Obscure Model Puts a Price on Good Health and Drives Down Drug Costs

I think this comment comes off as misleading, so I'm going to fill in with knowledge gained from a past career. The regulatory environment didn't create this set-up, and it's not really institutional capture. We've gotten here through the market finding it's own Nash equilibrium.

For the most part, American drug coverage is driven by traditional American employer-based insurance or by insurers who make the majority of their money via employer-based insurance. Medicare provides general drug coverage via Medicare Part D, but Part D is optional for patients, and administered via traditional insurers. For some specialty drugs, Medicare provides drug coverage via medical coverage, but those prices are specifically set based on the average prices paid by commercial insurance. I can't recall how specifically Medicaid handles drug coverage, but it's not a large enough segment of the population to distort the market by itself. Therefore, consider the playbook for a drug manufacturer looking to maximize profits:

The playbook for a drug manufacturer looking to maximize profits in Europe looks like this: * In northern Europe, price your drug based on some value per QALYs as outlined in national regulations * Most of the rest of Europe, assemble a team analyze the bidding and tendering rules and devise a pricing structure around those rules

The relationship between different tendering systems might be complex, because some countries may require that they get the lowest price offered to any of their neighbors, while others are willing to grant complete exclusivity in a class in exchange for more favorable pricing (ie, beating out similar but different competitor drugs). You're going to need a team of specialists to navigate the terrain, but fundamentally the principles are simple.

By comparison, the playbook for a drug manufacturer in the US looks like this: * Raise list prices noticeably * Negotiate with insurers for formulary access in exchange for rebates * Offer co-pay assistance programs for patients * Next year, repeat

List prices are essentially just the starting positions in the US, and are essentially made-up. Insurers will negotiate for rebates, in exchange for not requiring prior authorizations or setting high co-pays or coinsurance. Prior authorizations are generally effective at dissuading doctors from prescribing a certain drug (because it's more paperwork), but the efficacy of prior authorizations goes down as competitor drugs also require prior authorizations (or if there are no competitor drugs). From the manufacturer side, the only way to circumvent prior authorizations would be have pharma reps help fill out that paperwork, but that's illegal for multiple reasons (as I understand it, this one of the crimes that brought down Insys Therapeutics).

Co-pays are generally less effective in dissuading prescribing by doctors. That's because co-pay assistance programs let drug manufacturers cover the patient copays, a) makes the drug manufacturer look good in front of the end consumer, and b) let's the drug manufacturer price discriminate based on patient income after-the-fact. An insurer could choose the nuclear option and ban any drug that has co-pay assistance, but that's a heavy-handed method not popular with patients or employers (especially if the manufacturer structures the co-pay assistance as a separate charity).

Insurers will respond by banding together behind PBMs. The PBM will get a cut of the rebates that they negotiate, so higher prices will make it easier to negotiate with them. Medicare drug coverage is split between being run by traditional health insurers via Medicare Part D (most conventional medications), or having prices set as fixed discount on average prices via Medicare Parts A, B and C (most specialty drugs). Medicaid will be the same way, with a steeper required discount. The drug manufacturer can think about Medicare and Medicaid after thoughts.

Additionally, the drug manufacturer knows that costs will ultimately be passed to employers. While insurers and PBMs need to negotiate for those rebates, they don't need to negotiate that hard since the cost will ultimately be passed onto insurers. As long as the PBMs are negotiating a better deal for insurers than what insurers would have gotten on their own, everyone in the negotiations will be happy with the rebates.

Fundamentally, rising prices are a result of the system being stuck in a Nash equilibrium that's extremely favorable to drug manufacturers that understand the game, which means raising prices.

As a side note, we're starting to get integrated health systems (where the insurer and hospital network are the same company) a side effect of hospital systems consolidating, that can buck this trend. In general, the average working American sticks with the same employer-provided insurance for less than 2 years, since they'll either switch jobs or their employer will shop around for cheaper insurance. Because they tend to dominate specific locales, the integrated health systems tend to stick with patients longer, and therefore have much stronger incentives to find cost effective care for their patients than traditional insurers.