Pharmacy benefit managers (PBMs) and their effects on the prescription drug marketplace have been on prosecutors’ radar lately, with attorneys general from Ohio to Kentucky filing suits against PBMs for alleged overcharges of state Medicaid programs. Both prescription drug patients and independent pharmacies accuse PBMs of unfair competitive practices, particularly when they are vertically integrated with national pharmacy chains. However, PBMs are just one part of the ecosystem that results in high prescription drug prices for consumers.

The Pa. General Assembly Subcommittee on Progressive Policies for Working People held public hearings July 12 in Harrisburg to explore avenues of bringing prescription drugs to Pennsylvanians at a lower cost, such as importing them from Canada or using the state’s purchasing power to bargain for lower prices from pharmaceutical firms. One independent pharmacy owner from western Pennsylania described his business’s successful use of a cost-plus model, which relies on low generic prices without sacrificing the personal touch.

Hearings prompted

by constituent concerns

Rep. Eddie Day Pashinsky (D-Luzerne) and Rep. Emily Kinkead (D-Allegheny) scheduled the hearings after hearing repeated concerns from constituents about struggles to pay for prescription drugs.

“What really prompted it,” Kinkead told the Press, “was conversations I had when I was running [for office], with a lot of seniors, but also young people, who were struggling with being able to afford health insurance, being able to afford co-pays, and deal with the increasing cost of medications.”

Kinkead and Pashinsky have introduced House Bill 833, which would direct the Pa. Dept. of Health to conduct a study of the feasibility of drug importation from Canada. Importation from Canada is permitted by the federal government, but the negotiating party on the American side must be a state like Pennsylvania, rather than an individual patient or a pharmacy.

“Nationally,” Kinkead said, “we’re seeing lifesaving medications that people rely on every day, from insulin to epi-pens, being price-gouged, with no relation to new innovations that would justify the price increases. Pharmaceutical companies are dramatically increasing the cost of lifesaving medications, things people should not have to ration.”

Kinkead and Pashinsky called the hearings to provide a forum for public discussion of the pros and cons of importing drugs from Canada, as well as to hear other possible solutions to the problem of high prescription drug prices.

Freeman co-sponsors HB 833

Rep. Bob Freeman, a Democrat representing Easton, the Borough of Freemansburg and portions of several neighboring townships, is a co-sponsor of HB 833.

“I applaud Emily Kinkead’s proposal,” he told the Press, “because it [importation from Canada] is something that needs to be looked at.”

Freeman outlined the demographics of Pennsylvanians most dramatically affected by the high cost of prescription drugs.

“Typically, the concerns come from senior citizens who don’t qualify for PACE or PACENET, the state prescription drug programs,” he said.

PACE and PACENET are available to Pennsylvanians age 65 and older. PACE is available to single Pennsylvanians who earn $14,500 or less per year and married residents who earn $17,700 or less per year; PACENET covers single residents earning $14,501 through $27,500 and married Pennsylvanians earning $17,701 through $35,500. (More information on both programs is available from the state government at https://www.aging.pa.gov/aging-services/prescriptions/Pages/default.aspx.)

“As good as these programs are,” Freeman said, “there are a lot of people who get lost between the cracks.” As examples, he mentioned people ages 62 through 64 and people whose earnings are just slightly higher than the PACE/PACENET caps.

“There’s a growing need of people getting into that age bracket who are oftentimes forced to choose between paying for expensive prescription medicines, or putting food on the table and paying rent,” he said. “And you have younger people with more complicated conditions [requiring multiple medications, who] don’t have a prescription benefit through their employer.”

Cost-plus pricing

on generics

Kyle McCormick, owner of Blueberry Pharmacy in Pittsburgh, testified at the hearing and spoke to the Press about his business model. Blueberry sells only generic drugs, and uses a “cost-plus” pricing model. For a 30-day supply of medication, the pharmacy charges non-member customers the actual cost of the drug plus a $10 dispensing fee; the dispensing fee for members is only $3. On 90-day supplies, the dispensing fees are only $15 for non-members and $5 for members. Membership is $18 per quarter or $60 per year, and the benefits include discounts on non-prescription items, as well as one free delivery or mailing per quarter.

McCormick told the Press he believes the most pernicious problem of generic drug dispensing is AWP, a figure that supposedly represents the average wholesale price paid by a retailer for a drug. Within the industry, however, it’s widely acknowledged that AWP is not a true average. Information site Drugs.com (operated by Drugsite Trust) notes, “AWP is not a government-regulated figure, does not include buyer volume discounts or rebates,” and is “a controversial pricing benchmark.”

“Each pharmacy sets its own list price,” McCormick explained, “using algorithms that use AWP.” Acknowledging that pharmacies typically do not receive full reimbursement for what they bill for covered drugs, he explains that pharmacies set their prices at some multiple of AWP to guarantee themselves a certain level of profit; commercial insurance plans pay a higher percentage of the billed price than Medicare and Medicaid.

