The Mafia of Pharma Pricing

You can actually look up payments from certain companies to doctors now: https://openpaymentsdata.cms.gov/

I’ve checked several doctors that I’ve visited over the years. None of them show up, with one exception: The doctor who immediately set off my scam alarms when she tried really, really hard to get me diagnosed with sleep apnea, despite not one but two very clearly negative sleep studies.

I could never understand why she was pushing so hard, until I looked her up in this system. She takes an incredible amount of money from drug companies and device manufacturers.

I don’t know if a scheme like you described would even be allowed today. If it is, the bigger medical systems are actually quite strict with doctors taking anything resembling a payment like this, from what my friends in the industry tell me.

Kickbacks have a specific meaning - a payment made in order to get business.

Data rebates aren’t kick backs, they pay for something they wouldn’t otherwise get - patient level data.

The PBMs get paid a double digit percentage of purchases as a rebate when quality data is sent back. It’s optional and PBMs can decide not to do it.

"And it was all legal."

In some states.

It sounds like you thought there was nothing wrong with kickbacks. That's concerning. The dictionary definition of a kickback is a concealed, usually illegal payment, a form of bribe. Whereas the dictionary definition of a rebate is a portion of the sum paid returned to the purchaser. If you knew you would be helping these people to process kickbacks then why work for them.

Honest question.

Don't even have to work with them to notice this. Over here all dentists tell you to use Elmex products, noted on Elmex branded post it. Elmex's "rebates" and "symposiums" must be glamorous.

This is illegal nowadays, but rebates endure between manufacturers and PBMs.

It works like this:

Nanufacturer sells abc drug to PBM for x price. There is an agreement between them, that if pbm sells y number of abc, then pbm gets a rebate.

However, this gets the PBM in a jam. Now they have to somehow sell this crazy overoriced brand drug to the insurer. So they do a sleight of hand. So the PBM agrees with manufacturer to. . increase price! Why? For an edge in the conversation with insurer/employer:

PBM: here's brand drug abc. Price is x^2. I am soooo good at negotiating your prices, that I was able to get it for z instead. You see! Thats a 50% price reduction. Am I not awesome.

Insurer/employer: thats great. I'll be able to sell this 50% reduction off sticker to my manager. Thanks!

PMB keeps gwneric competition out of formulary, ensuring no competition

And eventually, PBM receives a rebate check for their troubles.

And its totally legal.

I think the point you’re missing is that many parts of pricing are government regulations.

And the way that the myriad of regulations drive some of this behavior.

A great example is the 340B program. A government regulation requiring manufacturers to offer steep discounts to hospitals.

It’s created all sorts of distortions including the purchasing of pharmacies by hospitals so they can access the discount but charge the full price for the insured.

The US healthcare system is terrible in big part because of regulations.

1. Development of a single new drug costs several billion.[0] There are outliers which cost less, but billions is a decent estimate on average.

2. There is continuing need for new drugs: in 2023, FDA approved 55 new drugs [1] not including new indications for existing drugs (which also cost money to achieve).

3. It therefore follows that (in the current regulatory environment) just maintaining the current level of development and approval of new drugs would probably cost over 100 billion per year (possibly not including manufacturing and supply).

4. Drug development is therefore hellaciously expensive, while being high risk (i.e. high risk of failure) and a long-term endeavor.

5. In our current world, the model that has evolved is that this money is raised from investors, entrusted to experts, and if everything goes well, capital plus profit are recouped via drug prices. Payors swap huge up-front costs with an uncertain outcome, for later huge costs with a known outcome.

6. Replacing this model would therefore likely take global collaboration between governments, funding expensive high-risk long-term projects, with the end-goal of (much) cheaper drugs - an end-goal that would likely take a decade to meaningfully realise (importantly, much more than a single electoral term). It would be politically momentous, as it would effectively destroy a significant and established sector of the economy.

7. As much as I like this concept, I simply don't see any evidence that we're even close to ready for such a model of global collaboration and funding. Even when the challenge was urgent and potentially existential (e.g. a global pandemic) the response was often the opposite of collaborative.

8. Interestingly, though, it wouldn't even be very expensive on a world scale. The GDP of (just) the top 20 nations is roughly 88 trillion.[2] 100 billion is barely over 0.1% of that. If you shared the cost by GDP amongst the top 20, US and China would pay a lot, but involved European nations would pay in the region of 2-5 Bn/year.

9. This obviously doesn't deal with the issue of ongoing costs for already-approved drugs...

===

[0] https://www.forbes.com/sites/matthewherper/2017/10/16/the-co... [1] https://www.fda.gov/drugs/novel-drug-approvals-fda/novel-dru... [2] https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...

We're seeing some signs of this, along with other changes in drug models: injectable hypertension treatment is in test. Imagine the impact on the cost basis of a pill-per-day model!

