Transcript
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This is Dr.
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Patient, a podcast that examines all the aspects of the patient provider relationship. I'm your host, Heather Johnston, MD, a real life doctor and patient.
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Hi, listeners. Thanks for joining me today for the start of an in depth look at drug costs in the US. This topic is vast, which even that is actually an understatement. This topic is vast and complex and convoluted. In this episode, part one of two, I'm going to review the history behind the rise of drug manufacturing companies here in the US, the creation of other entities that act as middlemen between them and you, and how all this laid the foundations for how drug costs are actually determined today. Next week, I'll release part two in this series, where I'll dive into what you can do about the cost of drugs at the register, whether you're uninsured, insured privately or insured through Medicare and Medicaid.
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So I'm assuming that all of you listening have heard of Ozempic and or Mounjaro, the drugs created for type two diabetes, that also happen to make you lose a lot of weight. They are the hot drugs all over the world right now, for both of those reasons, though, probably more the latter. But whether you can get them and then actually afford them depends on what country you live in, what your insurance status is, and more.
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For example, here in the US, ozempic, retails for about$1,000 a month. In Japan, which is the second highest cost in the world for this drug, it goes for only $169 a month. $93 in the UK, $87 in Australia and $83 in France. Huge discrepancy, right? So what the heck is going on?
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This is just one of a million examples actually. On a much less shocking scale. I went to Walgreens a few weeks ago to pick up a prescription and it costs me $30 for a one month supply. I pulled up the app called GoodRx, which compares the cost of medications at different pharmacies and saw that the same medication cost$38 at one grocery store, $44 at Costco, and $140 at a couple of other pharmacies. So again, what is going on? Well, my friends, today we're going to talk about drug costs in the US, specifically only in the US: how we got here, how the system works, what the problems are with it. And then next week, some things you can do about it.
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This seems like a good time to say that if you're not driving and have a pen and paper handy, you might want to grab some, this is some ridiculously complex stuff that we're about to dive into. I'll also be posting a lot of links and resources in the show notes, including a very handy if not very convoluted diagram I borrowed from a source explaining most of what I'm saying today. Or check out the video version of this episode on YouTube. Then you can see all my facial expressions when I show my surprise, outrage and frustration with what we'll be talking about.
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Let's begin with where things started with drug making. I promise that the history of the rise of drug companies is relevant to cost setting up drugs today. I've been listening to this really interesting episode of a podcast called Acquired. It was an episode from back in January that covered the Danish drug manufacturer Novo Nordisk, the pharma company behind Ozempic. They went into some history of the company, but what caught my ear was when they described how insulin was first developed in the 1920s at the University of Toronto medical school, by some of the folks that later actually go on to create Novo Nordisk and what a huge game changer it was going to be. I mean, at the time, diabetes was pretty much a death sentence. The doctor-scientists there knew that they needed to contract with someone to make more of it. But they were hesitating, because at that time in history, it was considered pretty unethical to try to make money off of the development of health and life saving medications. I mean, can you imagine that mentality that people were horrified by the concept of medicine being a business? If I had some canned audience laughter handy I'd insert it right here. So it's the 1920s, and the University of Toronto has like two dozen vials of newly made insulin. But there are a little over 2 million people in the US alone with diabetes at that time, so they really do need some help to make more. So the University of Toronto, which has a tiny lab, and knows it won't be able to handle the demand it's anticipating for the insulin, gives a limited one year exclusive license to produce and develop insulin to the US drug maker of quinine and other successful drugs. Eli Lilly.
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Between the 20s and the 70s, the health care industry grows, but it remains pretty fragmented, as all areas of it are growing like crazy but in parallel. You had small health insurance companies, independent pharmacies, doctors, offices, hospitals, and some drug manufacturers, all growing. Then a few big things happened that really shaped the next 50 years of the US healthcare and drug system. First pharmacy benefit managers or PBMs, from here on out, come on the scene in the 60s as middlemen. More on those in a bit. Second, major software developing changes the way that growing insurance companies and PBMs manage all that incoming patient data. And third, the discovery of bioengineering of drugs helped skyrocket production and thus availability of manufacture drugs.
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Remember, because the industry is still super fragmented at this time, you have lots of little health insurance companies, pharmacies, all these other little companies trying to negotiate individually with each other, which is pretty inefficient. Enter PBMs - these were a new kind of company founded by pharmacists, interestingly, that originally dealt with reimbursing pharmacies for drug costs.
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They're even credited with the development of the idea of a drug formulary, which is a list of approved drugs that someone can choose from. But with the rise of availability of prescription drugs, management software and more employer based health insurance, PBMs grow fast and they quickly pivot more towards helping the health insurance companies manage not only their drug formularies, but also their drug and other medical claims. And they become a go between for drug manufacturers and health insurance companies. Suffice it to say that these kinds of companies grew in popularity over the 70s, 80s and 90s, and have become a major player and influencer in the US for drug costs overall. Today, PBMs manage prescriptions for the roughly 220 million insured folks per year in the US. They cover about 2 billion prescriptions a year, about 70% of all prescription orders in the US dispensed for outpatients. But also, they have literally changed the way the drugs make their way from the manufacturer to you.
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Let's talk about how it all works today. This is the part where I was thinking some paper and pen might be handy. Or maybe pause and click the link in the show notes titled "convoluted diagram of us drug costs" and follow along. What you'll hear is that there are just too many players in the system now. And that drives cost up for the end user: patients. Because each player involved wants a piece of the pie so to speak. I'm told by a friend who works for a major drug manufacturing company that if they could sell direct to the patient costs would probably be about 80% less than they are now if not more. I mean, don't get excited, because it's almost certainly never going to happen, at least not in our lifetimes.
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So how does that drug get from the factory to you? It still all starts with the manufacturer, the company that literally makes the drug. The only people they sell the drugs to though are wholesalers, companies that buy from the manufacturer at a cheaper cost and then resell it, which is called distributing to a pharmacy. Then the patient you goes to the pharmacy and gets the drug. What we just went over is called the flow of drugs.
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This part isn't too complex.
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It's a lot like any retail industry maker to wholesaler to retail store to consumer. Okay, deep breath. Now we're going to talk about the flow of money.
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And this is where it gets super complicated. But before we dive in, I need to come back to the idea of the drug formulary. If you have health insurance, your insurance company has a list of approved drugs that they will cover most of the cost for if your doctor prescribes that drug. If your doctor prescribes a drug, not on the formulary, then they will not cover the cost and you will have to pay the full retail value which can really add up. So the flow of money. There's no clear start and end here as there is with the flow of product. On the convoluted diagram I mentioned there are money arrows going in almost every direction between all the players. So we can pick anywhere to start really. And I'm going to start with a concrete example that tracks the money.
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A PBM pharmacy benefit manager will go to a drug maker, let's say Eli Lilly, and they'll say hey, I have a represent Health Insurance Company X, and we have 2 million insured members, if you give me a good deal on this new drug Manjaro. Remember, this is the competitor of Ozempic.
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I'll make sure it's on the formulary for health insurance company X, so that all those 2 million members can get it if they need it. But if you want me to do that, you have to give me a humongous rebate. All right, note that I did not say discount, I said rebate. More on that shortly. Eli Lilly is thinking, well, that's a lot of potential patients to get this drug to. So we really want this to happen. Whether it's because of their good intentions of getting an important life saving drug in front of so many people that potentially need it, or because of their worst intentions of knowing that that's a lot of drug to sell and make money from, they're motivated to do it. So they say, Okay, we'll give you your humongous rebate. And I'm using fictional but realistic numbers for this next part of my story.
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Let's say Eli Lilly thinks, well, they cost us $100 per Manjaro injection to make in our factory. And the PBM is demanding a 75% discount off our retail cost, which by the way, is a pretty common rebate amount for a super hot drug. So we'll start at the base cost of $100 to make the one injection and add on a lot of money to cover the rebate that that PBM wants.
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But that's not all. We also want to keep paying our electric bill and pay our employees. And also we want to try to recoup the $10 billion we put into creating this drug over the last 10 years of research and development.
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That's a realistic number by the way. And don't forget about the other nine drugs we develop that never made it to market, but that we also invested hundreds of millions of dollars, and we need to recoup those costs as well. So we're going to set the retail value of that drug that costs $100 to make at about$1,000. In this model that PBM takes their demanded humongous rebate of 75% or $750 ila Eli Lilly recoups their $100, for the making of the actual drug, and then they're left with $150, a profit that goes towards all of the other costs I just mentioned. When you hear it this way, you might react the way that I did, which is I can't really blame the drug manufacturer for wanting to recoup their research and development and other costs. And I can't blame them for feeling like they have to negotiate with the PBM. My friend who works in this industry says that if they said no to the PBM, the PBM would just go to a different company and get a different brand drug and they'd be screwed and potentially go out of business. When I asked if the drug manufacturer could just sell direct to patients, he laughed for a long time actually, but then said the same thing would probably happen PBMs would be in an uproar, they would stop doing business with them. And they would lose so many billions of dollars from loss potential revenue that again, they'd likely go out of business.
