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  • - [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)

- [Presenter] You might think the process that determines

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How Drug Prices Work | WSJ

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    joey joey posted on 2021/05/30
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