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Hubwonk Drug Discount Distortions: How Middlemen Increase Costs and Reduce Access
01.09.2024
[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. On January 1st, the popular asthma drug Flovent disappeared from pharmacy shelves, leaving its users scrambling for alternatives and policy observers to wonder what happened. A closer look at the puzzle reveals that though Flovent’s producer, GlaxoSmithKline or GSK, was responding to regulatory pressure to lower the price of the drug, The Byzantine system of rebates that circulate between insurance companies, pharmacy benefit managers, and consumers serve to effectively eliminate coverage for a drug that had safely and effectively treated asthma patients, many of them children, since the year 2000.
[00:00:45] The Flovent story mirrors that of many drugs used to treat other chronic illnesses such as diabetes, shining a spotlight on a process that keeps the price of name brand therapies high while also serving to discourage the adoption of their generic substitutes. How does our healthcare system decide which drugs we can purchase and at what price?
[00:01:03] And how can incentives designed to reduce costs for consumers actually result in drugs like Flovent being removed from our pharmacy shelves? My guests today are Pioneer Institute’s Senior Fellow for Life Sciences, Dr. Bill Smith, and Pioneer Institute’s Visiting Healthcare Fellow and Founder of Conquest Advisors, Pharmacy Doctor Robert Popovian.
[00:01:23] Dr. Smith and Popovian will explain how drug therapies find their way to patients using a complex system of rebates coordinated by intermediaries known as pharmacy benefit managers. They will share how rebates originally negotiated as product discounts now provide pharmacy benefit managers with distorted incentives to cover more expensive name brand drugs and reduce access for those less expensive therapies when they go generic.
[00:01:49] We will discuss alternative models for drug access such as direct to consumer programs. And what steps policy makers might take to realign incentives for the benefit of patients. When I return, I’ll be joined by Drs. Bill Smith and Robert Popovian. Okay, we’re back. This is Hubwonk. I’m Joe Salvaggi, and I’m now pleased to be joined by frequent Hubwonk guest and Pioneer Institute Senior Fellow for Life Sciences, Dr.
[00:02:14] Bill Smith, and by Pioneer Institute’s Visiting Healthcare Fellow and founder of Conquest Advisors, Dr. Robert Popovian. Welcome to Hubwonk, gentlemen.
[00:02:23] Bill Smith: Thank you, Joe.
[00:02:23] Robert Popovian: Glad to be here.
[00:02:24] Joe Selvaggi: Okay. All right. So we’re going to be talking about some familiar topics. Certainly Bill, you and I have talked about drug prices, how we got here, what can be done, what the dynamic is before we as consumers ultimately buy and pay for that drug.
[00:02:38] but today we’re also going to talk about a phenomenon that happened just this past January 1, 2024, where a popular drug, in this case it was Flovent, the drug manufacturer actually reduced its price, and it fell off what’s called the formulary, meaning I can’t go out and my insurance company may not cover this anymore.
[00:02:56] I speak from experience. I’m sure there’s a lot of other drugs out there but let me give the listeners a little bit of background. I’m asthmatic, and I discovered albuterol and Flovent, and this was maybe 20 years ago, and I’ve run 13 marathons. Running is my drug, and if it weren’t for these drugs, on a cold day like this, I wouldn’t be able to walk down the street without developing a painful hacking cough.
[00:03:17] So this is near and dear to my own heart, which is a kind of an unusual step, but let’s talk about it. For instance, let’s use Flovent as our example. but before we do, before we figure out why Flovent isn’t any longer covered by my insurance company, Bill, explain to our listeners, where do drugs come from and how do we ultimately buy them in the drug store?
[00:03:36] Bill Smith: Where do they come from? They come from 1000 ideas. there are 1000 thousands and thousands of researchers, both in academia and in industry, that have ideas about different compounds and how it might affect a certain disease state. And they pursue 90 percent of those.
[00:03:54] Projects fail, but 10 percent succeed. and, that’s a good thing that they do. and pricing them is an art, not a science. It’s, a lot of it, it’s not just based on the R and D costs. As some people think it’s based on what market. forces you’re entering. What is their competition?
[00:04:11] Is the competition better than your own product? Is there generic competition? There’s a whole host of factors that companies have to consider when they set prices.
[00:04:21] Joe Selvaggi: And you and I have talked about the fact that whereas we all agree, healthcare prices are high and continue to go up. the cost of drugs really over time as good as those drugs are seem to over time.
[00:04:31] not really represent a larger percentage of our health healthcare costs meaning Though they do cost a lot when they’re new they fall off. into what’s called generic where whereby they’re no longer extremely expensive Robert, why don’t you share with us? Why is it that drug costs haven’t really escalated over time the way sort of the popular myth portrays it?
[00:04:51] Robert Popovian: It is a popular myth, and the reason that drug prices have stayed stable on average is because, as you mentioned, Joe, these medicines come out, they’re brand medicines, for a finite number of years.
[00:05:04] brand companies have an ability to price these medicines as they wish. After they lose their patents, these drugs become what they, typically generics or biosimilars. And with the introduction of biosimilars and generics, the prices started to plummet. So, what I always tell people is that the value of the medicine never goes away.
[00:05:25] the flow that you were, you’re used for your asthma, the value will continue in perpetuity, but the price will fluctuate. The price will be high for several years in the beginning, but then it will plummet after it goes generic. And that’s what we have seen. And this is why, on average, prices of medicines have not gone up significantly over the last.
[00:05:46] Okay. And that’s because we have more and more generics that come into the market as brand name products lose patents.
[00:05:53] Joe Selvaggi: Okay, that’s a good answer. We have why they cost money and why they over time cost less money. But unlike many of the products we’re used to buying, let’s say a gallon of milk, we have a manufacturer and a distributor, maybe the grocery store, and we buy that gallon of milk.
[00:06:07] But we know with drugs, there’s a different dynamic. There are many intermediaries, but we like to, we’ve covered this on earlier shows. but our insurance company buys it perhaps on our behalf and we do a copay, but they use intermediaries known as PBMs, pharmacy benefit managers explain for our listeners.
[00:06:23] Bill, why don’t you feel this one in basic terms? Who is it? That’s in a sense, buying these drugs are negotiating for these drugs on our behalf.
[00:06:32] Bill Smith: Pharmacy benefit managers, the PBMs are consultants to the health plans that ultimately pay for the drugs, or although the employers ultimately pay for the drugs through the health plans, and the pharmacy benefit managers serve as consultants to negotiate with the numerous drug manufacturers to try to get the most reasonable price for health care, for those products for the health plans and you know that in the abstract sounds fine, but there are many perverse incentives that we can talk about and Robert’s expert on this at how PBM’s actually increase the costs for both health plans employers and patients themselves.
[00:07:09] Joe Selvaggi: That’s a good tip. Robert, how is it that an organization, a PBM, that their express purpose for being there is to make sure my drugs are as cheap as they can be.
[00:07:19] They’ve got the knowledge; they’ve got the market power. They, in a sense, put it to those big, bad drug companies and say, give us the best price. How is it that they might be distorting the price that I ultimately see?
[00:07:29] Robert Popovian: because the way that the PBMs work though, is that they arbitrage the price of the medicine.
[00:07:35] So they buy the medicine at a certain price, but that’s not necessarily the price that the employers or the patient ends up paying at the drug store, at the pharmacy counter. So, what happens is that they have contracts with these manufacturers. for example, if the drug is, for sale for a hundred dollars.
[00:07:53] They end up negotiating the price down to a 50, but the price that ends up being paid by the patient at the pharmacy counter or by the employer generally ends up being 100 still. What they do is that they make money off of the margins and these margins have grown over time where they used to be maybe 5 or 10 percent now over 50 percent of a value or price of a medicine, a brand name medicine ends up in the hands of the PBMs.
[00:08:23] And because of lack of accountability and lack of transparency, we have no idea what they do with these. Negotiated prices, whether or not they keep. All of the 52, 3%, or they pass a certain percentage back to the employer or the federal government. Nobody knows that even the federal government doesn’t know exactly what the amount is.
[00:08:43] And that’s because it’s a very convoluted system that they’ve created. And 1 thing to also mention that Bill said there used to be independent. And as consultants now, because they are being either acquired or have been acquired by insurance companies, it’s become even more money. The waters have become even more money because now they can even hide more money in the supply chain where in the past.
[00:09:06] The insurers, where they were separate from the PBMs, were sort of a gatekeeper, and, but that no longer exists in the marketplace.
[00:09:14] Joe Selvaggi: Yes, Bill and I have talked about PBMs in that they, their revenue, rivals or even exceeds that of the drug companies themselves. In other words, as intermediaries, they make more money than the people actually producing the drugs.
[00:09:25] again, I’m going to put my economist hat on here and say there’s some real flaws with the model of a PBM, which is, as you say, they get paid by the discount they negotiate, right? So, the more that drug costs, the larger the discount. Explain, I’ll throw that one to you, Bill. Am I right? Or is it a weird sort of, codependency whereby the more the drug company charges, the more attractive they become to the PBM because they’ve got more room to negotiate?
[00:09:51] Okay.
[00:09:52] Bill Smith: Yeah. So, you know, let’s have a simple analogy. Suppose you go in and get a generic drug and you pay 10 for it. the PBM doesn’t make very much money on that prescription. but they say there’s an equivalent branded drug that costs 200 and the PBM gets 100 rebates on that drug. They’d much prefer the patient to be on the rebated drug than they would on the 10 generics.
[00:10:17] And that’s the perverse nature of the PBM system. They sometimes favor much more expensive drugs. It doesn’t help their clients, it doesn’t help their health plans, it doesn’t help their employers, and it doesn’t help patients. They should be steering patients to the lowest possible cost drug, and they have a disincentive to do that, because they make so much money from rebates.
[00:10:37] Joe Selvaggi: So I want to tie some of the ideas we’ve had so far, because I’m sure our listeners are, maybe their eyes are glazing over, they’ve heard all this alphabet stuff, PBM and all that, but All they know is, look, we all agree we want drugs, Robert explained the reason drugs have remained relatively, a fairly stable portion of our health care bill, they not, they have not gone substantially up is because of this move towards generic.
[00:10:58] But Bill, you just explained that if they go generic, they become less attractive to the PBMs because there’s less money to be made are you saying that effectively the fact that we pay so much in drugs is not quote unquote greedy pharmacies But rather PBMs preferring and I don’t know if we’ve made this clear But I think we should the PPM doesn’t just negotiate it tells us what drugs we can buy so it may not allow us To buy that cheaper generic.
[00:11:23] It may insist that we buy the more expensive branded drug is do I have that right Robert or am I exaggerating?
[00:11:29] Robert Popovian: No, you’re not exaggerating and that’s what the problem is the formularies that you refer to which is a list of medicines that are covered by the pharmacy benefit management companies Formulars started as a way to promote less expensive medicines over more expensive medicine.
[00:11:43] So What they’ve turned out to be are now rebate or profit maximizing machines. And the best example is what you refer to, the Flovent issue, which was covered by the Wall Street Journal article this last week. Flovent, brand name drug, it’s been around for a long time. The manufacturer, GlaxoSmithKline, decided to withdraw the product from the market and instead introduce an authorized generic.
[00:12:09] That means it’s a product that Glaxo actually makes. But it’s a generic version of it at about 35 percent discount the pharmacy benefit management company at that point decided that they no longer are going to cover the generic and they took the generic off the formulary and the reason they gave is that the net price.
[00:12:30] Or Flovent is higher. The generic is higher than the net price. They were negotiating for the brand name. The question is the net price to whom the net price to the PBM may have been a little bit higher. But remember, Joe, you, me, Bill, everybody pretty much in the marketplace today within our insurance design, we have what it’s called a deductible or a coinsurance.
[00:12:55] A deductible is when you have to meet a certain number of dollars before your insurance kicks in. And a coinsurance is a percentage that you have to pay of the price of the medicine. So, for somebody who is a patient, the generic version is far less expensive, about 35 percent less expensive. Because remember, I have a deductible and coinsurance.
[00:13:16] So when I walk into the pharmacy, I’m going to pay less if I have a deductible or a coinsurance on the generic version of the Flowback. And that’s been the incentive driven, rebate incentive driven problem that, again, what you alluded to, there’s an incentive in the marketplace for them to cover more expensive drugs with higher rebates and higher fees and everything else that goes along with it.
[00:13:39] Latin land, lower expense of medicines. And Flovent is just one example. We did a study with which I was a co-author at the Global Healthy Living Foundation. We looked at the Express Scripts formulary, which is the second largest PBM. And for two years in a row, the number of times that a generic was excluded in front, in favor of a brand-new drug grew.
[00:14:02] And it’s now on the formulary that Express Scripts have. There were about, I think, 15 cases this last year. Where generic, the actual generic was removed, and the brand name was covered. So, it tells you all the bad incentives that ultimately help the bottom line and the profitability of PBMs to the detriment of a patient who has to pay a coinsurance or a deductible at the pharmacy count.
[00:14:26] Joe Selvaggi: So, profits aside, again, I hate to keep introducing my own personal concern is there’s two products. The same product is either generic or branded, Flovent or it’s generic, made by the same company. Right now, it says January 1. I can’t get either. So I have to find a different drug, than the one that’s been working for me for 20 years.
[00:14:45] the PBM has not just said, I want my cut, I want my money. They’re saying, you can’t have your drug as, how is that possible? Where did that go?
[00:14:54] Robert Popovian: And that’s the problem right now. You’ve caused not only for you as a patient, you have to look for a new medicine that works for you. So guess what you have to do.
[00:15:04] You have to go visit your physician. The physician has to now re-diagnose you and prescribe something new for you as an asthmatic. What ends up happening is that drug may or may not work for you. You have to try it out, you may have some side effects, or it may not work for you, it may not be as efficacious, you have to go back again and get adjusted on the dosing or get another drug.
[00:15:27] what it’s doing is to add the bottom line of the PBMs to profitability. It’s increasing costs for the patient, because now you have to go to the physician and pay coinsurance or copayment or even pay cash. It increases costs for the health care system, but the only entity that’s really saving money.
[00:15:48] And making the money is the PBM And so it creates a lot of problems in the marketplace when these products are removed indiscriminately From the formularies and patients are left to fend for themselves.
[00:16:00] Joe Selvaggi: So, I want to get a little more technical and I want to understand why it was on January 1 I you know, I don’t know if this is too technical.
[00:16:07] But let’s go there, you know all these perverse incentives existed On December 31, but now again, I’m beating the drum because I can’t get the drug that I, I need my running. If I don’t get out there and run, I’m a monster. So, if I can’t cure my asthma or treat my asthma, I’m in trouble. So why did this happen January 1 specifically?
[00:16:31] Robert Popovian: It’s a simple explanation. Plan year. Plan year starts January 1. So even though we enroll for Health insurance, generally in October, November, every year, the plan year actually starts January 1st, so all the formulary shifts and all the physician coverages and hospital coverages, everything starts anew on January 1st, and that’s what happened.
[00:16:53] Bill Smith: Yeah, and it also has to do with the Medicaid rebate.
[00:16:57] Joe Selvaggi: Which is more about that because I think, yes, it does reset on January 1, but I’ve heard a lot about this rebate cap, but that there was legislation, albeit maybe well meaning, but that cap goes away. Explain that bill. What? Why is that?
[00:17:10] Bill Smith: So, Medicaid requires at least a 23 percent rebate, but it also has what’s called an inflation rebate.
[00:17:19] So if a drug company raises a price of a drug above. The inflation rate, they have to rebate back that money. Products like Flovent who have been on the market for a long time can reach 100 percent rebate. Because year after year, they’ve taken price increases and suddenly they’re maxed out.
[00:17:39] So they’re essentially free to the Medicaid program. It used to be that it was capped at a hundred percent once you reached a hundred percent of rebates. That’s it. The pharma company didn’t have to pay Medicaid. The Biden administration got rid of that cap. And basically, now If you go over if your med your inflation rebates for your particular product go over a hundred percent because the park is the product’s been on the market for 20 years You have to pay Medicaid for every prescription that is written for your own product.
[00:18:12] That’s the reason Flovent was taken off the market. Glaxo didn’t want to pay for every prescription that was written for their brand Flovent product. So, they basically said, we’re taking this off, we’re reducing the price on our generic, so we won’t have to pay for every prescription. Instead, patients and Medicaid will actually pay for the prescription.
[00:18:32] Joe Selvaggi: Robert, do you want to add anything to that?
[00:18:34] Robert Popovian: No, I think Bill explained it really well. It was a cap on the average manufacturer price. An average manufacturer price when that cap was removed. Technically, the easiest way to say is that manufacturers had to pay Medicaid to cover their own medicines. So, every time they got a prescription in Medicaid, Glaxo would actually have to pay.
[00:18:52] in my opinion, and this is a little bit different, I think that even though it was the Biden administration that did the rule, this was not something that the Biden administration came up with, Alex Azar, the previous, HHS, secretary and the Trump administration actually had proposed it. And as an economist, I think it’s one of the ways to force the market to correct itself.
[00:19:18] Because what it did is that it forced Glaxo to reduce the price of its medicine. And again, I have to go back. This benefits patients because at the end of the day, A Flovent brand name drug, if it’s 100 and you show up to the pharmacy and you have deductible, you’re paying 100 or if you have coinsurance, you’re paying 20 percent of that 100 versus now that price is 65, 35 percent less.
[00:19:42] So if you show up to the pharmacy and get the generic version of the Flovent, which is the same exact drug, you’re paying 65 or 20 percent of that 65. So, this is a good thing for the patient. Unfortunately, it’s a bad thing for the profitability of the PBMs. And it was made inevitable by the rule that was administered.
[00:20:04] And it’s forcing the issue that the pharma companies are saying, you know what? I’m just going to roll back the prices instead of having to pay Medicaid. And at the end of the day, that’s not a bad thing for patients.
[00:20:17] Joe Selvaggi: And yet, okay, so we’re trying to reconcile, square the circle. You think it’s a favorable rule change that maybe we’re stumbling in the transitional period, but nevertheless, my Flovent isn’t available.
[00:20:27] And you, we’ve touched on the fact it’s not just my Flovent. I was reading about, many of the diabetes drugs. These, again, these are not optional. These people absolutely need these things. How is it that a rule that was perhaps well intentioned to give an incentive to reduce prices will lead to the drug that is demonstrably effective, leaving the formulary. Again, I’m asking this genuine question, not as a rhetorical.
[00:20:51] Robert Popovian: No. I think it’s a fair question. And the reason being is because we have a broken market in pharmaceuticals where we have rebate contracting driving what’s available for patients.
[00:21:04] If rebate contracting did not exist, right? Think about it. What would be the incentive? For at this point, for PBM to cover the brand name versus generic, if they would be even happier if Flovent went to generic and it was 35 percent cheaper, that would automatically cover it. But because of rebate contracting, because they’re so dependent on their profitability due to this rebate contracting, it creates misaligned incentives such as this one.
[00:21:32] And the one that you just mentioned, also with the diabetes drugs, that has been happening for several years. And it’s not just the diabetes drugs, it’s the hepatitis C drugs, too. Manufacturer comes out with a brand name. Same manufacturer comes out with a generic. The generic is excluded from the formulary and only the brand name is covered.
[00:21:50] In your case, the Flovent. Branding was completely excluded. All the drugs were excluded from the formula. But this is the bad incentives that rebate contracting creates. And until we get rid of rebate contracting as an incentive, we will always have this misaligned situations where less expensive drugs are sacrificed or to favor more expensive medicines.
[00:22:12] Bill Smith: Joe, I hate to be simplistic, but. Formularies now are assembled like a rug bazaar. It’s all opaque, no one knows what’s going on, and it’s all about money. And, you may be frustrated you can’t get the rug you want, but you got to understand, if you’re not, if the price is not high enough for that rug, it’s not going to be available. And PBM’s view. Formularies, they want to maximize revenue.
[00:22:37] Joe Selvaggi: So, if, let me imagine a brave new world in which PBMs don’t exist. And we have, everybody’s in my mind in that universe, insurance companies want to pay as little as possible for drugs. And so, they should, can negotiate with pharmacies, because why do they want to pay less? They want to have. Lower premiums and attract new customers, or frankly, if they don’t want lower premiums, they want to pocket the money, it’s better for shareholders. But you know that those are healthy. Those are normal incentives that intermediaries have. the grocery store wants, but Walmart wants the best price for its products so they can deliver the best price to its customers. Why can’t insurance companies just do the same thing?
