There is a lot of discussion about “Medicare for All” nowadays. Most people don’t realize that “Medicare for All” is not a thing, but rather a variety of different pieces of legislation and plans that work in different ways. They also overlook that close to 100% of current Medicare participants have, in addition to Medicare, either supplementary insurance or Medicaid, because Medicare in its current form doesn’t cover everything, nor does it pay enough to providers to cover their costs. In addition, many Medicare participants have a specific drug plan, or their formulary is rolled into their Medicare Advantage plan.

Over time, I’m going to cover different aspects of changing our medical care provision and payment options, because there are a lot of moving parts, and much to understand. Today’s topic is drugs.

When you talk to people about what they hate about healthcare today, their biggest concerns relate to the cost of things. And at the top of the list of costs are drugs – especially for those millions of people who take non-generic drugs. One of the biggest complaints is about insulin, which you would think was a generic, but well, it’s actually spelled “insu — American-Pharma-Benefit-Manager-Greed — lin”.

Let’s take a look at those costs to get a better understanding of how things work, and some options for fixing the problem.

Some History

In 1923, the Nobel Prize for Physiology or Medicine was awarded to Frederick Banting and John Macleod “for the discovery of insulin.” The Nobel committee, at Banting’s urging, ended up admitting that Charles Best should have been included because Best was the lab worker and Macleod gave Banting lab space….but I digress. The point is that injectable insulin was AND IS a lifesaver for every diabetic whose pancreas cannot produce its own insulin. These are all Type I diabetics, and some percentage of Type II diabetics.

The patent was sold for one dollar, because the inventors wanted every diabetic to be able to live. Banting, Macleod and Best, by the way, were Canadian.

The original insulin was a shot that allowed a diabetic to self-inject and decrease blood sugar levels. It was what is clinically termed “short acting” – and to use it, one needed to get the dosage correct for the amount of carbohydrates eaten, and the patient’s specific situation. Drug companies undertook research to create synthetic insulins that would last longer, smooth out blood sugar spikes, and work more consistently. And over time, they have been successful in that regard.

Side Note

As an aside, I have great respect for drug researchers. These men and women are dedicated to solving disease puzzles and finding cures to help people live, and live better. They fail more often than they succeed, they work tirelessly, and every last one of us has benefited from their successes. Raise your hand if you, or a loved one, survived cancer, lives long-term with AIDS, survived a heart attack because of TPA, or is living with a chronic condition that would have been a death sentence a hundred years ago. If you raised your hand, thank a drug researcher.

Today

So, back to insulin. You can still get short-acting insulin. Here in the US, it costs about $320 per vial (prices depend on whether you have insurance, and what the company’s formulary covers, but that vial cost is average for patients with no insurance coverage) and you need a prescription. In Canada, that exact same vial is sold over the counter for $30 because the Canadian government believes that the only reason to buy insulin is because you’re a diabetic who needs it.

Synthetic, long-lasting insulins are far more expensive. And in a certain way, they should be, because of the costs involved in their development that need to be recouped. But they in no way need to be as expensive as they are. In addition to development costs, insulin prices rise relative to the laws of supply and demand. There are more and more diabetics every year, thus increased demand.

So now that we understand the problem, what can we do to decrease prices? Before you yell “Medicare for All” at me — let’s look at some things that we could do NOW outside of that argument.

The Canadian Model

In Canada, the government sets drug prices. Well, to be more honest, each of the provinces sets prices, predicated on a national review of efficacy, with the exception of Ottawa, which is completely independent. Drugs are reviewed at issue, and again semi-annually for efficacy, comparison to related treatments, worldwide costs, and a few other technical factors. An interesting aside is that Canada, in general, has the second highest drug prices in the world (after the US) because of how the central government prices drugs (which again varies by province).

Canada does not include all drugs in its formularies, but they cover enough for all the various conditions, even orphan diseases. The rule of thumb for how they set prices is as follows, with the caveats that prices may vary in different provinces, and some orphan drugs are treated differently. In general, the government looks at the price of a drug in all the other industrialized countries, e.g. what insulin costs everywhere else, throws out the price in the US, takes an average and adds 5%. Again, that 5% sometimes varies over time, but I’m betting you get the idea.

So, independent of any “Medicare for All” plan, the US could set prices for drugs predicated on a formula and a review. If you think they can’t, remember that the government sets the price for milk.

BUT

TWO THINGS

First, the issue of the expense of drug development. Right now, most drugs are developed by drug companies, and so the government would need to throw money at these costs. Development of a drug can take up to 20 years, and involves early science (development of the molecule, and testing it on rats and dogs) and then late science (mostly clinical trials) and the associated worldwide review processes. To cover these costs, taxes would need to go up to be allocated to drug development. Just saying, we get what we pay for.

Second, let’s talk Pharmacy Benefit Managers (PBM) who are criminals in ways that rise to the level of Bernie Madoff. Under current law, no drug company can sell a drug to a person, drug store, hospital or anywhere other than through a PBM. Theoretically, these companies work with insurers to develop their formularies, and choose the most efficacious drugs for conditions. In reality, they are scam artists that inflate the cost of drugs.

Let’s take insulin. These numbers will not be exact, but will show you an order of magnitude that is correct. Let’s assume that it costs drug company X $25 to manufacture one vial of long-lasting insulin. That’s a raw cost. Therefore, they need to sell it for $50/vial to cover their overhead, taxes, and related expenses, and that increase is fair. In a perfect world, drug company X would sell that vial to drugstore Y and the drugstore would sell it to a patient for $60. And that’s reasonable.

But, drug company X is told by the PBM that they won’t pay the $50, they will instead pay $100/vial with a $50 rebate back to the PBM. Drug company X is competing with drug companies Y and Z and wants to make the formulary, or else they cannot sell their drug. Side note: there are five major PBMs in the US. So, the $50 still stands, but from an accounting perspective, the vial cost is $100, which the PBM ups to $150 as the cost to drugstore Y, splits the profit with their insurer, and then offers a rebate to those patients who have private insurance.

In the end, the “retail” price of the vial is now something like $200, which is what someone with no insurance would pay, but will drop all the way down to $0 for someone who has hit their up-set limit on their insurance policy, and will cost somewhere in between depending on insurance company, insurance policy parameters, rebates, and just basically spinning the magic wheel at the drugstore to find out what it costs that month.

SO

The government could pass a law allowing drug companies to sell their drugs directly to pharmacies and hospitals, and that would immediately reduce costs. This would increase competition between the pharma companies who sell similar medications, and would remove a whole level of pure profit shared by the PBMs and the insurers.

My gut says that outlawing PBMs would make most people as happy as if there were a way to completely outlaw robo-calls. It would take political courage, and legislative education so that the lawmakers truly understood how the process worked. Further, adding in development costs to the mix costs a lot of money (meaning taxes, as that’s the major income source to the government) because now the cost of drug development would fall to all of us instead of the patients who need each medication directly.

So that’s today’s healthcare post.