December 18th, 2021

Why are drug prices so high? The answer in two charts

It’s clear to most Americans that our medical costs are higher than they should be, and that drug prices in particular are growing out of control.  These rising costs place a massive burden on America’s businesses, particularly small- and medium-sized businesses, as well as American families directly.

Why is this the case?  Books have been written to address this complex question, but there’s a simple way to understand what part of the drug ecosystem is most to blame for high costs: just look at which part of the pharmaceutical supply chain is running away with the money.  

When we see high drug costs, our first instinct is to blame the drug companies.  The drug companies are certainly profiting from the configuration of our market, but there’s an even bigger financial winner: the middlemen.  

The middlemen payers (insurance companies) have been assembling conglomerates in the middle of the supply chain - buying up pharmacies and PBMs - and wield their power over both sides of the market. They extract higher rebates from drug companies on one side, and higher prices from employers and patients on the other.  All of the “big 3” PBMs which control the flow of 80% of drugs in the US are owned by payer conglomerates: OptumRx is owned by United HealthCare (acquired 2011), ExpressScripts is owned by Cigna (acquired 2018), and CVS Caremark is owned by CVS (acquired 2007) who merged with Aetna in 2018.  These payer conglomerates have been extremely effective in harvesting profits from their PBMs, and their financial results reflect this.

Two charts tell this story, one at the micro level for one drug (insulin) and the other at the macro level comparing stock prices for payers vs. drug companies:

Chart 1

This chart from an article entitled Untangling the Price of Insulin from the USC School of Pharmacy shows the middlemen profit expansion at an individual drug level for insulin. While the focus here is on insulin, this phenomenon is widespread throughout the drug supply chain.

Chart 2

From a macro perspective, looking at the market capitalization of middlemen payers versus drug companies provides fascinating insight into who is profiting from increasing drug prices. As illustrated on the chart below, drug companies are doing well, but the middlemen have run away with the money: payers are performing 3x better in the stock market than even the pharma companies!

Payer Index: CI, UNH, ANTM, HUM.
Pharma Index (DRG): MYL, SNY, JNJ, RDY, MRK, GSK, TEVA, ABBV, NVS, ABT, AZN, NVO, AGN, PRGO, TARO, MNK, SHPG, VRX, ALKS, JAZZ, BMY, LLY, ZTS, PFE, ENDP

Unfortunately, there are losers in this story as well: American businesses and patients, whose overpayments are enriching the payers who are supposed to be the ones controlling costs.

At SmithRx, we believe our role as a PBM is to be a highly efficient channel between drug companies and plan sponsors - not to extract outsized profits at the expense of our clients.  We are achieving this every day with our Drug Acquisition Platform, built around an aligned business model (100% pass-through), advanced technology, and integrated cost saving programs.  In the years ahead, we look forward to working with you - our valued clients and partners - to build a healthier drug supply chain for all Americans.

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Why are drug prices so high? The answer in two charts

It’s clear to most Americans that our medical costs are higher than they should be, and that drug prices in particular are growing out of control.  These rising costs place a massive burden on America’s businesses, particularly small- and medium-sized businesses, as well as American families directly.

Independent pharmacies vs. big chains: who has better prices?

The economics of the U.S. healthcare system can be confusing, especially when it comes to pharmacy benefits. Under “normal” retail conditions concepts like  “economies of scale”, “supply and demand”, “consumer choice” drive business decisions. It is not that these concepts do not exist in healthcare (they do), it is just that they don’t always lead to intuitive outcomes. 

Partnering with SmithRx to provide transparent pharmacy benefits helps us deliver low-cost, high-quality care. Their pass-through model is the best way to ensure prescription drug pricing is fair.

Will Young
CEO at Sana Benefits

My loudest and most challenging group was handled perfectly in the first 30 days post-go-live by SmithRx. If it were up to me, I would put every one of my new groups with SmithRx.

Ken Mensio
Vice President at Risk Strategies

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