Why are drug prices so random? Meet Mr. PBM

Dan: So at the beginning of the year, my family switched to a new health insurance plan and I’ve got this prescription I take. I get three months worth of it at a time.

And in February it was time to renew The drugstore texted me they had it. I called to check, got the robot voice. There’s one prescription here. And some news,

Robot Voice: the out pocket cost is $720 and 69 cents. And that’s ready for pickup.

Dan: I was like, what? This is an old time generic drug. I’m used to paying like 15 bucks.

Robot Voice: Would you like me to repeat that?

Dan: I was like, maybe you better. I want this on tape.

Robot Voice: The out of pocket cost is 700.

Dan: I was also like, yeah, I’m just gonna bring my new insurance card over to the drugstore and hope that clears things up. And it did. The copay was $0. That is some good new insurance right there.

And as I walked outta the drug store, I was like. What was that all about? I pulled up a site called GoodRx on my phone. A doctor friend of mine sometimes recommends it to people whose prescriptions cost a lot, and what I found there was weird. I punched in the name of the medication and my zip code and it showed me prices from a bunch of different places.

Drugstore chains like CVS and Walgreens. Big box stores like Costco and Walmart, local supermarkets with pharmacy counters, and the spread was crazy. 25 bucks at Costco, 170 at the supermarket, 300 some at CVS and more than 700 at my drugstore, Walgreens. And that was just the first set of prices. There were actually two.

The first what you’d pay if you just walked in the second was what you’d pay at each place if you brought in a digital coupon from GoodRx. And with the coupons, another crazy spread, a bunch of $20 options. But. 75 bucks at CVS 195 at Walgreens. And this was just super, super weird, and it meant I was gonna have to do something.

I’d been honestly kind of dreading figuring out prescription drug prices. I’d done some reading about it before and it always made my eyes glaze over. I was like, ah, no. Too complicated. Let me come back to this like in some other lifetime. But this was too weird not to investigate. Because I was used to seeing stories about high drug prices.

I figured we all knew that, but I wasn’t used to seeing stories about random prices. I was new. Better get on that. This is an arm and a leg show about the cost of healthcare. I’m Dan Weiser. And I did some reading and eventually I figured out how to maybe explain this to myself without getting totally lost.

And I ended up running this explanation by some experts and they all said, that is not the most idiotic explanation. So here it goes. It starts with the old movie. It’s a Wonderful Life. Right at the beginning of the movie, the Jimmy Stewart character, George Bailey is a 12-year-old kid. Working in the drugstore.

Now note the sound effect here from this scene. Click, this is olden days, 1919. And in the scene, the kid keeps the pharmacist, Mr. Goer, from sending out literal poison pills.

Actor: Mr. Goer, he don’t know what you’re doing. You put something bad. Those capsules, it wasn’t your fault, Mr. Goward, just look and see what you did.

Look at the body. You took the potter from. It’s poison, I tell you. It’s poison.

Dan: Now late in the movie, there’s a scene with another character, a really grouchy bartender.

Actor: Hey, look, Mr. We save hard drinks in here for men who wanna get drunk fast, and we don’t need any characters around to give the joy atmosphere.

Is that clear? But I have to slip you my lip for a convincer.

Dan: And here’s the thing. At the time of these scenes, the druggist and the bartender were basically in the same kind of business. I’m talking about the structure of the business. You go to the bar, order a martini, the guy grabs the gin, the vermouth, some olives, mixes it up and.

Tells you a price that reflects his negotiations with all his suppliers and his sense of local market conditions, what he thinks you’ll be willing to pay for a martini. And he is balancing all those things and it’s like a straight line. You negotiate with the bar, keep, he deals with everybody else. In 1919, Mr.

Gower isn’t exactly the same kind of business except instead of gin and vermouth, he’s got big jars, full of powders and okay. I mean, one of those jars is marked poison. I’m not sure what that’s about, but, okay. Mr. Gower measures out doses and sells them to his customers at a price he sets. Same exact deal.

