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Beyond the US Inflation Reduction Act: the Real Causes of High Drug Prices

Insights from a Drug Manufacturer and a New Model that Lowers Drug Costs

By Neil Owens, PhD

As President of a drug maker called Medicure Pharma, I’m used to and frankly not surprised by negative publicity surrounding drug pricing. Having insight into the world of drug pricing, the truth is that it is not transparent and there are bad players who profiteer. High drug prices enrage everyone and hurt people. We have a solution you might not have heard about.

Why the Inflation Reduction Act won’t solve the problem

The Inflation Reduction Act (IRA) set out with good intentions to solve this problem. In essence, the IRA seeks to penalize manufacturers of medications who raise the price of medications above inflation. Any increase above inflation on Medicare Part D drugs will require the manufacturer to pay Medicare rebates equivalents.

At face value, this seems logical.

Here’s where it gets interesting. Data published by Drug Channel Institute on June 13, 2023 demonstrated that while the average list price for branded (think expensive and marketed) medications rose by an average of 4.0%, the average net price fell by 0.9%.

Net price is the cost of a medication after you have considered all of the discounts, rebates, or taxes. List price, on the other hand is the price set on a product without any discounts considered.

So while it is true that drug manufacturers have implemented price increases for branded medications, the truth is that manufacturers actually generate less revenue than the list prices would suggest. This highlights the substantial gap between the list price and the actual revenue received by these companies due to rebates and discounts. Let me emphasize rebates and discounts you don’t see, and are hidden because of confidentiality agreements.

If drug manufacturers aren’t making more money then who is?

Here is where middlemen that operate behind the scenes, like Pharmacy Benefit Mangers (PBMs) come into play. A significant reason behind the rising drug prices, which often surpass the rate of inflation, is the interplay of pricing strategies employed by PBMs and the pharmaceutical industry's tacit agreement to participate in these schemes for better formulary coverage (in other words better insurance coverage so that your copay is lower).

While the wholesale acquisition cost (WAC) of medications escalate, the gross-to-net income ratio for pharmaceutical companies often remains consistent or even dwindles as referred to above. The fact of the matter is, drug prices increase above the inflation rate largely because PBMs strategically facilitate this escalation. By negotiating contracts with manufacturers on behalf of insurance companies and influencing insurance coverage decisions, PBMs gain more from higher drug prices, because they pocket a percentage of the list price.

Moreover, pharmaceutical companies are swayed to amplify the prices of their medication, enabling them to propose greater discount or rebate to PBMs. This, in turn, may secure them a superior coverage tier with the insurance company and expand access to insured individuals. Pharma companies want more people to theoretically access a medication through their insurance, and with a low copay – it doesn’t make sense to have it so expensive and exclusive that no one can afford it or get access to it.

Ironically, IRA only penalizes the pharmaceutical companies, overlooking the root cause of these hikes beyond inflation—PBMs. Regrettably, pharmaceutical companies become scapegoats for the real perpetrators, the PBMs. Again, the bad press for pharma companies is easy to hide behind. But look at which companies were in the top 10 for revenue last year – were they insurance conglomerates or pharma companies?

How Marley Drug’s Direct-to-Patient model offers a solution to the high cost of branded medications

This pricing dilemma is something we, at Medicure, have encountered firsthand with our product, ZYPITAMAG (pitavastatin). Our product was priced at $697.41 WAC for a 90-day supply. Yes, expensive. Even after offering significant rebates of over 70% to PBMs, we were unable to surpass our competitor, priced at over $1000 for a 90-day supply. Faced with the challenge of escalating our WAC price to appear more attractive to PBMs, we chose an alternative path—direct selling by eliminating all middlemen. To achieve this, we invested in our own infrastructure and bought Marley Drug, a high-throughput pharmacy licensed to ship medications to all 50 states (see Why Medicure purchased Marley Drug). We now offer ZYPITAMAG at an affordable $34.50/month, a pricing model just as profitable as the traditional insurance route. Just to repeat, our profit from $232 through insurance or $34 without insurance was the same – think about how could that be possible?

Other manufacturers are beginning to transition to this Direct-to-Patient model

Other manufacturers have taken note of our Direct-to-Patient model – and we’ve begun to partner with several manufacturers to offer branded medications, like LODOCO (colchicine) tablets, SOAANZ (torsemide), and EUTHYROX (levothyroxine) directly and without need for insurance.

Notably, we now offer BRENZAVVY (bexagliflozin), a medication used to help manage type 2 diabetes, at a cash-price of $59.95 for 30-tablets. BRENZAVVY is part of a drug class called SGLT2 inhibitors, which are prescribed to millions of Americans each year. The high retail cost of these medications of over $500/month make it impossible for many to access this drug class. Think again about why that price is so high.

Two medications from this drug class, JARDIANCE and FARXIGA, are part of first cycle of Medicare drug price negotiations which the Inflation Reduction Act identified as high expenditure, single source medications without generic or biosimilar competition.

Of the 10 medications listed as part of this first cycle of negotiations, Medicare enrollees paid a total of $3.4 billion in out-of-pocket costs in 2022. Our model enables patients to access these medications for up to 90% less than through their insurance. Again, those high out-of-pocket costs are a symptom of high prices engineered to benefit PBM’s (which govern Medicare contracts as well).

Final thoughts

We’ve found a way to save Americans hundreds and thousands of dollars on their prescriptions. We removed the middlemen. if you know someone who can’t afford JARDIANCE or FARXIGA we have a solution for them. Hopefully we can bring you a lot more solutions.

Our motto is ‘We Bring Medicine to Life’ – not only because we’re involved in research into new medicine, but also because we want to make medications accessible to those who need them.