Tablets are generally dirt cheap to produce. Sterile injectables adds a lot of variables and requirements, both in production and sometimes also in distribution (cold chain?) and administration (directly and sometimes requiring reconstitution).

Maybe if you have an API that’s expensive to produce and has poor bioavailability an injectable might be cheaper.

A long acting injectable antihypertensive will have a place for some, but creates other issues: can’t stop it quickly and hypertension often requires multiple agents to treat.

I wish poly-pills took off :(

This is understatement. Inefficiency is certainly a factor in the performance of the amalgamated U.S. health care system. But the fact that it is essentially a multi-tier private system, additional avenues for abuse and corruption are widespread -- particularly when compared against the health care systems of other industrialized countries. The system honestly is only good for the wealthy -- who enjoy 1% preferred treatment, exploit the structure of the system for financial gain, and solidify its presence through aggressive lobbying.

"Efficient" in a corporate context simply means "efficient at making money for shareholders."

It does not automatically mean "better able to serve customers."

And often it means the opposite.

So yes, while the list price for Gleevec has gone up, the actual price paid is very different.

You say it like it's a good thing. It's part of the problem.

The fact that there is no clear no-nonsense to get a drug at a reasonable price without jumping through a bunch of hoops which aren't even clearly documented is not a good thing.

We are talking of life-saving drugs here, not hacking frequent flier miles or credit card rewards.

You've described the problem:

here is no “price” for a drug

Yes, there is. If we look on their 10-K statements, they will have a fixed cost and a variable cost assigned to each drug. The variable cost will be just the manufacturing, and the fixed will be research and overhead allocated to this drug.

Total cost = fixed + variable. The rest is profit. We can decide what a "reasonable" profit is, and Total Cost + Profit is the notional "price."

That doesn't mean treating them like a state monopoly and the final price is fixed by law, but it does tell us a "price." All those things you mentioned (list, net, Medicaid, AMP, ASP) are kinda irrelevant.

It sounds like you're saying exactly what TFA says? Bit odd to criticize an NYT article (and without linking) as a comment on an article that does get into these details?

So when a diabetic goes to get lifesaving insulin and some mistake happens w insurance they are paying the inflated price. Not rare, since insulin comes in bottles which can and do break.

sell people's medical data for

Why isn't this illegal?

Last time I made blood test it really pissed me off why their forms require national ID and phone number. The nurse in turn was pissed at me why I'm reluctant to write down phone number.

Not sure if you'll take it as reassuring, or alarming, but having worked with a few PBMs on the insurer side ES was the most tech-competent. Worst probably being CVS Caremark.

What you have described here is the phenomenon that Stigler describes as "Regulatory Capture". [0]

Regulatory capture is the use of state resources (mostly regulation). To tilt the ground of business in thier favour at the expense of the public and other competitors.

People beg for "regulation" from the government but the problem is that the politicians are often puppets of the very corporations they are meant to regulate. That's how we end up with regulatory capture scams.

Is that "capitalism"? I don't think so. Does it contain traces of capitalism? Yes.

But I think what Americans have is more of corny-capitalism, state-capitalism & regulatory capture.

It is very different from Hayekian capitalism which is actually anti-crony capitalism & anti regulatory capture.

[0]: https://en.m.wikipedia.org/wiki/Regulatory_capture

It is but it's the government paying for it. Basically all new novel drugs relied on public research funds [5

The fact that it was partially government funded doesn’t mean that the drug companies didn’t have to put it in a significant % of their own money. Of course it varies but it’s a bit like saying that e.g. Tesla is/was government funded (well kind of but not really)

No one else has the scale to even begin negotiating with the Pfizers of the world. Try to buy something from them directly, and the price would be "Fuck you".

Go around how? The point is it’s a consolidated monopoly. The same people own every step in the chain. They use this particular step to extract monopoly profits.

Cost plus pharmacies do still exist. The problem is, some drugs really are just way more expensive, so if you already have "free" (or heavily discounted) insurance from your workplace, it's a bit of a waste not to use it, especially since expensive drugs do also contribute to your deductible.

Also, wholesalers also negotiate with PBMs, so the cost plus pharmacies might not be able to get the drugs at the same rate PBM-friendly pharmacies do.

The PBMs have mostly been captured by the insurance companies, so they're charging themselves and pocketing the profits themselves. Insurance companies just pass on the costs by charging higher premiums.

If this is somewhat the case, I would sort of expect insurance companies to be lobbying for the system to be changed, and they seem to have the capital to actually make a difference in that "fight"?

Insurance companies have the opposite incentive. Their profit is, to simplify, a percentage cut of the total amount spent on medical care. If the cost of medical care goes up, they raise rates and the market pays for it (what else is it going to do?) the poor or underemployed or non-traditionally-employed suffer.

They will fight a small amount to keep costs low, but only in a relative sense in that they want to beat their competitors or not pay for one off extremely expensive things.

