In trying to promote innovation and competition in pharmaceutical drugs, America has allowed the pharmaceutical industry to increase prices well beyond what other developed countries pay and the market should bear. While a majority of Americans say that prescription drugs have made their lives better in the last ten years, nearly 80% find the price of prescription drugs “unreasonable.” Yet drug prices and pharmaceutical-industry revenues continue to rise. Continuing her tour de force of scholarship focused on the pharmaceutical industry, Professor Robin Feldman’s latest article, Perverse Incentives—Why Everyone Prefers High Drug Prices, delves into the highly secretive world of drug distribution, data ownership and manipulation, and reimbursement to expose some of the least well-understood drivers of pharmaceutical prices. In doing so, Professor Feldman zeroes in on one of the most important political topics of this decade and has produced a must read for anyone attempting to understand U.S. drug prices.
Professor Feldman’s article, forthcoming in the Harvard Journal on Legislation, painstakingly pieces together primary-source data to illuminate the perverse web of incentives that promote the use of higher-priced drugs for nearly all market actors, including providers, wholesalers, PBMs, brand-name drug companies, insurers, patient-advocacy groups, and self-insured employers. Professor Feldman’s research particularly uncovers the practices of PBMs, the mysterious middlemen of the pharmaceutical industry, who have tight lips and deep pockets and who negotiate rebates for pharmaceutical manufacturers and establish formularies, which incentivize patients to select certain drugs over others. PBM contracts with pharmacies, providers, and manufacturers that include negotiated drug prices and rebates have been religiously protected through nondisclosure agreements, trade-secrets assertions, and confidentiality protections, ensuring that the net price of pharmaceuticals remains enshrouded in secrecy from government officials, consumers, insurers, and payers.
Yet when prices are opaque, market function suffers. As Professor Feldman aptly points out, “the core of the incentive problem lies with the PBM system.” PBMs are paid based on an amount off the list price; therefore, the greater the spread between the list price and the final price, the more revenue the PBM generates. Unfortunately, higher-priced drugs also result in higher patient out-of-pocket contributions through copays or deductibles. Professor Feldman points out, however, that aside from these payment effects, the “list” price bears little relationship to the net price after a complex web of discounts and rebates are passed back and forth between the various actors within the system. As a result, insurers, employers, and consumers often find it nearly impossible to determine the per-unit price paid for drugs. Furthermore, providers may receive payments for administering specialty drugs based on a percentage of the list price, creating incentive for them to select a higher-priced option. In addition, patients may receive coupons from pharmaceutical manufacturers to cover the cost of their copay, which can result in the patient selecting a much higher-priced drug, which will cost their insurance company significantly more, rather than a lower-priced alternative with no coupon. Insurers often do not know which patients have received coupons. These and the other numerous incentives Professor Feldman highlights depict a system so fraught with abuse and self-interest that it begs for legal and regulatory intervention.
Interestingly, Professor Feldman points out that the pharmaceutical industry often uses legal constructs, such as trade-secrets protections and contract provisions, to hide its pricing distortions. Pharmaceutical companies have used trade-secrets protections to keep confidential contract terms like prices, rebates, and provisions regarding competitors. For instance, contracts between PBMs and drug manufacturers can contain most-favored-nations clauses in which the manufacturer promises not to give any other purchaser a lower price, giving the PBM a significant market advantage. For pharmacies, some contracts between the PBM and the pharmacy contain gag clauses to prevent the pharmacist from informing patients that they can pay less by paying the cash price for a particular drug or by switching to a different drug within the same class. In 2018, numerous states passed laws prohibiting the inclusion of gag clauses in pharmacy contracts. These contract provisions significantly impact the ability of smaller market participants from gaining a competitive foothold and keep prices artificially high. Professor Feldman also discusses how these anticompetitive behaviors, as well as increased consolidation through horizontal and vertical mergers (insurer-PBM, PBM-pharmacy) have resulted in significant market distortions.
Professor Feldman concludes her article with advice to policymakers about how to target future policy measures. She argues that pharmaceutical-industry pledges to keep price increases below 10% entrench both existing high prices and the notion that prices should increase 9.9% per year. She also notes that value-based pricing and outcomes-based pricing mechanisms that offer rebates if the drug does not prove efficacious hold little promise due to challenges in accurately measuring and quantifying value and continued information asymmetries in the market. Instead, Professor Feldman favors shining a light throughout the pharmaceutical-industry pricing scheme to uncover the tangled web of incentives. By enhancing price transparency through both federal and state initiatives, she hopes to uncover anticompetitive behavior and root out unnecessary cost drivers. Finally, Professor Feldman argues in favor of increased antitrust enforcement in pharmaceuticals to reduce concentration and rethink market governance. Without question, the pharmaceutical industry requires both more transparency and greater antitrust oversight.
Professor Feldman’s article is rife with details and examples of all forms of pharmaceutical pricing and market manipulation, some so brazen they will infuriate even the most jaded of readers. It’s clear that there is plenty of blame to go around within the system, but at the end of the day, Professor Feldman reminds us of the stark truth—if we as a society do not have the political and social will to bring drastic changes to this market, we will also have ourselves to blame.