We Need Transparent Drug Prices, Virginia Lawmakers Say

FILE- In this July 10, 2018, file photo bottles of medicine ride on a belt at a mail-in pharmacy warehouse in Florence, N.J. Drug companies are still raising prices for brand-name prescription medicines, just not as often or by as much as they used to, according to an Associated Press analysis. (AP Photo/Julio Cortez, File)

By Ashley Spinks Dugan

November 30, 2020

If you want to make prescription drugs more affordable, their pricing process needs to be more transparent, experts told workgroup members Monday.

RICHMOND- One vial of insulin costs between $3 to $6 to manufacture. There are more than 200,000 diabetics in Virginia alone who rely on the medication to stay alive. But around a quarter of those people skip doses they can’t afford. Although the nearly century-old drug is relatively simple and inexpensive to produce, patients are charged more than $300 a vial. 

Gary Dougherty, the director of state government affairs at the American Diabetes Association, said a lack of transparency around prescription drug pricing is the root problem. 

On Monday morning, members of the Virginia House of Delegates Drug Pricing Workgroup assembled via Zoom to discuss potential solutions.

The Problem is PBMs

Several experts on the prescription drug supply chain joined the workgroup meeting, and all drew essentially the same conclusion. The main contributor to out-of-control costs is an utter lack of transparency, particularly with regard to pharmacy benefit managers. Pharmacy benefit managers, or PBMs, are companies that manage prescription drug programs for health plans and insurers. PBMs negotiate with drug manufacturers on costs, as well as determine which drugs will be included on a health plan’s “formulary.” The formulary is a list of specific drugs that will be covered by an insurance plan.

Dr. Madelaine Feldman, a New Orleans-based rheumatologist and advocate for transparency who joined the workgroup meeting Monday, said this relationship creates a set of “perverse incentives” that lead to higher costs. 

Basically, PBMs make money for each prescription filled at a pharmacy. To convince PBMs to include their drugs on a given formulary, manufacturers will offer rebates on the drug as well. Feldman explained a hypothetical formula that determines PBM profit: the manufacturer’s listed price for a drug x the percentage rebate offered to the PBM x the number of prescriptions filled. The manufacturer has little control over the third variable, but is incentivized to increase both the list price and the rebate percentage to convince PBMs to put drugs on the formulary.

Rather than drugs that are the most efficacious, for instance, being offered to patients, often the ones on the formulary are simply the most expensive. To further complicate matters, these contracts between drug-makers and PBMs are considered proprietary, which means no one knows exactly how much money is exchanging hands or what is reflected in drug prices.. Oftentimes, the only way to get the data, Feldman said, is to sue. 

The language PBMs use to market their services further obfuscates the issue, Feldman said. She invoked a useful metaphor. If two identical dresses were offered for 50% off at two different shops—one originally listed at $1,000 and the other at $100—which purchase would save you more money? The second dress would be less expensive, but buying the first dress would technically produce more savings. Feldman said PBMs apply this same backwards logic to justify listing higher-priced drugs that are more deeply rebated. 

States’ Hands are Tied 

Delegates on the call seemed eager to increase transparency. However, most regulations of PBMs must start at the federal level. State governments only have jurisdiction over about 35% of health plans, Del. Mark Sickles (D-Fairfax) explained. They can regulate state Medicaid programs and insurance plans offered on the statewide exchange. 

But delegates also have an obligation to balance the state budget, which is difficult to achieve unless they too participate in the rebate game. PBMs that negotiate on behalf of Medicaid have the same incentives to keep list prices (and rebates) high as those that work for private insurance companies. 

One problem Virginia has been able to address is so-called “spread pricing,” where PBMs ask insurers to reimburse them for prescriptions at a rate many times higher than the drug cost. Again, transparency with these rates is a problem.  In 2019, Virginia passed a law prohibiting spread pricing in its Medicaid program. Antonio Ciaccia, a consultant with 3 Axis Advisors, which specializes in the prescription drug supply chain, said Virginia officials should “sleep better at night” since they’ve passed that legislation. However, he compared statewide attempts to control costs to a game of whack-a-mole. As long as PBMs have the capacity to set prices, he said, they’ll shift costs wherever is necessary to maintain profits. In Ohio, for instance, the pharmacy payout rate for certain generic drugs jumped about 2,000% after the state legislature banned spread pricing.

Virginia Ahead of the Curve 

Compared with other states, however, Virginia seems to be ahead of the curve when it comes to promoting transparency and controlling costs.

In 2018, Gov. Ralph Northam signed a bill releasing pharmacists from a “gag rule” that prevented them from informing patients about potential lower costs. Now, pharmacists can tell people filling prescriptions if the medication might be cheaper without using their insurance.

Co-pay caps can also help control costs. These mitigation measures are especially important for drugs that are life-sustaining or have no substitute, Doughtery said, like insulin. Last year, Del. Lee Carter (D-Manassas) sponsored a bill, which became law, capping the cost for people with diabetes at $50 per month.  Del. Keith Hodges (R-Essex), who is also a pharmacist, worried that such co-pay ceilings may lead to higher health insurance premiums. However, he conceded that since one-third of hospital admissions would be avoided if patients were adherent to medication regimens, healthcare costs in the aggregate likely would still decrease.

Hodges also suggested implementing a “cost plus model,” where pharmacies are simply reimbursed for the cost of the drug plus a flat administrative fee, could help control spending.

The General Assembly has several bills related to drug price transparency and PBM regulation that it must decide whether to continue to its 2021 session.

Ashley Spinks Dugan is a freelance reporter for Dogwood. You can reach her at [email protected].

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