Three ways drug pricing should work in a functioning market, but doesn't

The healthcare industry is hungry for innovation, and a well-functioning market should enable that innovation. So why do we continue to see unsustainable increases in drug costs? Why are drug affordability and accessibility still lagging so far behind? While there is no consensus on how to fix the broken drug pricing and rebate system, California has more opportunities than ever to improve prescription drug affordability by targeting the Pharmaceutical Benefit Manager (PBM) middlemen who can drive up costs.

We cannot wait for others to find a solution to high drug prices. It is clear what in a functioning drug pricing market at the federal level and in California, but today this is not happening:

#1: Competition should lead to lower drug costs.

As brand-name drugs face generic competition, prices should come down. One example is Zytiga (abiraterone), a drug that's off patent since 2018 but is still widely used to treat prostate cancer. CivicaScript—a nonprofit generic drug company created to offer cheaper drugs—sells abiraterone for about $160 a month. But large PBMs charge 20 to 40 times more for the generics. So far, only one of the three largest PBM-owned specialty pharmacies has bought or dispensed abiraterone from CivicaScript, and that too only in small quantities. In addition to CivicaScript, there are many new transparency-focused entrants, including Foundation Health, Prescryptive Health, and AffirmedRx. But this is not a functioning market for drug pricing.

#2: Biosimilars are likely to gain market share because they are clinically equivalent but less expensive.

Biosimilars are clinically equivalent versions of expensive biological medicines and cost on average 50% less than the reference brand when they are launched on the market.

Before the breakthrough Covid vaccines, Humira was the best-selling drug in American history, with sales of over $200 billion. There are now 14 biosimilar versions of Humira on the market. Despite this strong competition, biosimilar versions of Humira have struggled to gain market share in the United States. This is primarily due to our misguided incentive system, which has led PBMs to become dependent on rebate guarantees and other fee payments from manufacturers, resulting in blocking or delaying the transition to lower-cost biosimilar options.

Biosimilar competitors to Humira have captured just one percent of the drug's annual market. A recent analysis found that keeping patients on Humira costs patients and employers up to $9 billion more per year than switching entirely to biosimilars. It's clear we're overpaying, and we should all be asking why.

#3: Competitors should respond to unfair prices to gain a commercial advantage.

We know that unjustified markups on specialty generic drugs – up to 100 times the price – are widespread among the major PBMs. The same companies that are supposed to keep costs down are raising prices. This includes the cancer drug Gleevec, which can sell for over $6,000 through a PBM but is available from Cost Plus Drug Company for $39 plus shipping.

What happens from here?

While defenders of the status quo are actively working to block legislative reform, there is more push than ever for drug pricing change among key players in healthcare. The status quo is an opaque market with perverse incentives, high prices, concentrated market power in a few large PBMs, and unfair barriers to competition. We must do more to be transparent about the problems in the U.S. drug pricing system and work to change them.

California led the nation by passing the country's first drug pricing transparency law. Now, more than half of the states have similar laws. California can lead the way again by forcing transparency into PBM practices that drive up costs. At the same time, the state should begin building the infrastructure to independently determine the value of high-priced drugs. It could then set a maximum payment limit for those drugs — as many states do. These simple steps would go a long way toward restoring balance to the broken drug pricing market.

*The author is a board member of CivicaScript. Her employer partners with CivicaScript to provide affordable generic drugs.

Photo: Devrimb, Getty Images

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