How Drug Prices Work | WSJ

How Drug Prices Work | WSJ


– [Presenter] You might think
the process that determines how much you pay for something
is pretty straightforward, and it often is. For example, here’s the
supply chain for a beverage you might buy at the
drugstore, say, a Pepsi. Pepsi Co. Manufactures
the soda and sends it to a retailer, who sells it to a customer. The customer pays the retailer, and the retailer pays Pepsi Co. Simple, right? Well, that is not the
case for the products behind the pharmacy counter. The drugs. Here’s a typical supply of
chain for prescription drugs. It looks really different. That’s because the way
that drugs are priced is not at all a straightforward process. Experts and politicians argue
that the very complexity of this chain is part of why drug prices have grown so high for customers. – Everyone involved in the broken system, the drug makers, insurance companies, distributors, pharmacy benefit managers, and many others contribute to the problem. – [Presenter] To understand this debate, first, you should understand
the flow of drugs and money within this chain. Let’s start here with the
pharmaceutical companies. They are the ones who develop
a drug and set a price, known as the list price. This isn’t a straightforward
as it might look, which I’ll explain in a moment. Next you have the wholesalers
who transport the drugs and sell them to the pharmacies. The patient pays the copay
and the pharmacy sends out a bill that gets paid by
the insurance company. That’s simple enough,
but we’re missing a link. The link that manages
this transaction and adds a lot of complexity to the chain. Meet the pharmacy benefit managers or PBS. They are who the drug
companies and some politicians are talking about when
they refer to middle men. They work for insurance companies, big employers, and government agencies. And a big part of their
job is to bring down the cost of drugs for their employers. They do this by negotiating with pharmaceutical companies for rebates. Yup, for many of the drugs a
pharmaceutical company sells, it pays a rebate to the PBM. The PBM sometimes pockets
a portion of the rebate and passes another portion on to the insurance company or employer. Why the pharmaceutical
company pays these rebates is the source of a lot of controversy. What happens is the drug
company gets moved up on something called a formulary. So what’s a formulary? It’s the list of drugs that
the insurance company covers. And it’s grouped in tiers. Each tier represents what
portion of the list price the patient pays and what
portion of the list price the insurance company pays. The highest tier in the
formulary is the lowest copay for the patient. And the lowest tier is the
highest copay for the patient. When the pharmaceutical
company pays a higher rebate, the PBM will move the
drug up on the formulary. Pharmaceutical companies
want high placement on the formulary. That’s because patients are
more likely to take the drug that’s most affordable. And that usually means higher sales for the pharmaceutical company. If the patient wants to take
a drug that’s lowered down on the formulary or not on it at all, they have to pay higher copays
or even the full list price of the drug. If this seems confusing,
that’s because it is. Let’s take another walk
through that transaction, this time with an example. Say a hypothetical drug costs $100. A PBM negotiates a $50 rebate,
$10 of which they pocket, and $40 of which they pass on to the insurance company or employer. In return for that rebate,
the PBM moves the drug to a better spot on the
formulary making it cheaper for the patient to buy the drug. This transaction is important
because the pharmaceutical companies say it’s a big reason they keep raising the price of drugs. You’ve probably seen a
chart like this before. It’s the rise in the
price of a drug in the US, in this case, Humalog, according
to its maker Eli Lilly. Th pharmaceutical company say
they have raise less prices to protect their sales and
profits from the demands of these higher rebates. Here’s the CEO of the
pharmaceutical company Merck at a hearing on drug prices. – If you bring a product to the
market with a low list price in this system, you get
punished financially and you get no uptake because
everyone in the supply chain makes money as a result
of a higher list price. – [Presenter] And here’s
that Humalog chart again this time with a net price, where the average revenue that Eli Lilly says they take in under this system. For their part, the PBM
say that drug companies don’t have to raise prices
to boost their bottom lines and that rebates reduce the cost of drugs, not inflates them. They say rebates reduce the
real cost of prescription drugs because they lower the price
that insurance companies pay. That helps the insurers lower the premiums that the patients have
to pay for their plans. Here’s Derica Rice, an
executive vice president at CVS Caremark, one of the
pharmacy benefit managers. – Our job is to work with
the employers, unions, and government programs
who serve to ensure that when their members get
to the pharmacy counter, they get the medicines that they need at the lowest possible cost. – [Presenter] So what
does all of this mean for the patient back at
the pharmacy counter? That the heart of all this
is what the patient pays is often based on the list price, not the price the insurance
company is responsible for after the rebates. And patients who don’t have
insurance or coinsurance or who have really high deductibles sometimes pay the entire list price. It’s important to know that
the details surrounding rebates are shrouded in mystery. Pharmaceutical companies
and PBMs don’t release their rebate data saying it’s proprietary. But it’s clear that different
people and different insurance companies pay different prices for the same drugs. As you can see, the way
that prices work behind the counter is totally different from how they work in front. (calm techno music)

