Reporter: Fred de Sam Lazaro
The supply chain that brings pharmaceutical drugs from the factory to the pharmacy is long, complex and unclear. Congress and several state legislatures have proposed or enacted laws to bring more transparency and curb soaring drug prices. As special correspondent Fred de Sam Lazaro reports, many small or independent pharmacies complain the system also hurts them.
Geoff Bennett: The supply chain that brings pharmaceutical drugs from the factory to the pharmacy is long, complex, and, many experts say, opaque. Congress and several state legislatures have proposed or enacted laws to bring more transparency and curb soaring drug prices. As special correspondent Fred De Sam Lazaro reports, many small or independent pharmacies complain that those high prices in many cases actually hurt them.
Fred De Sam Lazaro: This story began on a personal note. I recently went to refill a prescription at my neighborhood pharmacy. I assumed my drug's $500 co-pay was bringing a reasonable profit to the store. But, much to my surprise, a few months ago, the folks at St. Paul Corner Drug asked if I could take my business out elsewhere because they were losing money filling this prescription.
John Hoeschen, Owner, St. Paul Corner Drug: If you pay $578 for something, and you only take in $500, that's not a sustainable model. And that's kind of where we're at right now.
Fred De Sam Lazaro: John Hoeschen owns the drugstore, a Norman Rockwell-like fixture that's been here for 101 years, complete with a soda fountain until the pandemic. He's not sure how long he will be able to hang on.
John Hoeschen: They're literally sucking the financial life out of my business.
Fred De Sam Lazaro: The "they" he's referring to are three principal links in a complex supply chain, drug manufacturers, wholesale distributors, and he says his most immediate existential threat, PBMs, or pharmacy benefit managers, so-called middlemen companies that determine what drugs are covered by insurance, the price he is paid, and the co-pays required of patients. PBMs began to grow rapidly in the 1980s and '90s, as the pharmaceutical pipeline began swelling with new drugs, statins to lower cholesterol, antidepressants, acid reducers. Health insurers scrambled to keep up.
John Hoeschen: It didn't take very long for the insurance side of life, to say, hey, if you want to manage this stuff for us, great. It was a reasonable thing to simplify the claims management of prescription drugs.
Fred De Sam Lazaro: PBMs were hired by insurance companies to manage the growing drug benefit costs by establishing and maintaining formularies, a list of what drugs will and will not be covered. Over time, they have evolved into a multibillion-dollar business themselves.
John Hoeschen: They literally are taking money from every aspect of pharmacy distribution.
Fred De Sam Lazaro: They demand extensive documentation, tie reimbursements to elaborate metrics of quality, and yet, Hoeschen complains, reimburse him far less than what it costs to fill a prescription and far less than they bill their client health plans for the same prescription.
John Hoeschen: Bill Blue Cross $40, pay me $7. People ask, where does the $33 go? To the PBM.
Fred De Sam Lazaro: And PBMs have branched into his business with their own retail shops, like CVS, and with mail-order and specialty pharmacies.
John Hoeschen: All the things that you see advertised on TV, those are all essentially not available at my pharmacy. They have been classified by the pharmacy benefit manager industry as specialty drugs. And what's special about them is that they can make a lot of money off of them.
Fred De Sam Lazaro: Nothing beyond your expertise?
John Hoeschen: Correct. They're supposed to be negotiating lower prices for consumers, but they're actually doing the opposite. The St. Paul pharmacist has an unlikely ally in Stephen Ubl, who heads pharma, the trade group of large drug manufacturers. Stephen Ubl, CEO, Pharmaceutical Research and Manufacturers of America: They're buying pharmacies. They're buying health care providers. And they're steering patients to the providers that they own.
John Hoeschen: He notes that the three top pharmacy benefit companies are now owned by large insurance companies and control nearly 80 percent of the market. And a key source of revenue are rebates they negotiate from drug manufacturers. A company must agree to these price discounts to have its product, instead of a competitor's, covered by the insurance plans. The amount of the rebates is not publicly disclosed for proprietary reasons, PBMs say. But instead of bidding down drug prices, PhRMA's Ubl says they do the opposite.
