Imagine you go to a car dealership and receive a modest discount off the sticker price of the car you buy. Then you find out that the dealer got a much bigger rebate on your car as a result of cutting a kickback deal with the car manufacturer—a kickback that they either pocketed outright, told you they “reinvested” so you could save money on your next purchase or kept the lion’s share of for themselves while tossing you a tiny rebate. You’d probably not buy their car and go to a dealership that didn’t take rebates or kickbacks, or decide to skip the car purchase altogether and take the bus. Now imagine that this is the way you purchase—not a car—but life-saving pharmaceuticals and medical devices. It comes down to this: your money or your life.

There’s been so much talk about the obscene cost of health care. You’ve seen the headlines—there are too many frivolous law suits, there is waste and abuse of the system, there’s not enough emphasis on disease prevention and early detection—the list goes on and on. It’s complicated to be sure, but as we follow the money, we’ll present ways the “rules of the game” inhibit access to quality care. There is no single solution to the problem of high cost inefficient health care. In this issue we will focus on the price of drugs.

History Of Middlemen

It seemed like a good idea at the time. Group Purchasing Organizations (GPO) were created back in 1910, when hospitals in New York formed the Hospital Bureau of New York.  The concept was simple. GPOs presented a way to allow independent pharmacies and small pharmacy chains (and hospitals and other health care providers and other industries) to band together and use their collective buying power to negotiate discounts from manufacturers. More than 70 years after the Hospital Bureau of New York was formed, about 40 GPOs existed, and that was only because of the existence of Medicare and Medicaid.

The theory was that GPOs were a win-win for the industry because group discounts leveled the playing field. Great in theory, but rife with opportunities for corruption, bribery and deception.  This only became worse with the 1987 anti-kickback and safe harbor law passed by the Congress of the United States, which granted health care GPOs legal protection from prosecution for practices that could be considered to be kickbacks for any other industry or individual.  It was like giving a politician a free pass to openly accept lobbyist bribes to push his agenda, even if it cost his constituents their jobs, money or even their lives.

Not surprisingly, this law and one passed in 2004 that bestowed the same exemption to Pharmacy Benefit Managers (PBMs), those who act as middlemen for large insurers or providers, spawned more than 600 organizations getting a piece of the action and are part of group purchasing in health care.  Consequentially, instead of reducing the cost of prescription medication, prices have skyrocketed out of control.

How Did We Get Here?

Drug manufacturers have been discounting their drugs to PBMs and GPOs for decades, but in the 1990s, smaller pharmaceutical groups sued to level the playing field (by citing antitrust laws), eliminating the deep discounts secretly negotiated with larger groups. So, Big Pharma came up with the concept of giving rebates to GPOs and PBMs in exchange for meeting certain volume benchmarks of drug distribution and usage.

This empowered and emboldened GPOs and PBMs to work together with manufacturers and determine what drugs you can have and how much you will pay for them. It goes beyond getting the best deal for you. They are getting the best deal for them. They dictate through their “formulary” lists what your doctor can prescribe and use to treat you. These decisions are made in part by how much of a kickback revenue GPOs and PBMs can get from the manufacturers, not necessarily what is optimal for the doctor or the Patient. This practice can muscle similar products that are lower priced to produce off the formulary lists because these smaller firms don’t have the bargaining power of larger manufacturers. And in the end, those calling the shots benefit financially from the out of control price of pharmaceuticals. Consumers, on the other hand, are being priced out of the market, and it is a true life-threatening national crisis.

How Could This Happen In America?

Take the case of insulin. For diabetics, this is a life-saving drug. They literally can’t live without it. Insulin is well-established. The cost of developing it has long since been recouped, having been discovered and first used in 1922. Yet, its price has tripled from 2002 to 2013. Since 2008, the three leading insulin makers have raised the price for their product 10 or more times. The practice of rebates and grabbing more market share by getting on a formulary list of approved and suggested drugs, while driving your competition out of the market by undercutting his rebate or getting him removed from the formulary list isn’t healthy for consumers. In fact, it might just kill them.

The story of Alec Smith shows who the real victim of this money grab is. He died at the age of 26 because he couldn’t afford to buy insulin. Yet, he was making $35,000 a year as a manager of a restaurant. Although it was a full-time job, it did not come with health insurance. Thanks to the Affordable Care Act (ACA) he was previously on his mother’s health insurance. Once his insurance lapsed because he turned 26, he tried rationing his insulin because he couldn’t afford to pay $1,300 a month for it and died 27 days later from diabetic ketoacidosis, a life-threatening complication of diabetes that occurs when the body produces excess blood acids (called ketones) because it lacks enough insulin.