100 comments

  1. Should drug companies sell straight to consumers instead? Sort of like what Apple and Tesla did? But my hunch is that some bureaucratic crony politician might put out a law that makes direct selling illegal.

  2. That makes no sense. What is the point of increasing the list price of the drug and then giving rebates to Insurance companies, government and employers, apart from artificially creating an opportunity for a middleman/PBM to take their cut from it, and that too for adding 0 value to the transaction? It's crazy.

    If they were worth their cut, they would be able to justify it very easily (real estate brokers, financial advisers, car dealerships etc. can do this and so can many other professionals). They wouldn't need to hide behind the "proprietary" nonsense.

  3. The solution is simple:
    Get rid of the entire concept of rebates which also makes the "formulary" completely redundant . Have negotiators/committees directly employed by government/employers/insurance companies whose job it will be to drive down the price as much as possible. They don't get any kickbacks from anything, they get paid a salary that they are happy to work for and that motivates them to do the right thing.

  4. Rebates in this context, and "Formulary" sound like concepts some scammers and fraudsters would come up with if they were given the responsibility to handle this task for the benefit of society.

  5. Go to India, buy all kinds of good knock off meds. That's what tourists usually do when they come to India. $2000 vs $20, same effects. Wait for the gov to fix will take a century.

  6. No mention of the fact that Americans essentially subsidize drug costs because every other nation directly negotiates the price of drugs and FORCE companies to sell drugs at a reasonable price, but right-wing Americans think that if our government negotiated prices directly we’d go the way of “Venezuela” (they’re very smart, you see?). That’s why you have instances of drugs costing roughly $10 USD per month in some countries and back in the good ole US of A, the same drug may cost hundreds or even THOUSANDS of dollars. Google “difference in drug prices versus other countries” and you’ll see.

    American-type capitalism breeds this kind of ignorance and greed. The drug companies hammer Americans to make up for their greed not being met around the world, whilst nationalistic Americans (namely poor, uneducated, nominal Christian white people) refuse to admit that American-styled capitalism keeps them sick, poor and uneducated and thus will never revolt against the captive system.

    The republicans exploit this and laugh all the way through the revolving door between Congress and lobbies and on to the bank!

  7. If they drugs came from China and were sold in a similar fashion in the US, they would be labelled as a threat to national security

  8. they should just remove PBM’s and then make the CDC or whatever decide what drug goes on where in the formulary.
    PLUS
    government should regulate prices by pharma companies

  9. All people need to do is get rid of insurance companies and middle man (the rebate guy).
    Then parmaceutical companies will be able to set their own prices (lower the prices) whenever they want and only they will be to blame if something shady starts happening… Sounds simple, but I think someone wants to keep this system… I wonder who…🤔
    Insurance companies and rebate guys!
    They intentionally stale this situation to keep their profits going otherwise they will go out of business… Its all about money…

  10. What’s the problem with getting rid of PBM‘s?
    Give insurance companies a financial benefit to get rid of them. Seems like no one likes them anyways.

  11. This is missing information, AKA lying. YOU paid for the R&D for these drugs to be developed. In other words, it’s SUPPOSED TO BE OPEN SOURCE, as in it’s supposed to be cheaper. You’re being lied to. Pharmaceutical companies have been receiving subsidies for more than twenty years and then some. But now they just trade in patent exclusivity.

  12. This is an one huge fucked up system where the increase in competition between pharmaceuticals leads to a greater price for consumers whether they pay directly to drug stores or indirectly to healthcare.

  13. So this is what Pharma Bro was talking about all this while. Raising prices of his drug by 5000% but at the same time eligible individuals are able to buy it for $1. I never understood it until now. Kinda.

