Trump vs Drug Prices

Any American who hears or sees the news probably recalls President Donald Trump making some pretty bold statements regarding drug prices.   During his presidential campaign, for example, drug price reduction was one of his key promises.  In fact, he went so far as to accuse drugmakers of “getting away with murder.”  In May of 2018, he announced that drug companies would be announcing “massive” voluntary drug price cuts within weeks.  Many Americans were delighted to hear that their President would bring some measure of accountability to medical costs.

Well, as we all know by now, none of that has happened.  In fact, during the first seven months of 2018 there were 96 drug price increases for every one price cut.  So, why is it so hard for the mighty US Government to rein in drug prices?  Well, according to Health and Human Services Secretary Alex Azar, the complexity of the medicine market and its incentives for drugmakers to raise prices so they and middlemen make bigger profits.

Employers hire consultants, who are supposed to act as disinterested third parties, to help them select a pharmacy benefit manager (PBM) to negotiate with drug companies. But those consultants don’t direct companies to the best deals.  These consultants solicit bids from the selected PBM and give these options to their client companies.  The companies then select one option, typically based on drug prices and pharmacy networks. 

The Big Three PBMs CVS Caremark, Express Scripts and OptumRx effectively form an Oligopoly and effectively lock out the smaller players because of entrenched relationships and sheer scale.  Benefits leaders usually select the big PBMs because lower fees and the promises of sizeable rebate checks make their financial executives happy.  Even Costco, with its vast network of retail warehouses and online presence, loses out to the Big Three because of entrenchment of relationships and business familiarity.  Further, the Big Three have scant turnover, typically retaining 97% of their business from one year to the next.

PBMs negotiate discounts from Big Pharma and rely on a model called “spread pricing” under which they pocket the difference between what they pay pharmacies and what employers pay for pharmaceuticals.  The Big Three also pocket a portion of the rebate. 

This complex and entrenched business relationship is what Trump, or anyone else who seeks to lower drug prices, faces.  Complicating the matter is that many members of Congress receive campaign donations from Big Pharma and the Big Three PBMs, and the consulting companies.  So, there is some sense that key players are “bought and paid for.”

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