How To Lower Insulin Prices? Focus on the Middleman.

Millions of Americans depend on insulin. And due to price hikes, over 1 million of them have had to ration the drug. 

That's an outrage. Fortunately, we're beginning to understand the root causes of these increases -- and lawmakers in Washington are investigating the problem. 

The Senate's Health, Education, Labor, and Pensions Committee recently held a hearing on rising insulin costs -- and focused on the cost-inflating role of pharmacy benefit managers. PBMs serve as the intermediary between employers and insurance plans that pay for drugs and biotech companies that manufacture them. PBMs determine which drugs insurers cover -- and use this leverage to negotiate discounts from drug companies. 

In theory, this should result in savings for patients. But in reality, PBMs have made drug costs soar -- because they've fashioned a system in which their profits rise when drugs are pricier. 

Here's how it works: PBMs generally keep a percentage of a drug's nominal "list" price as compensation. The higher the list price, the higher the PBM's cut. As a result, drug makers raise list prices to please PBMs, and PBMs pick the highest cost drugs for their approved lists.  Conversely, what is the reward for a manufacturer when they lower the list price? Oftentimes they are deprioritized or removed altogether from the PBMs list.  

This isn't theoretical. Returning to insulin, the drug manufacturer Viatris recently launched two identical insulins: one lower-priced and one higher-priced. Express Scripts, one of the nation's largest PBMs, selected the higher-priced version. That meant more money for Express Scripts -- but costlier insulin for patients who still owed a deductible or "coinsurance" payment, which is based on the list price of drugs, rather than the discounted price PBMs negotiate.  

Similar shadow pricing strategies are at play across the market, including as biosimilar competitors challenge the rheumatoid arthritis drug Humira. Patients are the ones who lose out on savings.

I've spent two decades immersed in drug pricing debates. I've represented nearly every stakeholder, from brand and generics manufacturers to health plans, and partnered with pharmacy organizations and patient advocates. I've realized the reason so many Americans can't afford their medications is the upside-down world created by PBMs in which low-priced drugs aren't covered and high-priced ones are rewarded with preferred formulary positioning.   

I'm not the only one to raise this issue. Academics have concluded that for every additional dollar PBMs receive in negotiated discounts, the list price of a drug goes up $1.17. 

Another study explored which entities received more or less money as insulin prices rose. The answer: From 2014 to 2018, the share of insulin payments flowing to drug manufacturers dropped 33% -- while the share going to PBMs increased 154%. "Overall, the share of a hypothetical $100 insulin expenditure that accrued to manufacturers decreased," concluded the academics, "such that by 2018 more than half of expenditures on insulin flowed to distribution system intermediaries."

Data from Janssen Pharmaceuticals bear this out. The manufacturer sent $39 billion -- roughly 58% of the list prices of its medicines -- in rebates and discounts to PBMs and other intermediaries last year. Meanwhile, the net price accrued to Jannsen went down, just as it has for the past six years.  

Congress is asking the right questions about PBMs -- but it needs to act on the answers. 

First, Congress must decouple the money PBMs make from the list prices of drugs. Today, that system creates an inflationary arms race: Drug makers don't want to be excluded from formularies, and PBMs have the power to exclude them if drug prices -- and thus their own compensation -- are too low. A Senate Finance Committee investigation found the board of one drug maker, Novo Nordisk, voted against a price decrease on its insulin. The reason? Risk of backlash from PBMs.

Second, Congress must demand more clarity from PBMs, which generally aren't required to report the prices at which they buy and sell drugs. Unsurprisingly, that's led to inefficiency. A two-year Delaware State Auditor investigation found that PBMs led state employees to overpay for prescriptions by 20%. 

Critics of America's healthcare system often say the root problem is "greed." But that's not quite correct. 

Every actor in the healthcare system is trying to make a profit. But every actor -- except PBMs -- ultimately turns a profit by making patients' lives better. A physician practice won't stay in business if the doctor fails to improve patients' health, and a drug company won't survive if its treatments don't work.

PBMs are the only players for whom drug pricing is a zero-sum game. They make money by keeping as many discounts for themselves as possible. Every dollar in a PBM's pocket is a dollar that doesn't stay with manufacturers, insurers, or most importantly, patients. 

It's up to Congress to turn this upside down pricing world rightside up -- starting by holding middlemen accountable.

Dan Leonard is the former president and CEO of the Association for Accessible Medicines, former president and CEO of the National Pharmaceutical Council, and former executive vice president of public affairs for America's Health Insurance Plans.