Simple. Since then, a couple things have happened. First, scientific breakthroughs made drugs a much bigger deal. I mean, penicillin, insulin, the polio vaccine, just for starters, it’s a miracle and a big business. The other thing is health insurance became a thing including prescription drugs. So now you’ve got this intermediary standing between you and the provider, hashing out prices, telling you what your share is gonna be, and those two things created an opportunity for a new kind of business pharmacy benefit managers.

Geoffrey Joyce is an economist at the University of Southern California. He studies the drug supply chain. He says, originally these companies did one narrow technical thing. They created systems that told the drugstore what each customer’s specific insurance plan meant that customer was supposed to pay for their specific prescription. And these systems did all that in real time

Geoffrey Joyce: so that when you show up at the pharmacy, it’s a seamless transaction, and they know exactly what your insurance is and what your copay should be

Dan: ?because Mr. Cower. He’s not sending you a bill. He needs to ring you up right now. And insurance companies weren’t set up to make that happen.

So pharmacy benefit managers, PBMs for short, that’s what they came along to do.

Geoffrey Joyce: That’s what they functioned primarily as for many, many years.

Dan: And then PBMs got this new idea. They said to their customers, the insurance companies, Hey, we could save you some money. How about we start negotiating with manufacturers to get you lower prices?

Here’s how that works. There’s lots of kinds of drugs where different companies make their own version. Like for high cholesterol, there’s drugs called statins, and they’ve got brand names like Lipitor, Mevacor, Crestor. But they all basically do the same thing, and that is an opportunity for the PBMs.

Geoffrey Joyce: They will go to the different manufacturers and say, who’s gonna give us the best price?

Who wants to be our preferred statin?

Dan: And that preferred statin, that one’s gonna move a lot of units because the PBM and any insurance company they’re working for is gonna say to consumers, if you are our patient, our customer covered by our insurance. We want you to take this statin and we’ll make it worth your while.

’cause this one, the preferred statin has a $10 copay and all the others 50 bucks, maybe 75, maybe we don’t cover them at all. And suddenly manufacturers are coming to the table

Geoffrey Joyce: and manufacturers offer discounts or rebates. So, hey, I’ll give you 40 or 50% off if you make mine the preferred statin with a $10 copay.

And all my competitors are either aren’t covered on your plan or have a $50 copay.

Dan: And here’s an important distinction. The manufacturers are not lowering their sticker prices here for whoever wants to buy. They are giving this rebate to this PBM, in other words. The PBM isn’t shopping. They’re not comparing the prices on offer in the open market.

They’re negotiating, they’re cutting individual deals behind closed doors, but whatever. Okay. At first, to an economist like Geoffrey Joyce, this all set up sounds like great news.

Geoffrey Joyce: I bought into their argument that they actually lowered prices by negotiating competitively and end with manufacturers.

Dan: Now, sellers can’t just charge whatever they want.

They’ve gotta compete to give the best deal to buyers. Everybody wins. It’s like economics 1 0 1.

Geoffrey Joyce: In, in, in theory, you would want this type of entity and you want them to go around and say, who’s gonna gimme the best price?

Dan: But it hasn’t worked out that way, which is why Geoffrey Joyce published an essay last year called An Economist’s Change of Heart.

Geoffrey Joyce: So instead of sort of serving a, a role of, of constraining drug prices, I think they play a role in increasing drug prices.

Dan: Yeah. Wait, how do we go from their holding prices down to their jacking prices up? That’s right after this break,

an Arm and a Leg is a co-production of Public Road Productions and Kaiser Health News, a nonprofit newsroom that covers healthcare in America. Kaiser Health News is not affiliated with a giant healthcare provider, Kaiser Permanente.

We’ll have a little more on them at the end of this episode. So how do pharmacy benefit managers go from holding prices down to jacking prices up? This is where Mr. Gower and Nick the bartender, come in once upon a time, before penicillin, before insurance, before pharmacy benefit managers. The relationships were simple.

