Here's how a $50 drug ends up costing you $700 in America's healthcare system

Pharmacists around the country are agitated.

For years they've been watching their customers struggle to pay for prescription drugs, even when they have generic or over-the-counter alternatives. These drugs are supposed to treat simple, everyday ailments, like acid reflux and heartburn.

In the case of acid reflux, the drug in question is Nexium, and it serves as an illustration of the pharmacists' chief complaint.

Nexium comes in many forms, including a less potent over-the-counter version. That costs between $25 and $50.

There's also a prescription version with twice the strength. If you're getting that one through Medicare Part D, the government's program for prescription drugs, it could cost as much as $700.

To try to understand why, we talked to pharmacists, and they all pointed to the same thing: It's the pharmacy benefit managers, or PBMs.

PBMs are companies that manage insurance plans for the government, employers, and other payers. They're middlemen. For the insurance companies and employers, they help manage prescription claims. They do this in part by creating lists of drugs that will or won't be paid for and then use their scale to negotiate lower costs.

But they also get paid by the drugmakers, who want their product on the list of approved drugs. And, because some of their fees are pegged to the drug's price, the PBMs can actually profit from higher prices too. To the pharmacists, these conflicts are made worse by the PBM's secretive contracts.

"PBMs operate on the back side in secret deals with drug companies to keep their drugs being used and to keep market share," said Tim Mitchell, a second-generation pharmacy owner who operates Mitchell's Drug Stores in southwestern Missouri.

This, Mitchell alleges, is what is going on with Nexium, a drug that has been off-patent for almost two years.

"In our contracts they say you can't talk to the press. You can't talk to the patients. You can't talk to the payers. You can't talk to anyone. Well, I'll tell you what, I don't care. I'm tired of them scamming Americans," Mitchell told Business Insider. "They're not decreasing drug costs. They're driving drug costs."

To be clear: The reason pharmacists have an ax to grind with PBMs is that they feel the PBMs are squeezing profits out of every part of the industry - the insurers, the drugmakers, and the pharmacists - while providing little value.

They believe that the slices that the PBMs are taking only inflate the ultimate cost of prescriptions drugs. Sometimes the PBMs even claw back profits from pharmacies. Either way, the pharmacy owners can barely say a word about their relationships with PBMs because of restrictions in their pharmacy provider agreements.

They aren't the only ones concerned about the growing power of PBMs either. PBMs are being sued by some customers for double dealing, and they're now also starting to draw the attention of Congress. Perhaps the biggest threat of all: They're facing a backlash from America's largest employers, a group of which is working on a way to rewire the system.

What's Nexium?

The reason I'm talking about Nexium is that I take the drug. In 2004, I had an invasive surgery to re-angle my stomach. I was born with it tilted the wrong way, so stomach acid was moving up through my esophagus and over time it wore away the lining to the point that my esophagus collapsed in three places.

For a while the surgery was enough to keep me comfortable, but as I've gotten older I've had to take Nexium every day. I take the over-the-counter Nexium 24HR, which is a 20 mg dose rather than the 40 mg prescription.

I asked AstraZeneca, the maker of Nexium, to explain the differences between Nexium and Nexium 24HR, and they told me simply that, well, one is branded and one is a generic, according to the FDA.

From the company's representative:

"With regards to your inquiry on the difference between branded and generic Nexium, in general there are differences pertaining to the requirements for FDA approval. To support the approval of branded medicines the FDA requires efficacy and safety data from in human, well-controlled clinical trials.

In contrast, according to the FDA, the generic drug manufacturer must prove their drug is the same as, or bio equivalent to the brand name drug by measuring the amount of drug in the bloodstream and comparing that to the brand.

It's important to know that not all medications, brand name or generic, work the same for all patients, which is why it is important for healthcare providers and patients to determine the best treatment option on an individual basis."

All righty then. If that's it, then that's it.

Nexium buyers, like pharmacies and wholesalers, have sued AstraZeneca, accusing the company of being involved in a "pay for delay" scheme. That means a drug company pays off a generic drug maker - in this case a company called Ranbaxy - to get it to delay putting a generic version of their drug in the market. In 2014 the drug companies prevailed, but the plaintiffs are appealing that decision.

There's more. In 2015, AstraZeneca had to pay a $7.9 million fine after allegedly paying kickbacks to PBM Medco Health. The government's allegation was that AstraZeneca paid kickbacks to ensure that Medco kept Nexium on its formulary.

From Law360:

"According to the government, AstraZeneca agreed to give Medco about $40 million, largely in the form of discounts on other drugs, in exchange for Medco's agreement to maintain Nexium's 'sole and exclusive' status on its list of approved drugs, and the pharmaceutical company then submitted claims for reimbursement under the Retiree Drug Subsidy Program in violation of the False Claims Act."

