Health Care in America I – Drug Pricing

Trump promises to replace Obamacare with “Something Really Great.” Here are several Really Great areas where he could begin that could substantially reduce healthcare costs without affecting quality or care.

The Affordable Care Act, otherwise known as Obamacare had the effect of making health care available to people with preexisting condition, but insurance premiums and deductibles went way up, so for most, health care became less affordable.

It is well known that the United State spends more on healthcare per person than any other western nation, yet gets less value. There are several things in America running up the costs, which, in other contexts, would be called larceny, and would be a felony offence.

Here are the Really Great areas, and I am going to endeavor to devote several posts to these, as things are really out of control, and the chief enabler is the U.S. congress, and the chief victim is you.

  • Drug prices
  • Emergency Room Price Gouging
  • Out-of-Network doctor charges
  • Inflated Blood Tests
  • Medicare Drug Price Negotiations


OK, let’s start with…

Drug prices

Drug prices in America cost anywhere from three to ten times as much as in other countries. And this for the exact same drug, not a generic. I am not exaggerating. My wife is French and goes there several time a year. She has seven first cousins that are M.D.s. When we need a drug that is absurdly pricey in America, an Epipen, for instance, she gets one her cousins to write a prescription. Pair of Epipens: here $600, France $80. Of course, we all know the Epipen people are holding us up. Another drug we use is Symbicort, an asthma inhaler. Price here: $320, in France, $43.

Why? The way drugs are sold here is not what you might think. You would probably suppose that the manufacturer sells it to the retailer for some wholesale price and the retailer in turns sells it to us, and then the insurance might pay some of the cost, and that is the end of it. After all, that’s more or less how everything works, right?

Drugs are a major exception, at least in America. Drug pricing involves all sorts of kickbacks and secret discounts. Look at this drawing from an article found here. Believe it or not, this is very simplified.

Follow the money. It is the dashed green line. You will see that money flows back to the manufacturer and it flows back to the “third party payer”—your health insurance company. The only person that the money doesn’t flow back to is the patient—you. And that’s the whole point.

Here are a couple of specifics on the various kickbacks and under-the-table shenanigans going on.

The Insurance Companies Get a Kickback

The manufacturer and insurers negotiate drug prices. So far, so good. But instead of the pricing being lower at the checkout counter, it stays high, and the manufacturer subsequently receives a higher price. The manufacturer then turns around and passes some of this back to the insurance company. There is a whole hidden industry that keeps track of this.

Here is what this means: You are charged $100 for a drug at your local drugstore.. You pay, let us suppose, a $40 copay and your health insurance pays the rest. You would probably think that “the rest” is $60. No. If the manufacturer got, say, $80 for the drug, they rebate maybe $30 of it to the insurance company. The insurance company then pays the $60 balance. But since they got that $30 rebate, it was really only $30. Think that is sleazy? It is about to get a whole lot sleazier.

Let us suppose you have a deductible. You pay $100, give the drugstore your insurance card, they duly record it, but since you have this deductible, you pay the full $100. Guess what happens now. You won’t believe this, but I promise I am not making this up. See here. What happens is this. Even though you paid full price for the drug, the insurer still gets their $30 rebate, even though they didn’t pay a penny. If this strikes you as somehow criminal, you are in good company.

That same $100 drug in Europe is probably $30 or less.. Not hard to see why.

There is another in depth article from Forbes.

The Manufacturers Get a Kickback

Lest it seems that the pharmaceutical companies are the victims here, bear in mind that if you go into your local drugstore and pay cash for our example drug. The drugstore still pays $80 to the manufacturer who then pockets that $30 they might have otherwise had to pass on to the insurer. Because of the back door manufacturer->insurer kickback structure, the potentially cheaper cash price is never seen at the cash register. Plus the drugstores don’t really mind keeping the prices high. Everyone wins here, except for the patient.

There Are Significant Administrative Costs Too

There is a huge bureaucratic industry called Pharmacy Benefits Manager that manages all these kickbacks. It is OUR MONEY that is paying for this wholly unnecessary administrative layer. How much of our drug money goes for this? From Wikipedia: “Express Scripts Holding Company is the largest pharmacy benefit management (PBM) organization in the United States, with 2013 revenues of $104.62 billion.” $100 billion? Come on. But what does that mean to us? There are 32 of these Pharmacy Benefit Manager companies. Lets suppose that grand total is $300 billion. Collectively they manage 5 billion prescriptions per year. So that means, assuming my $300 billion guesstimate is right, that on average, $60 of every prescription you fill is shared between a Pharmacy Benefits Manager and the insurer, via kickbacks.

Rube Goldberg did not create this money extraction contraption depicted above. It is a collaboration of the drug companies, the insurance companies, and the U.S. congress. It is a wholly American invention that has not caught on elsewhere.

There seems to be a widespread belief that it is the Republicans in congress that are the culprits. Not so. It is clearly a bipartisan effort. Check out this list of prominent Democrats who sided with the drug companies.

This particular vote had to do with getting the drugs offshore. Reputable Canadian pharmacies (some are, some aren’t, do your homework) deliver the drugs at half the cost or less. The senators claim there would be no control over the quality. Possibly. But could we not certify offshore providers. All we really need to know is that they are actually shipping the drugs we ordered and not some counterfeit stuff. Doesn’t sound like rocket science to me.

But better still, in a single stroke the convoluted mess above could be outlawed. No rebates to manufacturers, no rebates to insurers. Instead we do it like everything else: manufacturer->wholesaler->retailer->patient. The larger outfits will clip the wholesaler out of the food chain, lowering the price.

So will Trump attack this mess? And if he does, will congress go along? You might want to share this post with your congressman.

Next post: Emergency Room—the Money Machine

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