Spreading the Blame for High Drug Costs

The cost of prescription drugs continues to be an important topic in the U.S. healthcare system. Blaming the manufacturer for setting high prices for its products is almost too easy; in reality, various members of the drug delivery system play a role in increasing the cost of drugs. Let’s discuss how the cost of a drug changes as it flows from the manufacturer to the patient, and how the patient’s share of cost is increased by this process.

Defining “Cost”

First, it is important to define “cost”. It is also important to understand that the definition of “cost” changes according to one’s perspective.

The simplest (and first) definition of cost is set by the manufacturer. This price point is called “Wholesale Acquisition Cost”, or WAC. A manufacturer will look at the health economic value of its product, current and future competition in the market, and other factors to set WAC.

From the perspective of insurance companies, WAC is what defines “cost”. This is because WAC is the primary variable in the reimbursement formula used to pay for prescriptions given to its members. In other words, reimbursement for prescription drugs is generally based on WAC.

A Patient’s Perspective

But what about patients? They likely have no idea of the WAC price for a drug they were just handed at the pharmacy counter. For patients, “cost” is more accurately defined as the money they had to pay in the form of a copay or coinsurance.

And this is where setting blame for the high cost of drugs is tricky.

Let’s refine our discussion by asking this question: Which drug “cost” is more important, the one paid by insurance companies or the one paid by patients? I’ll make an assumption that most of us are more concerned about the burden placed on patients. Therefore, it is important to understand how a patient’s cost is increased by the intermediaries involved in the drug delivery system.

Rebates Don’t Benefit Patients

We mentioned a manufacturer considers many factors when it sets a drug’s WAC. One important consideration is the rebate that is typically paid to Pharmacy Benefit Managers (PBMs) and insurance companies. These rebates are often paid by the manufacturer to help a patient gain access to the drug on the insurance company’s formulary. The higher the rebate, the better the drug’s position on the formulary. Oftentimes a better formulary position leads to a lower share of cost paid by the patient. In this way, rebates paid by the manufacturer represent a positive impact on a patient’s share of cost. However, there is a downside.

Manufacturers consider rebates when they set WAC. If WAC is set at $100, and the manufacturer agrees to pay a 30% rebate (not an unusual scenario), then the net price collected by the manufacturer is closer to $70, not $100. If the manufacturer believes its product actually has a $100 value on the market, then it must set WAC at $143 to achieve a $100 net price.

And this is where the patient can get hurt by rebates to PBMs and insurance companies: A patient’s coinsurance payment is based on WAC. It is not based on the actual net price paid by an insurance company. In effect, this means PBMs and insurance companies do not share the cost benefits of rebates with patients. Using our example of a $100 WAC versus a $143 WAC, and assuming the patient has a 20% coinsurance:

  1. $100 (WAC) x 20% (coinsurance) = $20 payment by the patient
  2. $143 (WAC) x 20% (coinsurance) = $28.60 payment by the patient

While $8.60 isn’t much, the cost difference goes way up for many of today’s expensive drugs. A $1,000 prescription would result in an $86 difference in payment. And so on and so on…

The cost of drugs is influenced by many factors. By taking the patient’s perspective on cost, we see that mechanisms like rebates to PBMs and insurance companies can actually increase their cost.

Allowing the patient to share in the benefits of a drug’s net cost would go a long way to reducing their financial burden. In our next discussion, we’ll share some of the efforts underway to help make that happen.

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