[00:23:11] Robert Popovian: They can, but they don’t want to because it’s more profitable. If you look at the insurance companies in general, now that they own PBMs, for example, which is the largest insurer in this country and has the largest, third largest PBM, which is, I’m sorry, United is the largest insurer.
[00:23:30] Optum is the third largest PBM. Optum makes more profit for United Healthcare as an entity within United than any of their other divisions. So pharmaceutical contracting and rebate contracting is a very lucrative business model. Now, do we have a model in this country that Insure doesn’t use rebate contracting and your Flovent, now a generic version of the Flovent, will be available in the formulary?
[00:23:58] Yes, it’s the largest insurer in our most populous state in the United States, it’s in California. The largest insurer in California is Kaiser Permanente. Kaiser Permanente uses no incentives, no rebate contracting, they just do net price contracting, they go with the lowest price. And guess what? I’ll put money on it, that Flovent is still covered within the Kaiser formulary because they do not have that rebate contract in the center built in.
[00:24:28] Joe Selvaggi: Yeah. All right. again, I don’t like to just complain. I say, we’re a think tank, but we think a think and do tank. So, let’s shift our conversation because we’ve identified a huge problem. You even identified a place. Where it isn’t a huge problem. What would a consumer, I’m going to count myself among those potential consumers, and ultimately, legislators, people who really, see no one winning, but it’d be PBM, employees.
[00:24:49] What could we do to make this better? It seems an epic problem that’s not well understood.
[00:24:55] Robert Popovian: I think starting, and Bill can add to this, starting point is the, get rid of rebate contracting, but that’s going to be very difficult because that’s been built into the model for a long time.
[00:25:06] I think what people are saying now is that, okay, if you’re not going to get rid of rebate contracting, then as a consumer, as a patient, I should benefit from that negotiated price when I show up to the pharmacy counter. Joe, when you show up at the pharmacy counter. You should benefit and pay based on that negotiated price that’s been done on your behalf instead of the inflated retail price in every other segment of the health care system, whether it’s your dental care, your optometrist, your physician care, your hospital care, when you show up to pay for your services, you’re paying based on a negotiated price that’s been done on your behalf.
[00:25:43] Except for pharmaceuticals, where the PBMs have bamboozled the entire business community, including legislators, to think that the only way you can contract is through this rebate, convoluted rebate contracting, and Patients should not benefit from it directly.
[00:26:01] Bill Smith: Joe, you can envision a world where PBMs were not necessary. Suppose a health plan wanted to get rid of the rebate contracting system. They just wanted the lowest price. They open up bidding in every therapeutic area. for psoriatic arthritis, they say, Okay, manufacturers, submit your bids. For your drugs, and those bids get submitted, no rebates involved, just here’s what our price is going to be, and a drug comes in at the lowest price, and it’s not the greatest drug, it’s a good drug, but it’s not the greatest drug, so the health plan could decide, okay, the three lowest bidders, we’re going to put those drugs on formulary, and we’re going to make the prices available, those low bid prices, we’re going to make them available to the patients at the pharmacy counter, no rebates involved, just The lowest prices they can get based on bids that manufacturers submit that’s an that’s the way the Chinese do it.
[00:26:55] If you can believe that they do it in their national health care system, open up therapeutic areas, ask for low bids and then construct the formulary based on the bids that come in. And you don’t necessarily just put the lowest bid on the formulary as the only preferred drug. You might put a handful of them that come in at low prices.
[00:27:14] Robert Popovian: And that’s exactly, by the way, Joe, that’s exactly how Kaiser does it. They don’t have one product on the formulary, they have several products in the class, but they allow, they just do it based on net pricing. And say that’s net price, I’m paying as Kaiser, you as the patient is going to be paying for it.
[00:27:32] Joe Selvaggi: What? So let me just ask what might seem like an obvious question. We all here believe in markets or market dynamics, I hope, and we say, okay, look, I have a need and we’re dealing in a world with the Internet and sort of the disintermediation of everything, right? Which is we almost directly communicate with providers, with producers.
[00:27:53] Why isn’t that? I can’t go get on Amazon and get Flovent provided I have well documented, prescription and, I like the generic, why can’t I just get my drug on Amazon?
[00:28:06] Robert Popovian: You can, and it’s not just Amazon. You can go get it at Costco and you can get it at the Mark Cuban’s pharmacy, and you can pay cash for it.
[00:28:15] Unfortunately, you, insurance companies are not. Paying for those things. And the reason that these pharmacies exist, these cash pharmacies, whether it’s Amazon, whether it’s Cuban’s Pharmacy, whether it’s Costco, is because they fill a void. We haven’t even talked about this other issue, which is a lot of times, about 70%, about 25 percent of the time, not 70%, 25 percent of the time, when you and I are purchasing a generic medicine, a typical generic, we’re overpaying by using our insurance card.
[00:28:48] As a consumer, we’re paying more out of pocket than if not, if we would have walked down the street to Costco and paid for it in cash. And that’s where I’m, that’s where the market is moving towards is that patients are looking at it and saying, wait, if I use my insurance card, I’m going to pay 25. If I walk down the street to Costco or call Cuban’s pharmacy, I’m going to pay 20.
[00:29:09] Guess what? I’m going to do that instead. And that’s what we’re moving towards as a society. In consumerism needs to take place in the pharmaceutical marketplace and more consumerism is a good thing.
[00:29:24] Joe Selvaggi: Indeed. Bill, would you like to amplify on, what. Robert, you said?
[00:29:28] Bill Smith: No. No. I think Mark Cuban has hit upon something great. Basically, PBMs were making great money off generic drugs. They could buy a generic prescription for five bucks. It’s, it doesn’t cost anything to manufacture a generic drug so they can buy ’em for five bucks. And then, the patient may have a $15 copay under their health plan. So, they go in and pay $15 for a drug that costs the PBM $5.
[00:29:50] So they’re overpaying. So, Mark Cuban stepped in and said, this is ridiculous. They should be paying. 5 plus maybe 50 cents for me, and that’s the way he has made money. I’m skeptical about how well this model can work in the branded space. I’m just not sure how well it’s going to work. branded drugs are a very different economic model.
[00:30:13] Joe Selvaggi: And of course, when we talk about expenses to insurance companies, nobody’s hoping that insurance companies are profitable. And of course, all of our premiums are comprised of all the money that our insurance company pays on our behalf. collectively, if insurance companies are paying too much.
[00:30:29] Or we’re paying too much to them. It’s costing us more in health care. If our goal is to help reduce or create the market dynamics that make health care less costly, going around our insurance companies is, makes sense. One thing, again, we’re getting close to the end of our time together when we do go off, in on our own Rx or whatever Mark Cuban’s, new enterprises called none of that money we spend is applied towards our deductible or that It’s innocence. Our insurance company doesn’t know it’s there. So, we may save money on that prescription, but ultimately, if it doesn’t help us get to our deductible, ultimately, at the end of the year, we may actually spend more because we spent less because it didn’t get applied to our deductible.
[00:31:10] Right.
[00:31:11] Robert Popovian: You’re right, but it does work for patients who are multiple generic drugs that are going to pay a lot more and they never are going to be on a brand name drug, really, that’s going to hit that deductible. it depends on the patient, but at the end of the day, Whether it’s Costco or, Amazon or Mark Cuban’s pharmacy or row.
[00:31:30] com, there’s a lot of these cash-based pharmacies. The reason that they exist is because there’s a consumer marketplace that figured out, they’re overpaying by using their insurance card. And they’ve done the math. We all do math, right? It’s just doing your budget and you figure out that if I’m paying 25 for a copay instead I can pay 5 for this generic, for example, I’m saving so much more money and even if it applies to my deductible because most of us have deductibles in the thousands, we’re not going to never going to reach the deductible anyways, right throughout the year for especially for people who have chronic diseases on multiple generic medicines.
[00:32:09] Now, if you’re on a brand name is and I agree with Bill, I don’t know how well this will work in the brand marketplace. but in that case, that’s insurance, but. Joe, this is not a bad thing. I think what we’re doing now by forcing these issues is going back to what insurance is meant to be.
[00:32:26] Insurance is meant to be for the purposes of covering expensive, traumatic type of events. Just like we buy homeowner’s insurance, or we buy car insurance. Healthcare insurance has evolved into being the opposite covering everything that’s not supposed to be covering and when it gets to expensive medicines like brand name medicines and things like that doesn’t want to cover it because it’s too much.
[00:32:52] So we’re doing the reverse almost in health care, what we have done in the insurance marketplace and other.
[00:33:02] Bill Smith: Yeah. And Joe, you’re always looking for legislative ideas. So what about those requiring that those cash purchases of generic drugs through Mark Cuban’s pharmacy be counted towards your deductible or out of pocket costs? It’s a healthcare expense.
[00:33:18] Joe Selvaggi: Yeah. And right. It should. And of course, now, again, what we are always trying to do as lovers of markets is align incentives. If the individual has an incentive. positive incentive to go direct and cash, and it helps them. and there’s no longer a negative incentive that they must go through the insurance company.
[00:33:38] it gives, as Robert was saying, it gives incentives for, drug manufacturers to keep their prices lower and move, when they get to a generic, produce a useful generic. and we’re back into reality, right? I want to echo, I agree with you, Robert, that our idea of health insurance is so bizarre and so distorted.
[00:33:55] I use the analogy of if, as you mentioned, our car insurance, imagine if our car insurance. paid for our new tires, our windshield wiper blades or our gas, it would be absurd. we have car insurance for God forbid we slip on the ice and smash into a tree. This happens, maybe once in a lifetime and the insurance is there when we need it.
[00:34:15] Our health insurance has become some sort of a payment program or, collective, payment.
[00:34:21] Bill Smith: Yeah, let’s cover every preventative possible, medicine or, it’s, they’ve loaded it up to cover everything.
[00:34:28] Joe Selvaggi: Yeah. And ironically, the people who really need it. We accept that there are people with some rare diseases that are profoundly costly, but because we’ve loaded it up with all this nonsense, those people are the ones that are not served by. Classic insurance. They, that’s when the insurance company says, sorry, can’t cover you. I’m too busy covering, Flovent.
[00:34:48] Robert Popovian: Exactly. And that’s the problem. And you just put the word rare diseases. that’s the thing we want insurance to cover rare events and expensive events, right? You want an insurance to cover you, when you’re having a cardiovascular event and you need a cabbage, for example. You don’t want your insurance to be covering your aspirin.
[00:35:08] that’s what it’s doing covering the aspirin, not necessarily the cabin or not fully, not well enough. And it’s exposing patients to significant out of pocket costs. But now what we’re finding out. With humans’ pharmacy and everything else and that even though they’re covering the aspirin they’re overcharging for the aspirin now It’s both sides. They’re making money off of the patient.
[00:35:32] Joe Selvaggi: So this is a couple you mentioned it was good Yeah, we’re getting at the end of our time together So I want to give our audience some place to go and continue to read about this because they’re probably you know Almost incredulous they you know, it’s hard to believe this is going on You mentioned the Wall Street Journal article, of course, I read that in a couple other Pieces they’ve done throughout the year.
[00:35:50] Who’s studying this and where can our listeners go to learn more about, what’s going on with the dynamics and, what they might do to mitigate the, the harm to if they need some of these drugs.
[00:36:00] Robert Popovian: I would say Pioneer Institute, since we’re doing most of the work in this space, I don’t want to pat ourselves on the back, but Bill started it.
[00:36:07] And, since I’ve come on, we’ve done a ton of work in this space, and we’ve tried to expose a lot of these perverse incentives in the market. And we what we try to do is do it individually. We’re not trying to do a holistic look at the entire system. We’re saying, look, this is a problem. This is the solution for this problem.
[00:36:24] For example, 340 be pricing or we’re looking at accumulators and maximizers. So, I would say. By far, Pioneer Institute has done more work in this space in the last 24 to 36 months since Bill came on board.
[00:36:38] Bill Smith: And Robert’s done some great stuff with the Global Healthy Living Foundation, which is a kind of patient advocacy group, which he’s affiliated with, so I’d point to some of his studies, too.
[00:36:49] Joe Selvaggi: Wonderful, good. I want to get our, our plug, our self-congratulatory plugs in the ad at the end. I appreciate it. This has been an exciting topic for me only because it touched his home, and it’s, it’s fun to, dive into something, as personal as this. So, thank you both for joining me on Hubwonk today. Thank you, Robert. And thank you, Bill. You’re always great.
[00:37:06] Bill Smith: Sure, Joe, we’ll try to talk to our friends at GSK and see if we can find Flovent for you.
[00:37:13] Robert Popovian: As a pharmacist, I hope you do get your Flovent, and you just keep running.
[00:37:17] Joe Selvaggi: Yeah, I, good. Yeah, I say if running were as a drug, I think it would be the best, most prescribed ever, let me pitch for that drug as well. Thanks guys. Thanks for joining me.
This has been another episode of Hubwonk. If you enjoyed today’s episode, there are several ways to support Hubwonk and Pioneer Institute. It would be easier for you and better for us if you subscribe to Hubwonk on your iTunes Podcatcher.
[00:37:40] It would help make it easier for others to find Hubwonk if you offer a five-star rating or a favorable review. Of course, we’re grateful for any word-of-mouth recommendations. If you have ideas or comments or suggestions for me about future episode topics, you’re welcome to email me at Hubwonk@pioneerinstitute.org. Please join me next week for a new episode of Hubwonk.
Joe Selvaggi talks with Drs. Bill Smith and Robert Popovian about how the complex system of rebates from drug companies to insurance firms serve to increase costs and reduce access for patients.
Guests:
Dr. William S. Smith is Senior Fellow & Director of Pioneer Life Sciences Initiative. Dr. Smith has 25 years of experience in government and in corporate roles. 
His career includes senior staff positions for the Republican House leadership on Capitol Hill, the White House Office of National Drug Control Policy, and the Massachusetts Governor’s office where he served under Governors Weld and Cellucci. He spent ten years at Pfizer Inc as Vice President of Public Affairs and Policy where he was responsible for Pfizer’s corporate strategies for the U.S. policy environment. He later served as a consultant to major pharmaceutical, biotechnology and medical device companies. Dr. Smith earned his PhD in political science with distinction at The Catholic University of America.
Dr. Robert Popovian is Senior Visiting Health Policy Fellow at Pioneer Institute. Dr. Popovian is the Founder of the strategic consulting firm Conquest Advisors. He previously served as Vice President, U.S. Government Relations at Pfizer. One of the country’s foremost experts on every significant facet of biopharmaceuticals and the healthcare industry, he is also a recognized authority on health economics, policy, government relations, medical affairs, and strategic planning.
Dr. Popovian has published extensively on the impact of biopharmaceuticals and health policies on costs and clinical outcomes in the most prominent medical sources and media publications, including the Clinical Economics and Outcomes Research, The Oncologist, Journal of Vaccines and Vaccinations, Health Science Journal, USA Today, Managed Healthcare Executive and Morning Consult. He is also a sought-after speaker and has been invited to provide detailed presentations, briefings, and expert reviews for the U.S. Congress, dozens of state legislatures, and at conferences and medical symposiums throughout the country and around the world.
He is one of the select few researchers to study and publish both clinical and policy-related economic analysis as well as empirical data regarding emerging payment models in the U.S. healthcare system and for biopharmaceutical reimbursement. His insight and analysis also led to one of the first inclusions of health outcomes data regarding a biopharmaceutical labeled indication.
Dr. Popovian was recently appointed as the Chief Science Policy Officer for Global Healthy Living Foundation. He also serves on the Board of Councilors of the University of Southern California School of Pharmacy, Senior Health Policy Fellow at Progressive Policy Institute, and Board of Advisors for Equideum Health. Robert completed his Doctorate in Pharmacy and Master of Science in Pharmaceutical Economics and Policy degrees at the University of Southern California with honors. He has also completed a residency in Pharmacy Practice/Adult Internal Medicine and Infectious Diseases at the Los Angeles County-USC Hospital and a fellowship in Pharmaceutical Economics and Policy at USC.
This week on The Learning Curve, guest co-hosts Prof. Albert Cheng of the University of Arkansas and Charlie Chieppo interview two-time Pulitzer Prize winner T.J. Stiles. Mr. Stiles delves into the life of America’s first tycoon, Cornelius Vanderbilt, exploring his rise to historic wealth in steamboats, shipping, and railroads. He discusses Vanderbilt’s legal battles, philanthropy, and enduring legacy, exploring his business competitiveness and wide impact on 19th-century America’s economy. Mr. Stiles closes the interview with a reading from The First Tycoon: The Epic Life of Cornelius Vanderbilt.
Stories of the Week: Albert comments on a story from Education Next about the rise of apprenticeships; Charlie reviews a story in The Hill about the Chicago Board of Education eliminating selective enrollment in high-achieving public schools, claiming equity but potentially harming minority students’ opportunities.
Guest:
T.J. Stiles is an award-winning American historian and biographer. His book The First Tycoon: The Epic Life of Cornelius Vanderbilt won a National Book Award and the 2010 Pulitzer Prize for Biography or Autobiography, and his Custer’s Trials: A Life on the Frontier of a New America received the 2016 Pulitzer Prize for History. Stiles became interested in Vanderbilt while researching and writing his historical account of another legendary figure, Jesse James: Last Rebel of the Civil War. He served as historical adviser and on-screen expert for Jesse James and Grand Central, two films in the PBS documentary series American Experience. Stiles has written for The New York Times Book Review, Smithsonian, Salon, the Los Angeles Times, and other publications. He studied history at Carleton College and Columbia University.
Tweet of the Week:
At the close of a more tumultuous academic semester in recent memory — one replete with vitriolic debates over war in the Middle East, free speech, leadership crises at elite colleges, and a national reckoning over plagiarism — this intern finds himself finishing his history degree after a most peculiar college experience.
It’s no understatement to say that higher education has changed greatly since I began my studies, and this change is readily apparent in admissions practices.
Affirmative action initiatives peaked after the fervor of 2020, heavily influencing the composition and tenor of student cohorts across the country before the Supreme Court outlawed the practice this past summer.
Standardized tests like the SAT and ACT have been deemphasized in favor of more qualitative metrics. Fewer students take standardized tests today compared to 2019, one of many indications that elite colleges’ less rigorous, post-COVID admissions policy changes have already affected student behavior.
From my biased perspective, the precipitous, consistent dropoff in students studying the humanities is noteworthy. History majors declined nationally by almost one-third between 2012 and 2019. The recent trends for humanities majors at Williams College, a liberal arts institution very much like that which I attended in California, are shown in the table below. They tell a sad tale.
So, as I end my collegiate career with a degree in one of those “downward-sloping” academic disciplines, I thought to offer seven guiding principles that helped me stay motivated and interested in what I was learning. May they help another college student thinking about studying history or any other humanities subject, and hopefully reverse the trend seen at Williams, my own liberal arts college, and others across the country.
Follow the great books
For brash eighteen-year-olds raised on Wikipedia and SparkNotes, reading the classics offers valuable insight and a good intellectual humbling. Any theory course with a reading list that includes Herodotus, Thucydides, Plato, and Aristotle offers an elevated caliber of reasoning and analysis of the Western tradition’s great minds, a time-tested curriculum that is impossible to replicate with other source material. All students, irrespective of major, could benefit from great books study.
Do the reading — not for anyone else, but for you
Grade inflation and declining standards have made it easier than ever to get an A in a college course while putting in reduced effort. Now more than ever one truly gets out what one puts in. Getting by with a quick skim of the material before class may not harm students on paper, but it won’t let them understand the subtleties of the professor’s and course’s message. They will also have meaningful insight to contribute in class discussions, instead of non-sequiturs that usually begin with “like for me personally…”
Be wary of courses with ideological, narrow focuses
In the college course catalogues of this decade, many options resemble word salad from the woke urban dictionary. Esoteric titles like “mapping intersectional discourses,” “gendered feminisms,” or “queering the body politic” leave little indication of their respective courses’ scholarly underpinnings, while loudly signaling the dominant ideology in class. I learned more and thought more critically in courses with a general, narrative-based theme — “Classical Political Theory,” “Early East Asian History,” and “World War Two in East Europe”— which allowed their students to reach individual analytical conclusions instead of those bathed in nouveau ideology.
Take classes with professors who appreciate perspective and challenge you
This tip involves a bit of luck. Everyone is at the mercy of some chance while hunting through the course catalogue, but those who do find that prof with the time and energy to invest in their students’ success are well-positioned to reap the benefits. Developing valuable relationships with professors may not happen quickly, which is why taking multiple courses from favored professors is the surefire way to maximize those four years.
