Middlemen Pushing Up Retail Costs of Drugs

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Common rhetoric among policymakers and the general public holds that pharmaceutical prices continue to skyrocket, making medicines virtually inaccessible to most patients. While it is true that drugs can be hard to access, there must be a re-evaluation of why such inaccessibility is an issue.

Adam Fein from Drug Channels does a fantastic job highlighting the trends of drug production and prices over the years. Fein’s analysis shows that net prices for brand-name prescription drugs have declined every year for the last six years. That may shock most people.

Not only are brand drug prices dropping; drug spending, which is a very small share of U.S. healthcare spending, remains consistently low. Fein outlines that since 2000, outpatient prescription drugs have consistently accounted for between 9 percent and 10 percent of U.S. healthcare spending.

Public perceptions of increases in drug prices can largely be attributed to non-price factors, such as utilization by payer beneficiaries and the mix of drugs utilized by patients. The Centers for Medicare & Medicaid Services (CMS) computed that, from 2018 to 2021, since drug prices fell, non-price factors accounted for all the changes in drug spending.

One of the most interesting facts that Fein brings up — one that completely contradicts how people perceive U.S. healthcare — is that the percentage of total spending on drug prescriptions matches closely with the ratios found in most countries.

The range among other countries is typically between 14 percent and 18 percent; when inpatient hospital drugs are included, the United States lines up solidly within that range at 15 percent. Once again, the narrative around healthcare spending is completely at odds with these facts, leading policymakers, and healthcare officials to quickly bash the United States for its allegedly excessive drug costs and place the blame specifically on pharmaceutical companies.

The reality is that other players are causing net prices to decline and retail prices to increase. Those players include employers, health plans, and pharmacy benefit managers (PBMs), all of whom have continuously circumvented the system through loopholes and complicated systems of reimbursement that tend to hurt patients. For example, PBMs engage in rebate negotiations, payer-funded programs, and formulary exclusions.

Despite the decreases in net drug prices, the real payer — the patient — is still required to pay deductibles or coinsurance based on inflated retail prices.

The issue with this misperception of drug spending is that it directly impacts policymaking at the federal level. Focusing solely on retail drug prices with legislation such as the Inflation Reduction Act attacks pharmaceuticals in an unwarranted manner and negates the conversations of where high prices are really coming from and the impact on patients’ out-of-pocket costs.

Gauri Binoy is Research Assistant, Pioneer Life Sciences Initiative.