Minnesota’s Border Battles: COVID-19 edition
Last year, I wrote a report titled ‘Minnesota’s Border Battles‘ in which I compared the economic outcomes in Minnesota counties bordering other states with the outcomes in the border counties…
I believe this is the first American Experiment post that could lead to immediate and direct savings to your family’s budget. I only ask that, if you do experience significant savings, you remember where you first heard about this cost saving source and support our important work with a tax-deductible contribution.
For nearly 30 years American Experiment has delivered relevant intellectual ammunition and sound public policy ideas for the purpose of building a Culture of Prosperity for Minnesota and the Nation. Today I’m very excited to tell you about a drug purchasing option that could immediately save you a lot of money.
Recently John Tierney, a science columnist for the New York Times, had a tremendous piece published in City Journal titled, Disrupting the Pharmacy: Innovative technology could eliminate the inflated costs that Americans pay for drugs. In it he describes how the cause of high drug prices is not Big Pharma, but Big Pharmacy, the oligopoly of middlemen that administer the drug benefits of most health plans. To cut to the money saving chase, Blink Health is the company that found a way to eliminate the middlemen and let people comparison-shop at their website: BlinkHealth.com.
High drug prices didn’t really affect me until two weeks ago while my son was preparing for a summer internship that would take him to Africa. He needed to get two prescriptions that totaled $217. If only I had known about Blink sooner I could have saved $100 from what we paid at Walgreens through our health savings account. Big Pharmacy “has created a byzantine system governed by secret contracts” so your savings could be less dramatic based on your drug benefit plan, but the lack of any transparent market in health care is what drives up the overall market. Here are the key parts from John Tierney’s excellent piece:
Why the high cost health care mess?
A functioning market requires price signals to provide consumer guidance; but at the pharmacy, neither the buyer nor the seller knows what the price is. In choosing among drugs to prescribe, your doctor doesn’t know how much each will cost you or your insurance company. You can’t find out what you’ll pay until after you’ve chosen a pharmacy to handle the prescription. The pharmacist must contact the insurance company to find out how much to charge you—and even then, he doesn’t know whether the transaction will be profitable.
All that information is available only to the middlemen, who have exploited the system’s secrecy and complexity to profit at the expense of patients, local pharmacists, drug manufacturers, and taxpayers. While politicians denounce the supposed power of Big Pharma, the pharmaceutical manufacturers are a puny, disorganized force compared with the companies that control the pricing and availability of drugs—Big Pharmacy, as the executives at Blink Health call these middlemen. They’re the ones who decide whether your insurance will cover a drug, how much you’ll pay for it at the counter, and how much of that payment the drugstore will keep.
Big Pharmacy is essentially an oligopoly dominated by several businesses that administer the drug benefits provided to most Americans by health-insurance plans. By negotiating with drug manufacturers on behalf of the insurers, these companies set the terms for most prescriptions, and they’ve gained further leverage through what economists call vertical integration: merging or forming partnerships with insurers, wholesale distributors, and chain pharmacies. In other industries, big-box chains use economies of scale to undersell small stores, but CVS and Walgreens get away with charging higher prices than local drugstores because they’re part of the oligopoly.
Thanks to all this leverage, Big Pharmacy has created a byzantine system governed by secret contracts that make it impossible for outsiders to know the true cost of a drug. Manufacturers publicly set an artificially high list price—and get pilloried in the press for it—but then privately agree to kick back a large chunk of it. These legal kickbacks, politely known as rebates, go to the middlemen, along with other fees. As a result, too many patients pay inflated prices for prescriptions, especially the sickest patients and those lacking good insurance.
The airline industry was revolutionized, why not health care?
The best way to understand what Blink is up against—and what kind of revolution might be possible—is to consider what’s happened in the airline industry. In the pre-Internet era, buying an airline ticket presented some of the same challenges as filling a prescription today. The airlines offered varying fares and options, and the only practical way to comparison-shop was to go through middlemen. You had to consult a travel agent, who had access to the airlines’ schedules, available seats, and fares on a centralized computer-reservation system—typically, the system run by Sabre, which dominated the industry.
The travel agent was supposed to guide you to the best deal, but only he could see the options, and your interests weren’t necessarily his top priority. Besides collecting a standard commission for each ticket, travel agents could earn bonuses by steering passengers to certain airlines. Just as today’s travelers get frequent-flier miles, a travel agent who booked enough passengers on an airline would get extra commissions. So when a choice existed between a flight on United or American, the agent’s decision—unknown to you—might well depend on which airline offered him a higher fee.
It was a bad deal for the airlines, too, because so much of their passengers’ money was being siphoned by the travel agencies and by Sabre, which collected fees from the airlines for each flight booked on its computer system. These middlemen came to control the reservations business, extracting higher and higher fees, though their own costs declined as computers got cheaper. In one year, 1993, the airlines shelled out nearly $8 billion to the middlemen—ten times the combined annual profit of all the airlines.
Who are these middlemen driving prices so high?
The dominant middlemen are the pharmacy benefit managers, or PBMs, which are hired by private and government health-insurance plans to administer drug benefits. Dozens of small PBMs once competed for business, but today three large firms—Express Scripts, CVS Caremark, and OptumRx—together control more than 75 percent of the market. Like travel agents, they’re supposed to get the best deals for their clients, but they, too, have conflicting incentives. Thanks to their purchasing power and market share, the PBMs have the leverage to extract price concessions from drugmakers, but those savings don’t go directly to the customer at the counter. The PBMs pressure the manufacturers to set an artificially high list price for a drug and then offset it through rebates, discounts, and other payments to the PBMs, based on how many of their patients buy the drug. Again, like travel agents, they can make bigger profits by steering customers to certain purchases.
How Blink works
The system has been especially unfair to the sickest patients, who use the most medication, because they shell out more money at the pharmacy and reap relatively little benefit from the secret rebates and discounts. Even when the PBM passes most of the rebate on to its client, the health insurer, the money is typically used to keep monthly premiums lower for everyone in the insurance plan. So the sick are effectively subsidizing the healthy—precisely the opposite of how insurance is supposed to work.
Blink solves this problem by passing the savings directly to each patient. Like a PBM, it negotiates with drug manufacturers, using its purchasing power to extract discounts off the list price. Then, instead of collecting secret rebates or steering patients to a preferred drug, it posts all the discounted prices on its website (and makes money by charging the patient slightly more than it reimburses the pharmacy). Instead of forcing patients to turn over their prescription to a pharmacist to find out what it will cost, Blink lets doctors and patients shop on the web before making a commitment.
Why are drug prices lower in Europe?
Drugs are priced lower in Europe because the nationalized health systems function like PBMs, with a legal monopoly in each country. The government decides which drugs to provide at what price, so it can offer a drugmaker exclusive access in exchange for a steep discount. That saves lots of money for the government, but it leaves patients with fewer choices at the pharmacy. …
The nationalized systems of Europe, long hailed by progressives as a model for America, were built on the assumption that only centralized authorities had the expertise to manage people’s health care. Now that the web has democratized information, that model looks increasingly obsolete. The one-size-fits-all system may still appeal to central planners and to the entrenched interests benefiting from it, but there’s a better way forward. Give capitalism a chance.
My favorite P.J. O’Rourke quote remains: “If you think health care is expensive now, just wait ‘til it’s free.”
Peter Zeller is Director of Operations at Center of the American Experiment.