The middleman to which you give a fixed percentage isn't really all that motivated to get you your best price.

Setting aside what happens for the uninsured (which is important, I'm just trying to simplify for my own understanding), isn't this mostly the levying of costs of very expensive drugs onto the insurance providers, rather than the patient? Meaning the "victim" of the price gouging is the insurance company?

The article touches on this, but perhaps doesn't spell it out sufficiently:

1. Insurance companies have their profits legally capped

2. To get around this: somehow (merger, purchase &c.) end up with Company X that owns both an insurance company and a PBM

3. The PBM price gouges the insurance company, increasing PBM profits (which is legal, unlike increasing the insurance company profits)

4. The Insurance company passes the price-gouging on in the form of increased premiums.

5. Company X makes more money by charging higher premiums, just like it would if it had (illegally) increased the profit margins of the insurance company.

isn't this mostly the levying of costs of very expensive drugs onto the insurance providers, rather than the patient? Meaning the "victim" of the price gouging is the insurance company?

I feel there's the obligatory remark here of "and how exactly is the insurance company paying for it?".

I assume it does somewhat directly in the form of higher monthly payments (for the patient and other customers of the insurance)?

Absolutely directly.

Can the insurance company deny access due to the high cost?

They have little motivation to do so. They just up the premiums. They're limited by law on administrative overhead costs, and are mandated to return unspent premiums (or roll them over), so the only way to make more money is "increase premiums, so we're allowed higher administrative overheads".

This was a hallmark of Martin Shkreli. He liked to paint a picture of "I'll ensure you're only paying a low copay while the insurance companies take the hit for this drug I'm charging exorbitant pricing[1] for", as if customers thought that insurance had a magical money fairy, rather than that money was coming from them (albeit usually indirectly through their employer). Sadly, he was often right - a non-negligible amount of people saw him as an everyday hero, sticking it to the man.

[1] Yes, pharma has R&D costs. Shkreli's company didn't do much R&D though, mostly patent acquisition[2].

[2] "Fun" story about that. New drug comes before the FDA for approval, and it is opened up for comment. Shkreli lodges an objection to approval of this drug.

Why? Because it's unsafe? No - trials thus far have shown it to be safer than the existing drug options.

Why? Because it's less effective? No - it's also been shown to be more effective than existing drugs.

Perhaps it's more expensive? No - cost of R&D and production, and estimated retail costs are expected to be lower than existing drugs.

Huh, odd. So why in this case would Shkreli oppose this drug getting to the market?

The only reason he lodged an appeal with the FDA had nothing to do with the drug, butbecause he and his company had just bought the patent to one of those 'existing drugs' referenced, and this new drug coming to market would crater the demand for his drug, and as a result torpedo the profitability of his investment/gamble.

Fuck Martin Shkreli.

Here's a pretty simple, accurate description of price discrimination:

- The purpose of price discrimination is to reduce the share of gains-from-trade received by consumers to zero.

The concept is that you should never feel that you're getting more value out of a purchase than you would otherwise have gotten from the money you spent on that purchase.

It's true that, as the article mentions, this means that impoverished people might buy things that, absent the price discrimination, they wouldn't have bought at all. But this "benefit" can't be worth much, because -- even though they paid a small price for whatever it was -- we know that they valued it only slightly more than that.

Given this, it's not really clear why price discrimination is supposed to be beneficial.

I mean there's a spectrum between "acceptable" price discrimination and "abusive". Nobody bats an eye at lower rates for bulk purchases or movie theaters offerering half price for kids.

Lower rates for bulk purchases is not an example of price discrimination. Half price for children's movie tickets might or might not be - if your theory of the discount is that people will pay more to go on a date than they will to entertain their children, that would be a valid example of price discrimination. If your theory is that children have less money than adults, that doesn't really work - kids young enough to get cheaper movie tickets don't pay for their own tickets.

On this timeline, it seems to me much more likely they caught wind of the FTC’s attention being put on this topic.

NYT is still good at coverage, I'd just argue that the optics of their coverage can be removed from their original, erm, style, at times. (I don't want to say "politics" but we all know I mean politics.)

Still, they do excellent work to this day, just with questionable detours.

See also: Bastiat's "broken window" fallacy.

https://www.investopedia.com/ask/answers/08/broken-window-fa...

Nope. Even at its most mundane you are “encouraged” to use the insurers mail order pharmacy or affiliate… for the few routine drugs I take I cannot get a 90 day refill authorized at a retail pharmacy, only 30 day supplies.

If I want a 90 day refill schedule I have to go through their mail order.

We have spent most of the last 50 years under an antitrust enforcement regime that considers vertical integration to be harmless, so #1 might be simple, but it's definitely not easy.

The prevailing attitude is “it’s already $15,000 a month, no-one’s going to rock the boat if we bump it to $18,000 and pocket the difference.”

Recommended reading: https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefi...