In a tweet announcing former Eli Lilly CEO Alex Azar as his nominee for secretary of Health and Human Services, the president exclaimed, “He will be a star for better healthcare and lower drug prices.” Yet at Senate confirmation hearings late last year, Azar offered no specifics on how he plans to do that.
Here’s a solution: stop focusing on trying to control drug prices, and start paying attention to who’s paying them. Tax and regulatory policy, such as the exemption for employer‐provided insurance or mandated‐benefits laws, have led to a third party—often the government—paying the vast majority of medical bills. With the consumer out of the loop, costs to the third party—and consequently premiums—continue to rise.
There’s no denying that rising drug prices are having an outsized impact. The uproar over the $600 EpiPen has barely faded from memory. A recent Washington Post article cited the staggering growth in the price of naloxone, an antidote for opioid overdoses in use since 1971. Soaring prescription drug prices strain state and local budgets and fuel insurance premiums.
Some politicians clamor for price controls on prescription drugs. Some think the rise of pharmacy‐benefit management firms, middlemen that negotiate prices with manufacturers on behalf of insurers, might provide relief. But drug makers charge outrageous prices because they can, largely by gaming the third‐party‐payer system. PBMs only insert another layer into it.
Drug makers take advantage of the third‐party‐payer system, where they quote a price to a deep‐pocketed third party, not the consumer. This results in high, often imaginary prices charged to the third party, with the understanding that the third party will likely negotiate the price down. Not everyone can negotiate, however. For example, Medicare is not legally permitted to negotiate drug prices. Medicaid, by contrast, is required by law to pay the lowest price negotiated by a private insurer. Veterans Affairs is allowed to negotiate drug prices like private insurers do.
Yet none are negotiating from the standpoint of the end‐user consumer. This means that even relatively inexpensive drugs fetch a higher price than they would if there was a direct producer‐to‐consumer market.
To help defray patients’ out‐of‐pocket drug costs for high‐priced drugs, many pharmaceutical companies offer coupons or contribute to charities called Patient Access Programs, which help cover copays and other coinsurance requirements. These tax‐deductible charitable donations are a small price to pay to remove consumers’ cost concerns from the transaction with the third party.