Stephen Ubl: They actually make more money off a higher-priced drug. Our members now capture less than 50 cents of the dollar of the list price of a medicine.
John Hoeschen: That, in turn, forces drug companies to raise their list prices, he says. What do PBMs say? They have gone public.
NARRATOR: Big pharma has power over drug prices.
J.C Scott, CEO, Pharmaceutical Care Management Association: Big drug companies are setting the price of pharmaceuticals out of reach.
Fred De Sam Lazaro: J.C Scott, who heads the trade association of PBM companies, says things would be a lot worse without his members.
J.C Scott: The pharmacy benefit companies have been largely very successful in helping to mitigate the net cost of prescription drugs and provide access for millions and millions of Americans.
Fred De Sam Lazaro: Scott argues his members' entire focus is on high quality and lowering costs and in providing cost-saving options to patients.
NARRATOR: Price hikes and patent schemes.
Fred De Sam Lazaro: The PBM group accuses drug companies of raising prices and gaming patent laws to preserve high prices. He cites insulin, the diabetes drug whose prices were cut first by one and then the two other leading makers amid widespread criticism of sharp price increases over recent decades.
J.C Scott: They used their discretionary power to cut the price of those drugs. They weren't prevented by the rebates. It was a good thing. And, in fact, we continue to encourage pharma companies to cut the — cut the price of their drugs.
Actress: I'm sorry. This medicine isn't covered by your insurance.
Fred De Sam Lazaro: As Congress and state legislatures debate reforms, pharma has its own ad campaign.
Actor: I'm your insurance company's pharmacy benefit manager.
Fred De Sam Lazaro: PhRMA's Ubl seizes the insulin example to make a counterpoint. When prices began to fall, he says many, PBMs continue to require that their patients remain on brands that had not yet dropped their prices, sticking patients with higher co-payments.
Stephen Ubl: Because they made more money as a percentage of the higher-priced drug. To me, it's a poster child for why the system needs to be changed.
Dr. S. Vincent Rajkumar, Hematologist, Mayo Clinic: The system is so complex, I don't think there are even 50 people in the U.S. who understand the full thing. See the price going up over time.
Fred De Sam Lazaro: Dr. Vincent Rajkumar, hematologist at the Mayo Clinic, says, despite various bipartisan efforts to bring more transparency and the Inflation Reduction Act, which will allow Medicare to begin negotiating the price of some drugs, comprehensive reform is difficult in a complex half-trillion-dollar business.
Dr. S. Vincent Rajkumar: There's a blame game where pharmaceutical companies say, it's not us, and PBM say, it's not us, it's them. So we really are caught between two people who are both profiting.
Fred De Sam Lazaro: So what do you see emerging in the next few years?
Dr. S. Vincent Rajkumar: I don't even think it's right to say what the market will bear. It's what outrage will bear.
Fred De Sam Lazaro: Insulin remains a rare example of a price drop, he says, one at least partly a response to public outrage.
Dr. S. Vincent Rajkumar: The outrage caused by families losing children with type 1 diabetes to high prices of insulin, the outrage caused by citizens in the U.S. finding that they could go to Canada and find the same drug at one-tenth the price led to this movement of advocacy. That advocacy led to action.
Fred De Sam Lazaro: What does all this mean for the corner drugstore?
John Hoeschen: I get letters every month from one of the major chains to purchase my prescription records, my files, and basically buy me out.
Fred De Sam Lazaro: His response is to buy time and sell new things, nutritional supplements and vaccination services, hoping reforms at the state and federal level somehow bring relief. And although his store is so busy, they're not accepting new patients, Hoeschen says there's a good chance the ones he has will soon have to go to those chain stores, and this drugstore, like a third of all independent pharmacies in Minnesota, will go the way of the soda fountain.
For the "PBS NewsHour," this is Fred De Sam Lazaro in St. Paul.