Merck's Frazier Joins Growing List of Pharma CEOs Attacking Drug Rebates

Published: Oct 09, 2018 By

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Kenneth Frazier, chief executive officer of Merck & Co., speaking with the Economic Club of New York, joined a growing list of pharmaceutical chiefs in criticizing the role of middlemen in rising drug prices.

Frazier points out that the company sets a drug price and publishes that price. But once that figure is set, the company often makes discounts to middlemen, typically pharmacy benefit managers (PBMs). The prices, Business Insider reports, “may or may not make their way directly to patients. And if you have a high deductible plan, you might still be on the hook for paying the full list price, even if you don’t get the direct benefit of the discounts.”

Frazier is not the only pharmaceutical executive to bring up the subject of drug rebates. Pfizer’s chief executive officer Ian Read told Reuters in early August, discussing the Trump administration’s attacks on high drug prices, “I believe the administration does want to remove rebates, and they consider it a priority.”

The Trump administration has proposed a rule to push back protections already in place that allow rebates between drug companies and pharmacy benefit managers. Read believes the administration wants to eliminate them completely and has discussed its plans “in broad terms” with Department of Health and Human Services Secretary, Alex Azar.

In a profile of Leonard Schleifer, the co-founder of Regeneron Pharmaceuticals that came out this summer, Forbes wrote, “The difference between a $10,000 drug with a $4,000 rebate and a drug simply priced at $6,000 is that the former lets the benefits manager crow about the savings it delivers and passes money back to the company buying the health plan. ‘I would like to see the rebate system go away,” Schleifer says.”

Read has noted that Pfizer gets about 58 percent of its list prices on drug, with about 40 percent going to PBMs. If the rebate system were ended, he said, drugmakers could keep price hikes in line with health care inflation.

Business Insider, writing about Merck, indicated, “Merck has published reports outlining the company’s average list and net price increases for its products. Merck’s average net prices after factoring in those discounts decreased by 1.9 percent in 2017 as list prices increased 6.6 percent.”

“I don’t understand where we live in a world where 50 percent of the value goes to the supply chain,” Frazier said.

Frazier, perhaps optimistically, thinks the number of companies between a product and the consumer will start to decrease. But there definitely are signs of consolidation. In March, U.S. insurer CIGNA Corporation announced it was acquiring pharmacy benefits manager Express Scripts for approximately $52 billion. Insurer Aetna is also merging with CVS Health, a $69 billion deal announced in December 2017.

Express Scripts is the largest PBM in the U.S., handling drug plans for more than 80 million people, including the U.S. Department of Defense.

Many are interpreting the deal as a realization by these established companies that their business models need to change as customers and the government demands better drug price controls. Insurers and pharmacy benefit managers are middlemen for employers and governments, and, The New York Times notes, “the proposed mergers are an attempt to convince their customers that they are working to reduce costs.”

Not only has the possible entry of Amazon into the pharmacy business worried the industry, but Berkshire Hathaway’s Warren Buffet, Amazon’s Jeff Bezos and J.P. Morgan Chase’s Jamie Dimon created a joint venture to cut healthcare costs and improve services. Atul Gawande is the chief executive officer of the joint venture. The three companies have 840,000 to 1.2 million employees worldwide and many industry-watchers believe that whatever the unnamed company comes up with may have a ripple effect throughout the industry.

Frazier noted, “I know how hard it is to make my 50 cents on the dollar. I think that system’s got to change.”

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