PhRMA report shows how supply chain shapes brand-name medicine prices

A medicine’s path from the biopharmaceutical company to the patient is complex and involves many entities across the biopharmaceutical supply chain. A new report from the Pharmaceutical Research and Manufacturers of America (PhRMA) is among the first to examine how money flows through this system – which includes wholesalers, pharmacy benefit managers (PBMs), pharmacies and insurers – and how that impacts what patients pay at the pharmacy.

In the competitive marketplace for medicines, negotiations between PBMs and biopharmaceutical companies result in substantial rebates and fees. According to the report, Follow the Dollar: Understanding How the Pharmaceutical Distribution and Payment System Shapes the Prices of Brand Medicines, "in many cases, this system creates incentives for PBMs to prefer medicines with higher list prices and higher rebates." The report also notes that "some industry observers and government agencies have questioned whether insurers and PBMs are more focused on the size of rebates than on achieving the lowest possible costs and best outcomes for patients."

"As a result of robust negotiation and competition in the marketplace, medicine costs are growing at the slowest rate in years," said Stephen J. Ubl, president and chief executive officer of PhRMA. "At the same time, this report highlights the need to evolve our current system to better reward results and ensure patients more directly benefit from the significant price negotiations."

As the report explains, the prices wholesalers, pharmacies, PBMs, insurers and patients pay for a medicine all vary and are shaped by negotiations in the supply chain. In recent years, rebates negotiated have increased significantly. Earlier this year, the Berkeley Research Group reported that rebates create savings of more than US$100bn annually and that more than one third of the list price for brand medicines is rebated back to payers and the government or retained by the supply chain.

Although discounts and rebates are growing each year, insurers are dramatically increasing the share patients are required to pay out of pocket. Furthermore, patients with high deductible health plans or coinsurance do not realize the benefit of negotiated savings because their out-of-pocket costs are based on the medicine’s undiscounted list price.

The new report provides three hypothetical examples to illustrate how money flows through the supply chain when a patient is purchasing a medicine with a copay, coinsurance or in the deductible:

• Janet takes a high blood pressure medication with a list price of $100.00. Insurers and PBMs negotiate down the price with the biopharmaceutical company, which is paid only $62.00. The wholesaler, pharmacy and PBM are paid $16.00 in rebates and fees as the medicine moves through the supply chain. Of the $78.00 spent on Janet’s medicine ($62.00 + $16.00), her insurer pays just $38.00 while Janet is required to pay her $40.00 copay — $2.00 more than her insurer.
• Scott takes insulin with a list price of $400.00. Because the market for insulin is highly competitive, his insurer is able to negotiate a 65% rebate. After these negotiations, the biopharmaceutical company keeps just $88.00. Since Scott hasn’t reached his deductible his insurer does not cover any of his costs. Despite this, his insurer still earns the $239.00 rebate it negotiated with the biopharmaceutical company. Unfortunately, Scott still has to pay an amount close to the list price: $408.00.
• Diane takes an HIV medication with a list price of $3,000.00. Diane’s insurer receives a 20 percent rebate, but her coinsurance of $612.00 is calculated based on the medicine’s list price, meaning she pays over $100.00 more than if her coinsurance was based on the insurer’s negotiated price. The PBM also earns revenues and fees that are based on the medicine’s list price. In total, the PBM earns $522.25, including $308.00 for managing the pharmacy benefit on behalf of Diane’s insurer and $214.23 because it owns the specialty pharmacy that dispenses Diane’s medicine.