Speak your mind, and don’t be afraid of your classmates
Rigidity and silence abound in today’s cruel polemic. Far too often, people avoid sharing their thoughts and opinions because they fear ostracization, not because speaking out is de jure prohibited. I found that confidently expressing my ideas often drew a less vitriolic response, if any, than what I had imagined in my head. The group is often more afraid of countervailing ideas than the contrarian is afraid of the group.
Remember the real world
College can often feel like a self-sustaining ecosystem ridden with groupthink; it is vitally important that students have valuable learning experiences outside this environment before they graduate. Taking advantage of the internships, summer jobs, study abroad, and domestic exchange programs on offer will ensure a smoother transition to life after graduation.
ALWAYS do your own writing — it may come in handy
Humanities majors learn to write. This time-honored maxim runs the risk of losing its accuracy with the rise of new AI learning software that generates passable prose faster than anyone living. Soon its prose will be more than passable, but as of now, AI’s shortcomings leave a window for well-trained writers and critical thinkers to prosper in this digital age. That is if they can still write better than the average language model. To all my fellow so-called “useless BAs,” take notice!
Jude Iredell is a Roger Perry Civics Intern with the Pioneer Institute. Last week, he completed his bachelor’s in history at Pomona College.
“She’s a good girl. She helps me a lot. She has big, big dreams. I don’t have the money, but she has big dreams. I hope she’s going to get everything, but she works so hard. She works so hard in school.”
“Our family is needing to make some really big sacrifices because we believe this is important, and so, we’re basically going to do whatever it takes… Sometimes we look at each other and go ‘I don’t know if I can do it again another month…’”
“A lot of the families have to sacrifice and work multiple jobs… And just scraping together enough money to just make tuition, just the basics.”
“It is discriminatory, that parents who want to choose an alternative to public school for their children, would not in any way receive any compensation for that, whether it be tax credit, whether it be a voucher…”
In the 1840s, nativist movement leaders formed official political parties and local chapters of the national Native American Party (later the American Party), although they continued to be commonly known as the Know-Nothing Party. Politicians sought to insert provisions into state constitutions against Catholics who refused to renounce the pope. The Know-Nothing movement brought bigotry and hatred to a new level of violence and organization.
The party’s legacy endured in the post-Civil War era, with laws and constitutional amendments it supported, still today severely limiting parents’ educational choices. A federal constitutional amendment was proposed by Speaker of the House James Blaine prohibiting money raised by taxation in any State to be under the control of any religious sect; nor shall any money so raised or lands so devoted be divided between religious sects or denominations. These were then named the Blaine Amendments of 1875.
in recent decades, often in response to challenges to school choice programs, the U.S. Supreme Court has demonstrated great interest in examining the issues of educational alternatives and attempts limit parental options. Massachusetts plays a key role in this debate. The Bay State was a key center of the Know-Nothing movement and has the oldest version of Anti-Aid Amendments in the nation, as well as a second such amendment approved in 1917. Two-fifths of Massachusetts residents are Catholic, and its Catholic schools outperform the state’s public schools, which are the best in the nation.
Click here to read a transcript
Hubwonk Drug Discount Distortions: How Middlemen Increase Costs and Reduce Access
01.09.2024
[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. On January 1st, the popular asthma drug Flovent disappeared from pharmacy shelves, leaving its users scrambling for alternatives and policy observers to wonder what happened. A closer look at the puzzle reveals that though Flovent’s producer, GlaxoSmithKline or GSK, was responding to regulatory pressure to lower the price of the drug, The Byzantine system of rebates that circulate between insurance companies, pharmacy benefit managers, and consumers serve to effectively eliminate coverage for a drug that had safely and effectively treated asthma patients, many of them children, since the year 2000.
[00:00:45] The Flovent story mirrors that of many drugs used to treat other chronic illnesses such as diabetes, shining a spotlight on a process that keeps the price of name brand therapies high while also serving to discourage the adoption of their generic substitutes. How does our healthcare system decide which drugs we can purchase and at what price?
[00:01:03] And how can incentives designed to reduce costs for consumers actually result in drugs like Flovent being removed from our pharmacy shelves? My guests today are Pioneer Institute’s Senior Fellow for Life Sciences, Dr. Bill Smith, and Pioneer Institute’s Visiting Healthcare Fellow and Founder of Conquest Advisors, Pharmacy Doctor Robert Popovian.
[00:01:23] Dr. Smith and Popovian will explain how drug therapies find their way to patients using a complex system of rebates coordinated by intermediaries known as pharmacy benefit managers. They will share how rebates originally negotiated as product discounts now provide pharmacy benefit managers with distorted incentives to cover more expensive name brand drugs and reduce access for those less expensive therapies when they go generic.
[00:01:49] We will discuss alternative models for drug access such as direct to consumer programs. And what steps policy makers might take to realign incentives for the benefit of patients. When I return, I’ll be joined by Drs. Bill Smith and Robert Popovian. Okay, we’re back. This is Hubwonk. I’m Joe Salvaggi, and I’m now pleased to be joined by frequent Hubwonk guest and Pioneer Institute Senior Fellow for Life Sciences, Dr.
[00:02:14] Bill Smith, and by Pioneer Institute’s Visiting Healthcare Fellow and founder of Conquest Advisors, Dr. Robert Popovian. Welcome to Hubwonk, gentlemen.
[00:02:23] Bill Smith: Thank you, Joe.
[00:02:23] Robert Popovian: Glad to be here.
[00:02:24] Joe Selvaggi: Okay. All right. So we’re going to be talking about some familiar topics. Certainly Bill, you and I have talked about drug prices, how we got here, what can be done, what the dynamic is before we as consumers ultimately buy and pay for that drug.
[00:02:38] but today we’re also going to talk about a phenomenon that happened just this past January 1, 2024, where a popular drug, in this case it was Flovent, the drug manufacturer actually reduced its price, and it fell off what’s called the formulary, meaning I can’t go out and my insurance company may not cover this anymore.
[00:02:56] I speak from experience. I’m sure there’s a lot of other drugs out there but let me give the listeners a little bit of background. I’m asthmatic, and I discovered albuterol and Flovent, and this was maybe 20 years ago, and I’ve run 13 marathons. Running is my drug, and if it weren’t for these drugs, on a cold day like this, I wouldn’t be able to walk down the street without developing a painful hacking cough.
[00:03:17] So this is near and dear to my own heart, which is a kind of an unusual step, but let’s talk about it. For instance, let’s use Flovent as our example. but before we do, before we figure out why Flovent isn’t any longer covered by my insurance company, Bill, explain to our listeners, where do drugs come from and how do we ultimately buy them in the drug store?
[00:03:36] Bill Smith: Where do they come from? They come from 1000 ideas. there are 1000 thousands and thousands of researchers, both in academia and in industry, that have ideas about different compounds and how it might affect a certain disease state. And they pursue 90 percent of those.
[00:03:54] Projects fail, but 10 percent succeed. and, that’s a good thing that they do. and pricing them is an art, not a science. It’s, a lot of it, it’s not just based on the R and D costs. As some people think it’s based on what market. forces you’re entering. What is their competition?
[00:04:11] Is the competition better than your own product? Is there generic competition? There’s a whole host of factors that companies have to consider when they set prices.
[00:04:21] Joe Selvaggi: And you and I have talked about the fact that whereas we all agree, healthcare prices are high and continue to go up. the cost of drugs really over time as good as those drugs are seem to over time.
[00:04:31] not really represent a larger percentage of our health healthcare costs meaning Though they do cost a lot when they’re new they fall off. into what’s called generic where whereby they’re no longer extremely expensive Robert, why don’t you share with us? Why is it that drug costs haven’t really escalated over time the way sort of the popular myth portrays it?
[00:04:51] Robert Popovian: It is a popular myth, and the reason that drug prices have stayed stable on average is because, as you mentioned, Joe, these medicines come out, they’re brand medicines, for a finite number of years.
[00:05:04] brand companies have an ability to price these medicines as they wish. After they lose their patents, these drugs become what they, typically generics or biosimilars. And with the introduction of biosimilars and generics, the prices started to plummet. So, what I always tell people is that the value of the medicine never goes away.
[00:05:25] the flow that you were, you’re used for your asthma, the value will continue in perpetuity, but the price will fluctuate. The price will be high for several years in the beginning, but then it will plummet after it goes generic. And that’s what we have seen. And this is why, on average, prices of medicines have not gone up significantly over the last.
[00:05:46] Okay. And that’s because we have more and more generics that come into the market as brand name products lose patents.
[00:05:53] Joe Selvaggi: Okay, that’s a good answer. We have why they cost money and why they over time cost less money. But unlike many of the products we’re used to buying, let’s say a gallon of milk, we have a manufacturer and a distributor, maybe the grocery store, and we buy that gallon of milk.
[00:06:07] But we know with drugs, there’s a different dynamic. There are many intermediaries, but we like to, we’ve covered this on earlier shows. but our insurance company buys it perhaps on our behalf and we do a copay, but they use intermediaries known as PBMs, pharmacy benefit managers explain for our listeners.
[00:06:23] Bill, why don’t you feel this one in basic terms? Who is it? That’s in a sense, buying these drugs are negotiating for these drugs on our behalf.
[00:06:32] Bill Smith: Pharmacy benefit managers, the PBMs are consultants to the health plans that ultimately pay for the drugs, or although the employers ultimately pay for the drugs through the health plans, and the pharmacy benefit managers serve as consultants to negotiate with the numerous drug manufacturers to try to get the most reasonable price for health care, for those products for the health plans and you know that in the abstract sounds fine, but there are many perverse incentives that we can talk about and Robert’s expert on this at how PBM’s actually increase the costs for both health plans employers and patients themselves.
[00:07:09] Joe Selvaggi: That’s a good tip. Robert, how is it that an organization, a PBM, that their express purpose for being there is to make sure my drugs are as cheap as they can be.
[00:07:19] They’ve got the knowledge; they’ve got the market power. They, in a sense, put it to those big, bad drug companies and say, give us the best price. How is it that they might be distorting the price that I ultimately see?
[00:07:29] Robert Popovian: because the way that the PBMs work though, is that they arbitrage the price of the medicine.
[00:07:35] So they buy the medicine at a certain price, but that’s not necessarily the price that the employers or the patient ends up paying at the drug store, at the pharmacy counter. So, what happens is that they have contracts with these manufacturers. for example, if the drug is, for sale for a hundred dollars.
[00:07:53] They end up negotiating the price down to a 50, but the price that ends up being paid by the patient at the pharmacy counter or by the employer generally ends up being 100 still. What they do is that they make money off of the margins and these margins have grown over time where they used to be maybe 5 or 10 percent now over 50 percent of a value or price of a medicine, a brand name medicine ends up in the hands of the PBMs.
[00:08:23] And because of lack of accountability and lack of transparency, we have no idea what they do with these. Negotiated prices, whether or not they keep. All of the 52, 3%, or they pass a certain percentage back to the employer or the federal government. Nobody knows that even the federal government doesn’t know exactly what the amount is.
[00:08:43] And that’s because it’s a very convoluted system that they’ve created. And 1 thing to also mention that Bill said there used to be independent. And as consultants now, because they are being either acquired or have been acquired by insurance companies, it’s become even more money. The waters have become even more money because now they can even hide more money in the supply chain where in the past.
[00:09:06] The insurers, where they were separate from the PBMs, were sort of a gatekeeper, and, but that no longer exists in the marketplace.
[00:09:14] Joe Selvaggi: Yes, Bill and I have talked about PBMs in that they, their revenue, rivals or even exceeds that of the drug companies themselves. In other words, as intermediaries, they make more money than the people actually producing the drugs.
[00:09:25] again, I’m going to put my economist hat on here and say there’s some real flaws with the model of a PBM, which is, as you say, they get paid by the discount they negotiate, right? So, the more that drug costs, the larger the discount. Explain, I’ll throw that one to you, Bill. Am I right? Or is it a weird sort of, codependency whereby the more the drug company charges, the more attractive they become to the PBM because they’ve got more room to negotiate?
[00:09:51] Okay.
[00:09:52] Bill Smith: Yeah. So, you know, let’s have a simple analogy. Suppose you go in and get a generic drug and you pay 10 for it. the PBM doesn’t make very much money on that prescription. but they say there’s an equivalent branded drug that costs 200 and the PBM gets 100 rebates on that drug. They’d much prefer the patient to be on the rebated drug than they would on the 10 generics.
[00:10:17] And that’s the perverse nature of the PBM system. They sometimes favor much more expensive drugs. It doesn’t help their clients, it doesn’t help their health plans, it doesn’t help their employers, and it doesn’t help patients. They should be steering patients to the lowest possible cost drug, and they have a disincentive to do that, because they make so much money from rebates.
[00:10:37] Joe Selvaggi: So I want to tie some of the ideas we’ve had so far, because I’m sure our listeners are, maybe their eyes are glazing over, they’ve heard all this alphabet stuff, PBM and all that, but All they know is, look, we all agree we want drugs, Robert explained the reason drugs have remained relatively, a fairly stable portion of our health care bill, they not, they have not gone substantially up is because of this move towards generic.
[00:10:58] But Bill, you just explained that if they go generic, they become less attractive to the PBMs because there’s less money to be made are you saying that effectively the fact that we pay so much in drugs is not quote unquote greedy pharmacies But rather PBMs preferring and I don’t know if we’ve made this clear But I think we should the PPM doesn’t just negotiate it tells us what drugs we can buy so it may not allow us To buy that cheaper generic.
[00:11:23] It may insist that we buy the more expensive branded drug is do I have that right Robert or am I exaggerating?
[00:11:29] Robert Popovian: No, you’re not exaggerating and that’s what the problem is the formularies that you refer to which is a list of medicines that are covered by the pharmacy benefit management companies Formulars started as a way to promote less expensive medicines over more expensive medicine.
[00:11:43] So What they’ve turned out to be are now rebate or profit maximizing machines. And the best example is what you refer to, the Flovent issue, which was covered by the Wall Street Journal article this last week. Flovent, brand name drug, it’s been around for a long time. The manufacturer, GlaxoSmithKline, decided to withdraw the product from the market and instead introduce an authorized generic.
[00:12:09] That means it’s a product that Glaxo actually makes. But it’s a generic version of it at about 35 percent discount the pharmacy benefit management company at that point decided that they no longer are going to cover the generic and they took the generic off the formulary and the reason they gave is that the net price.
[00:12:30] Or Flovent is higher. The generic is higher than the net price. They were negotiating for the brand name. The question is the net price to whom the net price to the PBM may have been a little bit higher. But remember, Joe, you, me, Bill, everybody pretty much in the marketplace today within our insurance design, we have what it’s called a deductible or a coinsurance.
[00:12:55] A deductible is when you have to meet a certain number of dollars before your insurance kicks in. And a coinsurance is a percentage that you have to pay of the price of the medicine. So, for somebody who is a patient, the generic version is far less expensive, about 35 percent less expensive. Because remember, I have a deductible and coinsurance.
[00:13:16] So when I walk into the pharmacy, I’m going to pay less if I have a deductible or a coinsurance on the generic version of the Flowback. And that’s been the incentive driven, rebate incentive driven problem that, again, what you alluded to, there’s an incentive in the marketplace for them to cover more expensive drugs with higher rebates and higher fees and everything else that goes along with it.
[00:13:39] Latin land, lower expense of medicines. And Flovent is just one example. We did a study with which I was a co-author at the Global Healthy Living Foundation. We looked at the Express Scripts formulary, which is the second largest PBM. And for two years in a row, the number of times that a generic was excluded in front, in favor of a brand-new drug grew.
[00:14:02] And it’s now on the formulary that Express Scripts have. There were about, I think, 15 cases this last year. Where generic, the actual generic was removed, and the brand name was covered. So, it tells you all the bad incentives that ultimately help the bottom line and the profitability of PBMs to the detriment of a patient who has to pay a coinsurance or a deductible at the pharmacy count.
[00:14:26] Joe Selvaggi: So, profits aside, again, I hate to keep introducing my own personal concern is there’s two products. The same product is either generic or branded, Flovent or it’s generic, made by the same company. Right now, it says January 1. I can’t get either. So I have to find a different drug, than the one that’s been working for me for 20 years.
[00:14:45] the PBM has not just said, I want my cut, I want my money. They’re saying, you can’t have your drug as, how is that possible? Where did that go?
[00:14:54] Robert Popovian: And that’s the problem right now. You’ve caused not only for you as a patient, you have to look for a new medicine that works for you. So guess what you have to do.
[00:15:04] You have to go visit your physician. The physician has to now re-diagnose you and prescribe something new for you as an asthmatic. What ends up happening is that drug may or may not work for you. You have to try it out, you may have some side effects, or it may not work for you, it may not be as efficacious, you have to go back again and get adjusted on the dosing or get another drug.
[00:15:27] what it’s doing is to add the bottom line of the PBMs to profitability. It’s increasing costs for the patient, because now you have to go to the physician and pay coinsurance or copayment or even pay cash. It increases costs for the health care system, but the only entity that’s really saving money.
[00:15:48] And making the money is the PBM And so it creates a lot of problems in the marketplace when these products are removed indiscriminately From the formularies and patients are left to fend for themselves.
[00:16:00] Joe Selvaggi: So, I want to get a little more technical and I want to understand why it was on January 1 I you know, I don’t know if this is too technical.
[00:16:07] But let’s go there, you know all these perverse incentives existed On December 31, but now again, I’m beating the drum because I can’t get the drug that I, I need my running. If I don’t get out there and run, I’m a monster. So, if I can’t cure my asthma or treat my asthma, I’m in trouble. So why did this happen January 1 specifically?
[00:16:31] Robert Popovian: It’s a simple explanation. Plan year. Plan year starts January 1. So even though we enroll for Health insurance, generally in October, November, every year, the plan year actually starts January 1st, so all the formulary shifts and all the physician coverages and hospital coverages, everything starts anew on January 1st, and that’s what happened.
[00:16:53] Bill Smith: Yeah, and it also has to do with the Medicaid rebate.
[00:16:57] Joe Selvaggi: Which is more about that because I think, yes, it does reset on January 1, but I’ve heard a lot about this rebate cap, but that there was legislation, albeit maybe well meaning, but that cap goes away. Explain that bill. What? Why is that?
[00:17:10] Bill Smith: So, Medicaid requires at least a 23 percent rebate, but it also has what’s called an inflation rebate.
[00:17:19] So if a drug company raises a price of a drug above. The inflation rate, they have to rebate back that money. Products like Flovent who have been on the market for a long time can reach 100 percent rebate. Because year after year, they’ve taken price increases and suddenly they’re maxed out.
[00:17:39] So they’re essentially free to the Medicaid program. It used to be that it was capped at a hundred percent once you reached a hundred percent of rebates. That’s it. The pharma company didn’t have to pay Medicaid. The Biden administration got rid of that cap. And basically, now If you go over if your med your inflation rebates for your particular product go over a hundred percent because the park is the product’s been on the market for 20 years You have to pay Medicaid for every prescription that is written for your own product.
[00:18:12] That’s the reason Flovent was taken off the market. Glaxo didn’t want to pay for every prescription that was written for their brand Flovent product. So, they basically said, we’re taking this off, we’re reducing the price on our generic, so we won’t have to pay for every prescription. Instead, patients and Medicaid will actually pay for the prescription.
[00:18:32] Joe Selvaggi: Robert, do you want to add anything to that?
[00:18:34] Robert Popovian: No, I think Bill explained it really well. It was a cap on the average manufacturer price. An average manufacturer price when that cap was removed. Technically, the easiest way to say is that manufacturers had to pay Medicaid to cover their own medicines. So, every time they got a prescription in Medicaid, Glaxo would actually have to pay.
[00:18:52] in my opinion, and this is a little bit different, I think that even though it was the Biden administration that did the rule, this was not something that the Biden administration came up with, Alex Azar, the previous, HHS, secretary and the Trump administration actually had proposed it. And as an economist, I think it’s one of the ways to force the market to correct itself.
[00:19:18] Because what it did is that it forced Glaxo to reduce the price of its medicine. And again, I have to go back. This benefits patients because at the end of the day, A Flovent brand name drug, if it’s 100 and you show up to the pharmacy and you have deductible, you’re paying 100 or if you have coinsurance, you’re paying 20 percent of that 100 versus now that price is 65, 35 percent less.
[00:19:42] So if you show up to the pharmacy and get the generic version of the Flovent, which is the same exact drug, you’re paying 65 or 20 percent of that 65. So, this is a good thing for the patient. Unfortunately, it’s a bad thing for the profitability of the PBMs. And it was made inevitable by the rule that was administered.