Me, Mr. Gower, his suppliers straight line. Now those relationships are a tangled knot. I found this super complicated flowchart made by Geoffrey Joyce’s, colleagues from the University of Southern California. It is from a paper called Follow the Money, except the money’s impossible to follow. There’s insurance companies, manufacturers, pharmacies, money going back and.

All over the place. And in this knot, the pharmacy benefit manager is in the middle of everything. Every loop, all the deals and all the money, it all goes through them.

Geoffrey Joyce: You’re right. And they’re the hub. You’re absolutely right. And I think that’s at the, the crook of it. They have an inherent conflict of interest.

Dan: That is everybody’s gotta negotiate with them, the drug makers, the pharmacies, and the insurance company, and. Nobody knows the deal anybody else is getting. So yeah, in theory, you’d want entity like the PBMs negotiating on your behalf. But that’s not what they’re doing. They’re negotiating on their own behalf.

Geoffrey Joyce: And they got sued, uh, in several states for saying, Hey, you should be acting in the best interest of your clients. And they’ve won in court and saying, no, we have no obligation to do what’s best for our clients. We do what’s best for us.

Dan: So how does that work and how does it lead to higher prices?

Well, it helps. These companies have gotten huge. There used to be a bunch of PBMs, but they’ve gone around buying each other up. Now, three PBM companies represent like four fifths of all consumers. The single biggest one covers like 80 million people, so they make a list of drugs for those 80 million people, which drugs cost $10?

Which ones cost $50? And which ones. Aren’t covered at all. That list has a name. It’s called the formulary, and controlling a formulary with 80 million customers gives the PBM. A whole new kind of leverage.

Geoffrey Joyce: Just let me put it in this way. Imagine you are a manufacturer and you produce a good drug and Express Script says we represent 80 million Americans and their drug benefits.

If you’re off our formulary as a manufacturer, you lose access to 80 million consumers. That’s an enormous hit. You’ll do anything to stay on that formulary.

Dan: You will do anything the PBM wants. And what the PBM wants is a big discount and the devious, tricky wild part that Geoffrey Joyce taught me, the easiest way to give a big discount is.

Jack up the sticker price, which sounds like it would never work. Like I know. We’ll double the price, then we can charge them the same, but we’ll tell them they’re getting a 50% discount. I mean, are PBMs supposed to be stupid but PBMs aren’t stupid? Remember, they’re not shopping on the open market. They’re negotiating in secret, and they’re not just negotiating for discounts.

They’re getting rebates, not money off, money back.

Geoffrey Joyce: A payout, it’s more money that potentially they can retain. Right? So the more, the bigger the rebate, that’s money they have control over. Now

Dan: it’s, it’s literally, it’s cash in their pocket. It’s cash. And Joyce says, those negotiations get totally explicit.

Raising prices is part of the deal.

Geoffrey Joyce: And so I’ve had several CEOs of drug companies tell me, PBMs put a gun to their head. Raise your prices. IE raise your rebate, or you’re off our formulary.

Dan: And of course, doing business in a back room someplace is what makes all this possible.

Geoffrey Joyce: Everything is, is proprietary.

No one can see what kind of discount or rebates they’re getting, and no one really knows how much is being retained and how much is being passed on. And anytime you have that lack of information and lack of clarity, there’s, it’s, it’s a ripe environment for abuse and excess profit.

Dan: There’s just one other thing, and I’m kind of reluctant to tell you this ’cause I have this rule about the show where it’s supposed to be more entertaining and empowering and maybe useful than it is enraging and terrifying and depressing. But I cannot hold back this part. So here it is, that knot, that tangle of deals with money going back and forth in the PBMs in the middle of everything.

That knot is getting tighter. Because the players are merging with each other, those three big PBMs. One of them is CVS, the drugstore chain, which is also merging with an insurance company, Aetna, and the other two, one belongs to an insurance company and the other is getting bought by one.

Geoffrey Joyce: They always argue there are economies of scale and synergies, et cetera.

