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Drug Pricing System Used by Middlemen (bloomberg.com)
201 points by refurb 35 days ago | hide | past | web | favorite | 105 comments

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.

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.

This was one of the many things misrepresented in the ACA debate. ACA, as intended, (and Medicare for all) put small business and startups on a more equal footing with the "big guys", but the "anti" campaign said "oh small business will suffer". Of course most small businesses can't afford to provide health insurance at all right now.

And of course some lobbyist was able to put a stumbling block into the ACA: companies can't reimburse your ACA premiums (they can give you a raise but it's taxed).

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.

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.

Huge companies are the only ones that have a real voice. Small companies only get lip service.

One layer removed from this - stop giving employers tax breaks for providing insurance benefits, and you remove the infinite gov't money hose from the equation - only then will you get a pricing signal that means something to individuals.

Yes, it's a f...ed up system that pretty much benefits everyone but the patient. Employers have control and providers and middlemen make boatloads of money.

An employer benefits only if you are a big employer with an HR department that can afford to spend time on the BS paperwork. If you're a smaller employer, the overhead and costs are crushing.

For smaller employers, it's better to just tell the employees to go to healthcare.gov and reimburse them for premiums they pay. Less paperwork, and employee gets to pay for health insurance with tax exemption.

Pricing Transparency isn't about insurance. It's about people knowing the total out of pocket expense before they ever agree to a procedure. Emergency medical services only account for 2-7% of medical spending in the US so there's a lot of room for people to shop around for the best price.

> Your [large] employer benefits from the system and wants it to stay. > > Edit: as others have pointed out, it is the large companies who benefit at the expense of small companies and employees.

This is completely wrong. The amount of money that employers have to pay in order to subsidize public insurance (which is the literal reason that prices are not transparent) is orders of magnitude more than what they can quantifiably get from you working that extra summer, or what have you.

Unfortunately, as long as getting health insurance through your employer remains tax-advantaged, people will be unlikely to demand the decoupling of work and health coverage...

Japan does this, the government decides the costs of all procedures and medicine, and user pays 30% + a couple of hundred bucks per month (more or less depending on your income).

In general a trip to the doctor and medicine is $10-20. I paid $500 for a 4 night stay in hospital (appendicitis)

Yeah, and the system is deeply in the red in Japan and everyone knows it. Seniors only pay for 10% of the cost and go way more to get medical care than salarymen, so there's no one to pay the bill in the end. It's not sustainable at all. You know that an injection of a typical cancer drug costs like 150 000 JPY and it's once every 2 weeks or so? And you have chronic conditions like Psoriasis or RA where biologic treatments cost more than 100 000 JPY per month/patient, and potentially for dozens of years as patients remain on treatment. This represents massive costs for the healthcare system.


> the government decides the costs of all procedures and medicine

That's a simplification. There are rules for pricing. Drugs in Japan will typically be priced somewhere between EU pricing and US pricing because the PMDA benchmarks across different countries, so Japan drug prices can't be massively cheaper or something. Companies know that very well and on purpose do not let Japan get a first approval for any kind of major drug, as benchmarking vs EU/US will enable them to secure higher prices in Japan. There are whole teams working on optimizing the rollout of drugs worldwide just based on maximizing pricing strategies.

It really doesn't seem particularly deep in the red. 284 billion ¥ annual deficit for 32 million people, that would be covered entirely by raising everyone's premiums 750¥ (less than $7) per month.

Your calculation is wrong. That's a deficit for a single year. There is a lot more deficit coming from multiple years piling up.

Plus, the article clearly mentions:

> The relatively low incomes of those covered by government insurance make it difficult to raise premiums

The ones who benefit the most from large healtchare payments have close to no income (retired people), so they can't bear any cost at all basically. This means massively increasing premiums for a minority of the population.


Per capita healthcare costs in Japan are still less than half of the costs of the US. Because of the age heavy demographics in Japan, that should be more difficult to handle than the US.

