Drugmakers Point Finger at Middlemen for Rising Drug Prices

Pharmacy-benefit managers and the rebates they command come in for criticism by pharmaceutical executives

As U.S. drug prices rise, drugmakers are playing down their role, instead heaping blame on the middlemen who help determine how medicines are priced.

Some of the sharpest criticism has come from drug-industry executives who have been grilled by lawmakers or skewered on social media over sharp price increases on their products. They include the chief of Mylan NV, maker of the lifesaving EpiPen, who says her company is being tarred unfairly for a dysfunctional system in which wholesalers, pharmacies and pharmacy-benefit managers take their own cut of each prescription.

Pharmacy-benefit managers, or PBMs, oversee drug-benefit plans for employers and health insurers. Their job is to hold down the cost of providing those benefits, which they do by choosing which drugs to cover and using that leverage to wrest lower prices from drugmakers through rebates. PBMs keep some of those savings but pass most of it on to their clients.

But the system has some serious side effects, drug executives and other critics say. Because rebates are based on a percentage of a drug’s list price, PBMs have benefited as the price of drugs has skyrocketed in recent years.

Critics say these rebates also can encourage drug companies to increase prices more sharply than they would have done otherwise. For example, if a drugmaker wants to raise the price it gets for a drug by 6% to drive sales growth and offset research costs, it has to raise the sticker price even more than that to offset the percentage it rebates to PBMs, says Ron Cohen, chief executive of drugmaker Acorda Therapeutics Inc.

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“So you get this pressure year after year that tends to escalate the price increases,” said Dr. Cohen, who is also chairman of the Biotechnology Innovation Organization, a biotech trade group

PBMs deny that they cause drug-price inflation, saying drug costs would be even higher without rebates. “We have every incentive to make costs as low as possible,” saidTroyen Brennan, chief medical officer at CVS Health Corp., whose Caremark unit is one the biggest PBMs, along with UnitedHealth GroupInc.’s OptumRx and industry leader Express Scripts Holding Co.

PBMs compete aggressively on price to win business from “very sophisticated purchasers,” Mr. Brennan added.

For many years, drugmakers defended the practice of privately negotiating rebates as a market-based alternative to government-run price negotiations. They also prospered under the rebate system, which largely failed to curb drug-price increases.

Now, with drugmakers under scrutiny for sometimes-dramatic price increases, some industry executives say the system no longer works efficiently and is ripe for reform.

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“As the pressure on drugmakers has increased, they have been trying to deflect that pressure by pointing to another scapegoat,” says Geoff Porges, a biotechnology analyst at Leerink Partners LLC.

In August, Mylan Chief Executive Heather Bresch, lambasted for raising EpiPen prices, said that the “broken” system of paying for drugs was to blame for price increases on the product, which counteracts severe allergic reactions. “The irony is that the system incentivizes higher prices,” Ms. Bresch said on CNBC.

Pfizer Inc. Chief Executive Ian Read said recently that “the absence of rebates would be healthy for the system.” Drugmakers are paying bigger rebates to PBMs, Mr. Read said at an investor conference, but patients are paying more for prescriptions. “The rebates are being paid, and the copays are going up,” for consumers with drug coverage, he said.

PBMs say they aren’t responsible for rising copays, which are set by health insurers and employers. Express Scripts, the largest PBM, says it advises clients to cap copays for even very expensive drugs at $150.

“EpiPens are expensive because Mylan raised the price of EpiPens,” Steve Miller, chief medical officer at Express Scripts, said in a recent interview. “To blame it on distributors…is just ridiculous.”

Despite their purchasing power, PBMs have struggled to hold down drug costs. U.S. spending on prescription drugs is estimated to have risen 8% to $321.9 billion last year, compared with a 5.6% increase on all health-care consumption, according to federal data.

Many major drugmakers, meanwhile, have continued to report higher sales, driven in part by price increases.

Criticism of PBMs has accelerated as the industry has consolidated and grown more powerful, while also more-aggressively steering patients to drugs with the largest rebates. The industry’s top three account for three-quarters of the U.S. market—up from 49% in 2011, according to Jefferies LLC. Their combined operating profit was $10.1 billion last year, up 30% from 2013.

Beyond rebates, PBMs collect other fees based on a percentage of drugs’ prices. PBMs charge drug companies “rebate administration fees” of 2% to 5% of product sales in exchange for tracking the rebates owed to their clients, and providing data on claims that drug companies use to assess market share. PBMs also collect percentage-based fees for distributing high-price drugs through their own mail-order pharmacies.

Express Scripts keeps in aggregate 10% to 15% of rebates, though some clients negotiate to have all rebates passed back to them and pay higher flat fees instead, Everett Neville,Express Scripts’ senior vice president for supply-chain management, said in a January interview.

Mr. Neville said that PBMs profit from higher prices, but don’t cause them. “Absolutely, we benefit when prices rise,” he said “The same way that guys who plow driveways in the Northeast makes money when it snows a lot. We don’t make it snow, though.”