  14. I live in a country where all the medicine is payed for by the government, no matter how expensive it is.

  15. Already knew it. I don't live in US and I used to work for a US company that serves Pharma companies there. And there's a bit more complexity to it than your video describes it. Add the Sales Rep and Targeting of Health Care Providers/Accounts.

  16. Drug price is the least of our problems.
    The intermediary health insurance companies are the largest problem in the US.
    Adding billions of dollars to the cost of healthcare with their bureaucracy.

  17. the main difference between pharma conglomerates and illegal drug dealers is that the dealers actually care about their customer base. whenever you hear a pharmcon asshole say that drugs are expensive due to costly research and development just remember that your tax money is actually whats used to pay for it. still no charges have been filed against the sackler family….

  18. If PBMs are getting rebates and passing it on to the insurance companies to lower prices, and we know the insurance doesnt reduce their prices, so doesnt that just sound like a bribe to classify a drug into a tier that will sell more?

    If a PBM is getting a rebate, and throws some at the insurance company so the company will push the drug more, isnt that just a bribe?

  19. Fixed copay percentage, make it illegal for pharmacies to give rebates… solution is simple, but lack of political will is reason. (Oh they get rebates too, ironic. It’s just given a different name)

  20. To those who claim the U.S. consumer is subsidizing other countries consumers, well there is a misrepresentation right then and there. So before you blame others look inward and see how flawed your supply chain is.

    First of , in those countries, whether Health Coverage and Delivery is done through a single payer system or not, the incumbent Government Public Health Entity actually negotiates directly bulk pricing rates for every drug it distributes through the lowest rate it can bargain for. No broker fees, no benefit managers , no intermediaries.

    Then local retail chains negotiate pricing, but then, if such country has an indigenous pharmaceutical industry, then the local manufacturer will either produce a generic equivalent, or license the original formula and shoulder manufacturing and distribution all under a lower cost structure.

    Then there are multinationals who will manufacture , promote , and distribute their line directly. That being said , their local branded product will often be slightly more expensive than a generic equivalent on the account of being a household brand name.

    Fair to assumption, and using the dollar as an absolute value reference , on other parts of the world your median household earning might not be as high as the US , or even then, the typical local consumer might not tolerate what Americans will pay for. Your garden variety big pharmaceutical company still has to generate sales or else shut doors and pack it up. If they are in business in country A,B, or C, lower price or not , make no mistake , they are still reaping profits.

    And there are simply drugs that are not available in such countries simply because their average consumer cannot afford the cost the market will bear, the government sponsored health organization won’t fork over the asking price , and there is not a critical demand level to negotiate bulk rate or license and manufacture locally.

    I am using São Paulo , Brazil, as template. We have local pharmaceutical retail chains that stock and market packaged products , totally separate retail oriented compound pharmacies, private health plans, Government sponsored Health Care Entities , private Hospitals and even vertically integrated health care delivery supply chains.

  21. They dont work.

    Any critical service to the maintenance of society should be nationalized with profits capped to break even. No one and no thing has any right to profit off of tax payers NEEDS. Business is to facilitate their wants. Food, clothing, housing, utilities and critical services like health care, nationalize them all and stop profiting from those that paid to build these nations.

  22. I hear you. So… cut out PBMs, take the money going to them and reduce the price of the drug at the Rx

  23. Good Vid. This pretty much sums up how PBM works. This is also a pretty good representation of how Hospital Bills get paid as well. All the contracted rates between the Hospital and Network are also "Proprietary".

  24. CLICKBAIT! I thought it was going to talk about street drugs, cocaine, crack, meth, pcp, angel dust, heroin, molly, green goblin, sunset powder, Indian kusma etc.

  25. Hey if someone is willing to pay you their life savings to save there life. Then who cares how they came up with the price. If I win a car in a poker game I'm not going to sell it for nothing. It will be priced at what people are willing to pay for it. That's the great thing about capitalism.

  26. This is ALL lies. VOX said drugs high costs is because Muricans subsidizing the world drugs prices. That subsidies that made the price high not PBMs.

  27. PBMs steak from patients and the local pharmacy.

    The demand from the manufacturers and dictate limitations

    PBMs also create difficulties and cloud information from wholesalers that limit wholesalers to properly provide preferred pricing to pharmacies.