I would already be happy if the prices just were transparent. That should be an issue that should appeal to most reasonable people.

I 100% agree with this. I can get transparent pricing only AFTER treatments/stays, and only AFTER multiple phone calls and in-person visits to billing and administration.

We recently did this for my spouse who had to have surgery that ended up not being covered by insurance due to it being classified as 'elective'. It was 100% NOT elective, and I decided to dig.

After almost a full year (and being sent to collections for non-payment as I refused to pay until I had an itemized bill) I received a bill that was actually itemized. The surgeon/staff coded the surgery as the wrong procedure.

But because there is never, ever a bill that lays out what you're paying for, I was never presented with an opportunity to question charges. Luckily I have a position that allows that much flexibility, but not everyone is that lucky.

But because there is never, ever a bill that lays out what you're paying for, I was never presented with an opportunity to question charges.

The opportunity to question charges arises when you get your day in court. But, as you have discovered, the collection agency won't ever try to get a judgement in court because they full well know that the charges on the bill are bogus and the judge will throw the whole thing out if they pull up in front of one. That's how it works.

How would price transparency work for emergencies that require hospital treatment? It's routine emergencies like appendicitis, psychiatric crises requiring a few days of inpatient treatment, even broken limbs. Those are the real cost-drivers, and if you've ever had a child or spouse with any of these you know that this isn't like picking a clinic for butt enlargement or LASIK.

If you can't know upfront then publish the cost after the treatment. In addition publish the negotiated rates for all insurances. It's not that hard.

That should appeal to everyone except those with a vested interest in opacity. I am a libertarian and I think both people like me as well as the far left would absolutely agree that transparency benefits society. Our main disagreement would be “who” pays, but that’s a debate for another time.

Just how calorie counts are required on menus in many states, it might seem that price lists might be legislated similarly.

> Our main disagreement would be “who” pays, but that’s a debate for another time.

Our main disagreements are about "who" pays. Or at least that's what all of our major political fights seem to be about. Its a great distraction, because it sucks up nearly all the air of public conversation.

As a result, no one is ever having that conversation about why we need someone else to pay in the first place. The whole system is setup so that the sticker price of everything is unreasonably expensive, such that an intermediary to "negotiate prices" has become mandatory. Almost regardless of who is actually footing the bill in the end.

Even better, using the intermediary to negotiate prices makes them go up dramatically. At this point if I need something decently expensive from the hospital I just tell them I have no insurance. Because if I tell them I have coverage, they will use the negotiated price, which is absurdly high, and then my HSA plan means I end up paying the whole thing anyway.

The system is completely broken.

In terms of setting prices, that's what Medicare is largely. The government sets the prices. That's why in the US there has been a large push for "Medicare for all" (with Medicare Advantage plans covering above the basic coverage).

I bet the US could save boatloads of money if they abolished Medicaid, VA and other programs and instead went to Medicare for all as base coverage. Then you can add private insurance on top of that if you want more extensive coverage.

Not the worst idea. We have already boxed ourselves into the worst type of socialized medicine, we might as well try to fix it.

VA costs for drugs are lower than Medicare because the VA is allowed to negotiate drug prices, while Medicare is not. Part of the Medicare for all bill should change that.

The VA prices are less a negotiation and more of “the law says you have to give me at least a 24% discount”.

Considering that other first world nations pay half or less per capita for healthcare, and have government bodies setting allowed prices for drugs, then perhaps this is a big clue to affordable healthcare in the US.

similar to the netherlands, where the government mandates pricing and coverage options and private insurers compete within those guidelines. basically everyone over a certain income threshold pays about a hundred euros out of pocket per month, with almost no cop-pays to speak of (including doctor visits and perscriptions). people in the netherlands are healthy and have easy access to affordable healthcare, and the big insurers still operate within a competitive system. it's not my personal favorite but it seems to work well for most people.

