The Mafia of Pharma Pricing

I’ve checked several doctors that I’ve visited over the years. None of them show up, with one exception: The doctor who immediately set off my scam alarms when she tried really, really hard to get me diagnosed with sleep apnea, despite not one but two very clearly negative sleep studies.

I could never understand why she was pushing so hard, until I looked her up in this system. She takes an incredible amount of money from drug companies and device manufacturers.

I don’t know if a scheme like you described would even be allowed today. If it is, the bigger medical systems are actually quite strict with doctors taking anything resembling a payment like this, from what my friends in the industry tell me.

Data rebates aren’t kick backs, they pay for something they wouldn’t otherwise get - patient level data.

The PBMs get paid a double digit percentage of purchases as a rebate when quality data is sent back. It’s optional and PBMs can decide not to do it.

It works like this:

Nanufacturer sells abc drug to PBM for x price. There is an agreement between them, that if pbm sells y number of abc, then pbm gets a rebate.

However, this gets the PBM in a jam. Now they have to somehow sell this crazy overoriced brand drug to the insurer. So they do a sleight of hand. So the PBM agrees with manufacturer to. . increase price! Why? For an edge in the conversation with insurer/employer:

PBM: here's brand drug abc. Price is x^2. I am soooo good at negotiating your prices, that I was able to get it for z instead. You see! Thats a 50% price reduction. Am I not awesome.

Insurer/employer: thats great. I'll be able to sell this 50% reduction off sticker to my manager. Thanks!

PMB keeps gwneric competition out of formulary, ensuring no competition

And eventually, PBM receives a rebate check for their troubles.

And its totally legal.

In some states.

It sounds like you thought there was nothing wrong with kickbacks. That's concerning. The dictionary definition of a kickback is a concealed, usually illegal payment, a form of bribe. Whereas the dictionary definition of a rebate is a portion of the sum paid returned to the purchaser. If you knew you would be helping these people to process kickbacks then why work for them.

Honest question.

Why isn't this illegal?

And the way that the myriad of regulations drive some of this behavior.

A great example is the 340B program. A government regulation requiring manufacturers to offer steep discounts to hospitals.

It’s created all sorts of distortions including the purchasing of pharmacies by hospitals so they can access the discount but charge the full price for the insured.

The US healthcare system is terrible in big part because of regulations.

Tablets are generally dirt cheap to produce. Sterile injectables adds a lot of variables and requirements, both in production and sometimes also in distribution (cold chain?) and administration (directly and sometimes requiring reconstitution).

Maybe if you have an API that’s expensive to produce and has poor bioavailability an injectable might be cheaper.

A long acting injectable antihypertensive will have a place for some, but creates other issues: can’t stop it quickly and hypertension often requires multiple agents to treat.

I wish poly-pills took off :(

2. There is continuing need for new drugs: in 2023, FDA approved 55 new drugs [1] not including new indications for existing drugs (which also cost money to achieve).

3. It therefore follows that (in the current regulatory environment) just maintaining the current level of development and approval of new drugs would probably cost over 100 billion per year (possibly not including manufacturing and supply).

4. Drug development is therefore hellaciously expensive, while being high risk (i.e. high risk of failure) and a long-term endeavor.

5. In our current world, the model that has evolved is that this money is raised from investors, entrusted to experts, and if everything goes well, capital plus profit are recouped via drug prices. Payors swap huge up-front costs with an uncertain outcome, for later huge costs with a known outcome.

6. Replacing this model would therefore likely take global collaboration between governments, funding expensive high-risk long-term projects, with the end-goal of (much) cheaper drugs - an end-goal that would likely take a decade to meaningfully realise (importantly, much more than a single electoral term). It would be politically momentous, as it would effectively destroy a significant and established sector of the economy.

7. As much as I like this concept, I simply don't see any evidence that we're even close to ready for such a model of global collaboration and funding. Even when the challenge was urgent and potentially existential (e.g. a global pandemic) the response was often the opposite of collaborative.

8. Interestingly, though, it wouldn't even be very expensive on a world scale. The GDP of (just) the top 20 nations is roughly 88 trillion.[2] 100 billion is barely over 0.1% of that. If you shared the cost by GDP amongst the top 20, US and China would pay a lot, but involved European nations would pay in the region of 2-5 Bn/year.

9. This obviously doesn't deal with the issue of ongoing costs for already-approved drugs...

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[0] https://www.forbes.com/sites/matthewherper/2017/10/16/the-co... [1] https://www.fda.gov/drugs/novel-drug-approvals-fda/novel-dru... [2] https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...

It does not automatically mean "better able to serve customers."

And often it means the opposite.

Still, they do excellent work to this day, just with questionable detours.

If I want a 90 day refill schedule I have to go through their mail order.

You say it like it's a good thing. It's part of the problem.

The fact that there is no clear no-nonsense to get a drug at a reasonable price without jumping through a bunch of hoops which aren't even clearly documented is not a good thing.

We are talking of life-saving drugs here, not hacking frequent flier miles or credit card rewards.

> here is no “price” for a drug

Yes, there is. If we look on their 10-K statements, they will have a fixed cost and a variable cost assigned to each drug. The variable cost will be just the manufacturing, and the fixed will be research and overhead allocated to this drug.

