Pharmaceutical Price Gouging – The Hidden Story

In my over 25 years of experience working in the Pharma/Biotech Industry, there is nothing more controversial than the subject of pricing.  And for good reason. There’s zero regulation of it within the US, and yet, somehow, outside the US, there are absolutely much stricter regulations to keep the pricing down.

It’s almost like universal healthcare has its advantages with collective buying power and such… that the US might take a look at. But I digress.

Americans, therefore, bear the brunt of the price-gouging tactics. But guess what? Pharma. Companies are only a PART of the story. And some of them actually do the right thing when it comes to pricing. And that’s why most people and politicians focus on them.

Which is absolutely maddening when you work for one.

People are only reading the headlines where it’s drug companies raising their prices, and the whole story is not being told. They are solely focusing on only a portion of the medicine pricing supply chain. And nothing else.

Which then begs the question – so if they aren’t the sole perpetrators in the gouging scheme, who else is to really blame?

Pharmaceutical Supply Chain Surcharge Safari

Who, you might ask, has some skin in the game when it comes to the pharmaceutical supply chain?  If you take a look at the graphic to the left for the most simplistic view of how drugs move from the Pharmaceutical companies to patients.

As you can see, there are various businesses in the middle, which is why you will pay a different price depending on where you get the medicine.

There are multiple wholesalers, all with different pricing (mark-ups) to what they paid to the pharma company. Who also have different pricing (and mark-ups) depending on whether you get them from a pharmacy, hospital, doctor, etc.

Every step of the way, medicines are marked up again and again, never truly reflecting the original price tag. Wholesalers typically can add up to 20% on top of the price they paid.

Pharmacies, hospitals, and other medical centers can mark-up prices ranging from 20-500%. And this is just the beginning of the drug markup story. Let’s take a deeper look at what else is causing different pricing for the same end-product.

The Money Blender – It’s Complicated ON Purpose

Wholesalers

I don’t think it takes a rocket-scientist to figure out that they are making pricing absolutely infuriating on purpose.

The more complex the supply chain, the harder it is to understand where to put the real blame (all parties are partially to blame in my humble opinion).

When you look at the graphic to the right, it is absolutely mind-bending. You have a wholesaler whose sole purpose is transportation.  And yet they get to mark up the price. 

Now I understand the need to make money. And there are some medicines that have very specific needs in transportation.

Take, for instance, products that need to be stored at freezer temperatures – things like the booming GLP-1 weight loss drugs. There is a lot of extra need for cold-room storage, icepacks for delivery, or dry ice.

So, of course, that cost has to be passed on for the business to be run. But if something is stored at room temperature, there just isn’t the need, and yet they still get to mark up those products up to 20%.

PBM’s (Pharmacy Benefit Managers) Role

PBMs are actually just another intermediary in the supply chain. Their roles are to manage prescription drug benefits for insurers, employers, and government plans.

And as a middleman, they negotiate rebates with the pharma. manufacturers, they then create drug formularies (coverage lists, process claims, and lastly maintain pharmacy networks to control drug costs.

• Pharma/Biotech companies negotiate with payers and PBMs to offer discounts, rebates, or “preferred” status in exchange for better tier placement, reducing patient copayments.
• PBMs earn revenue through administrative fees, a share of negotiated rebates, and the difference between the pricing of what they charge the insurer and what they pay the pharmacy.
• Major PBMs are actually vertically integrated with insurance companies and retail pharmacies.  Can you say conflict of interest much?

While PBMs are supposed to decrease costs to the end-consumer (through the use of complex rebate systems), you could easily argue that they could actually incentivize higher-priced drugs and increase costs for patients and insurers. Awesome.

Hospitals / Pharmacies

So this is where I really believe the media/critics should focus.  It’s where the real price-gouging lies. Why?

Hospitals, on average, charge 500% more than the acquisition cost of the drug. PHRMA.ORG

Now, why on earth would hospitals charge this much? Well, there are a few reasons that come to mind.

• They are for-profit companies.  They need to maximize their bottom line.
• To offset insurance / medicaid rates that pay out a percentage of what they charge.
• It’s unregulated, and because they can. And you don’t have a choice.
• It’s an easy way to add in ‘administrative costs.’

This is why you see a hospital easily charge $10-20 for a single aspirin, which is so insulting. You can buy a bottle of aspirin for less than what they are charging you for a single pill.

Which makes me think, where is the outcry about this? Why isn’t this more of a focus for the media to try to regulate hospitals?

Well, it’s simple. The reimbursements, purchasing prices, and billing are absolutely overly complex and have a clear lack of transparency. Add in a bunch of money spent on lobbying, and there you have it.

Pharmacies 

Retail pharmacies are another area of confusion. Ever wonder why you can get it cheaper with a mail-in pharmacy? Or if you go across the street from a CVS to Walgreens, why are the prices different?

Once again, we have an unregulated market. And a for-profit business that thrives in the ability to provide little transparency into their pricing.

“Among the specialty generic drugs dispensed by PBM-affiliated pharmacies for commercial health plan members, 22 percent (10 out of the 46 drugs in our sample during this period) were marked up more than 1,000 percent, with 50 percent of these marked up more than 2,000 percent, while 41 percent (19 drugs) were marked up between 100 and 1,000 percent.” PSCA.org

While on average, mark-ups are around 20%, nothing is stopping them from increasing pricing. So again, where is the outrage here?

Closing Thoughts on Pharmaceutical Firms’ Drug Pricing

Now, I’m not one for super-long blogs, so I know this is a diversion from some of my more fun and light-hearted pieces.  So I’ll try to keep the summary short.

There are a lot of parties to blame for drug pricing in the USA. Are Pharma/Biotech companies part of this? Absolutely. Do they raise prices year over year with no regulations? Absolutely.

And really, their focus should be on the patient, not just the bottom line. But again, they are running a for-profit business in an unregulated market.

But I’ll leave you with one last thought on my counter-argument on why they do this. And why do so many European drug makers move to the US market so quickly? Sometimes, they even prioritize it over the EU market and go straight to the US for FDA approval

It can cost up to $2B to get a drug to market and up to 10 years of time.

And that is only on the drugs that actually make it to market. There are plenty of drugs where companies spend hundreds of millions to try and find new cures, only to end up in the trash (only 10% actually make it to market).

So, how do they fund research and development to get new drugs to market? That’s right, they have to mark it up over the price it costs to make. And given that not all drugs are blockbuster status with over $1B in sales, they have to make up for those costs somewhere.

Now I’m not saying they should have carte blanche with pricing. Just the need for the markup itself. Especially when more than 90% of molecules tend to fail in clinical trials.

That said, I believe the entire supply-chain for drugs needs a major overhaul and added regulations. Without it, we’ll just continue to see absorbent pricing. And that only benefits companies, not the patients.

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