The
you watched at the end of Chapter 6 describes how insurance companies negotiate discounts on branded drugs — how they rarely pay full list price. They do that via organizations called Pharmacy Benefit Managers, or PBMs, as we touched on briefly in Chapter 4.
The discounted price, often called the net price can be much lower than the sticker price. Remember the drug Januvia mentioned in Chapter 4? Januvia’s list price is $6,900, but the CEO of Merck, who makes the drug, testified before Congress that its average net price is just $690. The difference between list and net prices is typically caused by rebates that drug makers negotiate with PBMs to access drug formularies, the list of drugs that are covered by an insurance plan. There’s nothing nefarious about negotiating a better deal, and that’s what happens when PBMs have the ability to drive prices down when there is more than one drug that treats a particular condition. That’s the market working!
Understanding the role of PBMs is crucial to understanding how drug pricing really works.
Because most drugs are sold through insurance, drug companies need to get their products listed on insurance formularies. PBMs get a cut of the discount they negotiate on behalf of the insurance company client, and so it’s in their interest to select drugs with high list prices and negotiate higher rebates. This can cause a significant financial burden for patients, because their out-of-pocket costs are usually based on the inflated list price of medications, rather than the actual negotiated net price. In some instances, a patient’s out-of-pocket cost is greater than the total cost insurance is spending for the drug!
And if this system wasn’t convoluted enough, the real problem lies in the fact that these deals between PBMs, insurers, and drug makers are kept entirely secret. We don’t know how much the insurers are actually paying the PBMs or the drug makers, only that it’s less than the list price of the drug. To make matters worse, the three major PBMs in the United States serve 80% of patients … And they’re all owned by major insurance companies.
We’ll let Dr. Glaucomflecken explain, via “Jimothy,” in this hilarious video: