Buzz
Pharmaceutical firms are clearly thriving: Producing ads featuring heroic toenails isn’t inexpensive, especially when aired during high-profile events like the Super Bowl. Similarly, acquiring a rare Wu-Tang album doesn’t come cheap. Yet, many of the most expensive medications can be obtained for free with a simple coupon. This system is clearly flawed.
When you use a “free” prescription for a costly medication, the drugmaker covers your copay. They sacrifice a small portion of profit to bill your insurance company for the remaining amount. In fact, these transactions are so lucrative that they can even provide the medication at no cost to uninsured patients in need.
In essence, within the bizarre realm of drug pricing, coupons, charitable programs, and low copays are all mechanisms that sustain inflated prices. Still puzzled? Here’s a breakdown of how it works.
When You Receive Something for Free, You’re Not the One Being Sold To
Let’s examine the medications advertised during the Super Bowl, as they perfectly illustrate this approach.
Drug: Jublia (efinaconazole) for toenail fungus.Marketed by: ValeantFun Facts: Treatment lasts approximately a year and is effective in 15-18% of cases.Price: $642 for a 1-2 month supply for one toenailYou pay (with coupon): Zero dollars with commercial insurance!
Drug: Xifaxan (rifaximin) for irritable bowel syndrome with diarrhea (IBS-D)Marketed by: ValeantFun fact: It is effective 40% of the time, alleviating abdominal pain during the 2-week treatment and maintaining its effects for an additional 10 weeks. After that, symptoms typically return.Price: $2206 You pay (with coupon): Zero dollars with commercial insurance!
Drug: Movantik (naloxegol) for opioid-induced constipationMarketed by: AstraZeneca and Daiichi-SankyoFun fact: Potential side effects include opioid withdrawal symptoms and intestinal perforation. Success rate is 44%.Price: $340 per monthYou pay (with coupon): Only $20 per month with commercial insurance!
Patients receive these medications at no cost, while the insurance company covers the bill. The pharmaceutical company markets directly to the patient, placing the insurer in a position akin to a parent being pressured to buy expensive cereal for their child—except the cereal costs hundreds or thousands of dollars, and the child’s life may depend on it.
This is a lose-lose situation. Coupons are prohibited for government-funded insurance programs like Medicare because they’re viewed as kickbacks: the drugmaker incentivizes patients to drive up government spending. However, private insurers lack this legal protection. Insurers cannot refuse coverage for costly drugs if they’re prescribed within plan guidelines and meet the patient’s needs, explains Clare Krusing, a spokesperson for America’s Health Insurance Plans. The coupon arrangement is strictly between the drug company and the patient, leaving insurers with no authority to intervene.
Regardless of coupons, exorbitant drug prices strain both private and public insurers. The Oregon Health Authority noted in a report that providing the best hepatitis C treatment (costing $95,000) to every Medicaid patient would exceed the state’s entire pharmacy budget. Consequently, Oregon and 33 other states limit access to patients with existing liver damage, despite the drug’s ability to prevent such damage if used earlier. This rationing violates the law, but what alternative do they have?
Determining the True Cost of Medications Is Nearly Impossible
When I covered Addyi, the so-called “female Viagra” with numerous downsides, Valeant’s PR team declined to disclose the actual cost of the drug. Despite multiple attempts via email and phone, I was either directed to their coupon program or met with silence. (For context, we now know the price is approximately $800 per month.) Transparency about drug pricing simply doesn’t align with pharmaceutical companies’ interests.
Even when the list price of a drug is known, it doesn’t reveal the actual amount paid by anyone. Here’s how Nancy Retzlaff, a Turing executive, explained the pricing of Daraprim, the drug infamously hiked to $750 per pill by Martin Shkreli:
Rep. Welch:
If Springfield Hospital in Vermont wanted to purchase Daraprim, how much would they need to pay you?
Ms. Retzlaff:
We’ve introduced a hospital discount program—
Rep. Welch:
Just give me a figure. What’s the exact amount they’d have to pay?
Ms. Retzlaff:
For a 100-count bottle, the cost would be approximately $35,000. For a 30-count bottle, it would be around $11,000 [reflecting a 50% discount].
Rep. Welch:
If I were covered by Blue Cross Blue Shield, how much would they pay?
Ms. Retzlaff:
That depends on the copayment and coinsurance. Around 25% of Daraprim patients have commercial insurance. ...The patient might face a copay of, say, $5,000, but we would cover most of it, ensuring they pay no more than $10 out of pocket.
Rep. Welch:
What about Medicaid patients? What would they pay per pill?
Ms. Retzlaff:
Medicaid patients, as well as those under
340B programs
, can access the medication for just one penny per pill. This accounts for about two-thirds of Daraprim’s sales.
Rep. Welch:
If the patient pays just one penny, who covers the remaining cost?
Ms. Retzlaff:
That’s the final price. No one else pays.