[00:20:04] And it’s forcing the issue that the pharma companies are saying, you know what? I’m just going to roll back the prices instead of having to pay Medicaid. And at the end of the day, that’s not a bad thing for patients.
[00:20:17] Joe Selvaggi: And yet, okay, so we’re trying to reconcile, square the circle. You think it’s a favorable rule change that maybe we’re stumbling in the transitional period, but nevertheless, my Flovent isn’t available.
[00:20:27] And you, we’ve touched on the fact it’s not just my Flovent. I was reading about, many of the diabetes drugs. These, again, these are not optional. These people absolutely need these things. How is it that a rule that was perhaps well intentioned to give an incentive to reduce prices will lead to the drug that is demonstrably effective, leaving the formulary. Again, I’m asking this genuine question, not as a rhetorical.
[00:20:51] Robert Popovian: No. I think it’s a fair question. And the reason being is because we have a broken market in pharmaceuticals where we have rebate contracting driving what’s available for patients.
[00:21:04] If rebate contracting did not exist, right? Think about it. What would be the incentive? For at this point, for PBM to cover the brand name versus generic, if they would be even happier if Flovent went to generic and it was 35 percent cheaper, that would automatically cover it. But because of rebate contracting, because they’re so dependent on their profitability due to this rebate contracting, it creates misaligned incentives such as this one.
[00:21:32] And the one that you just mentioned, also with the diabetes drugs, that has been happening for several years. And it’s not just the diabetes drugs, it’s the hepatitis C drugs, too. Manufacturer comes out with a brand name. Same manufacturer comes out with a generic. The generic is excluded from the formulary and only the brand name is covered.
[00:21:50] In your case, the Flovent. Branding was completely excluded. All the drugs were excluded from the formula. But this is the bad incentives that rebate contracting creates. And until we get rid of rebate contracting as an incentive, we will always have this misaligned situations where less expensive drugs are sacrificed or to favor more expensive medicines.
[00:22:12] Bill Smith: Joe, I hate to be simplistic, but. Formularies now are assembled like a rug bazaar. It’s all opaque, no one knows what’s going on, and it’s all about money. And, you may be frustrated you can’t get the rug you want, but you got to understand, if you’re not, if the price is not high enough for that rug, it’s not going to be available. And PBM’s view. Formularies, they want to maximize revenue.
[00:22:37] Joe Selvaggi: So, if, let me imagine a brave new world in which PBMs don’t exist. And we have, everybody’s in my mind in that universe, insurance companies want to pay as little as possible for drugs. And so, they should, can negotiate with pharmacies, because why do they want to pay less? They want to have. Lower premiums and attract new customers, or frankly, if they don’t want lower premiums, they want to pocket the money, it’s better for shareholders. But you know that those are healthy. Those are normal incentives that intermediaries have. the grocery store wants, but Walmart wants the best price for its products so they can deliver the best price to its customers. Why can’t insurance companies just do the same thing?
[00:23:11] Robert Popovian: They can, but they don’t want to because it’s more profitable. If you look at the insurance companies in general, now that they own PBMs, for example, which is the largest insurer in this country and has the largest, third largest PBM, which is, I’m sorry, United is the largest insurer.
[00:23:30] Optum is the third largest PBM. Optum makes more profit for United Healthcare as an entity within United than any of their other divisions. So pharmaceutical contracting and rebate contracting is a very lucrative business model. Now, do we have a model in this country that Insure doesn’t use rebate contracting and your Flovent, now a generic version of the Flovent, will be available in the formulary?
[00:23:58] Yes, it’s the largest insurer in our most populous state in the United States, it’s in California. The largest insurer in California is Kaiser Permanente. Kaiser Permanente uses no incentives, no rebate contracting, they just do net price contracting, they go with the lowest price. And guess what? I’ll put money on it, that Flovent is still covered within the Kaiser formulary because they do not have that rebate contract in the center built in.
[00:24:28] Joe Selvaggi: Yeah. All right. again, I don’t like to just complain. I say, we’re a think tank, but we think a think and do tank. So, let’s shift our conversation because we’ve identified a huge problem. You even identified a place. Where it isn’t a huge problem. What would a consumer, I’m going to count myself among those potential consumers, and ultimately, legislators, people who really, see no one winning, but it’d be PBM, employees.
[00:24:49] What could we do to make this better? It seems an epic problem that’s not well understood.
[00:24:55] Robert Popovian: I think starting, and Bill can add to this, starting point is the, get rid of rebate contracting, but that’s going to be very difficult because that’s been built into the model for a long time.
[00:25:06] I think what people are saying now is that, okay, if you’re not going to get rid of rebate contracting, then as a consumer, as a patient, I should benefit from that negotiated price when I show up to the pharmacy counter. Joe, when you show up at the pharmacy counter. You should benefit and pay based on that negotiated price that’s been done on your behalf instead of the inflated retail price in every other segment of the health care system, whether it’s your dental care, your optometrist, your physician care, your hospital care, when you show up to pay for your services, you’re paying based on a negotiated price that’s been done on your behalf.
[00:25:43] Except for pharmaceuticals, where the PBMs have bamboozled the entire business community, including legislators, to think that the only way you can contract is through this rebate, convoluted rebate contracting, and Patients should not benefit from it directly.
[00:26:01] Bill Smith: Joe, you can envision a world where PBMs were not necessary. Suppose a health plan wanted to get rid of the rebate contracting system. They just wanted the lowest price. They open up bidding in every therapeutic area. for psoriatic arthritis, they say, Okay, manufacturers, submit your bids. For your drugs, and those bids get submitted, no rebates involved, just here’s what our price is going to be, and a drug comes in at the lowest price, and it’s not the greatest drug, it’s a good drug, but it’s not the greatest drug, so the health plan could decide, okay, the three lowest bidders, we’re going to put those drugs on formulary, and we’re going to make the prices available, those low bid prices, we’re going to make them available to the patients at the pharmacy counter, no rebates involved, just The lowest prices they can get based on bids that manufacturers submit that’s an that’s the way the Chinese do it.
[00:26:55] If you can believe that they do it in their national health care system, open up therapeutic areas, ask for low bids and then construct the formulary based on the bids that come in. And you don’t necessarily just put the lowest bid on the formulary as the only preferred drug. You might put a handful of them that come in at low prices.
[00:27:14] Robert Popovian: And that’s exactly, by the way, Joe, that’s exactly how Kaiser does it. They don’t have one product on the formulary, they have several products in the class, but they allow, they just do it based on net pricing. And say that’s net price, I’m paying as Kaiser, you as the patient is going to be paying for it.
[00:27:32] Joe Selvaggi: What? So let me just ask what might seem like an obvious question. We all here believe in markets or market dynamics, I hope, and we say, okay, look, I have a need and we’re dealing in a world with the Internet and sort of the disintermediation of everything, right? Which is we almost directly communicate with providers, with producers.
[00:27:53] Why isn’t that? I can’t go get on Amazon and get Flovent provided I have well documented, prescription and, I like the generic, why can’t I just get my drug on Amazon?
[00:28:06] Robert Popovian: You can, and it’s not just Amazon. You can go get it at Costco and you can get it at the Mark Cuban’s pharmacy, and you can pay cash for it.
[00:28:15] Unfortunately, you, insurance companies are not. Paying for those things. And the reason that these pharmacies exist, these cash pharmacies, whether it’s Amazon, whether it’s Cuban’s Pharmacy, whether it’s Costco, is because they fill a void. We haven’t even talked about this other issue, which is a lot of times, about 70%, about 25 percent of the time, not 70%, 25 percent of the time, when you and I are purchasing a generic medicine, a typical generic, we’re overpaying by using our insurance card.
[00:28:48] As a consumer, we’re paying more out of pocket than if not, if we would have walked down the street to Costco and paid for it in cash. And that’s where I’m, that’s where the market is moving towards is that patients are looking at it and saying, wait, if I use my insurance card, I’m going to pay 25. If I walk down the street to Costco or call Cuban’s pharmacy, I’m going to pay 20.
[00:29:09] Guess what? I’m going to do that instead. And that’s what we’re moving towards as a society. In consumerism needs to take place in the pharmaceutical marketplace and more consumerism is a good thing.
[00:29:24] Joe Selvaggi: Indeed. Bill, would you like to amplify on, what. Robert, you said?
[00:29:28] Bill Smith: No. No. I think Mark Cuban has hit upon something great. Basically, PBMs were making great money off generic drugs. They could buy a generic prescription for five bucks. It’s, it doesn’t cost anything to manufacture a generic drug so they can buy ’em for five bucks. And then, the patient may have a $15 copay under their health plan. So, they go in and pay $15 for a drug that costs the PBM $5.
[00:29:50] So they’re overpaying. So, Mark Cuban stepped in and said, this is ridiculous. They should be paying. 5 plus maybe 50 cents for me, and that’s the way he has made money. I’m skeptical about how well this model can work in the branded space. I’m just not sure how well it’s going to work. branded drugs are a very different economic model.
[00:30:13] Joe Selvaggi: And of course, when we talk about expenses to insurance companies, nobody’s hoping that insurance companies are profitable. And of course, all of our premiums are comprised of all the money that our insurance company pays on our behalf. collectively, if insurance companies are paying too much.
[00:30:29] Or we’re paying too much to them. It’s costing us more in health care. If our goal is to help reduce or create the market dynamics that make health care less costly, going around our insurance companies is, makes sense. One thing, again, we’re getting close to the end of our time together when we do go off, in on our own Rx or whatever Mark Cuban’s, new enterprises called none of that money we spend is applied towards our deductible or that It’s innocence. Our insurance company doesn’t know it’s there. So, we may save money on that prescription, but ultimately, if it doesn’t help us get to our deductible, ultimately, at the end of the year, we may actually spend more because we spent less because it didn’t get applied to our deductible.
[00:31:10] Right.
[00:31:11] Robert Popovian: You’re right, but it does work for patients who are multiple generic drugs that are going to pay a lot more and they never are going to be on a brand name drug, really, that’s going to hit that deductible. it depends on the patient, but at the end of the day, Whether it’s Costco or, Amazon or Mark Cuban’s pharmacy or row.
[00:31:30] com, there’s a lot of these cash-based pharmacies. The reason that they exist is because there’s a consumer marketplace that figured out, they’re overpaying by using their insurance card. And they’ve done the math. We all do math, right? It’s just doing your budget and you figure out that if I’m paying 25 for a copay instead I can pay 5 for this generic, for example, I’m saving so much more money and even if it applies to my deductible because most of us have deductibles in the thousands, we’re not going to never going to reach the deductible anyways, right throughout the year for especially for people who have chronic diseases on multiple generic medicines.
[00:32:09] Now, if you’re on a brand name is and I agree with Bill, I don’t know how well this will work in the brand marketplace. but in that case, that’s insurance, but. Joe, this is not a bad thing. I think what we’re doing now by forcing these issues is going back to what insurance is meant to be.
[00:32:26] Insurance is meant to be for the purposes of covering expensive, traumatic type of events. Just like we buy homeowner’s insurance, or we buy car insurance. Healthcare insurance has evolved into being the opposite covering everything that’s not supposed to be covering and when it gets to expensive medicines like brand name medicines and things like that doesn’t want to cover it because it’s too much.
[00:32:52] So we’re doing the reverse almost in health care, what we have done in the insurance marketplace and other.
[00:33:02] Bill Smith: Yeah. And Joe, you’re always looking for legislative ideas. So what about those requiring that those cash purchases of generic drugs through Mark Cuban’s pharmacy be counted towards your deductible or out of pocket costs? It’s a healthcare expense.
[00:33:18] Joe Selvaggi: Yeah. And right. It should. And of course, now, again, what we are always trying to do as lovers of markets is align incentives. If the individual has an incentive. positive incentive to go direct and cash, and it helps them. and there’s no longer a negative incentive that they must go through the insurance company.
[00:33:38] it gives, as Robert was saying, it gives incentives for, drug manufacturers to keep their prices lower and move, when they get to a generic, produce a useful generic. and we’re back into reality, right? I want to echo, I agree with you, Robert, that our idea of health insurance is so bizarre and so distorted.
[00:33:55] I use the analogy of if, as you mentioned, our car insurance, imagine if our car insurance. paid for our new tires, our windshield wiper blades or our gas, it would be absurd. we have car insurance for God forbid we slip on the ice and smash into a tree. This happens, maybe once in a lifetime and the insurance is there when we need it.
[00:34:15] Our health insurance has become some sort of a payment program or, collective, payment.
[00:34:21] Bill Smith: Yeah, let’s cover every preventative possible, medicine or, it’s, they’ve loaded it up to cover everything.
[00:34:28] Joe Selvaggi: Yeah. And ironically, the people who really need it. We accept that there are people with some rare diseases that are profoundly costly, but because we’ve loaded it up with all this nonsense, those people are the ones that are not served by. Classic insurance. They, that’s when the insurance company says, sorry, can’t cover you. I’m too busy covering, Flovent.
[00:34:48] Robert Popovian: Exactly. And that’s the problem. And you just put the word rare diseases. that’s the thing we want insurance to cover rare events and expensive events, right? You want an insurance to cover you, when you’re having a cardiovascular event and you need a cabbage, for example. You don’t want your insurance to be covering your aspirin.
[00:35:08] that’s what it’s doing covering the aspirin, not necessarily the cabin or not fully, not well enough. And it’s exposing patients to significant out of pocket costs. But now what we’re finding out. With humans’ pharmacy and everything else and that even though they’re covering the aspirin they’re overcharging for the aspirin now It’s both sides. They’re making money off of the patient.
[00:35:32] Joe Selvaggi: So this is a couple you mentioned it was good Yeah, we’re getting at the end of our time together So I want to give our audience some place to go and continue to read about this because they’re probably you know Almost incredulous they you know, it’s hard to believe this is going on You mentioned the Wall Street Journal article, of course, I read that in a couple other Pieces they’ve done throughout the year.
[00:35:50] Who’s studying this and where can our listeners go to learn more about, what’s going on with the dynamics and, what they might do to mitigate the, the harm to if they need some of these drugs.
[00:36:00] Robert Popovian: I would say Pioneer Institute, since we’re doing most of the work in this space, I don’t want to pat ourselves on the back, but Bill started it.
[00:36:07] And, since I’ve come on, we’ve done a ton of work in this space, and we’ve tried to expose a lot of these perverse incentives in the market. And we what we try to do is do it individually. We’re not trying to do a holistic look at the entire system. We’re saying, look, this is a problem. This is the solution for this problem.
[00:36:24] For example, 340 be pricing or we’re looking at accumulators and maximizers. So, I would say. By far, Pioneer Institute has done more work in this space in the last 24 to 36 months since Bill came on board.
[00:36:38] Bill Smith: And Robert’s done some great stuff with the Global Healthy Living Foundation, which is a kind of patient advocacy group, which he’s affiliated with, so I’d point to some of his studies, too.
[00:36:49] Joe Selvaggi: Wonderful, good. I want to get our, our plug, our self-congratulatory plugs in the ad at the end. I appreciate it. This has been an exciting topic for me only because it touched his home, and it’s, it’s fun to, dive into something, as personal as this. So, thank you both for joining me on Hubwonk today. Thank you, Robert. And thank you, Bill. You’re always great.
[00:37:06] Bill Smith: Sure, Joe, we’ll try to talk to our friends at GSK and see if we can find Flovent for you.
[00:37:13] Robert Popovian: As a pharmacist, I hope you do get your Flovent, and you just keep running.
[00:37:17] Joe Selvaggi: Yeah, I, good. Yeah, I say if running were as a drug, I think it would be the best, most prescribed ever, let me pitch for that drug as well. Thanks guys. Thanks for joining me.
This has been another episode of Hubwonk. If you enjoyed today’s episode, there are several ways to support Hubwonk and Pioneer Institute. It would be easier for you and better for us if you subscribe to Hubwonk on your iTunes Podcatcher.
[00:37:40] It would help make it easier for others to find Hubwonk if you offer a five-star rating or a favorable review. Of course, we’re grateful for any word-of-mouth recommendations. If you have ideas or comments or suggestions for me about future episode topics, you’re welcome to email me at Hubwonk@pioneerinstitute.org. Please join me next week for a new episode of Hubwonk.
Joe Selvaggi talks with Drs. Bill Smith and Robert Popovian about how the complex system of rebates from drug companies to insurance firms serve to increase costs and reduce access for patients.
Guests:
Dr. William S. Smith is Senior Fellow & Director of Pioneer Life Sciences Initiative. Dr. Smith has 25 years of experience in government and in corporate roles. His career includes senior staff positions for the Republican House leadership on Capitol Hill, the White House Office of National Drug Control Policy, and the Massachusetts Governor’s office where he served under Governors Weld and Cellucci. He spent ten years at Pfizer Inc as Vice President of Public Affairs and Policy where he was responsible for Pfizer’s corporate strategies for the U.S. policy environment. He later served as a consultant to major pharmaceutical, biotechnology and medical device companies. Dr. Smith earned his PhD in political science with distinction at The Catholic University of America.
Dr. Robert Popovian is Senior Visiting Health Policy Fellow at Pioneer Institute. Dr. Popovian is the Founder of the strategic consulting firm Conquest Advisors. He previously served as Vice President, U.S. Government Relations at Pfizer. One of the country’s foremost experts on every significant facet of biopharmaceuticals and the healthcare industry, he is also a recognized authority on health economics, policy, government relations, medical affairs, and strategic planning.
Dr. Popovian has published extensively on the impact of biopharmaceuticals and health policies on costs and clinical outcomes in the most prominent medical sources and media publications, including the Clinical Economics and Outcomes Research, The Oncologist, Journal of Vaccines and Vaccinations, Health Science Journal, USA Today, Managed Healthcare Executive and Morning Consult. He is also a sought-after speaker and has been invited to provide detailed presentations, briefings, and expert reviews for the U.S. Congress, dozens of state legislatures, and at conferences and medical symposiums throughout the country and around the world.
He is one of the select few researchers to study and publish both clinical and policy-related economic analysis as well as empirical data regarding emerging payment models in the U.S. healthcare system and for biopharmaceutical reimbursement. His insight and analysis also led to one of the first inclusions of health outcomes data regarding a biopharmaceutical labeled indication.
Dr. Popovian was recently appointed as the Chief Science Policy Officer for Global Healthy Living Foundation. He also serves on the Board of Councilors of the University of Southern California School of Pharmacy, Senior Health Policy Fellow at Progressive Policy Institute, and Board of Advisors for Equideum Health. Robert completed his Doctorate in Pharmacy and Master of Science in Pharmaceutical Economics and Policy degrees at the University of Southern California with honors. He has also completed a residency in Pharmacy Practice/Adult Internal Medicine and Infectious Diseases at the Los Angeles County-USC Hospital and a fellowship in Pharmaceutical Economics and Policy at USC.
This week on The Learning Curve, guest co-hosts Prof. Albert Cheng of the University of Arkansas and Charlie Chieppo interview two-time Pulitzer Prize winner T.J. Stiles. Mr. Stiles delves into the life of America’s first tycoon, Cornelius Vanderbilt, exploring his rise to historic wealth in steamboats, shipping, and railroads. He discusses Vanderbilt’s legal battles, philanthropy, and enduring legacy, exploring his business competitiveness and wide impact on 19th-century America’s economy. Mr. Stiles closes the interview with a reading from The First Tycoon: The Epic Life of Cornelius Vanderbilt.
Stories of the Week: Albert comments on a story from Education Next about the rise of apprenticeships; Charlie reviews a story in The Hill about the Chicago Board of Education eliminating selective enrollment in high-achieving public schools, claiming equity but potentially harming minority students’ opportunities.
Guest:
T.J. Stiles is an award-winning American historian and biographer. His book The First Tycoon: The Epic Life of Cornelius Vanderbilt won a National Book Award and the 2010 Pulitzer Prize for Biography or Autobiography, and his Custer’s Trials: A Life on the Frontier of a New America received the 2016 Pulitzer Prize for History. Stiles became interested in Vanderbilt while researching and writing his historical account of another legendary figure, Jesse James: Last Rebel of the Civil War. He served as historical adviser and on-screen expert for Jesse James and Grand Central, two films in the PBS documentary series American Experience. Stiles has written for The New York Times Book Review, Smithsonian, Salon, the Los Angeles Times, and other publications. He studied history at Carleton College and Columbia University.
Tweet of the Week:
At the close of a more tumultuous academic semester in recent memory — one replete with vitriolic debates over war in the Middle East, free speech, leadership crises at elite colleges, and a national reckoning over plagiarism — this intern finds himself finishing his history degree after a most peculiar college experience.
