Supply Chain, Drug Pricing System Reform Could Lower Health Care Costs: PRI

by Ruth Seeley

In 2016, the Centers for Medicare and Medicaid Services predicted that spending for retail prescription drugs ($329 billion that year) would consistently outpace all other health spending categories.

As Washington pushes for price caps and government controls to address prescription drug prices, a new brief from the Center for Medical Economics and Innovation at the Pacific Research Institute (PRI) argues that reforming the complex drug supply chain and ending the current drug pricing system that overcharges patients–along with system-wide reforms–are what’s needed to lower America’s health care costs.

“Politicians are promoting drug price caps and increased regulation in a futile attempt to increase health care affordability,” said Dr. Wayne Winegarden, director of PRI’s Center for Medical Economics and Innovation and the brief’s author. “Experiences worldwide have shown that more government control will worsen America’s health care problems–threatening innovation and limiting access to life-saving medication–without lowering costs.”

Contrary to popular belief, drug prices are not driving up U.S. health care costs thanks to generics, which save the system $293 billion annually. However, patients overpay for co-pays due to the complex drug supply chain–by as much as $2.1 billion, according to a 2013 USC study.

Ongoing problems with pharmacy benefit managers (PBMs), originally created as middlemen to reduce administrative costs, also increase costs. Winegarden notes the current system gives PBMs little incentive to pass through negotiated rebates to patients at the pharmacy counter, pocketing large profits. The higher the list price and discount negotiated, the more money the PBM makes.

This is illustrated by biosimilars, or cheaper alternatives to originator biologic medicines, which are high-value, high-cost medicines driving patient affordability concerns. Like generics, greater biosimilar use will reduce drug costs. PBMs favor the original biologics over biosimilars due to their higher list price, thwarting potential savings.

“To lower drug prices and health care costs, policymakers should reform the complex drug supply system, increase transparency, and put an end to PBM middlemen pocketing discounts instead of patients,” said Winegarden. “Enacting new price controls and more government regulation, however, will only exacerbate America’s health care affordability problems.”

Among the reforms suggested by Winegarden are ending the current system of PBMs negotiating rebates off the list price. Instead, he proposes a system based on the net price paid by the patient or insurer. Doing so would eliminate disincentives favoring medicines with more expensive list prices but higher rebates. He also suggests requiring PBMs to publicly publish rebates, discounts, and price concessions, so patients and doctors can more easily recognize the costs of alternative medicines.

Source: Pacific Research Institute 

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