> In general a trip to the doctor and medicine is $10-20. I paid $500 for a 4 night stay in hospital (appendicitis)

But you need to factor in your monthly costs into the equation.

If you never experience a severe illness or accident then you're paying $3,020 ($250/month?) a year to see a doctor once for a routine checkup, or ~30k for 10 years, or nearly ~100k for 30 years.

Low out-of-pocket is an advantage in and of itself.

The total cost calculations that show the US system to be twice do include taxes spent on health care, naturally.

Rather than futz around with piecemeal regulation, we need to either make legal changes to return to pre-1971 views on anti-trust or socialize the whole process.

I live in a country with socialised healthcare (UK/NHS) and while I like the NHS (I have two complex medical conditions that would largely make me uninsurable in the US) it has it's problems.

As always it's the implementation not the concept, the NHS has been a political football for decades, The left wing party (Labour) get in and increase funding to offset the damage the Right wing party did (the Conservatives) by underfunding, then they swap back and forth.

Even with all of it's problems it's a very efficient system at scale but it could be much better.

For what it's worth out of 600 odd MP's (our version of Congress people) I'd maybe piss on two or three if they where on fire, the rest can burn.

Sorry but this isn't a problem with socialized healthcare, this is a problem with education of people in general and voting knowledge and the election system. If a party that bankrupts a popular system keeps getting re-elected then something is wrong, _generally_ this can be attributed to the two party system of government that has become much more predominant in the western world and enables extremism by catering to single issue voters.

To reword your statement, "My sandcastle building is going great except every once in a while this jerk comes over and kicks over my sandcastle, I guess there's a problem with my sandcastle" and the correct answer is that the problem is the jerk.

1000% agree but no idea what the solution is.

We had a referendum on proportional representation vote and you should have seen the adverts from the against camp, it was depressingly expected though.

From what I have seen I'm the most optimistic about either ranked choice voting or leveling seats to help promote more diverse opinions in politics and I think that publicly funded elections are going to be a must either way - the corruption and elevation of corporate interests are getting too extreme.

How we get to that point I'm not certain of.

But one hilarious thing in the US is a trend lately of people submitting ballot measures, those ballot measure passing, and then the conservative held government refusing to honor those ballot measures. I don't personally thing direct democracy is a good general solution, voters generally won't have the expertise to decide intelligently, but when an issue is prominent enough that a plebiscite is called going against that is incredibly undemocratic.

I would go a step further. Pricing should be transparent and non-discriminatory.

Discounts, bundling, rebates, or preferred pricing of any kind should be illegal in health care.

I'd like to see this for telecoms and the banking sector as well.

Banking sector is legally required to be transparent. Specifically you should have received an "IMPORTANT DISCLOSURES" with information on them all like this:


Telecom I completely agree though. Some of the fake fees they charge (that are worded to look like taxes/regulatory) is almost criminal.

That's not transparency. That is disclosing their prices in small print.

I'm talking about removing hidden fees being passed around behind closed doors.

Fees like what visa will charge your merchant and kick back to your bank.

What other fees am I paying for indirectly without my knowledge? If I could see them maybe I could shop around for a bank that doesn't shaft merchants leading to a healthier economy and more jobs, you know, actual trickle down.

What's not transparent with banking? It's literally the most heavily regulated industry.

> What's not transparent with banking?

From what I gather in the US issues are e.g. weird shit banks do when processing checks and other payments, e.g. reordering transactions to generate unneccessary overdraft fees.

In Germany we for example long had the problem that ATMs of banks not in your network (e.g. when using a Deutsche Bank ATM with a Sparkasse card) were not required to show the fees associated with withdrawing cash. IIRC it needed EU regulation to finally fix this.

What aspect of banking?

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...

How's this for strange:

I once witnessed a situation where a relative of mine had insurance and the price of his prescription was $14.50 with insurance, but it just so happens the medication is also available over the counter and sells for $11.00.

