
This week we are going to tackle the fourth reason why drug costs are so high: the industry is fragmented and complicated. Due to the market fragmentation, no one really knows what the true cost of a drug is. It is almost impossible for an employer to determine what their actual cost is. They would have to take their claims data and match it up with their rebate payments they receive 150-180 days later to calculate the net cost of the drug (that is if they are lucky enough to get rebate data at the drug or claim level.) The employers’ net cost for a drug is only part of the puzzle.
Many of us in the industry are familiar with Adam Fein’s chart that outlines the product movement, contractual relationships and financial flows related to the distribution of a single drug. It is complex, and there are a lot of parties involved in the process. I have always found it fascinating that there are more “green” lines on the chart than “blue” lines.
Typically, each contractual relationship represented on the chart has an associated “discount” or “rebate” tied to the agreement. Therefore, depending on the entity there is a different definition of “drug cost.” When I talk about drug costs to my friends, they talk about list price (the cost the manufacturer sells to the wholesaler before any discounts). When drug manufacturers testify in front of Congress, they refer to net price (the price manufacturer receives after providing discounts to wholesalers, pharmacies, government programs and PBMs.) Even then there is the net cost to wholesales, pharmacies, Pharmacy Benefit Managers, patients, and employers.
Without having a concise definition of the drug cost, the industry is not able to truly understand if there is even a drug cost issue. According to drug manufacturers, the cost of drugs has been going down, but the average patient is not benefiting from the decreases. IQVIA’s study on the Use of Medicines estimates that in 2023 the discounts off list price to be an average of 37% and by 2028, they estimate the discounts to average 47%. It is important to note that the discounts IQVIA is referring to are not just the rebates manufacturers pay to PBMs, but these are all discounts that manufacturers pay to everyone in the supply chain. No wonder no one can determine the actual cost of a drug.
I would argue that even though it is difficult for the average consumer or employer to determine the actual cost of a drug, it shouldn’t be difficult for the big players in the marketplace to determine. With all the vertical alignment occurring the industry, especially with the Big 3 PBMs, Optum, CVS and ESI should know the true cost of the drug. Again, Adam Fein has a wonderful visualization of what I am referring to:
Since these PBMs own pharmacies, rebate GPOs and now manufacturers (with CVS owning Cordavis), they are in the best position to know the true cost of a drug. We need to start expecting more from our PBM partners. It is their responsibility to disclose to their clients and their members what the true net cost of the drug is. It shouldn’t be an employers’ responsibility to piece together the data to try to calculate it themselves.
With the growth in the number of the pass-through PBMs and organizations like Mark Cuban’s Cost-Plus Pharmacy, there is a light at the end of the tunnel on this issue. These entities purposes’ are to shed light on how our industry can be better, and there is an opportunity for us to get closer to understanding the true cost of drugs. We need to embrace these organizations!
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