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Fostering Transparency In The Pharmaceutical Market | Forbes

In response to the problem of rising list prices for drugs, elected officials continue to propose counterproductive reforms. Whether it is importing drugs from Canada or indexing U.S. drug prices to the prices charged in other countries, these policies will make the current bad situation worse because they fail to understand the disincentives that are the root cause of the problem.

Until now.

A proposal by Health and Human Services Secretary Alex Azar, if implemented, would meaningfully improve the pharmaceutical market. The details get complex quickly, but at its core Secretary Azar’s proposal recognizes that the solution requires the government to fix the broken price system. The price system has been broken by the complexity created by our current third-party payer system.

Thanks to the current system, there are multiple prices paid when a patient receives a drug. Simplifying this system, when a patient buys a medicine, her cost is based on the list price of the drug. So, if the list price of a drug is $100 and a patient has a $0 co-pay but 20% co-insurance, then she would pay $20 when receiving the drug.

While it might seem logical that the costs to insurers would then be $80, this is not how the system works. Instead pharmacy benefit managers (PBMs) have negotiated discounts on behalf of insurers. These discounts reduce the list price, on average, by 44%. Therefore, the cost for insurers is based off of this price, the net price, which would be $56 in this example, not the $100 from which patients’ costs are calculated.

While patients’ costs are based on the higher list prices, the income of manufacturers and the costs of insurers are based on the lower net prices. PBMs use the large spread between list prices and net prices to generate their fees and rebates. In fact, since PBMs’ revenues are based on the spread, they have an incentive for list prices to grow as fast as possible in order to enable a larger spread and, thus, higher profits.

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Fostering Transparency In The Pharmaceutical Market.