For simple things, I
completely understand the frustration, as an echo should be an echo. However,
what if they needed to run more tests, or did more for you as a patient and
thus didn't know what to bill until your hospital stay (or even outpatient
visit) is completed?

As for your point about costs being drastically different in other countries
for the exact same thing: I totally hear you, and wish there were more
competition. How do you hit that healthy balance of competition and quality,
though? Regulation is one way that comes to mind.

~~~
rootusrootus
When I saw a doctor while visiting Hyderabad, it was pay-as-you-go. Walked in
the door, paid a small fee to register as a patient. Consulted with a
cardiologist, then paid for an EKG with my credit card. After that, consulted
another cardiologist, who said let's do an echo. Paid for that, then had it
done (by an actual cardiologist, no less, not just some technician), then
visited an electrophysiologist. Got prescribed a beta blocker, went
downstairs, paid for that, left. Total bill ended up 4500 INR, or about 75
USD.

Then I flew home to the US a few days later, got a Holter monitor for a day
and a visit with my primary care physician and a cardiologist. Billed a couple
weeks later, 1000 USD. _After_ insurance.

For what it's worth, I could buy the Holter monitor and a bunch of disposable
supplies for it for about half what I was charged for borrowing it for 24
hours.

Our system is so terribly broken.

------
refurb
I’m not surprised that every egregious example of spreads is for recently
launched generic drugs.

The key problem with drug reimbursement is knowing what price the pharmacy
paid. Drug manufacturers have list prices, but offer discounts and rebates to
drop the price, particularly when a drug goes generic.

So if the list price is $100, the pharmacy might have paid anywhere from $95
to $5 for the drug.

In the past the PBMs are correct, that spread went to the pharmacies. That’s
less of a bug and more of a feature - it incentivized the use of generic
drugs.

Basically the PBMs inserted themselves in the process and grabbed the spread
for themselves.

~~~
shimon
This is a good point. Newly launched generic drugs go through a period of
rapid price adjustment, where at first they are priced only a little bit below
the brand-name drug. Then as more generics become available (and keep in mind
we're talking about physical products with expiration dates, inventory and
distribution delays, etc.) the best wholesale price drops.

In theory this is an area where PBMs can add a lot of value, because they have
broader visibility into the pricing of these drugs (both by researching manuf
pricing and negotiating prices with pharmacies).

------
mirimir
OK, here's a drug price cheat sheet.

AWP (average wholesale price) = "ideal" list price, excluding discounts

WAC (wholesaler acquisition cost) = supposedly realistic wholesale price,
excluding some discounts

ASP (average sale price) = supposedly realistic market price, including all
but the best hidden discounts

Generally, AWP>WAC>ASP. And real bottom-line prices may be below ASP. Because
of bundling and other well-hidden discounts.

I think that Medicare and Medicaid now use ASP. Medicare used to use AWP. For
Medicaid, some states used AWP, and some WAC. Both were getting screwed by
AWP-ASP and/or AWP-WAC spread, and they sued the drug industry over it.

The problem here is that PBMs are still allowed to bill at AWP or WAC.

~~~
refurb
A slightly different viewpoint:

AWP = an antiquated number currently defined as WAC+20% (it has been as high
as WAC+25%, but court decisions changed that). It was the "list price" that
distributors used when selling to pharmacies and was created to give them a
20% margin back when there were thousands of wholesalers and costs were
higher.

WAC = this is the public list price the drug companies set. Most wholesalers
get at least 1-2% off this price (prompt pay discounts, etc), but many drugs
are discounted much more (up to 90% off).

AWP was the standard for reimbursement (payments to a pharmacy when they fill
an Rx). Then Medicare realized they were paying AWP, when the real cost for
the pharmacy was AWP-80% for some drugs so they created ASP for physician
administered drugs (not pills that pharmacies dispense).

ASP = an average of the actual price paid by pharmacies for drugs, excluding
some special discounts mandated by the gov't like 340B or the Federal Supply
Schedule discounts.

Medicare uses ASP for all physician administered drugs (Part B) as do many
private insurers. For pharmacy dispenses drugs, it's all over the place and
can be AWP-X%, WAC-X% or something else. Medicaid is moving to actual
acquisition cost (AAC) where the pharmacy needs to share with Medicaid what
they paid and they are reimbursed that plus a dispensing fee.

~~~
mirimir
Thanks. As I recall, AWP for some generics was way more that 100 times actual
prices paid by pharmacies. And even WAC for some was on the order of 100 times
actual prices paid by pharmacies. Generic manufacturers were actually
competing on spreads for AWP and WAC vs actual prices. Because, when there are
several manufacturers, actual generic prices approach marginal cost of
production.

I had no clue that Medicare was still using AWP and WAC for pharmacy-dispensed
drugs. That's too stupid for words. But it seems that Medicaid has figured it
out.

~~~
refurb
It's complicated, but quite fascinating to see how we got to where we are
today.

You are correct that some drugs were being discounted 95%+ below AWP and the
entire spread was being pocketed by pharmacies.

For a very fascinating story, google Ven-a-Care Pharmacy.[1] Their entire
business model turned in suing drug manufacturers on behalf of the gov't under
the False Claims Act. Since they were a pharmacy, they had visibility into
both the prices that drug manufacturers charged and the reimbursement the
gov't paid. I believe most of their cases were related to the drug
manufacturers not correctly reporting their prices to the gov't, thus causes
Medicaid and Medicare to overpay.

Last I heard they had collected over $300M in whistleblower settlements.

[1][http://www.abajournal.com/news/article/repeat_whistleblowers...](http://www.abajournal.com/news/article/repeat_whistleblowers_reap_millions_of_dollars_in_false_claims_suits/)

~~~
mirimir
Wow.

What I know comes from a "you won't believe this!" conversation in some hotel
bar at a conference, some years ago.

------
seibelj
I will link to this book over and over: "Overcharged" explains the American
medical system and its problems in great detail. Cannot recommend it more.
Price obfuscation, third-party payments, and government interference have
warped the medical system in ways that will make you laugh (then cry).

[https://www.amazon.com/Overcharged-Americans-Much-Health-
Car...](https://www.amazon.com/Overcharged-Americans-Much-Health-
Care/dp/1944424768)

------
howard941
CVS is a PBM. How blatant does a conflict of interest need to be before
policymakers take action?

~~~
maxerickson
What's wrong with vertical integration?

It'd be a problem if there were no other pharmacies, and there is the separate
problem of the pharmacy benefit manager space (perhaps) getting over-
consolidated.

~~~
munk-a
Vertical integration is terribly anti-competitive, it's one of the reasons
it's often targeted in monopoly breakups. The main cause for this is that it
makes it harder to overcome barriers to entry. If you read this article,
studied up on PBMs and decided you could do a better job at PBM'ing then CVS
you'd need to negotiate with pharmacies and payers to offer your services,
even if those services are better if you're negotiating with CVS & CVS to try
and squeeze CVS out of the market... you probably won't have a lot of effect.
(IIRC in addition to the CVS pharmacy chain, CVS also runs a PBM (as
mentioned) and runs a self-funded insurance plan, I forget if they sell
policies to non-employees though)

Standard Oil is a great example of a company that used vertical integration to
prevent any actual market competition.

------
thomasfedb
As an Australian I'm a huge fan of our PBS. The government negotiats with
manufactures on behalf of all Australians, sets the total amount they will pay
(manufacturer, wholesaler, and retailer) price, and then sets the amount that
the patient contributes.

It's not perfect, and there are a few drugs we get a raw deal on, but overall
we all get decent access to whatever medication we need without blowing the
budget.

Healthcare is basically a right here though, so it's hard to compare to the
USA.

------
james1071
I haven't read beyond the first page, but do know a bit about the US drug
industry.

Briefly, since the late 1980s, the market for prescription drugs has evolved
from one where pricing was close to list price, to one where pretty much
everyone gets a large discount.

(By everyone I mean any kind of insurer or bulk buyer)

The effect is that the market has become completely lacking in transparency,
as the discounts are not public.

Also, in many cases, the discounts end up in the hands of middle men, such as
Pharmacy Benefit Managers or Insurers.

That suits them very nicely, as these discounts account for a large part of
their profit and are hidden, unlike their premiums and insurance plans.

------
En_gr_Student
This relates to the ongoing opiate crisis. Lets think about it.

Fentanyl comes from pharmacies, not the black market. The ecosystem that makes
this reasonable and normal also normalized the last "zombie (drug)
apocalypse".

If this dies, by clear public visibility, any group making radical profits
above normal price can be made grossly visible. This would make folks like the
Pharmacy in West Virgina that gave out 1500x more opiates per capita than the
average across the nation - stick out like a vast sore thumb. And it could be
stopped, early.

Dry up non-value-add cost increases, and healthcare might get less bad for
humans.

~~~
fucking_tragedy
In the US, most fentanyl sold by dealers comes from China and Canada, where
it's manufactured by clandestine labs.

I would not be surprised to find out that a Chinese pharmaceutical
intermediates lab with ties to the US was also selling fentanyl illicitly.

------
nemesisj
This has been a feature of the pharmaceutical industry since the 90s.
Ironically, pharmacy is one of the very few areas of healthcare where the
dataset is fairly pristine - prescriptions are always entered into a computer,
adjudicated electronically via a PBM (Pharmacy Benefits Manager) and
eligibility and pricing is then transmitted back to the pharmacy. However,
instead of this data being used for the benefit of the customer, it was used
to essentially insert a middleman (the PBMs) into the path between the
pharmacy and the insurer, and these grew to be large players over time.

The contracting process between pharmacy->PBM and PBM->insurer allows for
significant margins to be made by super chains like Walgreens and CVS (and
their associated and owned PBMs), and at the end of the day, the customer gets
hosed (via their insurance, or via paying cash on predatory "cash pricing"
schemes which are massively profitable to the pharmacy itself). Independent
pharmacies, unless they are in a particularly great location or have some
other specialty, are more or less toast on their prescription business, and
instead rely on front of house revenue.

But even this is nothing when you dig into the hospital side of things, and
some of the pricing programs that are available there. There are even specific
drug pricing programs (like the 340B program) that are specifically designed
to allow hospitals to save money on their pharmaceutical spend for certain
classes of patients, but these programs can also be extended outwith the
actual hospital's environment to the retail pharmacy.

None of the anecdotes I just shared are Medicare/Medicaid related (more or
less), and much of it (like 340B) are bandaids designed to try to help
disproportionate share hospitals that act as a safety net for care for
uninsured or indigent populations around the USA.

My point is this - this is just the pharmacy side. The USA healthcare system
is so complex, and involves so many layers, all of which are skimming profit
in a nontransparent way, that it is no surprise that American healthcare is
the most expensive in the world. Even diehard free market capitalists would be
absolutely amazed if they truly knew what was happening under the hood, and
whatever waste that exists in state run, single payer systems like the UK's
NHS (or hell, even Medicare in the USA) pales in comparison to the profits
being raked out of the system.

~~~
maxxxxx
It's amazing that Americans keep putting up with a system that literally lies
all the time, hides information , steals, has the power to bankrupt them at a
whim and is full of corruption and conflicts of interest.

Especially considering that there are plenty of examples around the world for
doing better. When you look around Europe they all are very different but none
of them is even remotely as f...ed up as the US system is.

~~~
nickjj
We really have no choice. If we refuse to pay for health insurance then we're
forced to pay penalties that are up to equal to the cost of bare bones
insurance ($400ish+ a month per adult) which offer practically no coverage and
constant headaches.

~~~
maxxxxx
"If we refuse to pay for health insurance"

Refusing health insurance is also not an option unless you accept to pay full
cash in an emergency. Or you need to accept not to get any care.

------
thinkcontext
If they are willing to do this to big entities like states imagine what they
are doing to small companies that have no power to get a modicum of
transparency.

------
mgkimsal
Bit of an OT/broad question, but...

Is there anyone in the US that has any sort of chronic condition or has had a
large medical expense that is vehemently in favor of the current system, or
vehemently opposed to some flavor of "medicaid for all"? I seem to only ever
read/hear/see healthy people who are against some form of basic universal
health services.

------
ereastman
Just acknowledging the incredible diagrams in this article.. really great work
by whoever made those

------
cbsmith
Click bait headline. It's not secret. PBM's are a well established part of the
health care industry. Maybe some people don't know about them, but they aren't
a secret.

~~~
munk-a
More people need to know because the US still doesn't have a sane healthcare
system. If you wrote for a ground breaking piece for a danish newspaper about
the terrible US healthcare system then maybe it'd be irrelevant (as all the
danes would say "Oh, that's terrible, thank god we don't have that here" and
go about their merry day), but in the US there is a large contingent of voters
(and a much larger oversized contingent of legislators) that oppose sane
changes to health care offerings.

~~~
cbsmith
Oh, I think the article is valuable, but it's BS to call it a "secret" system.
It's not a secret. It's how the system is supposed to work.

Of course, the system is flawed so...