It’s no understatement to say that higher education has changed greatly since I began my studies, and this change is readily apparent in admissions practices.
Affirmative action initiatives peaked after the fervor of 2020, heavily influencing the composition and tenor of student cohorts across the country before the Supreme Court outlawed the practice this past summer.
Standardized tests like the SAT and ACT have been deemphasized in favor of more qualitative metrics. Fewer students take standardized tests today compared to 2019, one of many indications that elite colleges’ less rigorous, post-COVID admissions policy changes have already affected student behavior.
From my biased perspective, the precipitous, consistent dropoff in students studying the humanities is noteworthy. History majors declined nationally by almost one-third between 2012 and 2019. The recent trends for humanities majors at Williams College, a liberal arts institution very much like that which I attended in California, are shown in the table below. They tell a sad tale.
So, as I end my collegiate career with a degree in one of those “downward-sloping” academic disciplines, I thought to offer seven guiding principles that helped me stay motivated and interested in what I was learning. May they help another college student thinking about studying history or any other humanities subject, and hopefully reverse the trend seen at Williams, my own liberal arts college, and others across the country.
Follow the great books
For brash eighteen-year-olds raised on Wikipedia and SparkNotes, reading the classics offers valuable insight and a good intellectual humbling. Any theory course with a reading list that includes Herodotus, Thucydides, Plato, and Aristotle offers an elevated caliber of reasoning and analysis of the Western tradition’s great minds, a time-tested curriculum that is impossible to replicate with other source material. All students, irrespective of major, could benefit from great books study.
Do the reading — not for anyone else, but for you
Grade inflation and declining standards have made it easier than ever to get an A in a college course while putting in reduced effort. Now more than ever one truly gets out what one puts in. Getting by with a quick skim of the material before class may not harm students on paper, but it won’t let them understand the subtleties of the professor’s and course’s message. They will also have meaningful insight to contribute in class discussions, instead of non-sequiturs that usually begin with “like for me personally…”
Be wary of courses with ideological, narrow focuses
In the college course catalogues of this decade, many options resemble word salad from the woke urban dictionary. Esoteric titles like “mapping intersectional discourses,” “gendered feminisms,” or “queering the body politic” leave little indication of their respective courses’ scholarly underpinnings, while loudly signaling the dominant ideology in class. I learned more and thought more critically in courses with a general, narrative-based theme — “Classical Political Theory,” “Early East Asian History,” and “World War Two in East Europe”— which allowed their students to reach individual analytical conclusions instead of those bathed in nouveau ideology.
Take classes with professors who appreciate perspective and challenge you
This tip involves a bit of luck. Everyone is at the mercy of some chance while hunting through the course catalogue, but those who do find that prof with the time and energy to invest in their students’ success are well-positioned to reap the benefits. Developing valuable relationships with professors may not happen quickly, which is why taking multiple courses from favored professors is the surefire way to maximize those four years.
Speak your mind, and don’t be afraid of your classmates
Rigidity and silence abound in today’s cruel polemic. Far too often, people avoid sharing their thoughts and opinions because they fear ostracization, not because speaking out is de jure prohibited. I found that confidently expressing my ideas often drew a less vitriolic response, if any, than what I had imagined in my head. The group is often more afraid of countervailing ideas than the contrarian is afraid of the group.
Remember the real world
College can often feel like a self-sustaining ecosystem ridden with groupthink; it is vitally important that students have valuable learning experiences outside this environment before they graduate. Taking advantage of the internships, summer jobs, study abroad, and domestic exchange programs on offer will ensure a smoother transition to life after graduation.
ALWAYS do your own writing — it may come in handy
Humanities majors learn to write. This time-honored maxim runs the risk of losing its accuracy with the rise of new AI learning software that generates passable prose faster than anyone living. Soon its prose will be more than passable, but as of now, AI’s shortcomings leave a window for well-trained writers and critical thinkers to prosper in this digital age. That is if they can still write better than the average language model. To all my fellow so-called “useless BAs,” take notice!
Jude Iredell is a Roger Perry Civics Intern with the Pioneer Institute. Last week, he completed his bachelor’s in history at Pomona College.
Drug Discount Distortions: How Middlemen Increase Costs and Reduce Access
/in Featured, Healthcare, News, Podcast Hubwonk /by Editorial StaffClick here to read a transcript
Hubwonk Drug Discount Distortions: How Middlemen Increase Costs and Reduce Access
01.09.2024
[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. On January 1st, the popular asthma drug Flovent disappeared from pharmacy shelves, leaving its users scrambling for alternatives and policy observers to wonder what happened. A closer look at the puzzle reveals that though Flovent’s producer, GlaxoSmithKline or GSK, was responding to regulatory pressure to lower the price of the drug, The Byzantine system of rebates that circulate between insurance companies, pharmacy benefit managers, and consumers serve to effectively eliminate coverage for a drug that had safely and effectively treated asthma patients, many of them children, since the year 2000.
[00:00:45] The Flovent story mirrors that of many drugs used to treat other chronic illnesses such as diabetes, shining a spotlight on a process that keeps the price of name brand therapies high while also serving to discourage the adoption of their generic substitutes. How does our healthcare system decide which drugs we can purchase and at what price?
[00:01:03] And how can incentives designed to reduce costs for consumers actually result in drugs like Flovent being removed from our pharmacy shelves? My guests today are Pioneer Institute’s Senior Fellow for Life Sciences, Dr. Bill Smith, and Pioneer Institute’s Visiting Healthcare Fellow and Founder of Conquest Advisors, Pharmacy Doctor Robert Popovian.
[00:01:23] Dr. Smith and Popovian will explain how drug therapies find their way to patients using a complex system of rebates coordinated by intermediaries known as pharmacy benefit managers. They will share how rebates originally negotiated as product discounts now provide pharmacy benefit managers with distorted incentives to cover more expensive name brand drugs and reduce access for those less expensive therapies when they go generic.
[00:01:49] We will discuss alternative models for drug access such as direct to consumer programs. And what steps policy makers might take to realign incentives for the benefit of patients. When I return, I’ll be joined by Drs. Bill Smith and Robert Popovian. Okay, we’re back. This is Hubwonk. I’m Joe Salvaggi, and I’m now pleased to be joined by frequent Hubwonk guest and Pioneer Institute Senior Fellow for Life Sciences, Dr.
[00:02:14] Bill Smith, and by Pioneer Institute’s Visiting Healthcare Fellow and founder of Conquest Advisors, Dr. Robert Popovian. Welcome to Hubwonk, gentlemen.
[00:02:23] Bill Smith: Thank you, Joe.
[00:02:23] Robert Popovian: Glad to be here.
[00:02:24] Joe Selvaggi: Okay. All right. So we’re going to be talking about some familiar topics. Certainly Bill, you and I have talked about drug prices, how we got here, what can be done, what the dynamic is before we as consumers ultimately buy and pay for that drug.
[00:02:38] but today we’re also going to talk about a phenomenon that happened just this past January 1, 2024, where a popular drug, in this case it was Flovent, the drug manufacturer actually reduced its price, and it fell off what’s called the formulary, meaning I can’t go out and my insurance company may not cover this anymore.
[00:02:56] I speak from experience. I’m sure there’s a lot of other drugs out there but let me give the listeners a little bit of background. I’m asthmatic, and I discovered albuterol and Flovent, and this was maybe 20 years ago, and I’ve run 13 marathons. Running is my drug, and if it weren’t for these drugs, on a cold day like this, I wouldn’t be able to walk down the street without developing a painful hacking cough.
[00:03:17] So this is near and dear to my own heart, which is a kind of an unusual step, but let’s talk about it. For instance, let’s use Flovent as our example. but before we do, before we figure out why Flovent isn’t any longer covered by my insurance company, Bill, explain to our listeners, where do drugs come from and how do we ultimately buy them in the drug store?
[00:03:36] Bill Smith: Where do they come from? They come from 1000 ideas. there are 1000 thousands and thousands of researchers, both in academia and in industry, that have ideas about different compounds and how it might affect a certain disease state. And they pursue 90 percent of those.
[00:03:54] Projects fail, but 10 percent succeed. and, that’s a good thing that they do. and pricing them is an art, not a science. It’s, a lot of it, it’s not just based on the R and D costs. As some people think it’s based on what market. forces you’re entering. What is their competition?
[00:04:11] Is the competition better than your own product? Is there generic competition? There’s a whole host of factors that companies have to consider when they set prices.
[00:04:21] Joe Selvaggi: And you and I have talked about the fact that whereas we all agree, healthcare prices are high and continue to go up. the cost of drugs really over time as good as those drugs are seem to over time.
[00:04:31] not really represent a larger percentage of our health healthcare costs meaning Though they do cost a lot when they’re new they fall off. into what’s called generic where whereby they’re no longer extremely expensive Robert, why don’t you share with us? Why is it that drug costs haven’t really escalated over time the way sort of the popular myth portrays it?
[00:04:51] Robert Popovian: It is a popular myth, and the reason that drug prices have stayed stable on average is because, as you mentioned, Joe, these medicines come out, they’re brand medicines, for a finite number of years.
[00:05:04] brand companies have an ability to price these medicines as they wish. After they lose their patents, these drugs become what they, typically generics or biosimilars. And with the introduction of biosimilars and generics, the prices started to plummet. So, what I always tell people is that the value of the medicine never goes away.
[00:05:25] the flow that you were, you’re used for your asthma, the value will continue in perpetuity, but the price will fluctuate. The price will be high for several years in the beginning, but then it will plummet after it goes generic. And that’s what we have seen. And this is why, on average, prices of medicines have not gone up significantly over the last.
[00:05:46] Okay. And that’s because we have more and more generics that come into the market as brand name products lose patents.
[00:05:53] Joe Selvaggi: Okay, that’s a good answer. We have why they cost money and why they over time cost less money. But unlike many of the products we’re used to buying, let’s say a gallon of milk, we have a manufacturer and a distributor, maybe the grocery store, and we buy that gallon of milk.
[00:06:07] But we know with drugs, there’s a different dynamic. There are many intermediaries, but we like to, we’ve covered this on earlier shows. but our insurance company buys it perhaps on our behalf and we do a copay, but they use intermediaries known as PBMs, pharmacy benefit managers explain for our listeners.
[00:06:23] Bill, why don’t you feel this one in basic terms? Who is it? That’s in a sense, buying these drugs are negotiating for these drugs on our behalf.
[00:06:32] Bill Smith: Pharmacy benefit managers, the PBMs are consultants to the health plans that ultimately pay for the drugs, or although the employers ultimately pay for the drugs through the health plans, and the pharmacy benefit managers serve as consultants to negotiate with the numerous drug manufacturers to try to get the most reasonable price for health care, for those products for the health plans and you know that in the abstract sounds fine, but there are many perverse incentives that we can talk about and Robert’s expert on this at how PBM’s actually increase the costs for both health plans employers and patients themselves.
[00:07:09] Joe Selvaggi: That’s a good tip. Robert, how is it that an organization, a PBM, that their express purpose for being there is to make sure my drugs are as cheap as they can be.
[00:07:19] They’ve got the knowledge; they’ve got the market power. They, in a sense, put it to those big, bad drug companies and say, give us the best price. How is it that they might be distorting the price that I ultimately see?
[00:07:29] Robert Popovian: because the way that the PBMs work though, is that they arbitrage the price of the medicine.
[00:07:35] So they buy the medicine at a certain price, but that’s not necessarily the price that the employers or the patient ends up paying at the drug store, at the pharmacy counter. So, what happens is that they have contracts with these manufacturers. for example, if the drug is, for sale for a hundred dollars.
[00:07:53] They end up negotiating the price down to a 50, but the price that ends up being paid by the patient at the pharmacy counter or by the employer generally ends up being 100 still. What they do is that they make money off of the margins and these margins have grown over time where they used to be maybe 5 or 10 percent now over 50 percent of a value or price of a medicine, a brand name medicine ends up in the hands of the PBMs.
[00:08:23] And because of lack of accountability and lack of transparency, we have no idea what they do with these. Negotiated prices, whether or not they keep. All of the 52, 3%, or they pass a certain percentage back to the employer or the federal government. Nobody knows that even the federal government doesn’t know exactly what the amount is.
[00:08:43] And that’s because it’s a very convoluted system that they’ve created. And 1 thing to also mention that Bill said there used to be independent. And as consultants now, because they are being either acquired or have been acquired by insurance companies, it’s become even more money. The waters have become even more money because now they can even hide more money in the supply chain where in the past.
[00:09:06] The insurers, where they were separate from the PBMs, were sort of a gatekeeper, and, but that no longer exists in the marketplace.
[00:09:14] Joe Selvaggi: Yes, Bill and I have talked about PBMs in that they, their revenue, rivals or even exceeds that of the drug companies themselves. In other words, as intermediaries, they make more money than the people actually producing the drugs.
[00:09:25] again, I’m going to put my economist hat on here and say there’s some real flaws with the model of a PBM, which is, as you say, they get paid by the discount they negotiate, right? So, the more that drug costs, the larger the discount. Explain, I’ll throw that one to you, Bill. Am I right? Or is it a weird sort of, codependency whereby the more the drug company charges, the more attractive they become to the PBM because they’ve got more room to negotiate?
[00:09:51] Okay.
[00:09:52] Bill Smith: Yeah. So, you know, let’s have a simple analogy. Suppose you go in and get a generic drug and you pay 10 for it. the PBM doesn’t make very much money on that prescription. but they say there’s an equivalent branded drug that costs 200 and the PBM gets 100 rebates on that drug. They’d much prefer the patient to be on the rebated drug than they would on the 10 generics.
[00:10:17] And that’s the perverse nature of the PBM system. They sometimes favor much more expensive drugs. It doesn’t help their clients, it doesn’t help their health plans, it doesn’t help their employers, and it doesn’t help patients. They should be steering patients to the lowest possible cost drug, and they have a disincentive to do that, because they make so much money from rebates.
[00:10:37] Joe Selvaggi: So I want to tie some of the ideas we’ve had so far, because I’m sure our listeners are, maybe their eyes are glazing over, they’ve heard all this alphabet stuff, PBM and all that, but All they know is, look, we all agree we want drugs, Robert explained the reason drugs have remained relatively, a fairly stable portion of our health care bill, they not, they have not gone substantially up is because of this move towards generic.
[00:10:58] But Bill, you just explained that if they go generic, they become less attractive to the PBMs because there’s less money to be made are you saying that effectively the fact that we pay so much in drugs is not quote unquote greedy pharmacies But rather PBMs preferring and I don’t know if we’ve made this clear But I think we should the PPM doesn’t just negotiate it tells us what drugs we can buy so it may not allow us To buy that cheaper generic.
[00:11:23] It may insist that we buy the more expensive branded drug is do I have that right Robert or am I exaggerating?
[00:11:29] Robert Popovian: No, you’re not exaggerating and that’s what the problem is the formularies that you refer to which is a list of medicines that are covered by the pharmacy benefit management companies Formulars started as a way to promote less expensive medicines over more expensive medicine.
[00:11:43] So What they’ve turned out to be are now rebate or profit maximizing machines. And the best example is what you refer to, the Flovent issue, which was covered by the Wall Street Journal article this last week. Flovent, brand name drug, it’s been around for a long time. The manufacturer, GlaxoSmithKline, decided to withdraw the product from the market and instead introduce an authorized generic.
[00:12:09] That means it’s a product that Glaxo actually makes. But it’s a generic version of it at about 35 percent discount the pharmacy benefit management company at that point decided that they no longer are going to cover the generic and they took the generic off the formulary and the reason they gave is that the net price.
[00:12:30] Or Flovent is higher. The generic is higher than the net price. They were negotiating for the brand name. The question is the net price to whom the net price to the PBM may have been a little bit higher. But remember, Joe, you, me, Bill, everybody pretty much in the marketplace today within our insurance design, we have what it’s called a deductible or a coinsurance.
[00:12:55] A deductible is when you have to meet a certain number of dollars before your insurance kicks in. And a coinsurance is a percentage that you have to pay of the price of the medicine. So, for somebody who is a patient, the generic version is far less expensive, about 35 percent less expensive. Because remember, I have a deductible and coinsurance.
[00:13:16] So when I walk into the pharmacy, I’m going to pay less if I have a deductible or a coinsurance on the generic version of the Flowback. And that’s been the incentive driven, rebate incentive driven problem that, again, what you alluded to, there’s an incentive in the marketplace for them to cover more expensive drugs with higher rebates and higher fees and everything else that goes along with it.
[00:13:39] Latin land, lower expense of medicines. And Flovent is just one example. We did a study with which I was a co-author at the Global Healthy Living Foundation. We looked at the Express Scripts formulary, which is the second largest PBM. And for two years in a row, the number of times that a generic was excluded in front, in favor of a brand-new drug grew.
[00:14:02] And it’s now on the formulary that Express Scripts have. There were about, I think, 15 cases this last year. Where generic, the actual generic was removed, and the brand name was covered. So, it tells you all the bad incentives that ultimately help the bottom line and the profitability of PBMs to the detriment of a patient who has to pay a coinsurance or a deductible at the pharmacy count.
[00:14:26] Joe Selvaggi: So, profits aside, again, I hate to keep introducing my own personal concern is there’s two products. The same product is either generic or branded, Flovent or it’s generic, made by the same company. Right now, it says January 1. I can’t get either. So I have to find a different drug, than the one that’s been working for me for 20 years.
[00:14:45] the PBM has not just said, I want my cut, I want my money. They’re saying, you can’t have your drug as, how is that possible? Where did that go?
[00:14:54] Robert Popovian: And that’s the problem right now. You’ve caused not only for you as a patient, you have to look for a new medicine that works for you. So guess what you have to do.
[00:15:04] You have to go visit your physician. The physician has to now re-diagnose you and prescribe something new for you as an asthmatic. What ends up happening is that drug may or may not work for you. You have to try it out, you may have some side effects, or it may not work for you, it may not be as efficacious, you have to go back again and get adjusted on the dosing or get another drug.
[00:15:27] what it’s doing is to add the bottom line of the PBMs to profitability. It’s increasing costs for the patient, because now you have to go to the physician and pay coinsurance or copayment or even pay cash. It increases costs for the health care system, but the only entity that’s really saving money.
[00:15:48] And making the money is the PBM And so it creates a lot of problems in the marketplace when these products are removed indiscriminately From the formularies and patients are left to fend for themselves.
[00:16:00] Joe Selvaggi: So, I want to get a little more technical and I want to understand why it was on January 1 I you know, I don’t know if this is too technical.
[00:16:07] But let’s go there, you know all these perverse incentives existed On December 31, but now again, I’m beating the drum because I can’t get the drug that I, I need my running. If I don’t get out there and run, I’m a monster. So, if I can’t cure my asthma or treat my asthma, I’m in trouble. So why did this happen January 1 specifically?
[00:16:31] Robert Popovian: It’s a simple explanation. Plan year. Plan year starts January 1. So even though we enroll for Health insurance, generally in October, November, every year, the plan year actually starts January 1st, so all the formulary shifts and all the physician coverages and hospital coverages, everything starts anew on January 1st, and that’s what happened.
[00:16:53] Bill Smith: Yeah, and it also has to do with the Medicaid rebate.
[00:16:57] Joe Selvaggi: Which is more about that because I think, yes, it does reset on January 1, but I’ve heard a lot about this rebate cap, but that there was legislation, albeit maybe well meaning, but that cap goes away. Explain that bill. What? Why is that?
[00:17:10] Bill Smith: So, Medicaid requires at least a 23 percent rebate, but it also has what’s called an inflation rebate.
[00:17:19] So if a drug company raises a price of a drug above. The inflation rate, they have to rebate back that money. Products like Flovent who have been on the market for a long time can reach 100 percent rebate. Because year after year, they’ve taken price increases and suddenly they’re maxed out.
[00:17:39] So they’re essentially free to the Medicaid program. It used to be that it was capped at a hundred percent once you reached a hundred percent of rebates. That’s it. The pharma company didn’t have to pay Medicaid. The Biden administration got rid of that cap. And basically, now If you go over if your med your inflation rebates for your particular product go over a hundred percent because the park is the product’s been on the market for 20 years You have to pay Medicaid for every prescription that is written for your own product.
[00:18:12] That’s the reason Flovent was taken off the market. Glaxo didn’t want to pay for every prescription that was written for their brand Flovent product. So, they basically said, we’re taking this off, we’re reducing the price on our generic, so we won’t have to pay for every prescription. Instead, patients and Medicaid will actually pay for the prescription.
