December 30, 2016 / 3:19 PM / a year ago

Pharma's middlemen will feel the squeeze in 2017

NEW YORK (Reuters Breakingviews) - The pharmaceutical industry’s middlemen face a 2017 clampdown. The U.S. medical system’s opacity and complexity have stoked drug prices, fueling the flow of dollars to insurers, wholesalers and pharmacy benefit managers (PBMs). The growth of high-deductible insurance - primed to accelerate under the incoming Trump administration - will bring much-needed transparency to the market, and unaccustomed pressure on these firms.

An art handler places drugs for the art installation 'In this terrible moment we are victims clinging helplessly to an environment that refuses to acknowledge the soul' by British artist Damien Hirst in the new Brandhorst modern art museum in Munich, May 6, 2009. REUTERS/Alexandra Beier

Mylan may have jacked the price of its allergy pen to $600, but few pay that much. PBMs like Express Scripts arrange discounts but don’t disclose all the terms to clients. Pharmacies and wholesalers like McKesson take a cut. The result is an opaque, inefficient mess.

The system encourages price increases and pernicious behavior. Drug firms can sell tweaked versions of old medicines at outrageous list prices knowing the PBM will encourage their use. A PBM can justify its existence by negotiating discounts, keeping some of the savings and forcing customers to use a captive pharmacy. Wholesalers buy medicines before regular price increases and pocket the difference. And insurers point to higher costs and raise premiums. The players have benefited. Express Scripts’ stock has quadrupled over 10 years, while McKesson’s and insurer UnitedHealth’s have tripled.

Rising insurance premiums have maddened customers. One way they have adjusted is by switching to cheaper, high-deductible insurance. About a quarter of insured employees were under high-deductible plans in 2015, compared with 4 percent a decade ago, according to the Kaiser Family Foundation. These patients typically pay list price for drugs until they hit a deductible threshold, often thousands of dollars. So growing numbers of patients see, and feel, rising list prices. As Mylan’s CEO recently said: “The pharma pricing system was not built on the idea of consumer engagement.”

Politicians and consumers are increasingly pushing back on drug prices. Chief executives of Valeant and Mylan were forced to testify in front of lawmakers. The Department of Justice is investigating Express Scripts’ financial ties to drugmakers. And McKesson warned in October that fewer drug companies were raising prices, and by smaller amounts than expected.

Republican plans to dismantle Obamacare will undoubtedly involve more use of high-deductible health plans. As such, expect the pushback on prices to intensify.

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