In an article for Truthout.org, Alec’s mother Nicole wrote, “Globally, half of the people who need insulin can’t reliably get access to it. With six million people in the US insulin-dependent, and nearly 40 percent of Americans uninsured or facing high deductibles that leave their medicine costs uncovered, the crisis is occurring right here, too. Endocrinologists here in the U.S. report that as many as one in five of their patients are not able to afford their insulin. For many persons with diabetes, that means they land in the emergency room with diabetic ketoacidosis. For others, like Alec, they never get there. Just 27 days after his coverage under my insurance ended, I received the call no parent ever wants to get.”

More recently, ThinkProgress.org reported on an American “caravan” crossing Canadian border to buy insulin.  The group, which took a 600-mile drive to Fort Francis, Ontario, Canada, where they could purchase 10 vials of insulin for about $300, instead of the $600 they had to pay back home for only two vials.  As one of the caravan told ThinkProgress.org, “We’re getting ripped off royally.  We’re cash cows to [pharmaceutical companies].  They're making so much money off of us.”

It’s Not Just Insulin

According to The American Diabetes Association (ADA) the total costs of diagnosed diabetes in the United States, as of 2018, had risen 26 percent since 2013.  This is an especially relevant topic for Hispanics. According to ADA researchers the prevalence of total diabetes (both diagnosed and undiagnosed) among all Hispanic groups was almost 17 percent for both men and women, compared to 10 percent for non-Hispanic whites.

And insulin isn’t the only drug being priced out of the reach of increasingly desperate consumers. As of January 2019, drug companies raised the prices of 1,000 medications. Although the average price hike was about 6 percent, the opioid OxyContin rose 9.5 percent and the blood thinner Pradaxa was up 8 percent. Six percent or 9 percent, all are three to more than four times the 2 percent rate of inflation. Looking at it another way, prescription drugs cost all of us more than half a trillion dollars on prescription drugs in 2018, which represents an increase of 50 percent since 2010.

What’s the Solution?

So, what’s the solution? The obvious answer is to repeal the Safe Harbor status for middlemen—PBMs and GPOs. But it would be a mistake to believe that they are the sole villains in this drama. In some ways, repealing the Safe Harbor without demanding greater accountability and transparency from manufacturers and providers is just rearranging the deck chairs on the Titanic.

The argument for keeping middlemen in a safe harbor goes back to the reason they were introduced into the system in the first place. They were meant to bargain for the best deals for their providers. The argument is that without them in the food chain, manufacturers could maintain artificially inflated prices with consumers’ only hope that competition would produce savings and cost control. But instead of becoming part of the solution to high costs, they have, arguably, become part of the problem—leaving Big Pharma free to set prices privately under the cloak of “trade secrets.”

Gaming the System?

On the other hand, how effective will rescinding safe harbor be to avoid further abuse? There is a theory that if middlemen can’t get rebates or kickbacks, they’ll simply do what is already becoming a trend in the industry. They’ll accept “fees” for services of negotiating and manufacturers will still factor these costs into their WAC (Wholesale Acquisition Cost) prices and pass them along to the consumer. Without transparency and accountability built into the system, it will be all too easy to game the system. They have to be part of a repeal process. And we have to keep in mind that this is only one part of a thorny and complicated problem.

In the months to come, we’ll fill in the bigger picture of our health care crisis including more talk about the Physician shortage.

Sources: BestMedicalDegrees.com, StudentLoanHero.com, Alliance for Health Policy, SpecialtyPharmacyTimes.com, “Answering Health care Costs Through Safe Harbor Repeal,” PhysiciansforReform.org, Free to Care Health care Professionals & Legislator Conference, The American Diabetes Association, ThinkProgress.org

PBMs: In theory, Pharmaceutical Benefit Managers are middlemen who bargain for lower prices on behalf of insurance companies, Medicare Part D plans and state employee plans for better drug prices.  However, they financially reap huge benefits from manufacturer rebates to them, which seldom if ever are shared with the outpatient consumers that they are supposed to serve.

GPOs: As designed, Group Purchasing Organizations are middlemen who bargain on behalf of hospitals, nursing homes and home health agencies to leverage volume purchases for manufacturer discounts.  However, they also can reap financial windfalls from manufacturer rebates that seldom if ever trickle down to the in-patient consumers that they serve.