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  29. I am in Canada. We have no insurance middleman. Our drugs are very affordable. I buy my drugs out of pocket and they are cheap. America needs to get rid of the all the middlemen that jack up the prices. The drug company makes the drug, you use it. That line needs to be as short as possible, not as long as possible. In the US, there are too many people trying to make money off of the regrettable fact that people need medication. Making healthcare a business and not a utility like the energy company, is what drives the cost of healthcare into orbit.

  30. Showing a clip of Trump to pretend he cares about drug prices? Laughable. He said he would negotiate drug prices through Medicare, then after he's elected says they should be HIGHER.

  31. The best solution is to fix the system so that the consumer could shop around for the best treatment at the lowest price. This is why practically everything that has been exposed to market forces has become much cheaper. A complex, third-party payer system will only spell disaster.

  32. Impressive video, good work WSJ.
    I think definitely the media of USA better than the media of South Korea.

  33. This video is missing an important part of the equation. CVS owns a PBM, which it uses to force people to use it's own phamacy.

  34. I think, the core problem is, that while you can refrain from buying that Pepsi and drink tap water all your life for a fraction of a cent per gallon, the drug market is extortionistic. I don't get, why people think, those two markets are comparable …

  35. The entire medical profession is a wealth extraction device with no intention of curing you of your ailment. The pharmaceutical companies are in direct alliance and partnership to one world government agenda. If you want to learn about health…….look up Charlotte Gerson. Utilize her information with ALL ailments, not just cancer. As an example…… learn that in the 1950's the Merck manual listed coffee enemas for improving the liver's ability to remove toxin from the body by 400% …. YES 400% ( a medically proven fact). In the 60's the medical profession at the direction of the pharmaceutical companies removed it from the manual…….why?…… because it WORKED SO WELL…..THATS WHY !

  36. Here in the Netherlands, it's simple. All drugs that you get from a doctor are 100% free. We pay around €1200 ($1340) a year in premiums. Even the dentist is free for most people.

  37. The wouldn't you technically be doing the same in a household of let's say ten members that required the same medication and you bought it in bulk at Costco verse says your average Joe that might need a similar medication once in awhile and stops and buys at whatever store… No?

  38. So it's possible that if drug costs 500$, the rebate price is 150$, and customent has 50% copayment than they pay 250$ in drug store for the drug that costs insurance company 150$ :). Nice system you have there Murica, and you say that Europe is socjalism where the same drug can cost the goverment insurence 100$ and the consument 1$ :).

  39. Very good explanation. I would like to see how the introduction of off-patent generic drugs influence the rebates negotiated for brand name drugs, and whether generic manufacturers are paying rebates to PBMs.

  40. Love the video however most drugs in America are actually developed by the government and nonprofits, then for some sick reason phrama decides to Patent these drugs that they did not fund nor have any right to

  41. In all my reading about this subject, I've come to the conclusion that non-disclosure of pricing is the means that insurance companies and pharmaceutical companies use to eliminate fair-market competition. Their non-disclosure is mutually beneficial, and economically equivalent to a cartel. There's nothing wrong with private insurance companies, but those companies combined price non-disclosure are really the main reasons why the US has its high medicine prices.

  42. Why do we even have a formulary? Can't we just buy the drugs that doctors prescribe? Even if doctors are involved in corruption, there would still be some good/honest clinics/doctors that people can trust

  43. That’s why I buy my cocaine directly from Columbia, I get daily news coverage on how my product is being made.

  44. The Insurance companies and PBM are fleecing patients who don't have a choice. The rebate is a kickback bribe to the PBM gatekeeper to gain market access.

  45. Look at the CEO of that Pharma company, he's completely unapologetic about profit and have no concern at all about patients. This is what's gone wrong in America, capitalism above everything else. They don't care about patients (read people), all they care about is the green back.

  46. Why can't the government do something about it? I will ask my senator, Ted Cruz, the next time I see him.

  47. How would you disrupt that whole industry?
    Could you make a video on that. It might inspire the next Elon Musk / Uber / Jeff Bezos etc.

  48. Bureaucrats ruin everything, far as I'm concerned they are just slightly better than serial killers and child molesters.

  49. It's just an elaborate series of kickbacks to maximize insurance company and drug manufacturer profits and leave the consumer/taxpayer footing the ever increasing bill.

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