A leaked letter exemplifies the fight between drugmakers and middlemen over who's to blame for the h

Publish date: 2024-07-28
2019-04-09T12:32:00Z

A leaked letter from one of the most powerful intermediaries in healthcare gets to the heart of why there's so much finger-pointing over who should bear the blame for the high cost of prescription drugs in the US.

In the letter, a middleman in the drug business demanded almost two years of advance notice from pharma companies before they lower the prices of their drugs, according to a note to investors sent in February from the Bernstein analyst Ronny Gal. According to Gal, the middleman, OptumRx, also made a second demand of the pharmaceutical companies that could make it difficult for those companies to reduce the list prices of their medications.

Analysts at Bank of America Merrill Lynch said at the time the letter raised worries that OptumRx was pressuring drug companies not to cut their prices.

"This would feed into the narrative that the middlemen in the supply chain are part of the problem for high drug costs," they said in a February research note.

OptumRx said the goal of its letter was to make sure its costs were predictable so it could set the appropriate prices for prescription-drug insurance plans. The company, which is a unit of the $250 billion healthcare giant UnitedHealth Group, declined to provide a copy of the letter.

The letter applies to prescription drugs that OptumRx covers as part of the government-funded drug-insurance plan for the elderly, called Medicare Part D.

"Our goal in asking for advance notice of price changes in the lengthy Part D bid process is to achieve greater transparency and predictability in consumer premiums and out-of-pocket costs," an OptumRx spokesman told Business Insider in an emailed statement on Monday. 

List prices for pharmaceutical have been increasing over the past decade. But many drug companies have said that net prices — which factor in discounts and rebates negotiated by pharmacy benefit managers on behalf of employers and insurers — have increased far less, or even declined. They say consumers are paying high out-of-pocket costs for their drugs because of policies set by insurers and pharmacy benefit managers.

On Tuesday, Congress is set to grill these PBMs, the little-known middlemen responsible for negotiating lower drug prices. 

Read more: These powerful but little-known companies that have been blamed for high drug prices are now coming out of the shadows for a congressional interrogation

Drugmakers pay out more than $100 billion in rebates annually. Rebates are a big business for PBMs such as Express Scripts, CVS Caremark, and OptumRx.

Rebates were the focus of the second, more complicated, demand in OptumRx's letter to drug companies, according to Gal. Essentially, OptumRx was demanding that drug companies keep their rebates at the same level, even if they lower the list price of a drug. That would make it difficult or impossible for drugmakers to lower their list prices, because lowering their list prices would automatically reduce their profits.

Gal noted that the pharmaceutical companies he spoke with weren't happy about the terms, though they wouldn't outwardly criticize them.

"Pharma's secrecy despite their anger testifies to the growing power of payers," he wrote. "Despite intense frustration over the demands in the letter, pharma execs are reluctant to go public with information that would cast UNH in a negative light."

The Trump administration is also targeting the rebate system, saying it drives up out-of-pocket costs for consumers. The Department of Health and Human Services proposed a rule earlier in 2019 that would effectively ban some rebate payments unless they're passed along to consumers. Big pharma companies applauded the rule, while PBMs and health insurance companies criticized it.

"Big Pharma has been working nonstop to deflect attention from outrageously high prices by convincing Americans that health insurance providers and their PBM partners are the problem," America's Health Insurance Plans, the health-insurance industry's main lobbying group, said in a statement. "From the start, the focus on rebates has been a distraction from the real issue — the problem is the price."

Since then, the Centers for Medicare and Medicaid have said that insurers can assume rebates will be in place as they build out their 2020 health plans. 

This article was initially published in February 2019 and has been updated. 

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