[00:18:32] Joe Selvaggi: Robert, do you want to add anything to that?
[00:18:34] Robert Popovian: No, I think Bill explained it really well. It was a cap on the average manufacturer price. An average manufacturer price when that cap was removed. Technically, the easiest way to say is that manufacturers had to pay Medicaid to cover their own medicines. So, every time they got a prescription in Medicaid, Glaxo would actually have to pay.
[00:18:52] in my opinion, and this is a little bit different, I think that even though it was the Biden administration that did the rule, this was not something that the Biden administration came up with, Alex Azar, the previous, HHS, secretary and the Trump administration actually had proposed it. And as an economist, I think it’s one of the ways to force the market to correct itself.
[00:19:18] Because what it did is that it forced Glaxo to reduce the price of its medicine. And again, I have to go back. This benefits patients because at the end of the day, A Flovent brand name drug, if it’s 100 and you show up to the pharmacy and you have deductible, you’re paying 100 or if you have coinsurance, you’re paying 20 percent of that 100 versus now that price is 65, 35 percent less.
[00:19:42] So if you show up to the pharmacy and get the generic version of the Flovent, which is the same exact drug, you’re paying 65 or 20 percent of that 65. So, this is a good thing for the patient. Unfortunately, it’s a bad thing for the profitability of the PBMs. And it was made inevitable by the rule that was administered.
[00:20:04] And it’s forcing the issue that the pharma companies are saying, you know what? I’m just going to roll back the prices instead of having to pay Medicaid. And at the end of the day, that’s not a bad thing for patients.
[00:20:17] Joe Selvaggi: And yet, okay, so we’re trying to reconcile, square the circle. You think it’s a favorable rule change that maybe we’re stumbling in the transitional period, but nevertheless, my Flovent isn’t available.
[00:20:27] And you, we’ve touched on the fact it’s not just my Flovent. I was reading about, many of the diabetes drugs. These, again, these are not optional. These people absolutely need these things. How is it that a rule that was perhaps well intentioned to give an incentive to reduce prices will lead to the drug that is demonstrably effective, leaving the formulary. Again, I’m asking this genuine question, not as a rhetorical.
[00:20:51] Robert Popovian: No. I think it’s a fair question. And the reason being is because we have a broken market in pharmaceuticals where we have rebate contracting driving what’s available for patients.
[00:21:04] If rebate contracting did not exist, right? Think about it. What would be the incentive? For at this point, for PBM to cover the brand name versus generic, if they would be even happier if Flovent went to generic and it was 35 percent cheaper, that would automatically cover it. But because of rebate contracting, because they’re so dependent on their profitability due to this rebate contracting, it creates misaligned incentives such as this one.
[00:21:32] And the one that you just mentioned, also with the diabetes drugs, that has been happening for several years. And it’s not just the diabetes drugs, it’s the hepatitis C drugs, too. Manufacturer comes out with a brand name. Same manufacturer comes out with a generic. The generic is excluded from the formulary and only the brand name is covered.
[00:21:50] In your case, the Flovent. Branding was completely excluded. All the drugs were excluded from the formula. But this is the bad incentives that rebate contracting creates. And until we get rid of rebate contracting as an incentive, we will always have this misaligned situations where less expensive drugs are sacrificed or to favor more expensive medicines.
[00:22:12] Bill Smith: Joe, I hate to be simplistic, but. Formularies now are assembled like a rug bazaar. It’s all opaque, no one knows what’s going on, and it’s all about money. And, you may be frustrated you can’t get the rug you want, but you got to understand, if you’re not, if the price is not high enough for that rug, it’s not going to be available. And PBM’s view. Formularies, they want to maximize revenue.
[00:22:37] Joe Selvaggi: So, if, let me imagine a brave new world in which PBMs don’t exist. And we have, everybody’s in my mind in that universe, insurance companies want to pay as little as possible for drugs. And so, they should, can negotiate with pharmacies, because why do they want to pay less? They want to have. Lower premiums and attract new customers, or frankly, if they don’t want lower premiums, they want to pocket the money, it’s better for shareholders. But you know that those are healthy. Those are normal incentives that intermediaries have. the grocery store wants, but Walmart wants the best price for its products so they can deliver the best price to its customers. Why can’t insurance companies just do the same thing?
[00:23:11] Robert Popovian: They can, but they don’t want to because it’s more profitable. If you look at the insurance companies in general, now that they own PBMs, for example, which is the largest insurer in this country and has the largest, third largest PBM, which is, I’m sorry, United is the largest insurer.
[00:23:30] Optum is the third largest PBM. Optum makes more profit for United Healthcare as an entity within United than any of their other divisions. So pharmaceutical contracting and rebate contracting is a very lucrative business model. Now, do we have a model in this country that Insure doesn’t use rebate contracting and your Flovent, now a generic version of the Flovent, will be available in the formulary?
[00:23:58] Yes, it’s the largest insurer in our most populous state in the United States, it’s in California. The largest insurer in California is Kaiser Permanente. Kaiser Permanente uses no incentives, no rebate contracting, they just do net price contracting, they go with the lowest price. And guess what? I’ll put money on it, that Flovent is still covered within the Kaiser formulary because they do not have that rebate contract in the center built in.
[00:24:28] Joe Selvaggi: Yeah. All right. again, I don’t like to just complain. I say, we’re a think tank, but we think a think and do tank. So, let’s shift our conversation because we’ve identified a huge problem. You even identified a place. Where it isn’t a huge problem. What would a consumer, I’m going to count myself among those potential consumers, and ultimately, legislators, people who really, see no one winning, but it’d be PBM, employees.
[00:24:49] What could we do to make this better? It seems an epic problem that’s not well understood.
[00:24:55] Robert Popovian: I think starting, and Bill can add to this, starting point is the, get rid of rebate contracting, but that’s going to be very difficult because that’s been built into the model for a long time.
[00:25:06] I think what people are saying now is that, okay, if you’re not going to get rid of rebate contracting, then as a consumer, as a patient, I should benefit from that negotiated price when I show up to the pharmacy counter. Joe, when you show up at the pharmacy counter. You should benefit and pay based on that negotiated price that’s been done on your behalf instead of the inflated retail price in every other segment of the health care system, whether it’s your dental care, your optometrist, your physician care, your hospital care, when you show up to pay for your services, you’re paying based on a negotiated price that’s been done on your behalf.
[00:25:43] Except for pharmaceuticals, where the PBMs have bamboozled the entire business community, including legislators, to think that the only way you can contract is through this rebate, convoluted rebate contracting, and Patients should not benefit from it directly.
[00:26:01] Bill Smith: Joe, you can envision a world where PBMs were not necessary. Suppose a health plan wanted to get rid of the rebate contracting system. They just wanted the lowest price. They open up bidding in every therapeutic area. for psoriatic arthritis, they say, Okay, manufacturers, submit your bids. For your drugs, and those bids get submitted, no rebates involved, just here’s what our price is going to be, and a drug comes in at the lowest price, and it’s not the greatest drug, it’s a good drug, but it’s not the greatest drug, so the health plan could decide, okay, the three lowest bidders, we’re going to put those drugs on formulary, and we’re going to make the prices available, those low bid prices, we’re going to make them available to the patients at the pharmacy counter, no rebates involved, just The lowest prices they can get based on bids that manufacturers submit that’s an that’s the way the Chinese do it.
[00:26:55] If you can believe that they do it in their national health care system, open up therapeutic areas, ask for low bids and then construct the formulary based on the bids that come in. And you don’t necessarily just put the lowest bid on the formulary as the only preferred drug. You might put a handful of them that come in at low prices.
[00:27:14] Robert Popovian: And that’s exactly, by the way, Joe, that’s exactly how Kaiser does it. They don’t have one product on the formulary, they have several products in the class, but they allow, they just do it based on net pricing. And say that’s net price, I’m paying as Kaiser, you as the patient is going to be paying for it.
[00:27:32] Joe Selvaggi: What? So let me just ask what might seem like an obvious question. We all here believe in markets or market dynamics, I hope, and we say, okay, look, I have a need and we’re dealing in a world with the Internet and sort of the disintermediation of everything, right? Which is we almost directly communicate with providers, with producers.
[00:27:53] Why isn’t that? I can’t go get on Amazon and get Flovent provided I have well documented, prescription and, I like the generic, why can’t I just get my drug on Amazon?
[00:28:06] Robert Popovian: You can, and it’s not just Amazon. You can go get it at Costco and you can get it at the Mark Cuban’s pharmacy, and you can pay cash for it.
[00:28:15] Unfortunately, you, insurance companies are not. Paying for those things. And the reason that these pharmacies exist, these cash pharmacies, whether it’s Amazon, whether it’s Cuban’s Pharmacy, whether it’s Costco, is because they fill a void. We haven’t even talked about this other issue, which is a lot of times, about 70%, about 25 percent of the time, not 70%, 25 percent of the time, when you and I are purchasing a generic medicine, a typical generic, we’re overpaying by using our insurance card.
[00:28:48] As a consumer, we’re paying more out of pocket than if not, if we would have walked down the street to Costco and paid for it in cash. And that’s where I’m, that’s where the market is moving towards is that patients are looking at it and saying, wait, if I use my insurance card, I’m going to pay 25. If I walk down the street to Costco or call Cuban’s pharmacy, I’m going to pay 20.
[00:29:09] Guess what? I’m going to do that instead. And that’s what we’re moving towards as a society. In consumerism needs to take place in the pharmaceutical marketplace and more consumerism is a good thing.
[00:29:24] Joe Selvaggi: Indeed. Bill, would you like to amplify on, what. Robert, you said?
[00:29:28] Bill Smith: No. No. I think Mark Cuban has hit upon something great. Basically, PBMs were making great money off generic drugs. They could buy a generic prescription for five bucks. It’s, it doesn’t cost anything to manufacture a generic drug so they can buy ’em for five bucks. And then, the patient may have a $15 copay under their health plan. So, they go in and pay $15 for a drug that costs the PBM $5.
[00:29:50] So they’re overpaying. So, Mark Cuban stepped in and said, this is ridiculous. They should be paying. 5 plus maybe 50 cents for me, and that’s the way he has made money. I’m skeptical about how well this model can work in the branded space. I’m just not sure how well it’s going to work. branded drugs are a very different economic model.
[00:30:13] Joe Selvaggi: And of course, when we talk about expenses to insurance companies, nobody’s hoping that insurance companies are profitable. And of course, all of our premiums are comprised of all the money that our insurance company pays on our behalf. collectively, if insurance companies are paying too much.
[00:30:29] Or we’re paying too much to them. It’s costing us more in health care. If our goal is to help reduce or create the market dynamics that make health care less costly, going around our insurance companies is, makes sense. One thing, again, we’re getting close to the end of our time together when we do go off, in on our own Rx or whatever Mark Cuban’s, new enterprises called none of that money we spend is applied towards our deductible or that It’s innocence. Our insurance company doesn’t know it’s there. So, we may save money on that prescription, but ultimately, if it doesn’t help us get to our deductible, ultimately, at the end of the year, we may actually spend more because we spent less because it didn’t get applied to our deductible.
[00:31:10] Right.
[00:31:11] Robert Popovian: You’re right, but it does work for patients who are multiple generic drugs that are going to pay a lot more and they never are going to be on a brand name drug, really, that’s going to hit that deductible. it depends on the patient, but at the end of the day, Whether it’s Costco or, Amazon or Mark Cuban’s pharmacy or row.
[00:31:30] com, there’s a lot of these cash-based pharmacies. The reason that they exist is because there’s a consumer marketplace that figured out, they’re overpaying by using their insurance card. And they’ve done the math. We all do math, right? It’s just doing your budget and you figure out that if I’m paying 25 for a copay instead I can pay 5 for this generic, for example, I’m saving so much more money and even if it applies to my deductible because most of us have deductibles in the thousands, we’re not going to never going to reach the deductible anyways, right throughout the year for especially for people who have chronic diseases on multiple generic medicines.
[00:32:09] Now, if you’re on a brand name is and I agree with Bill, I don’t know how well this will work in the brand marketplace. but in that case, that’s insurance, but. Joe, this is not a bad thing. I think what we’re doing now by forcing these issues is going back to what insurance is meant to be.
[00:32:26] Insurance is meant to be for the purposes of covering expensive, traumatic type of events. Just like we buy homeowner’s insurance, or we buy car insurance. Healthcare insurance has evolved into being the opposite covering everything that’s not supposed to be covering and when it gets to expensive medicines like brand name medicines and things like that doesn’t want to cover it because it’s too much.
[00:32:52] So we’re doing the reverse almost in health care, what we have done in the insurance marketplace and other.
[00:33:02] Bill Smith: Yeah. And Joe, you’re always looking for legislative ideas. So what about those requiring that those cash purchases of generic drugs through Mark Cuban’s pharmacy be counted towards your deductible or out of pocket costs? It’s a healthcare expense.
[00:33:18] Joe Selvaggi: Yeah. And right. It should. And of course, now, again, what we are always trying to do as lovers of markets is align incentives. If the individual has an incentive. positive incentive to go direct and cash, and it helps them. and there’s no longer a negative incentive that they must go through the insurance company.
[00:33:38] it gives, as Robert was saying, it gives incentives for, drug manufacturers to keep their prices lower and move, when they get to a generic, produce a useful generic. and we’re back into reality, right? I want to echo, I agree with you, Robert, that our idea of health insurance is so bizarre and so distorted.
[00:33:55] I use the analogy of if, as you mentioned, our car insurance, imagine if our car insurance. paid for our new tires, our windshield wiper blades or our gas, it would be absurd. we have car insurance for God forbid we slip on the ice and smash into a tree. This happens, maybe once in a lifetime and the insurance is there when we need it.
[00:34:15] Our health insurance has become some sort of a payment program or, collective, payment.
[00:34:21] Bill Smith: Yeah, let’s cover every preventative possible, medicine or, it’s, they’ve loaded it up to cover everything.
[00:34:28] Joe Selvaggi: Yeah. And ironically, the people who really need it. We accept that there are people with some rare diseases that are profoundly costly, but because we’ve loaded it up with all this nonsense, those people are the ones that are not served by. Classic insurance. They, that’s when the insurance company says, sorry, can’t cover you. I’m too busy covering, Flovent.
[00:34:48] Robert Popovian: Exactly. And that’s the problem. And you just put the word rare diseases. that’s the thing we want insurance to cover rare events and expensive events, right? You want an insurance to cover you, when you’re having a cardiovascular event and you need a cabbage, for example. You don’t want your insurance to be covering your aspirin.
[00:35:08] that’s what it’s doing covering the aspirin, not necessarily the cabin or not fully, not well enough. And it’s exposing patients to significant out of pocket costs. But now what we’re finding out. With humans’ pharmacy and everything else and that even though they’re covering the aspirin they’re overcharging for the aspirin now It’s both sides. They’re making money off of the patient.
[00:35:32] Joe Selvaggi: So this is a couple you mentioned it was good Yeah, we’re getting at the end of our time together So I want to give our audience some place to go and continue to read about this because they’re probably you know Almost incredulous they you know, it’s hard to believe this is going on You mentioned the Wall Street Journal article, of course, I read that in a couple other Pieces they’ve done throughout the year.
[00:35:50] Who’s studying this and where can our listeners go to learn more about, what’s going on with the dynamics and, what they might do to mitigate the, the harm to if they need some of these drugs.
[00:36:00] Robert Popovian: I would say Pioneer Institute, since we’re doing most of the work in this space, I don’t want to pat ourselves on the back, but Bill started it.
[00:36:07] And, since I’ve come on, we’ve done a ton of work in this space, and we’ve tried to expose a lot of these perverse incentives in the market. And we what we try to do is do it individually. We’re not trying to do a holistic look at the entire system. We’re saying, look, this is a problem. This is the solution for this problem.
[00:36:24] For example, 340 be pricing or we’re looking at accumulators and maximizers. So, I would say. By far, Pioneer Institute has done more work in this space in the last 24 to 36 months since Bill came on board.
[00:36:38] Bill Smith: And Robert’s done some great stuff with the Global Healthy Living Foundation, which is a kind of patient advocacy group, which he’s affiliated with, so I’d point to some of his studies, too.
[00:36:49] Joe Selvaggi: Wonderful, good. I want to get our, our plug, our self-congratulatory plugs in the ad at the end. I appreciate it. This has been an exciting topic for me only because it touched his home, and it’s, it’s fun to, dive into something, as personal as this. So, thank you both for joining me on Hubwonk today. Thank you, Robert. And thank you, Bill. You’re always great.
[00:37:06] Bill Smith: Sure, Joe, we’ll try to talk to our friends at GSK and see if we can find Flovent for you.
[00:37:13] Robert Popovian: As a pharmacist, I hope you do get your Flovent, and you just keep running.
[00:37:17] Joe Selvaggi: Yeah, I, good. Yeah, I say if running were as a drug, I think it would be the best, most prescribed ever, let me pitch for that drug as well. Thanks guys. Thanks for joining me.
This has been another episode of Hubwonk. If you enjoyed today’s episode, there are several ways to support Hubwonk and Pioneer Institute. It would be easier for you and better for us if you subscribe to Hubwonk on your iTunes Podcatcher.
[00:37:40] It would help make it easier for others to find Hubwonk if you offer a five-star rating or a favorable review. Of course, we’re grateful for any word-of-mouth recommendations. If you have ideas or comments or suggestions for me about future episode topics, you’re welcome to email me at Hubwonk@pioneerinstitute.org. Please join me next week for a new episode of Hubwonk.
Joe Selvaggi talks with Drs. Bill Smith and Robert Popovian about how the complex system of rebates from drug companies to insurance firms serve to increase costs and reduce access for patients.
Guests:
Dr. William S. Smith is Senior Fellow & Director of Pioneer Life Sciences Initiative. Dr. Smith has 25 years of experience in government and in corporate roles.
His career includes senior staff positions for the Republican House leadership on Capitol Hill, the White House Office of National Drug Control Policy, and the Massachusetts Governor’s office where he served under Governors Weld and Cellucci. He spent ten years at Pfizer Inc as Vice President of Public Affairs and Policy where he was responsible for Pfizer’s corporate strategies for the U.S. policy environment. He later served as a consultant to major pharmaceutical, biotechnology and medical device companies. Dr. Smith earned his PhD in political science with distinction at The Catholic University of America.
Dr. Popovian has published extensively on the impact of biopharmaceuticals and health policies on costs and clinical outcomes in the most prominent medical sources and media publications, including the Clinical Economics and Outcomes Research, The Oncologist, Journal of Vaccines and Vaccinations, Health Science Journal, USA Today, Managed Healthcare Executive and Morning Consult. He is also a sought-after speaker and has been invited to provide detailed presentations, briefings, and expert reviews for the U.S. Congress, dozens of state legislatures, and at conferences and medical symposiums throughout the country and around the world.
He is one of the select few researchers to study and publish both clinical and policy-related economic analysis as well as empirical data regarding emerging payment models in the U.S. healthcare system and for biopharmaceutical reimbursement. His insight and analysis also led to one of the first inclusions of health outcomes data regarding a biopharmaceutical labeled indication.
Dr. Popovian was recently appointed as the Chief Science Policy Officer for Global Healthy Living Foundation. He also serves on the Board of Councilors of the University of Southern California School of Pharmacy, Senior Health Policy Fellow at Progressive Policy Institute, and Board of Advisors for Equideum Health. Robert completed his Doctorate in Pharmacy and Master of Science in Pharmaceutical Economics and Policy degrees at the University of Southern California with honors. He has also completed a residency in Pharmacy Practice/Adult Internal Medicine and Infectious Diseases at the Los Angeles County-USC Hospital and a fellowship in Pharmaceutical Economics and Policy at USC.
Two Time Pulitzer Winner T.J. Stiles on Cornelius Vanderbilt & American Business
/in Education, Featured, Learning Curve, News, Podcast /by Editorial StaffRead a transcript
The Learning Curve T.J. Stiles
[00:00:00] Albert: Well, hello, everybody, and Happy New Year. Welcome to another episode of The Learning Curve podcast. I’m your host, Albert Cheng from the University of Arkansas, and co-hosting with me today is Charlie Chieppo. Charlie, Happy New Year.
[00:00:13] Charlie: Happy New Year to you, Albert. Good to see you. It’s been a while.
Albert: Well, I hope your New Year’s off to a good start here. And yeah, I can’t believe it’s 2024. I think we all share that feeling to some extent. Well, new year and with the new year, of course, there’s news. So, I saw a story over at EdNext all about apprenticeships.