Total cost = fixed + variable. The rest is profit. We can decide what a "reasonable" profit is, and Total Cost + Profit is the notional "price."

That doesn't mean treating them like a state monopoly and the final price is fixed by law, but it does tell us a "price." All those things you mentioned (list, net, Medicaid, AMP, ASP) are kinda irrelevant.

Regulatory capture is the use of state resources (mostly regulation). To tilt the ground of business in thier favour at the expense of the public and other competitors.

People beg for "regulation" from the government but the problem is that the politicians are often puppets of the very corporations they are meant to regulate. That's how we end up with regulatory capture scams.

Is that "capitalism"? I don't think so. Does it contain traces of capitalism? Yes.

But I think what Americans have is more of corny-capitalism, state-capitalism & regulatory capture.

It is very different from Hayekian capitalism which is actually anti-crony capitalism & anti regulatory capture.

[0]: https://en.m.wikipedia.org/wiki/Regulatory_capture

The fact that it was partially government funded doesn’t mean that the drug companies didn’t have to put it in a significant % of their own money. Of course it varies but it’s a bit like saying that e.g. Tesla is/was government funded (well kind of but not really)

https://www.investopedia.com/ask/answers/08/broken-window-fa...

Also, wholesalers also negotiate with PBMs, so the cost plus pharmacies might not be able to get the drugs at the same rate PBM-friendly pharmacies do.

I feel there's the obligatory remark here of "and how exactly is the insurance company paying for it?".

> I assume it does somewhat directly in the form of higher monthly payments (for the patient and other customers of the insurance)?

Absolutely directly.

> Can the insurance company deny access due to the high cost?

They have little motivation to do so. They just up the premiums. They're limited by law on administrative overhead costs, and are mandated to return unspent premiums (or roll them over), so the only way to make more money is "increase premiums, so we're allowed higher administrative overheads".

This was a hallmark of Martin Shkreli. He liked to paint a picture of "I'll ensure you're only paying a low copay while the insurance companies take the hit for this drug I'm charging exorbitant pricing[1] for", as if customers thought that insurance had a magical money fairy, rather than that money was coming from them (albeit usually indirectly through their employer). Sadly, he was often right - a non-negligible amount of people saw him as an everyday hero, sticking it to the man.

[1] Yes, pharma has R&D costs. Shkreli's company didn't do much R&D though, mostly patent acquisition[2].

[2] "Fun" story about that. New drug comes before the FDA for approval, and it is opened up for comment. Shkreli lodges an objection to approval of this drug.

Why? Because it's unsafe? No - trials thus far have shown it to be safer than the existing drug options.

Why? Because it's less effective? No - it's also been shown to be more effective than existing drugs.

Perhaps it's more expensive? No - cost of R&D and production, and estimated retail costs are expected to be lower than existing drugs.

Huh, odd. So why in this case would Shkreli oppose this drug getting to the market?

The only reason he lodged an appeal with the FDA had nothing to do with the drug, butbecause he and his company had just bought the patent to one of those 'existing drugs' referenced, and this new drug coming to market would crater the demand for his drug, and as a result torpedo the profitability of his investment/gamble.

Fuck Martin Shkreli.

Insurance companies have the opposite incentive. Their profit is, to simplify, a percentage cut of the total amount spent on medical care. If the cost of medical care goes up, they raise rates and the market pays for it (what else is it going to do?) the poor or underemployed or non-traditionally-employed suffer.

They will fight a small amount to keep costs low, but only in a relative sense in that they want to beat their competitors or not pay for one off extremely expensive things.

The middleman to which you give a fixed percentage isn't really all that motivated to get you your best price.

The article touches on this, but perhaps doesn't spell it out sufficiently:

1. Insurance companies have their profits legally capped

2. To get around this: somehow (merger, purchase &c.) end up with Company X that owns both an insurance company and a PBM

3. The PBM price gouges the insurance company, increasing PBM profits (which is legal, unlike increasing the insurance company profits)

4. The Insurance company passes the price-gouging on in the form of increased premiums.

5. Company X makes more money by charging higher premiums, just like it would if it had (illegally) increased the profit margins of the insurance company.

- The purpose of price discrimination is to reduce the share of gains-from-trade received by consumers to zero.

The concept is that you should never feel that you're getting more value out of a purchase than you would otherwise have gotten from the money you spent on that purchase.

It's true that, as the article mentions, this means that impoverished people might buy things that, absent the price discrimination, they wouldn't have bought at all. But this "benefit" can't be worth much, because -- even though they paid a small price for whatever it was -- we know that they valued it only slightly more than that.

Given this, it's not really clear why price discrimination is supposed to be beneficial.

> I mean there's a spectrum between "acceptable" price discrimination and "abusive". Nobody bats an eye at lower rates for bulk purchases or movie theaters offerering half price for kids.

Lower rates for bulk purchases is not an example of price discrimination. Half price for children's movie tickets might or might not be - if your theory of the discount is that people will pay more to go on a date than they will to entertain their children, that would be a valid example of price discrimination. If your theory is that children have less money than adults, that doesn't really work - kids young enough to get cheaper movie tickets don't pay for their own tickets.