Despite its nebulous nature, AWP is the number that insurers and PBMs use when they talk about discounting and rebates. It is the figure to which discussions about prescription drug costs tend to anchor.

McCormick views this as a problematic situation. AWP, he says, “is a false, completely made-up number.”

In the United States today, roughly 90 percent of prescriptions are filled with generic drugs. McCormick says AWP does not reflect this reality. Rather, the AWP for any particular drug formulation is unrealistically tied to the brand-name version, making it a higher figure than the true average wholesale cost. Speculating that AWP may have made more sense in the 1990s, when brand-name blockbuster drugs made up a larger share of the market, McCormick says that in many cases, patients would do better to buy generics and pay cash, cutting out the middlemen of insurance companies and PBMs.

Hatch-Waxman and generic competition

“My dream,” McCormick told the Press, “is a fair-priced marketplace for generics. In fact, we don’t need insurance for generic drugs. It adds cost.”

Acknowledging that a small minority of drugs and biosimilars may not fit this model, particularly when they first go off-patent, he reports that Blueberry’s average acquisition 30-unit cost for the generic drugs he dispenses is $3.79, and the median cost is $2.15; the average 30-unit cost to Blueberry members is $6.79, and the median is $5.15. On the other hand, he says, “If you operate in the world of insurance, you have to cover the cost of the call center, and somebody counting how many refills you’ve had in a 90-day period [etc.].” All of those peripheral activities mean that using insurance for generic drugs raises their effective cost, which is borne by the insurance system and by patients.

McCormick’s vision of a generic marketplace with cost-plus pricing seems consistent with the vision of the Drug Price Competition and Patent Term Restoration Act of 1984, informally known as the Hatch-Waxman Act, for sponsors Rep. Henry Waxman (D-CA) and Sen. Orrin Hatch (R-UT). The act, which became law in September 1984, provided a clear regulatory pathway for Abbreviated New Drug Applications (ANDAs, or generic drug applications) while introducing a new type of market exclusivity for new chemical entities created by drug innovators.

Generic competition

Competition among generic manufacturers has resulted in dramatically lower wholesale prices for off-patent drugs. This is where pharmacies like Blueberry and pharmacists like McCormick see a huge opportunity.

McCormick gives the example of a popular generic with a very low price that is typically billed at hundreds of times its actual cost.

“Ondansetron [the generic of anti-nausea/anti-emetic Zofran] is one of the most ridiculous ratios of AWP-to-cost,” he says. “[Its] AWP is $668 per bottle. [A pharmacy] can buy it for 95 cents.”

The problem is that health insurance hides the true cost of drugs from patients, whose experience with covered drugs typically begins and ends with their co-pay.

“Generic drugs are very deflationary, so month over month, prices go down, but you wouldn’t know that by what patients pay.” Many drugs covered by Medicare Advantage plans have a one-dollar or zero-dollar co-pay, so patients prefer to use their insurance for these drugs, even though the plan (funded by taxpayers) is paying many times what the drugs actually cost.

McCormick also notes that some commercial insurance plans require brand-name dispensing, and argues that the requirement is because of the rebate structure built into the plans by PBMs. For example, he says, “Certain Express Scripts plans require Advair, even though the generic costs $100 less.” (Advair is a branded version of fluticasone and salmeterol, used to treat asthma and chronic obstructive pulmonary disease, or COPD.)

He advocates for patients and independent pharmacy owners to change their view of health insurance when it comes to drugs.

“We think of health insurance as if it should cover everything,” he says. “We should think of it more like car insurance. To submit a claim for a dent will only guarantee a premium increase.”

He further explains that popular plans with extremely low co-pays do not cover more expensive drugs, so patients lose out, on average.

“Patients are drawn to these zero-dollar plans, and they complain when [the price for branded drugs] are ridiculously high,” McCormick said. “Of course it’s high, because [the plan is] covering the 95-cent things, but not the things insurance is meant for. They’re covering the dent in your car, but not the replacement cost of your car. What you should buy insurance for is [...] a car accident.”

The public perception of prescription drug costs in the United States is that they are very high, and the reality is that the cost to “the system” (commercial insurance plans, Medicare, and Medicaid) is high. Prescription drug spending totaled $369.7 billion in 2019, according to the Centers for Medicare & Medicaid Services. However, the actual cost of producing the vast majority of prescribed drugs is far lower than the prices being paid. Cost-plus pricing on generics may be a way for independent pharmacies and Pennsylvanians using prescription drugs to fight rising drug prices. (Video footage of the July 12 hearings is available from the Pa. House at https://www.facebook.com/PADemPolicy/videos/535232261161972/)