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Alright, let's go back to the convoluted diagram and trace the money in a couple of different directions. We're going to start with the health insurance company first. They take money in both from their millions of insured members in the form of premiums that you and your employer pay every month. But they also take in money from the PBMs who give them a share of that rebate that they got from the drug maker. And now they have all this money. Where does it go? As far as I can tell, the only money going out of health insurance companies for drug costs specifically seems to be back to the PBMs to pay them for their negotiating services and the rest I think they keep for themselves. Now let's follow the money by starting at you. If you're insured, you pay out of pockets in two directions, first towards the health insurance company in the form of your premium. The second way you're paying is the opposite of the flow of product that we talked about earlier. Remember that flow is drug maker to wholesaler to pharmacy to consumer? Well, the money you pay at the register goes in the opposite direction of that you pay to the pharmacy who pays the wholesaler who pays the drugmaker. There's one potential way you might actually take some money in the form of a discount, but I'm going to leave that for next week's episode. Lastly, let's follow the flow of money in and out from the pharmacy benefit managers perspective. As I've said before, they're receiving a rebate from the drugmaker that reflects that negotiated rebate.
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They also take money in from the Health Insurance Company as just mentioned, they pay out both to the health plan which is part of the rebate that they're passing on to them. They also pay out to the pharmacy who they separately negotiate with for how much they'll reimburse them for what you picked up and paid for. This part is a bit hard to explain because there is not a lot of transparency about how much PBM is reimbursed pharmacies. It's sort of hush hush.
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So now we've talked about which directions the money flows in.
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But how is your actual costs determined when you go to pick up a prescription at your local pharmacy? Remember my earlier example of the drug I picked up at Walgreens costing a different amount at every other pharmacy.
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While behind the scenes, your cost is determined by the PBM that your health insurance company has contracted with, since they are ultimately the ones negotiating which drugs will be on your formulary and what their costs will be to you.
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Or looking at it a different way, your cost is determined by what health insurance company you have, whether the drug is on formulary, with that health insurance company and what your copay is, the copay is part of the contract you entered into with the health insurance company. If you've ever looked at an overall table of what your health plan benefits are, it's listed there. For example, it's also listed that you probably have a deductible. And then they'll cover some percentage of your inpatient and outpatient visits or there might be a copay for seeing certain specialists.
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And one of the line items there is what your copay is for pharmacy. Maybe it's 25% of the drug cost. But guess what, that's based on the full retail value of the drug, not on the net cost of the drug to the health insurance company.
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Remember that they probably got that drug at a 75% discount, but you still have to pay your copay based on the full retail cost.
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Most of the time, this probably doesn't feel like that big of a deal to you because most drugs that we pick up at the pharmacy are not that expensive. Most of my drugs cost me anywhere from zero to $30 a month, which is thankfully doable for me. But if I want to go get ozempic Tomorrow, my health insurance company will make me pay that same 25% copay based on the retail value of $1,029 a month.
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So I'd have to pay about $257.25 per month for it, which is a ton of money. Another person with a different health insurance company, or even a different plan with the same insurance company as me might have a different copay, it could be more or less than mine.
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Lastly, before we move on from actual retail costs at the register a quick note about branding. Did you know that Novo Nordisk's Ozempic and Wegovy are the same drug? That Eli Lilly's Mounjaro and Zepbound are the same drug? Well they are. Same drug with different brand names for different uses. Ozempic and Mounjaro are marketed for diabetes. And Wegovy and Zepbound are marketed for weight loss. And guess what? The weight loss ones are more expensive.
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The current retail cost of one month of ozempic is $1,029. The current retail cost of Wegovy, the same exact medication, is$1,349. Because this is the United States of America, and we have a free market, and corporations are king and can set whatever pricing they want to meet demand, right? Well, not exactly. There has been some pushback from the federal government in the form of setting cost caps on certain drugs, though this isn't happening yet for these new hot drugs, though their cost has made a lot of headlines every week. For the time being PBMs have us all by the balls, and the early days of PBMs that were actually hundreds of them.
