Shadowy World of Drug Pricing-An Inside Look

As President Trump reportedly plans to deliver his first major speech on pharmaceutical pricing, new research published by University of California Hastings Law Professor Robin Feldman provides a full picture of the incentives structures in which higher-priced drugs receive favorable treatment and patients are channeled into more expensive medicines.

In Perverse Incentives: Why Everyone Prefers High Drug Prices-Except for Those Who Pay the Bills, Professor Feldman expands on her findings from Drug Wars: How Big Pharma Raises Prices and Keeps Generics off the Market, Cambridge University Press (July 2017), to detail “how drug companies use financial incentives, structured in different ways to appeal to hospitals, insurers, doctors, and even patient advocacy groups, to ensure that lower-priced substitutes cannot gain a foothold.” “It’s a win-win for everyone,” says Feldman, “except of course taxpayers and society.”

At the center, Feldman explains, lies the secretive and concentrated Pharmacy Benefit Manager (PBM) industry-middle players functioning as shadow brokers who negotiate between drug companies and health insurers by arranging for rebates and establishing coverage levels for patients. “Contracts between drug companies and other middle players are closely guarded secrets. Payors including, Medicare, private health insurer companies, and even their auditors, generally are not permitted access to the terms. And the middle players are not alone. Everyone is feeding at the trough. Despite the extreme secrecy, details regarding the competitive distortions of the pharmaceutical market are beginning to seep out in case documents and other reports.”

Following are allegations in cases recently filed or settled:

  • Documents unsealed in a class action lawsuit against the manufacturer of the psychiatric drug Zyprexa, suggesting that the middle player’s combination with one of the largest pharmacies in the country allowed it to use data-driven ad targeting to market its drug. Documents show CVS Caremark (a combined PBM and pharmacy) offering to send a letter to 120,000 doctors-targeted based on claims information-touting the benefits of Zyprexa. Letter carefully worded to look like simple information on the benefits of Zyprexa, downplaying reports of side effects, and pointing to similar side effects in other drugs.
  • Class action suits filed in 2017 against Walgreens and CVS alleging that pharmacies charged covered patients more than the uninsured when purchasing certain generic drugs, as part of a scheme to ensure higher payments to the middle players and enhance the brand’s market position.
  • Drug company donations to patient advocacy groups and patient assistance programs. Studies show that the majority of patient advocacy groups receive significant support from drug and device companies, which may influence the groups to advocate for policies favorable to the company. Donations of one’s own drug are particularly tax advantaged-the company gets a deduction above the cost of the drug-and patient assistance programs are 10 of the largest 15 charitable foundations in the US.
  • Lawsuit against Sanofi for tactics related to its pediatric meningitis vaccine. Case alleged that Sanofi charged 34% higher prices for the vaccine, unless buyers agreed to buy all of Sanofi’s vaccines exclusively.
  • 2017 lawsuit filed alleging J&J tried to suppress competition for its inflammation drug, Remicade, using payments to hospitals and health insurance plans to exclude the less expensive biosimilar completely or cover the competing drug only in the rarest of circumstances. As a result, hospitals declined to stock the biosimilar, even though covered by government programs, forcing the government to pay for the more expensive drug.

Research for Perverse Incentives: Why Everyone Prefers High Drug Prices-Except for Those Who Pay the Bills was supported by a generous grant from the Laura and John Arnold Foundation.

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