Rep. Welch:
So, after all the complexities you’ve outlined, most people have no clue what the actual price ends up being.
Ms. Retzlaff:
Exactly. That’s how pharmaceutical pricing operates in this industry.
In her example of a commercially insured patient, the cost of a 30-pill bottle, minus the $5,000 copay, comes to $17,500. This assumes the insurer pays the full $750 per pill without negotiation—though they often negotiate lower rates. Thus, the true price remains unclear.
The Real Issue Isn’t Martin Shkreli. It’s the Entire System.
We’ve found our favorite antagonist in the drug pricing saga: the man who grins, makes provocative statements, and clashes with musicians. But in reality, he’s almost insignificant. How can you tell?
Shkreli is no longer Turing’s CEO, yet Turing didn’t reduce Daraprim’s price after his departure. The cost (whatever that entails) remains $750 per pill.
Shkreli was arrested, but not for raising prices. That was entirely legal.
Frustrated by soaring drug costs? Take a look at these nine medications, each costing over $100,000 annually. Explore Valeant’s history of acquiring drugs and hiking their prices—not just once, but repeatedly. Observe that two of the three Super Bowl ads promoted expensive, newly acquired Valeant drugs.
Shkreli, you thrust drug prices into the limelight, only to walk away with most of the attention. A quick Google News search today yields more stories for the term “Shkreli” (Check out Ghostface Killah’s video about him!) than for the broader topic of “drug prices.” (Trade Deal May Undercut Efforts to Control Drug Prices is a typical...boring...top result.)
Lawmakers are equally clueless. Valeant’s interim CEO attended last week’s congressional hearing, but he wasn’t the main focus. Representatives initially zeroed in on Shkreli, who remained silent, then shifted their attention to Retzlaff, the chief commercial officer of Shkreli’s former company. When they finally asked the crucial question—aren’t insurance customers and taxpayers paying for these antics?—Retzlaff gave the frustratingly accurate response: Daraprim serves only 3,000 patients. The cost per individual is “pennies.”
This is maddening yet accurate because the entire pharmaceutical industry operates similarly. While Daraprim may cost pennies per person, the overall expense of “specialty” drugs—essentially the pricey ones—amounted to $311 per commercial insurance member in 2014, according to a report by pharmacy benefit manager Express Scripts.
Drug prices are climbing across the board. Price increases for medications contributed to at least 13% of the rise in insurance premiums for 2016 plans. (It’s unclear whether hospital-related categories include drugs administered in hospitals; if so, drug costs make up an even larger share.)
A pharmaceutical industry group highlights data indicating that cost growth is slower this year compared to previous years. While true, this is a statistical sleight of hand: the issue is worsening, but we’re expected to feel relieved that it’s worsening at a slightly reduced pace. To clarify: In 2014, drug list prices rose by 1%, while actual costs increased by 5.5%. Inflation was just 0.8%.
Some readers might already be rushing to the comments to argue that drug prices must be high. Fair, but how high is too high? A thorough discussion on the origins of drug prices would require another article, so I’ll point you to this Forbes piece, a detailed analysis separating fact from fiction among commonly cited reasons.
In short, the author argues that drug pricing isn’t about recovering R&D expenses directly; those costs are already incurred, and the goal is simply to maintain profitability considering overall spending. (After all, drug prices don’t decrease once a specific R&D target is reached.) Additionally, it’s not based on the drug’s “value.” Countries that quantify the value of a year of human life tend to have cheaper drugs than the U.S. (They decline to pay if the cost per “quality-adjusted life year” exceeds their valuation.)
In essence, pharmaceutical companies set prices based on what the market will bear.
There’s No Simple Fix
This is where I’m expected to urge you to take small steps and push for reforms that could permanently resolve the issue. But I can’t. I’m out of my depth here, and I fear lawmakers are as well.
First, regarding those coupons—I won’t advise against using them. If you need medication and can get it for free, take the opportunity while it lasts. (But be sure to read the fine print—some coupons are limited to a certain number of refills, and the program could end abruptly.)
A small step toward improvement is to avoid asking your doctor about name-brand medications. Some drugs are either unnecessary, ineffective (hello, Addyi), or have equally good generic alternatives. If an advertisement makes you wonder if a pharmaceutical solution might help, consult your doctor—but frame it as a genuine inquiry. Instead of requesting what you saw on TV, ask, “Is medication the best solution for this?” or “Is this new drug truly better than existing options?”
Meaningful change will likely depend on government intervention. It’s encouraging that the FDA has accelerated the approval process for generic drugs (though it’s still tackling a massive backlog). Another potential fix is permitting patients to import medications from Canada, effectively leveraging price control regulations we’re hesitant to implement domestically.
For now, the system remains flawed. Consider filling prescriptions at Costco, perhaps? And do your best to stay healthy.
Illustration by Sam Woolley.