Historically, we’ve seen the consumers lose when you see greater and greater concentration within an industry. Great.

Dan: You know what’s funny? None of this quite answers the question I started with. Why were there so many prices for that one generic prescription? I tried to fill, and it turns out Geoffrey Joyce has actually done research on this narrow little question, random prices at the drugstore. He sent hundreds of USC students to drug stores in LA with fake prescriptions to fill his findings.

My experience was not a one-off. Not an accident,

Geoffrey Joyce: and it’s basically the drug store or whatever saying, Hey, here’s a consumer that may or may not know the price, and we can charge them what we think we can get away with.

Dan: So Mr. Gower is still with us and he’s also trying to make a buck however he can.

Geoffrey Joyce: You or your child is sick and you need an antibiotic.

You’ve maybe not used that antibiotic in the past, or it’s been a long. You don’t know what the price of that is. You don’t know what a reasonable price is. Your

Dan: doctor’s like, you need a Z-pack.

Geoffrey Joyce: Exactly. And you’re like, all right. And when you walk in, would you know if a Z-pack is, you know, a hundred dollars, that that may be the price you have no idea.

Dan: So basically, we gotta watch our backs with everyone, which is turning into kind of a theme on this show. And sometimes, I guess an outfit like GoodRx can help us know if Mr. Gower is trying to put one over on us and it offers discounts with those coupons it has. So I asked Geoffrey, Joyce, and the other experts I talked with, how do I need to watch my back with GoodRx?

I mean, there’s a catch, right? And they said, no, not exactly, except that it’s, you know, just a bandaid. It’s not changing anything about the big picture with the PBMs and all the other players. In fact, when GoodRx shows us a coupon for a discount, it’s because they’ve made a deal with a pharmacy benefit manager behind the scenes to get it.

So GoodRx wrangles its prices outta that same crazy float chart, that same crazy knot that produced the jacked up prices we see. And presumably it’s finding a way to make a profit, but if a bandaid is useful to you. I guess it’s useful next time on an arm and a leg. We look at the most notoriously overpriced medication of all.

Insulin. Oh, you know that it’s crazily overpriced, but you really don’t know the story of how it got that way to get that story. We’re going back almost a hundred years, and we are revisiting the deaths of a lot of innocent dogs. Till then, take care of yourself. This episode was produced by me. Dan Weissman.

Our editor is Whitney Henry Lester. Our consulting managing producer is Daisy Rosario. Our music is by Dave Weiner and Blue dot sessions. Adam Raimundo is our audio wizard. Our intern is Daniel Fernandez. Special thanks this week to the other experts who did their best to help me understand drug prices, including Stacey Dina of Vanderbilt University, Richard Evans of the investment and consulting firm, SSR Health and Morningstar analyst.

Karen Anderson. Special thanks also this week for the show’s attorney podcast lawyer extraordinaire Spencer weRock for nerding out with me on the copyright rabbit hole. That is, it’s a wonderful life. This season of an arm andal leg is a co-production with Kaiser Health News. A nonprofit news service about healthcare in America.

It’s an editorially independent program of the Kaiser Family Foundation. Kaiser Health News is not affiliated with Kaiser Permanente, the big healthcare provider. They share an ancestor. That’s it. It’s a fun story. You can check it out at Arm and a leg show.com/kaiser. While you’re there, you might wanna sign up for our newsletter that is at arm and a leg show.com/newsletter.

Diane Weber is National Editor for broadcast, and Tanya English is senior Editor for Broadcast Innovation at Kaiser Health News. They are editorial liaisons to this show. Thank you finally to some of our new backers on Patreon. I literally could not make this show without you. Pledge two bucks a month or more.

Get a shout out right here. Thanks. This week too, mark Epstein, Andrew Thompson, Lisa Eckstein, Jocelyn Matthews, and Joe Mo. Finally, one last clip from Its Wonderful Life. The hero, George Bailey looking at a giant medical bill I know. $8,000 George. Isn’t it wonderful?