This wasn't an "almost" match either. It was the exact same brand, exact same dosage, exact same quantity but in a slightly different box (due to store branding). It even said "prescription strength" right on the OTC box.

The really crazy thing is the original prescription the doctor wanted to prescribe was $600 for a 5 day supply of something that needed to be taken for 6 weeks but the insurance company denied it (meanwhile he pays $400 a month for basic insurance). Medical treatment is beyond broken in the US.

Same exact thing happened with my wife's epipen, turned up an order of magnitude. 300$ for a two-pack via insurance. 40$ for a two pack OTC. Pharmacist said _nothing_ and it was only after she called me to be angry about how expensive it was that I realized it was the mylan ripoff and told her to request a generic.

And this for a medicine that she'll literally die without. I see red even thinking about this. I don't understand how to get the broader populous to realize how dangerously broken this system is if they haven't by now.

I used to think "oh, there's probably a good reason for this" in all facets of life, including healthcare in the US. Then my father had a heart attack, and I was exposed to just how stupid the whole system is. By and large, there are policies, procedures, and business practices that were written with good intentions, but we've evolved into a society where the most important P is Profit.

People generally just purchase insurance and think they're "covered." If the whole population only knew how dirty the system is, there'd be change. But simply because of the obfuscated nature of the system, there is no good reason for why things are the way they are.

The profits are a great reason. Not necessarily for your dad, but definitely for some people who couldn't care less about your dad.

Ha, as a funny opposite example I once had insurance (when I was in the US) that had 100% out of pocket drug coverage (i.e. no insurance) but the price of my drug when from 300$/30 to 120$/30 because of a "preferred rate" for the insurer, which is wonderful because the flipside was that simply having an insurance card saves you money so those unfortunate enough to lack insurance end up being burdened with a completely arbitrary higher price.

FYI, a few years down the line a generic of my drug came out and my price went down to 3$/90, so these costs are just 100% BS and caused by artificially enforced monopolies, as soon as actual competition was allowed in the prices quickly leveled out to a sane amount.

(Aside, I'd prefer a socialized system in the guise of Medicare for all or what-have-you, but it amuses me that this market is so messed up that even just letting crazy free-wheeling laissez faire market effects to work radically reduces costs)

They were lying. You can buy the drug however you like. There is no legal restriction (unless you're in Medicare or Medicaid, then it gets complicated). Then again, they also don't have to sell it to you.

A lot of independent pharmacies do things like that. For pharmacies, it's usually better to go with a chain than your local shop.

That's just a shitty pharmacy. Walgreens tried to do the same thing to me and that's why refuse to do any business there. The local chain I use now is pretty good about helping me find the cheapest option for prescriptions (sometimes there are rebates on branded drugs that make them cheaper than generics).

Also, Walmart has a decent list of $4 medications: https://www.walmart.com/cp/4-dollar-prescriptions/1078664

To tack on to this: https://goodrx.com GoodRx is also a decent resource for finding reduced cost medication or coupons.

FYI many pharmacies (individual stores that is) do not accept it for certain medications, lie about accepting it, or will change their mind after ordering your medication in order to try and extort you.

Get it in writing if they say they will accept it or try and pay in advance or something. Pharmacies are up their with mechanic shops for being overwhelmingly comprised of scumfucks.

Using GoodRx lowered the cost my uninsured girlfriends blood pressure medication by a little over half.

The pharmacist likely has a contract with the PBM that bars them from discussing cash prices with people who are covered by insurance. If the PBM finds out the pharmacy is circumventing them, they can void their contract which will likely put the pharmacy out of business. It's likely that the pharmacy also got screwed by this transaction as the amounts that PBMs clawback are significant for most generic drugs.

At our medical clinic, doctors review first line and second line drugs whenever they are prescribing. Along with this they discuss the cash prices based off of goodrx.com, but we're looking into commercial drug databases as well for more detailed pricing. (if you're looking for an open source project to start, create a drug interaction database as all of them are commercial and ludicrously expensive)

About a quarter of prescriptions are cheaper if you pay in cash rather than use insurance. If I were in your shoes, I would have taken the prescription to another pharmacy and asked for their cash price.

Kudos to your clinic! I wish more physicians thought about cost when making prescribing decisions.

The doctors I’ve talked to said “it’s too hard to figure out what a patient’s insurance pays for”.

I can’t count the number of times a doctor has prescribed me a costly branded drug without even trying a generic drug first. The difference even with insurance is often significant.

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.

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.

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.

Deductible or not, I fail to see how it’s not still just wasting money. Yeah, i “weighed the longer term option”, but I still can’t get the math to work.

I believe the pharmacy, who contracts with the insurance company, is obligated to charge you according to their agreement with the insurance co.

No they are not. You can just take your prescription elsewhere (e.g. to another Walgreens or whatever). For example, say you lose a pack of pills. If you want a refill you then have to pay for it out of pocket since the insurance won't pay. If the pharmacy charges an inflated cash price to an insurance customer vs a regular customer (without a coupon or something) then that would be a major lawsuit waiting to happen. You can use a drug manufacturers coupon too (e.g. they give a PBM code).

That would be quite a contract that obligated them to ensure a customer was not also a customer of a particular insurance company.

Drug manufacturers have discount programs for uninsured customers (it's price discrimination to get as much money as possible from both insure and uninsured clients); so, if this was involved, requiring that customers had no applicable insurance known to the retailer wouldn't be a surprising contract term at all.

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?

> 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.

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.

Information asymmetries and maybe corruption aka "political donations"

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.

> . with extreme regulations, often stifling competition, Americans are getting ripped off every day with convoluted billing mechanisms.

I'm not American, but have enough exposure to US politics that I can imagine how any scenario to change this will go:

- Republicans don't want to upset donors and thus leave uncompetitive market in place, despite preaching the free markets all the time

- Democrats don't want to upset donors and thus leave uncompetitive market in place, having taxpayers pay ridiculous prices and pretending this is "free".

- Anyone who tries to encourage competitors to charge, say $50 for a liter of saline (still a very healthy markup for purified salty water) instead of $98 (the normal price for purified salty water) will be hit by politicians (funded by PACs) that are 'looking out for the safety of Americans' by limiting the market to existing players.

Nothing will ever happen and Americans will never have competitively priced healthcare.

agreed. Insurance and pharma companies are supposed to be among the largest donors and no politician, Democrat or Republican, Sesnsible or not, would dare to take them on.

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.

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.

"Billing is complete" is a term that makes sense in the US, where the health insurance companies, equipment and pharma manufacturers dictate the final price, and the healthcare provider can get only so much from the patient + insurance, which should also cover the costs + profits considering the emergency care where those without money/insurance should also be treated.

The main difference with this experience in India and in US is that in the US, the tests and treatments needed may cost a million dollars, but I'm not asked to pay up front. In India, no matter the cost or severity of the situation, unless I pay up front in full I wont get the healthcare attention that I need (unless I have a private insurance)

Having seen what regulation did to taxis in US, and how Uber broke the transportation service industry off it's shackles, I think US healthcare market is ripe for disruption. Replicating the Indian healthcare model is certainly not ideal, but there are enough things that can be copied by the US to improve the certainty of costs for treatments and tests.

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.

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).

The other thing this article fails to mention, is that while a new generic was billed at $100, and the pharmacy got $20 (with an $80 spread) before there was a generic, the prescription was billed in the thousands. The person paying the bill is still paying less, and overall, the company should see its bills go down.

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.

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.

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.

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.



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

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).


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

Rite-Aid owns a PBM as well. However, it much smaller than CVS's.


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.

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.

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.

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.

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.

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.

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.

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.

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.

"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.

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.

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.

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

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.

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.

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...

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