It is hard not to become skeptical regarding the true cost of prescription drugs when it’s difficult to understand why they became so costly in the first place.

Complex interactions within the pharmaceutical supply chain blurs the math as rebates, discounts and governmental reforms perpetually fan the flames of confusion. Meanwhile, consumers continue to pay the ultimate price for their lifesaving medications. How does this happen?

Where it begins …

Manufacturers: Manage the distribution of their product from production to wholesaler. The drug maker analyzes anticipated demand and sets the list price for their products. They issue and grant authorization of rebates and discounts for each drug they produce.

Wholesalers: Purchase drugs at a wholesale acquisition cost (minus a confidential negotiated discount); take possession of manufactured drugs and then sells the product to physician offices, hospitals and pharmacies. More than 80% of all wholesale drug distribution comes from three companies: AmerisourceBergen Corp (ABC), Cardinal Health (CAH); McKesson Corp (MCK).

Pharmacy Benefit Managers (PBM): Contract with insurance companies, Medicare Part D plans, unions; large employers to design formularies (network list and tier placement), influence patient access, determine how much pharmacies will be paid and use their purchasing power to create and capture rebates and discounts from manufacturers. Their role impacts the total cost of drugs.

When the government steps in …

The Inflation Reduction Act (IRA)

Starting November 2023, the Secretary of Health and Human Services (HHS) will be required to negotiate certain drug prices with manufacturers. This will be the first time in our history that such empowerment has shifted to a government appointed official.

Measured by total federal spending, HHS will be required to publish a list of the top 100 most expensive Medicare medications. Fifty drugs within Part B (Medicare’s medical insurance) and fifty from Part D (Medicare’s prescription drug framework insurance plans must follow).

This list will be known as negotiation-eligible drugs (NEDs). List-worthy qualifications include non-generics; FDA drug approval for seven years; single sourced biologics (brand-name drug that comes from living sources; treats conditions like autoimmune disorders; cancers) must be eleven years or older.

HHS and the drug manufacturer will “negotiate” a ceiling based on certain metrics and NON-federal sales criteria. Both parties must enter into an agreement to determine the maximum fair price.

There are penalties built within the Act that force the manufacture from artificial inflation. If this becomes the case, drug makers must pay engorged fines directly to the Medicare Trust Fund. Further, if the manufacture does not parley with the Secretary, sizable penalties will accumulate; forced excise taxes could reach 90% on all sales of applicable drugs each day talks are stalled.

Part D Re-design

If it is was not already confusing, Medicare Part D programs which are built inside most Advantage Plans or purchased as a standalone, aka Prescription Drug Plan (PDP), will be restructured.

In 2025 redesigns will transfer liabilities from the government to drug manufactures and insurance carriers.

Current phases within D plans are a deductible (today, less than $500), the initial coverage where the enrollee tallies both retail Rx costs and pays their plan’s copays. Once an annualized limit accumulates the beneficiary advances to the elusive donut hole. Here the enrollee pays 25% of all drug costs up to yet another annualized limit. The final catastrophic phase lowers percentages to 5% of drug costs (of which 15% of responsibility returns to the plan; 80% remains with the governments). What a maze of more messy math!

The Act eliminates the donut hole all together. New Part D phases will be deductible most likely to increase beyond $500, the coverage phase adding potentially more drug tiers; larger and possibly more confusing coinsurance obligations and the improved catastrophic phase where the enrollee will pay nothing for drugs. Here the manufacture and insurance plan will cover costs with a 20% liability to the government.

Beneficiaries

Medicare Part D enrollees will benefit greatly as annual out-of-pocket drug costs be set to $2,000 per enrollee, per year in 2025. Moreso, insulin cost-sharing will be limited to $35 per month, premiums for D plans will be capped at 6% growth rate through 2029 and certain costly vaccines will become “free.”

Fallout

The Act will be subjected to numerous challenges as all drug and biologic manufactures are radically affected.

The drug industry will fight a mighty fight against forced price restructuring. This turbulence could stimy future drug innovations and/or create hyper-reactions within pricing schemes of non-listed medications in other prescription revenue streams, such as group or individual commercial markets. Once again, the public remains the monkey in the middle.