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That's dwindled down to about 30. But really, there are three big ones that cover about 80% of drug sales to insured people in the US. And all this consolidating and huge growth, it's become almost impossible for drug companies to have any negotiating power over them at all. I mean, we're calling it in negotiation, but it doesn't really seem to be anymore. In fact, drug companies seem to believe that they have to get their drug on the formulary with all three of the big PBMs in order to remain competitive, and the PBMs know that. Thus the ridiculous rebate percentages, which drive up the retail cost and thus drive your cost up and up Do you get it yet? Feel free to break and consult the convoluted drug cost diagram once again. Or just take a mental break if you need it. I'll understand. But I'm going to keep going. Because it occurs to me that these rebates don't feel that different than a bribe.
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Webster's Dictionary describes a bribe as "money or favor given or promised in order to influence the judgment under conduct of a person in a position of trust". Isn't this that? Drug companies are giving money to PBMs in the form of a rebate for a preferred position on the formulary. As I've been researching this topic, I've really been fighting against the assumption that there's a bad guy here. I mean, I guess I kind of naively want to think that we're all in this to help people to promote health to prolong life. But I have to be honest, I'm having a hard time seeing any good coming from PBMs sure they help electronically deal with claims. But couldn't the health insurance companies just create divisions within their own companies to deal with that, you'd think they'd want to as PBMs are taking a piece of the money pie out of the hands of the health insurance companies.
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They also have Congress by the balls in a way as they are some of the biggest lobbyists in Washington and have a lot of sway. Though, you may have heard on the news recently that our pal Bernie Sanders has been making a stink about the cost of Ozempic recently. A couple of weeks ago, Sanders publicly released his letter to the CEO of Novo Nordisk Lars Jorensen.
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Remember, that's Ozempic's maker, and I've linked to it in the show notes. It's a five page long letter with a list of references that would make a college professor proud. That ends with Sanders asking brutally straightforward questions of Sorenson as only he can, about why the cost of the drug is so high. He asked him to provide financials on everything, including what the top 10 insurance companies and top PBMs are paying for it, and asked him to hand over all communications related to the drugs development. Sorenson has until May 9 to respond, so keep your ears out for how this plays out. The fact that Sanders asked what each player on the chessboard of the convoluted diagram of drug costs is paying, at least shows that he's on to the insane flow of money that we just discussed.
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But all that aside, I have to say the drug companies do seem caught between a rock and a hard place because of the PBMs. They are the only player in the pharma world that actually take risks to create and make things better. They spend decades and billions of dollars to develop new drugs to help people for ozempic. For example, the work to develop that drug began almost 30 years ago, and they've spent reportedly about $10 billion to do it. Looking at Novo Nordisk specifically, they're actually owned by a not for profit foundation, which is pretty unusual for a drug maker.
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And interestingly, it's the largest charitable foundation in the world, with an endowment almost twice the size of the Bill and Melinda Gates Foundation. Their executives and board members are not paid with stock options like most other drug companies, but rather are required to buy and hold stock themselves, like you and me.
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This avoids them feeling pressure to make short term decisions that would affect a bigger stock bonus. Don't get me wrong, I'm sure they're making quite a bit off the stock that they do own. But the unfortunate reality is that we're no longer in the 1920s, where it's considered unethical to make money off of health care. It is firmly a business enterprise. So I can't fault drug makers from making money off of what they're producing. Though, famously, Novo CEO Lars Jorensen again, in 2015, said that curing diabetes once and for all is the goal. He said "I tell my employees, if we wind up curing diabetes in a destroys a big part of our business, we can be proud and you can get a job anywhere, we'll have worked on the greatest social service of any pharmaceutical company. And that would be a phenomenal thing". I gotta say, I kind of believe him and it's hard to think that they're the bad guy in any of this. Stay tuned for part two next week, where I'll go into more depth about what you can do to manage your drug costs, whether you're uninsured, privately insured, or on Medicare or Medicaid. We'll also talk a bit about industry disruptors like good RX, Mark Cuban's newest drug supply company cost plus, and others.
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Thanks for listening today.
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To catch up on more episodes and to get new ones delivered directly to you. Subscribe wherever you find your podcasts, Apple, Google, Spotify, iHeartRadio and more. If you'd like to be a guest or have an idea for an episode, let me know at www.drpatient podcast.com That's Dr.Patientpodcast.com.
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Here's the disclaimer. Even though I am a doctor, I'm not your doctor. These stories my coma and all discussion is purely reflection about what's working in the healthcare system and what isn't don't use any medical information that you hear in these episodes to diagnose or treat yourself if you have a question about your health get in touch with your doctor or local health clinic