[00:00:34] Albert: And it’s actually titled Apprenticeships on the Rise, and Pioneer actually released the volume about voc-tech, vocational education, not too long ago. So, I know you guys are doing plenty of stuff there in Massachusetts. I’ll direct listeners to check out that article on EdNext. I mean, it’s a pretty long article, but I think it’s an excellent summary of the state of apprenticeships. I mean, I’m just fascinated to learn about all the work that lots of different businesses are doing, lots of civic and charitable organizations, you know, the way they’re getting involved with trying to make apprenticeships more widely available.
[00:01:08] Albert: And personally, I think it’s a welcome change. We definitely have a college-for-all mentality here and with everything that’s going on in higher ed, you know, rising costs and the politicization of it, I think different options for folks to find employment, find you know, the dignity of work different paths to making that available for people to break into the middle class — I’m all for it. I think we ought to be trying a lot of new things.
[00:01:32] Charlie: It’s close to a no-brainer, I think, is you’re going to get, you know, I know more specifically about the construction industry, but when you look at what some of these career paths pay — and without requiring the cost of college debt — it is certainly an appealing option for a lot of people.
[00:01:48] Albert: Yeah, I definitely think it’s part of the solution to, I mean, you know, the way I like to put it is, the goal not simply be to make college more affordable, but to make it less necessary, open up more pathways. So, what do you got for hot off the press here?
[00:02:05] Charlie: Well, I got one that has me on a little bit of a rampage, but I’m going to try to be calm. So, what I want to talk about is a December 27 column in The Hill by Elizabeth Grace Matthew. This is a column that speaks directly to one of my sort of current public education obsessions. This month, Chicago Mayor, former Chicago Teachers Union organizer, Brandon Johnson, approved a resolution to move toward ending selective enrollment for public schools that serve high achievers. The idea being [that] to differentiate between applicants based on aptitude and achievement is presumptively unfair. And you talk about the soft bigotry of, what was the George Bush the expectations, right?
[00:02:53] Charlie: Yeah. I mean, this is, classic. Anyway, yeah, look, nothing could be further from the truth. A majority of students in Chicago’s 11 selective high schools are low income, about two thirds are black or Hispanic. The reason this piece sort of made me crazy was I just have this sort of growing frustration with the failure in public education to recognize that this obsession with sort of reducing the focus on excellence in public schools in favor of equity only degrades both, and the evidence is pretty overwhelming of that. The author writes the move is a morally unconscionable attack on disadvantaged students and their families. And I think that says it all. All it’s going to do is accelerate the flight from traditional public schools that began with the pandemic. You know, the bad news is, unfortunately, that the victims are going to be the ones who don’t have the means to escape. I think the good news is that as bad as this stuff is, at least I think what it will do is speed the pace at which a response comes, and the pendulum starts to swing the other way. I sure hope so, because this does no one any good.
[00:04:04] Albert: Yeah. Ironically, there’s actually some research evidence out there that testing and using tests to identify high achieving students for these kinds of accelerated programs actually promotes equity. Because it’s this way we can give access to traditionally disadvantaged students, at least, you know, students from those backgrounds, a way to actually get a seat in some of these schools.
[00:04:29] Charlie: That’s so true. I’m not one who, you know, says that everything should be based on testing or anything like that. But, to me, it’s very hard to ignore all this research by E.D. Hirsch and stuff that shows, you know, there clearly is a correlation between test results and just about every measure of a successful life, ranging from how likely you are to vote, how much money you make, to your likelihood of staying out of prison. It’s just very hard to ignore it.
[00:04:55] Albert: Stick with us coming up on the other side of the break, we’re going to have T. J. Stiles, an award-winning American historian/biographer, talk to us about Cornelius Vanderbilt.
[00:06:42] Albert: T. J. Stiles is an award-winning American historian and biographer. His book, The First Tycoon, The Epic Life of Cornelius Vanderbilt, won a National Book Award, and the 2010 Pulitzer Prize for Biography or Autobiography, and his Custer’s Trials, A Life on the Frontier of a New America, received the 2016 Pulitzer Prize for History. Stiles became interested in Vanderbilt while researching and writing his historical account of another legendary figure, Jesse James, the last rebel of the Civil War. He served as historical advisor and on-screen expert for Jesse James and Grand Central, two films in the PBS documentary series American Experience. Stiles has written for the New York Times Book Review, Smithsonian, Salon, the Los Angeles Times, and other publications. He studied history at Carleton College and Columbia University. T.J. Stiles, glad to have you on the show.
[00:07:39] TJ Stiles: It’s nice to be here.
[00:07:41] Albert: Let’s sketch a little bit about your background and how you got interested in Vanderbilt. I mean, you’ve got two Pulitzer Prizes, a National Book Award for your biographies on Vanderbilt and others as well, but share a little bit to our listeners about your background and how you became interested in American history and, you know, your process of selecting the subjects that you want to write about.
[00:08:01] TJ Stiles: Well, I’ve always been interested in history because history is about everything. And understanding the world and getting good stories at the same time. And my approach to history is very much shaped by wanting to combine scholarly knowledge with storytelling and understanding the human condition.
[00:08:20] TJ Stiles: I like to say that biography is the meeting ground of scholarship and literature. Now I got there. In an indirect way, because I went to Columbia University for graduate school in European history and due to a number of things, I ended up going “abd,” all but dissertation. And so, I didn’t go into the academic route.
[00:08:42] TJ Stiles: I got a job at Oxford University Press working on scholarly books that were intended for the general market. So, there are serious books, but they were what we call trade books. They were not aimed specifically at an academic audience, and I learned there were a lot of great writers who were doing some very serious thinking as well.
[00:09:02] TJ Stiles: And that’s what I wanted to do. And so, my first book was a biography of Jesse James called Jesse James, Last Rebel of the Civil War. And I found in that book that he was a political figure that he was someone who was a former Confederate guerrilla in the state of Missouri. And his life was not about the Robin Hood story.
[00:09:23] TJ Stiles: So that was fascinating to me. And it was a lot of fun to write, and it did well. But, you know, Jesse James, since he didn’t rob trains to get at the railroad corporations, that left open the question of the great rise of the railroad and with it the corporate economy. And that led me to Vanderbilt.
Albert: Well, let’s jump to Vanderbilt. So this is the subject of your book, The First Tycoon: The Epic Life of Cornelius Vanderbilt. Folks know the name — it’s a famous figure in American business history — but folks might not know much about him. So, can you start off by giving us a brief sketch of his life, how he made his fortune in shipping and railroads, how he become wealthy, but also just some other background information about him?
[00:10:05] TJ Stiles: Sure. He was born on Staten Island when Staten Island was not a part of New York city. It was a rural county with only a few thousand people. He was born in 1794. So, he was born during the presidency of George Washington. And he died in 1877 after the end of Reconstruction, after the invention of the telephone, when the corporate economy was pretty well established. And so, his life tracks the great arc of the rise of the industrial and corporate economy. And he himself was a dramatic figure. He was someone who got into fistfights, who engaged in steamboat racing when he was younger, who waged a private war in Central America during the California Gold Rush, and was this just titanic figure in American history and just a very interesting guy to write about.
[00:10:57] TJ Stiles: It was always a good story. And by being in transportation and by the good luck of being born in New York, he was at the strategic center of the economy. Because we had this sprawling nation with still horses and wagons and sailboats, the same way that the Romans got around. And he was involved in a business and legal dispute over the steamboat, brand new invention, motorized transportation that led him to adopt steamboats, become a steamboat entrepreneur, and he also was a part of the rise of competition as an American value, as an American virtue. And so, the irony of his life is that in his early years, he opposed corporations, which were seen as, as Adam Smith wrote, a species of monopoly. government intervention in the economy by sponsoring corporations.
[00:11:49] TJ Stiles: And then he began to take over corporations and discovered they were quite useful. And he ended up being one of the great masters of the early stock market. And then that led him into railroads as they were becoming the big thing in the economy. And each step of his episodic career was marked by a larger and larger conflict. So, it’s about big stuff. But his career also provides a great story as well. It’s a series of conflicts.
[00:12:16] Albert: Yeah. Well, speaking of conflicts and you mentioning his connection to the steamboat. So, the ferry entrepreneur Thomas Gibbons has a connection to Vanderbilt. And as you were talking about the rise of corporate America, you know, so, and Gibbons was fighting a steamboat monopoly in New York. Talk about Vanderbilt’s connection to that. And there’s a Supreme court case we all know Gibbons versus Ogden, that’s all part of this. So, what’s the deal there? What happened?
[00:12:41] TJ Stiles: We could devote a couple of podcasts to that. Thomas Gibbons was a bad-tempered Southerner who had been cheating on his wife and fighting with his daughter. So, he moved to New Jersey, and this is a guy who owned plantations. He had dozens, if not hundreds of enslaved people. But he moved to New Jersey, kept his plantations, but he moved to New Jersey, got into various businesses, including transportation. And his neighbor, Aaron Ogden, had a steamboat that ran between New Jersey and New York, and he had a license from a legal monopoly in New York, which was set up not so much to sponsor the rise of the steamboat, but it was a steamboat monopoly in New York waters as to reward Robert Livingston, who was the leader of one of the great landed gentry families in New York state, New York state was one of those places that resembled Britain in the sense that it had great landed families with tenant farmers and it’s very unusual in the United States, but its politics reflected that kind of manorial, aristocratic economy.
[00:13:51] TJ Stiles: And so, Livingston — who had met Fulton in France and actually managed to develop steamboat as a result — had this legal monopoly, and when Gibbons got into a dispute with Aaron Ogden, the guy who had the license, he decided that he was going to bankrupt Ogden because he was vindictive. And so, he got his own steamboat and began to compete and that got the attention of the monopoly.
[00:14:16] TJ Stiles: So, a legal battle broke out, which Gibbons intended to bring to the Supreme Court. He sought the advice of such men as Aaron Burr, for example, who was a practicing lawyer in New York. And he hired the sharpest boat operator in New York Harbor, who was Cornelius Vanderbilt. who thought he was only going to work for him for a few days, ended up working for him for years.
[00:14:37] TJ Stiles: So, while they were doing things like dodging the police who were trying to impound the boat whenever it docked in New York, the cases is proceeding to the Supreme Court and Cornelius Vanderbilt, who had no formal education, who very well may have had dyslexia — he would write the three letter word see, you know, the verb I see you three different ways in the same letter — yet he got fascinated by the case he understood that his whole future rested upon it and he actually went as the agent of Thomas Gibbons to New York to hire Daniel Webster as their lawyer. And he stuck around for the proceedings and he actually brought his own case against the monopoly, which was Vanderbilt v. Livingston. And if there had been any errors in the case Gibbons v. Ogden, then the Supreme Court case we all talk about now in terms of the Commerce Clause could very well have been Vanderbilt v. Livingston. It was next on the docket. they made the case that navigable waters cannot be interrupted by state laws and that states, which had often erected various kinds of barriers to interstate trade, that those barriers were unconstitutional.
[00:15:45] TJ Stiles: John Marshall issued this decision, and it was tremendously important for the American economy, incredibly important for the rise of the United States is a unified nation. And Vanderbilt, who’s deeply involved in the technical side, in the business side, was also very much involved in the legal case as well, and it gives a hint of the kind of all-encompassing grasp he had of his business in its context.
[00:16:27] Albert: Yeah, let’s, let’s talk about that topic a bit more. You portray Vanderbilt in your book as a combative businessman rooted in the ideals of Jacksonian democracy. You know, believed in individual equality and the open market competition there. How did he use his business to compete while also taking on monopolies and preexisting chartered or favored corporations?
[00:16:36] TJ Stiles: He did it two ways. One way is a steamboat is not as capital intensive as a railroad. You can also move it from one route to another. So it was one of the areas in which an individual proprietor could compete effectively against, you know, corporations. Corporations as we should remember during this period before the Civil War tended to be chartered by the state government in special legislation, one by one, and they’re very much mercantilist corporations where the state parceled out part of its sovereignty to private parties to encourage them to develop the economy.
[00:17:11] TJ Stiles: And they’re very unpopular with Jacksonian Democrats, and Vanderbilt really used this in his advertising. He probably believed it himself while he was competing against them. He knew how to keep his costs extremely low. He knew small details of the business, like which routes were more competitive. A lot of his most lucrative routes ran between New York and Boston during the rise of textile manufacturing in New England and how to time his departures, et cetera, et cetera. But meanwhile, in 1838, there was an incident in New York Harbor where the Staten Island ferry — called the Richmond Turnpike Corporation — had a legal monopoly in the ferry between Staten Island and Manhattan and his cousin was competing against it. So, the president of that monopoly ordered his steamboat captain to ram the other boat and sink it while it was carrying passengers in New York Harbor. It rammed it but didn’t succeed in sinking it. The passengers turned into a mob and literally destroyed the building of the monopoly. So this caused the small number of shareholders in this company to panic.
[00:18:21] TJ Stiles: They sold out to Vanderbilt. He took a 50 percent stake on the condition he could have sole control. And it’s interesting because his cousin sued and said Cornelius Vanderbilt has said he will run this corporation with a sole view of profit, which is of course the whole point of a business corporation today. Shareholders sue companies when they don’t run for the sole purpose of profit! But the early 19th-century corporation was a public service corporation. It was both for profit, but also to serve the public. And so, Vanderbilt began to ignore various requirements and he learned how useful a corporation was. And so that dramatic incident shows him discovering the corporation and also how corporate managers and shareholders — these early corporate leaders — began to infiltrate the corporation, the competitive business-minded ones, and take it over and remake it into a version of a private interest, and to change the nature of the corporation from within. The laws that would change the way government saw — courts at least saw — the corporation, they wouldn’t change until much later, Reconstruction and later, but in practice, they began to change through people like Vanderbilt.
[00:19:34] Albert: Well, let’s get into this episode a little bit with his acquiring of his own steamship company. He eventually gained control of the traffic on the Hudson River and cut fares, offered unprecedented luxury on his ships. How did Vanderbilt work his way into leading really America’s inland water trade?
[00:19:53] TJ Stiles: It’s interesting because there’s a couple of things that he did. One was he always had an eye for the strategic center of the economy. This is very much kind of a geographic business tale. So, you know, his first route that he worked on was between New York and Philadelphia, the two largest cities in the U.S. Then, when the Erie Canal opened, the trade between New York and Albany, close to where the Erie Canal comes out into the Hudson was a new strategic center and so he competed on that route and was very successful.
[00:20:22] TJ Stiles: Then, as I said, the Industrial Revolution takes off and the trade between New York and Boston becomes extremely important. And so, he switches his focus to those routes on Long Island Sound and in connection with the very early railroads. What’s interesting about that is not just that he was top competitor. He said things like, “If I can’t run my boat for 25 percent less than my competitor, I’m content to go out of business,” you know, that he was so fierce in cost-cutting. He helped introduce the practice of tipping because he didn’t pay his customer service crews very well. So, tipping took off. A lot of the things that we know from the way airlines are cutting costs and making money through marginal prices like on your bags and getting preferential seating, Vanderbilt introduced a lot of those things in the early 19th century. But again, what he would do is he would find a way to leverage his next step. So, he got involved in the early railroads, which are fairly short, by selling his connecting steamboats, say on Long Island Sound, to the railroad that ran a train down to the port where it connected. And then he, in return, would get shares of stock and go on the board.
[00:21:35] TJ Stiles: And so, he learned about railroads very early on. And very much saw how they were. This is an old myth that he hated railroads. It’s not true. So, he was president of a New England railroad as early as 1847, which he did by undercutting the prices on this railroad, dropping its share value down and then buying it up.
[00:21:54] TJ Stiles: But then a big revolution took place, which again, expanded his scope of operations, which was the California Gold Rush. And when California gold was discovered, it happened to be just when two corporations, which took large federal subsidies for mail delivery to maintain steady connection to California, just started business right as gold was discovered.
[00:22:17] TJ Stiles: So, they kept getting this large federal subsidy, but they were also making money hand over fist because people were dying to get to California. One company ran down to Panama. People were carried across by mule train and canoe, and then they met the steamships on the Pacific side that the Pacific Mail Corporation ran. Very large corporations for the day made lots of money and Vanderbilt entered into this trade.
[00:22:43] TJ Stiles: At first, he attempted to build a canal across Nicaragua. Then he couldn’t get funding in Britain for it. He traveled to the UK. And again, this is a very unlettered, unsophisticated man, culturally speaking, went to the Bering brothers and other banks and couldn’t get the funding. So, his contract with the Republic of Nicaragua allowed him to also open a transit route.
[00:23:04] TJ Stiles: And it was possible to cross Nicaragua by steamboat almost all the way, except for about a 10, 15-miles land passage. So that made it a very comfortable and rapid crossing, even though it’s wider than Panama, where a railroad was eventually built. So, he set up his own unsubsidized transit company. He built ocean-going steamships that were faster and more fuel efficient than his competitor, ran down to Nicaragua, got steamboats on the lake in the San Juan River, Nicaragua, which he helped open up himself.
[00:23:34] TJ Stiles: It literally was bursting through the rapids piloting his own steamboat to open up the route. And then he had steamboats in the Pacific. At the time and I don’t ask me what the equivalent is, he made a million dollars his first year, which was an incredible sum of profit, and while in competition with a federally subsidized line. And it opened up his horizons.
[00:23:56] TJ Stiles: He was operating a transcontinental international corporation. He also got into the transatlantic steamboat steamship business. When he sold out of Nicaragua, he came back in just as an American filibuster soldier of fortune conquered Nicaragua and went to war with its neighbors. And Vanderbilt not only funded the war effort from Costa Rica, but he sent a secret agent who knew the river and route well, who led a commando force in and seized all the steamboats, which cut off this man, William Walker, the soldier of fortune, from reinforcements — which forced him to surrender his forces. It’s really an amazing story. But Vanderbilt, he got revenge, but he didn’t set up the steamship business again. But at that point, the Civil War was about to break out, and his life was going to change dramatically.
[00:24:45] Charlie: Well, Mr. Stiles, Charlie Chieppo here. Thank you for joining us. So, you mentioned a minute ago geographic aspect of his story. And it seems that western expansion and Midwest, west coast are all central themes of century U. S. history and among the common features of historical figures that you’ve written about. Could you set the stage of America in the early to mid-1800s and talk about the West, as well as how it informs some of the ambitions of both the country and the subjects of your books?
[00:25:13] TJ Stiles: Sure. The United States, until the Erie Canal, was very much confined to east of the Appalachian Mountains. There were a lot of settlers who were filtering into Kentucky and Ohio, et cetera. But it didn’t pay to ship their crops back. As a matter of fact, it’s one of the reasons why we have so much American whiskey, is that when they distilled their grain into whiskey, it was worth sending over the mountains to the east.
[00:25:38] TJ Stiles: So, the Erie Canal opens things up, and then there were a number of projects to build railroads as very much as national development projects or state development projects over the Appalachians and all of this activity, which continues after the Civil War as well, is really confined to connecting the Midwest as we now call it to the East. There’s a separate project in the South, which doesn’t draw railroads or these activities, and that involves expanding the slave economy westward across the South. But what we’re talking about now is the Midwest. Now, California Gold Rush, which is really only possible because of ocean-going steamships and the central American isthmus crossing, means that there is now a substantial community from the United States on the West Coast in this large area, which is inhabited by native people who really operate what I call a separate world system.
[00:26:37] TJ Stiles: And, you know, they have their own idea of nations and trade, international relations, how they use natural resources, their economies are very different, completely different system. Then starting in the 1850s, but accelerating at the end of the Civil War, then you have the U.S. government is really encouraging the settlement and development of the West, which again means trampling on native people. There are a lot of wars of conquest, which happened in the 1860s and ‘70s. So, these areas now fall under a new federal project to connect the West to the East, which is the transcontinental railroad.
[00:27:15] TJ Stiles: So, the transcontinental railroad is a federally subsidized project, private corporation, but federally subsidized and the Union Pacific, which is the most notable one, that’s the first one, is followed by others. These railroads don’t actually cross the entire continent. Rather, they connect in the Midwest to this Eastern railway network, which is developing.
[00:27:37] TJ Stiles: Vanderbilt himself gets involved only to the extent of reaching Chicago. And he gets interested in the New York Central Railroad, which follows the route of the Erie Canal. And again, he understands the geography of trade and of commerce. The Erie Canal is a fairly level route. It doesn’t go up and over the mountains. So, he takes over the railroad, which runs alongside it, which is the New York Central, which connects the Hudson River Railroad, which again, very level following the Hudson River South. So, not only is it level, which means cheaper operations, but it runs through a series of industrial cities in northern New York you know, Utica, Syracuse, Rochester, Buffalo — these are all on the New York Central Railroad. Then he gets involved in taking over railroads west of the New York Central — which only covers New York State — notably the Lake Shore and Michigan Southern Railroad.
