Pharmaceutical giant Eli Lilly is about to face some fierce competition — from itself. The company recently announced plans to offer a generic version of its own insulin drug, Humalog, at half price.

What gives?

For drug companies, price reductions aren’t as simple as they are for, say, car dealers looking to clear out last year’s stock.

Most health insurers hire “pharmacy benefit managers” to manage their drug plans. Because PBMs decide which medicines are covered, drug companies offer huge discounts — typically via “rebates” — in exchange for formulary access and tier placement. In 2017, drug companies extended $150 billion in rebates to PBMs.

About 90 percent of these rebates make it back to insurers, who generally use the savings to keep premiums low and cover administrative costs. The other 10 percent is where PBMs make a sizable profit.

So when list prices are high, insurers and PBMs benefit.

Consider that on many formularies, branded drugs have preferred treatment over their cheaper, generic counterparts. Researchers found when looking at 2018 drug coverage in Medicare, “almost every plan has at least one branded drug on the formulary that’s in a better place than the generic.”

This doesn’t help with overall health care spending. But it does benefit insurers and PBMs.

Making matters worse, insurers typically peg a patient’s copay to the original, “list” price of a drug.

Consider, Humalog. The list price is $275. With insulin products like this one, rebates of 70 percent are common. So an insurer might acquire the drug for a net price of $82.50.

If that insurer requires a 25 percent copay, a patient should pay $20. But most insurers would expect that patient to shell out nearly $70, thus covering 85 percent of the drug’s true cost.

It’s no wonder why Americans fret about high out-of-pocket costs at the pharmacy. Today’s system leaves the sickest patients with the largest bills — and motivates many to simply skip their prescriptions. Non-adherence causes 10 percent of hospitalizations and costs the health care system upward of $289 billion annually.

Secret kickbacks shouldn’t be legal. Earlier this year, the Trump administration proposed a change to federal anti-kickback statutes that would prohibit drugmakers from offering rebates on drugs covered by Medicaid and Medicare Part D — unless those rebates are shared directly with patients at the pharmacy counter.

That’s a good first step. But it needs to be expanded to the entire market. A new study from my organization, the Partnership to Fight Chronic Disease, found that making manufacturer rebates for diabetes medicines available at the point of sale would save patients $3 billion annually. That’s an extra $791, each year, for the 30 million Americans living with diabetes.

For Americans who rely on prescription drugs to stay healthy, every penny counts. Authorized generics will offer some relief. But real change will only come when the whole system of drug rebates changes.

Kenneth E. Thorpe is a professor of health policy at Emory University and chairman of the Partnership to Fight Chronic Disease.

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