Iron curtain of drug pricing will topple the healthcare system

In the wake of the Mylan EpiPen scandal — where a life-saving device increased in price 400 percent to $600 per unit — Mylan CEO Heather Bresch pocketed a 600 percent rise in her compensation.

Congress and the public turned their attention to inflated drug prices. Responding to sudden mass protest and media outrage over this 9-year brewing scandal. Mylan has made moves to assuage the upset by expanding its EpiPen4Schools program. It will increase its discount card from a $100 discount to a $300 discount, expanding its assistance program for families making less than 400 percent of the federal poverty level, and announcing a generic to be released in the next few weeks at $300, or half price.

{mosads}What it would not do, however, is lower the price of the brand name product, despite numerous public calls to do so from Elizabeth Warren, Hillary Clinton, and several senators.

This refusal by Mylan sheds light on a bigger issue in pharmaceuticals and healthcare: transparency. Specifically, the pricing scheme of drugs and the web of payers of drugs are very complex systems. Drug purchases rely heavily on expected discounts, rebates, and yes, kickbacks.

As a result, the market price is rarely what is paid, but it does assist in dragging costs of healthcare up on a macro-system level with all payers —insurance companies, employers, the government, private pharmaceuticals, and patients. The existence of discounts, rebates and kickbacks allow for pharmaceutical companies to modify prices individually for certain clients while maintaining its list price as an anchoring price.

The dollars from these agreements often get split with state Medicaid programs or private pharmacy benefit managers (PBMs) to manipulate formularies for higher rebate (and higher overall profit) drugs.

Further complicating the system are middlemen finding profits in an already bogged-down system, such as group purchasing organizations (GPO). These are organizations that function to increase market shares in drug purchasing for buyers and sellers.

Specifically, hospitals contract with them and typically pay a percentage-of-total-purchase-price fee to the GPOs to be able to have the GPOs purchase drugs on their behalf. Because GPOs maintain multiple hospital contracts, the negotiating power is much greater than if the hospital made purchases on its own.

On the flip side, however, GPOs also receive fees from drug manufacturers as a “buy-in fee” for the access to the giant groups of hospitals that GPOs represent. Notably, these “buy-in fees” have exceeded half of a manufacturer’s revenue, as revealed in Senate committee hearings surrounding the drug shortage of common chemotherapy agent methotrexate, when Novation Pharmaceuticals reported that 56.25 percent of the revenue from its Ben Venue lab that manufactured methotrexate was spent on GPO buy-in fees.

That lab was subsequently closed due to quality control issues, issues arguably caused by the financial strain of GPO fees and a subsequent inability to invest in infrastructure and maintenance for the lab. The closure was a major contributor to the extreme shortage of methotrexate, and an open opportunity for price-gouging on a now low-supply but high-demand product.

While Congress’ recent focus in light of the EpiPen has been to out-of-pocket patient costs, the real inflation in healthcare from drugs is decoupled from direct consumer costs. Most drugs are becoming more and more expensive, but the patient share, the out-of-pocket cost from the patients (and Congress’ constituents) is staying low because drug makers use rebates and copay cards.

Furthermore, these rebate and copay cards may be used to induce patients to request a particular drug which has a lower cost to them after discounts, but may actually be a higher overall price which the insurance company will have to pay. The focus on mitigating out-of-pocket costs doesn’t necessarily result in a deflation of our bloated healthcare system. Insurance companies are left to shoulder the brunt of the damage, which raises indirect costs to consumers through premiums on them or their employers.  

These numbers are hard to tackle down. Even as Mylan increased its list price 31 percent for EpiPens in 2015, it saw no increase in sales because of hidden discounts and rebates. Most of these rebates, discounts and kickbacks, particularly by GPOs, pharmaceutical companies and health plans (including Medicare, Medicaid and private Pharmacy Benefit Managers) are strictly guarded as business secrets.  

Without being part of the channel, it nearly impossible to see actual dollars and where they flow, but those in the channel have no incentive to fight the infrastructure that generously feeds them. Patients as the terminal users will only see their co-pays as the costs, for the most part oblivious to the behemoth backend financial exchanges that got them there.

Our target for controlling costs shouldn’t be out-of-pocket payments for drugs, but transparency in the system as a whole. Otherwise, the small victories in copays will inevitably come back to bite us.  When that day comes, the whole house of cards will come tumbling down.

Amy Faith Ho, MD is an emergency physician and published writer and national speaker on issues pertaining to healthcare, including Forbes, Chicago Tribune, NPR, KevinMD, and TEDx. No financial disclosures.

The views expressed by contributors are their own and not the views of The Hill.