[00:28:37] TJ Stiles: These are all formed out of consolidating smaller companies, which were formed by local businessmen to serve their local communities, but due to the logic of the railroad they get absorbed into a larger line. So, Vanderbilt, by the end of his life, controls a vast network of railroads, which run from Chicago to New York.
[00:28:59] TJ Stiles: this is really the core of the American industrial and agricultural economy as one railroad. I think it was Henry Poor, the famous railroad journalist, said that the entire length of the Union Pacific and Central Pacific Railroad would not provide as much business as a railroad a hundred miles long east of the Mississippi.
[00:29:22] TJ Stiles: So, Vanderbilt doesn’t care about transcontinental railroads, even though it very much reflects what’s going on, the development of the West and the federal government’s involvement in that development. So, Vanderbilt puts a different light on that traditional story of Western expansion by showing that where money was really being made wasn’t so much in the West as in the Midwest, as that was fully settled and developed. And it’s not too much later that the transcontinental railroads really become profitable.
[00:29:52] Charlie: Well, following on Vanderbilt’s role as a railroad tycoon, can you talk a little bit about his competition with Jay Gould and his business dealings with John D. Rockefeller?
[00:30:03] TJ Stiles: There’ve been a lot of stereotypes and simplifications with Vanderbilt, because until my book nobody had done a full-scale biography of him because there are no Vanderbilt papers. So, there are a lot of stereotypes and I found some very interesting things. Jay Gould was a young broker who had gotten into Wall Street, and he got onto the board of the Erie Railroad. This is one of four, the four trunk lines, the railroads that cross the Appalachians, and it was not as profitable as the New York Central, which Vanderbilt came to control in 1867, but it was very important, and it was a potential threat to Vanderbilt’s lines.
[00:30:44] TJ Stiles: He started to buy up stock in the Erie Railroad in 1867, not because of its potential threat as a rival business, but because an old friend of his, Daniel Drew, had started to [00:31:00] short sell Erie stock. Daniel Drew is the treasurer of the company and he often profited at the expense of his own shareholders. And Vanderbilt was upset because he wanted a rising market in general which Drew had agreed to. So, to get personal revenge begins a corner Erie stock. But Jay Gould and his newfound-friend on the Erie board, Jim Fisk, they see a threat to their role in the Erie Railroad. So, they begin to conjure up ways to create new stock there’s a lot of cultural reasons why there were strict limits on how much stock a company could issue. There were laws that strictly limited how much stock a corporation could issue, and they broke all those laws.
[00:31:42] TJ Stiles: They just began to issue new stock like crazy. So, the price keeps falling, even though Vanderbilt is getting a larger and larger amount of stock himself. And it culminates when Daniel Drew goes personally to the New York State legislature to bribe the legislature en masse to legalize their stock issue and the legislature voted against him and then he came to town and then they completely reverse the 100 or something like that.
[00:32:12] TJ Stiles: And this is when he was a wanted fugitive. He had actually escaped from New York on a rowboat. So, what happened is, is that there are various legal things that Vanderbilt could hold over their heads. So finally, they come to terms. They agree to repay Vanderbilt his losses. So, Vanderbilt at least was made whole again, but now he had this new enemy, Jay Gould. And Jay Gould, it’s interesting because Vanderbilt was ruthless, but Jay Gould to Vanderbilt’s mind, broke all of the rules that Vanderbilt operated under. He really believed in a code. It was, you know, a code among thieves, but for example Jay Gould and Jim Fiske, they took over the Erie Railroad and they began to cut prices on cattle cars from the West.
[00:32:57] TJ Stiles: So, the New York Central followed suit. Then they cut it down to almost zero. It was like one dollar for an entire cattle car full of cattle. So, again, the New York Central followed suit. Then Jay Gould and Jim Fisk basically called a press conference and announced they had huge amounts of cattle and shipped it East on the New York Central Railroad. So, they had forced their opponents to basically make shipping cattle free and then they bought a bunch of cattle and shipped it. So, you know, they did this just to embarrass Vanderbilt. They lost a lot of money as a corporation. They did it just to embarrass him. And, you know, it drove him crazy.
[00:33:34] TJ Stiles: Now, they never actually got the better of him. One of the reasons he took over this connecting line to Chicago, The Lakeshore, was because it was threatening to make an alliance with the Erie Railroad and with Jay Gould. And so, Vanderbilt moved to snuff that out. And it was a very successful.. So Vanderbilt was never actually seriously hurt, but he was deeply embarrassed by all these maneuvers.
[00:33:59] TJ Stiles: Jay Gould himself went on to become a very successful corporate manager, especially with the Missouri Pacific system. And so, he became more than just the Loki of corporate finance. But it was very much in the headlines all the time, this personal rivalry between the two of them.
[00:34:15] Charlie: I think one theme that’s emerging here is that it wasn’t a real good idea to cross Cornelius Vanderbilt. He had a long memory.
[00:34:24] TJ Stiles: No, and you know, it’s very interesting, he had a long memory, and he was extremely cunning. Daniel Drew also was very cunning on the stock market. And so here are two guys — Vanderbilt started off, you know, selling boatloads of fish that he brought up from the Delaware River and Jay Gould started off driving cattle to market and they learned about markets on the ground with these very nitty-gritty operations early in the American economy.
[00:34:52] TJ Stiles: So, at the end, when you’re dealing with, you know, tens of millions of dollars of stock being traded with options and futures being traded, they understood all of it and they were masters of it very early on. It’s fascinating, he was very capable of getting revenge, either in business or in the stock market. But what’s interesting about him is that as the corporation became so much larger as the financial markets had such a larger sway over the economy as a whole, Vanderbilt’s ideas about the corporation and the role of government never changed. So when he was young, he saw himself as a leader of free enterprise, somebody who opposed government intervention in the economy back when government intervention in the economy meant not regulation, but establishing corporations and benefiting the wealthy with even more privileges as they saw it. Late in life, when he was sitting atop the corporate economy, he had the same view, but only now that view was directed against regulation, against laws that were designed to reign him in. He took over the New York Central Railroad by cutting off all rail traffic into New York City from the West via the New York Central during a huge blizzard in 1867 when no shipping could reach Manhattan neither. So, he basically blockaded the city of New York and, you know, it collapsed the share price of the New York Central and he bought up control of it.
[00:36:19] TJ Stiles: So, he was ruthless, and he didn’t believe that the government should intervene. There’s a reason why he was Ayn Rand’s darling. He very much believed that individuals should be allowed to fight it out, and everybody should be allowed to pursue their own self-interest. So, what’s interesting is that started off as a radical viewpoint in America and his life was so long that he lived to see and help make it a conservative viewpoint.
[00:36:43] Charlie: Right, interesting. That’s fascinating. Well, let’s shift gears a little bit. Shortly before his death in 1877, Vanderbilt donated a million dollars, equivalent to $27 million in 2022, to establish my law school alma mater, Vanderbilt University in Nashville. Would you discuss the common ware as a philanthropist, why he founded Vanderbilt, and the other ways in which he spent or invested his wealth in the decade after the American Civil War?
[00:37:10] TJ Stiles: Yeah, Vanderbilt in general was not a great philanthropist. I mean, a good example of his thinking is that he gave 95 percent of his estate to his oldest son. His many daughters were not happy about this. And he told them, I’ve given you enough to live like ladies and it was basically up to their husbands to make money for them. So, you know, he was determined to build an empire and have it last and remain. But he was very patriotic and this is the most kind of altruistic side of him.
[00:37:38] TJ Stiles: So, when the Civil War broke out, he very much wanted to donate his largest steamship. It was one of the largest steamships in the world, not the largest but one of — and also, one of the fastest named typically the Vanderbilt and he tried to donate it to the U. S. Navy when the Civil War broke out, but it wasn’t until the Merrimack, the Confederates called it the Virginia, the Southern ironclad, started to cause havoc that suddenly Stanton and Lincoln remembered his offer and he offered again.
[00:38:09] TJ Stiles: And so, he met with Lincoln personally and donated his ship. So, he reinforced it, equipped it, brought it personally down to Hampton roads and it played a role, never fought the Merrimack, but it played a role in bottling it up. The Confederates were in fact afraid they would be run down by this huge ship. And then it went on to serve in the Union fleet. So, this was a warship that as a civilian vessel cost a million dollars to build. So, after the war, he was very interested in reconciliation with the South. Now, by that he meant the white South. He really didn’t care about the freed people, but he wanted to reach out to the South. He believed in reconciliation and his second wife, after his first wife died, his second wife was from Mobile, Alabama, and she introduced him to the Methodist bishop from the South who had a project. The Tennessee legislature had passed a lot to establish a university. There are very few in the South. And so, he liked the bishop. And he wanted to reach out and help the South in some way to sort of match his gift to the Union Navy now that the war was won. He agreed to give a million dollars to Vanderbilt University in the end, it was in increments on the condition that the bishop — I can’t pronounce his name properly, McTeer — would have sole control. He very much believed in the right man. And so he wanted his man, the bishop to have sole control, not to be outvoted by the board of trustees. And so, they made those arrangements. And he never managed to visit.
[00:39:43] TJ Stiles: This is very late in his life. But he very much saw it as a personal project. And I believe William Vanderbilt, his son and heir, did eventually visit Vanderbilt University. But that was an enormous endowment. I mean, it was, for the time it was an unparalleled gift.
[00:39:59] Charlie: Wow. Yeah. That’s a lot of money. You just talked a little bit about how he sort of doled out his estate among his children. Could you talk about the massive wealth he possessed, you compared him to current moguls like Bill Gates and some of the key members of his family and also Vanderbilt’s legacy?
[00:40:17] TJ Stiles: Sure. I don’t like the idea of simply translating 19th-century figures into 21st-century figures when it comes to money. Sometimes we have to do it because we need something to wrap our minds around, but the nature of the economy has changed so much that the simple values don’t really translate. So, for example, the economy was much narrower then. In the 1870s, railroads were by far the largest and also most strategically important companies in the U. S. economy, but there’s nothing that equates to them today, not Apple, not anything in the digital or electronic sector, as important as they are. There’s just such a large and diverse economy now that $1 million then versus, say, $50 million now, it’s not the equivalent. So, I tried to think of Vanderbilt’s role in his holdings compared to the monetary circulation at the time. So, my book came out in 2009, finished it in 2008. Bill Gates was the wealthiest person in the U.S., in the world, in fact, and if you were able to sell all of his estate at full market value, he would have taken one out of every 158 dollars out of the economy using the feds M2 figure. So, that’s a huge single share of the economy. If Vanderbilt had been able to sell his entire estate at the moment of his death, he would have taken one out of every 20 dollars out of the U.S. economy. It is absolutely unbelievable. And it was concentrated in railroads and specifically in the railroads that connected to the nation’s largest city and largest port and one of its largest industrial hubs as well — New York City. So, he had not only this vast share of American wealth, but he also had control over the center of its economy.
[00:42:17] Charlie: Right. Interesting. Well, do you have a passage from the First Tycoon hat we could end with, that you’d like to read?
[00:42:24] TJ Stiles: Sure. This is actually from the middle of his career, when he’d become wealthy, but it just taken over his first railroad. He hadn’t even gotten involved in overseas shipping with steamships. He hadn’t become the great railroad tycoon. And so this is kind of a — shows Vanderbilt, it’s something we really haven’t talked about his relationship to New York society that very much class-conscious aristocracy-dominated New York society in 1848.
[00:42:55] TJ Stiles: So, it just gives you an idea of how Vanderbilt had to break his way in socially as well as in terms of business: “New York’s New Year in 1848 began as it always did with one of the annual traditions that marked the march across the calendar in the island city. The first of the year brought the tradition of the New Year’s Day call a custom practiced in New York by the elite, the wealthy and respectable, who debarked from private carriages before the brownstone townhouses that shouldered together in the streets radiating from Washington Square that increasingly line 5th Avenue North, reaching nearly to 20th Street. To meet the torrent of visitors, women fortified themselves in their parlors amid rosewood and red satin, dispatching servants to usher in the gentlemen who raced up the steps to make their calls, stopping long enough to hand off their hats and remark on the weather. George Templeton Strong, a rising young lawyer in Wall Street, informed his diary that he had made 80 calls by 6 o’clock on New Year’s Day, “and got home at last tolerably tired.”
[00:44:03] TJ Stiles: Neither Strong nor any other wealthy and respectable diarist is known to have recorded a visit to 10 Washington Place, to the parlor of Sophia Vanderbilt. That was her husband’s fault. When the Mercantile Agency, the nation’s first credit bureau, first reported on Vanderbilt in 1853, it examined his character as much as his finances. The result says much about the attitude of New York’s establishment toward the self-made Vanderbilt: “Started early in life as master of a small sailing craft between Staten Island and New York City. Manifested great ability in enterprise and was taken hold of by the late Thomas Gibbons of New Jersey,” observed its reporter. “From this position, Vanderbilt has risen to great prosperity in his way. He has a large fortune.” These words were honest, respectful, and only slightly snide. Unfortunately for Vanderbilt, it was a long report. After the commercial judgment came social, and it was blunt: “He is illiterate and boorish, very austere and offensive, and has made himself very unpopular with the inhabitants of Staten Island. So much so that his leaving there is subject of great rejoicing by the inhabitants and was manifested by a public jubilee among the Astors and Aspenwalls, the Skylars and Grinnells, Cornelius Vanderbilt did not belong. He had no place in their traditions.”
[00:45:29] Charlie: Wow. You’ve just painted a fascinating portrait of him. Thank you so much joining us. This is great.
[00:45:35] TJ Stiles: I really enjoyed it. Thank you.
[00:46:55] Albert: Excellent interview. And to close up here is the Tweet of the Week. This is actually a tweet from late last year, but really caught my attention from our friends at EdSurge. Is student happiness enough for academic success? Dive into our latest article exploring how the ancient Greek concept of eudaimonia might be more beneficial for students’ mental health and performance. Check it out, and I don’t know, maybe I’m just a sucker for all things classical but I mean, this is something that I’ve always thought and been in discussion with others. I’ve got to differentiate the difference between fulfillment and human flourishing and simple psychic and emotional indicators of happiness. And this article is fascinating because it talks about a study that shows how the latter psychic feelings of happiness or life satisfaction aren’t predictive of students’ mental health and academic performance later in life. It’s actually eudaimonia, or what we think of as flourishing and having a sense of purpose. So, Charlie, I don’t know if that’s a result that surprises you, but certainly caught my eye.
[00:48:01] Charlie: Yeah, it does a little bit. You know, I haven’t thought enough about that, that’s one I think I’ll have to look into. You piqued my interest.
[00:48:07] Albert: Yep, great, well, hey, and thank you for kicking off this year on this episode.
Charlie: Great to co-host with you.
[00:48:12] Albert: My pleasure. Next week we’re going to have Gabby Thomas, the American Olympic track sprinter. So be sure to tune in for our interview with her. Until then, I hope you have a great day and a great start to your new year.
This week on The Learning Curve, guest co-hosts Prof. Albert Cheng of the University of Arkansas and Charlie Chieppo interview two-time Pulitzer Prize winner T.J. Stiles. Mr. Stiles delves into the life of America’s first tycoon, Cornelius Vanderbilt, exploring his rise to historic wealth in steamboats, shipping, and railroads. He discusses Vanderbilt’s legal battles, philanthropy, and enduring legacy, exploring his business competitiveness and wide impact on 19th-century America’s economy. Mr. Stiles closes the interview with a reading from The First Tycoon: The Epic Life of Cornelius Vanderbilt.
Stories of the Week: Albert comments on a story from Education Next about the rise of apprenticeships; Charlie reviews a story in The Hill about the Chicago Board of Education eliminating selective enrollment in high-achieving public schools, claiming equity but potentially harming minority students’ opportunities.
Guest:
Tweet of the Week:
https://x.com/EdSurge/status/1740104019551412656?s=20
Studying the Humanities in the 2020s
/in Blog, Blog: Education, Blog: Higher Education, Blog: US History, Featured /by Jude IredellSeven tips from the college intern
At the close of a more tumultuous academic semester in recent memory — one replete with vitriolic debates over war in the Middle East, free speech, leadership crises at elite colleges, and a national reckoning over plagiarism — this intern finds himself finishing his history degree after a most peculiar college experience.
It’s no understatement to say that higher education has changed greatly since I began my studies, and this change is readily apparent in admissions practices.
Affirmative action initiatives peaked after the fervor of 2020, heavily influencing the composition and tenor of student cohorts across the country before the Supreme Court outlawed the practice this past summer.
Standardized tests like the SAT and ACT have been deemphasized in favor of more qualitative metrics. Fewer students take standardized tests today compared to 2019, one of many indications that elite colleges’ less rigorous, post-COVID admissions policy changes have already affected student behavior.
From my biased perspective, the precipitous, consistent dropoff in students studying the humanities is noteworthy. History majors declined nationally by almost one-third between 2012 and 2019. The recent trends for humanities majors at Williams College, a liberal arts institution very much like that which I attended in California, are shown in the table below. They tell a sad tale.
So, as I end my collegiate career with a degree in one of those “downward-sloping” academic disciplines, I thought to offer seven guiding principles that helped me stay motivated and interested in what I was learning. May they help another college student thinking about studying history or any other humanities subject, and hopefully reverse the trend seen at Williams, my own liberal arts college, and others across the country.
Follow the great books
For brash eighteen-year-olds raised on Wikipedia and SparkNotes, reading the classics offers valuable insight and a good intellectual humbling. Any theory course with a reading list that includes Herodotus, Thucydides, Plato, and Aristotle offers an elevated caliber of reasoning and analysis of the Western tradition’s great minds, a time-tested curriculum that is impossible to replicate with other source material. All students, irrespective of major, could benefit from great books study.
Do the reading — not for anyone else, but for you
Grade inflation and declining standards have made it easier than ever to get an A in a college course while putting in reduced effort. Now more than ever one truly gets out what one puts in. Getting by with a quick skim of the material before class may not harm students on paper, but it won’t let them understand the subtleties of the professor’s and course’s message. They will also have meaningful insight to contribute in class discussions, instead of non-sequiturs that usually begin with “like for me personally…”
Be wary of courses with ideological, narrow focuses
In the college course catalogues of this decade, many options resemble word salad from the woke urban dictionary. Esoteric titles like “mapping intersectional discourses,” “gendered feminisms,” or “queering the body politic” leave little indication of their respective courses’ scholarly underpinnings, while loudly signaling the dominant ideology in class. I learned more and thought more critically in courses with a general, narrative-based theme — “Classical Political Theory,” “Early East Asian History,” and “World War Two in East Europe”— which allowed their students to reach individual analytical conclusions instead of those bathed in nouveau ideology.
Take classes with professors who appreciate perspective and challenge you
This tip involves a bit of luck. Everyone is at the mercy of some chance while hunting through the course catalogue, but those who do find that prof with the time and energy to invest in their students’ success are well-positioned to reap the benefits. Developing valuable relationships with professors may not happen quickly, which is why taking multiple courses from favored professors is the surefire way to maximize those four years.
Speak your mind, and don’t be afraid of your classmates
Rigidity and silence abound in today’s cruel polemic. Far too often, people avoid sharing their thoughts and opinions because they fear ostracization, not because speaking out is de jure prohibited. I found that confidently expressing my ideas often drew a less vitriolic response, if any, than what I had imagined in my head. The group is often more afraid of countervailing ideas than the contrarian is afraid of the group.
Remember the real world
College can often feel like a self-sustaining ecosystem ridden with groupthink; it is vitally important that students have valuable learning experiences outside this environment before they graduate. Taking advantage of the internships, summer jobs, study abroad, and domestic exchange programs on offer will ensure a smoother transition to life after graduation.
ALWAYS do your own writing — it may come in handy
Humanities majors learn to write. This time-honored maxim runs the risk of losing its accuracy with the rise of new AI learning software that generates passable prose faster than anyone living. Soon its prose will be more than passable, but as of now, AI’s shortcomings leave a window for well-trained writers and critical thinkers to prosper in this digital age. That is if they can still write better than the average language model. To all my fellow so-called “useless BAs,” take notice!
Jude Iredell is a Roger Perry Civics Intern with the Pioneer Institute. Last week, he completed his bachelor’s in history at Pomona College.