"No one knows with the PBMs what kind of discounts their getting from the manufacturers, and then what they turn around and tell the patient," J. Randle House, a pharmacist at Metier Pharmacy in Arizona, told Business Insider. "It's a highly corrupt industry if you really look at it from afar, and then when you really dive into it you'll see that one and two doesn't equal three."

Another way

The three largest PBMs control about 80% of the market. Generally, they get paid per prescription. But some smaller PBMs manage far fewer formularies than the big three, which is to say they have fewer, and usually smaller, clients. These PBMs get paid a flat fee for managing programs, and also tend to be transparent about how much they make on drugs.

One of those PBMs is Detroit-based MeridianRx. When I asked its CEO, Andrew Miller, why formularies might include prescription Nexium, he sounded perplexed.

"Why don't they just take omeprazole?" he asked me, referring to the generic name for other acid-reflux medications (you probably know it as Prilosec).

"We don't have Nexium on our formulary because there's no point," he said. Other PBMs "have an incentive to keep it on there because the rebate is big," he said.

Because of Meridian's pricing model, Miller is willing to show his clients exactly how much he makes off of every drug. He also frowns on the vertical integration going on in the industry.

Big PBMs also sometimes own pharmacies. Miller does not, and he says Meridian avoids this practice because it gives PBMs "an incentive to fill inappropriately."

So what would he do with the industry to fix this high-cost mess?

"You need true pricing transparency from everyone in the industry, including wholesalers, drug companies, pharmacies, and PBMs. Outlaw drug commercials, outlaw co-pay coupons," said Miller.

Doughnut holes

The real danger of taking Nexium, at least for millions of Medicare Part D patients, is that it can put them in something called a doughnut hole.

That's when your out-of-pocket expenses start unexpectedly skyrocketing as a result of the structure of the Part D program. Unexpectedly, because most of the time patients don't know how much drugs cost insurers, they just know what they have to pay as a co-pay.

Here's how the doughnut hole happens: Most Medicare Part D patients have what's called a coverage gap. That means after Medicare Part D pays a certain amount (say, $2,000) the patient's co-pays go up from between $5 and $20 to half of what the drug costs.

"This means patients may find themselves in a situation where their initial co-pay of $10 for a 90-day supply of Nexium will exponentially increase to an out-of-pocket cost of $350 or more," said Melissa Kiguwa, a spokeswoman for Pharmacists United for Truth and Transparency, or PUTT. For a lot of Americans, that $350 is a lot of money, especially if they don't see it coming because they thought Medicare Part D was taking care of the full cost of Nexium.

PUTT sees no difference between Nexium and EpiPen, the life-saving antiallergy drug that has gone from costing $100 in 2007 to $608 in 2016. The drug's cost has caused a nationwide uproar, and in an interview with CNBC, CEO Heather Bresch placed part of the blame on "middle men" - on PBMs.

More from PUTT:

"The EpiPen drug hike exposed part of the problem when Mylan Pharmaceuticals CEO attempted to expose how PBMs, brokers, and insurers pocketed more than $280 per prescription within the drug supply chain. The payer pays more in the end, the patient pays a higher copay or higher cost of the medication, and the rebates may or may not go back to the ultimate payer. Yet, in standard contracts with PBMs, providers are forbidden to discuss these tactics and pricing abuses with the ultimate payers or to any one else.

While the Nexium or EpiPen story is not unique in healthcare today, PBMs are quick to refute claims that they are adding to the overall prices of expensive brand drugs with Rx rebates. However, PUTT believes this is happening for most expensive brand drugs- including insulin, inhalers and even expensive specialty medications. Interestingly enough, these are also the fastest growing part of Rx drug plans."

Just look at Nexium's list price. While it has gone up year after year, it isn't close to $700. In fact, the wholesale acquisition cost, or WAC, set by AstraZeneca has topped out at about $250. And the generic competition means the company's revenue from Nexium is falling. Sales declined by 18% to $1 billion in the first half of the year.

This is possible because WAC isn't even close to the whole story when it comes drug pricing. It's just the price of the drug before manufacturers do their deals with insurers and PBMs.

Ask the PBM

That is why AstraZeneca's representative suggested over email that we ask the many PBMs running Medicare Part D plans why the drug costs so much (emphasis added):

"AstraZeneca does not disclose specific details in regards to rebates for any of our products. The best determinant of a patient's out of pocket cost is their individual insurance plan and the respective formulary placement for a medicine.

Nexium is currently covered for about 60% of Medicare Part D patients. Preferred drug lists are often made publicly available by PBMs, and it may be helpful to inquire with them as to the tier coverage of Nexium and/or generics, which will give you a better sense of the out of pocket cost for an individual patient on a plan managed by that PBM."

For what it's worth, we did ask the PBM lobby about Nexium, and they gave us the same response they always give: They encourage lower cost drugs, but clients ultimately pick what they want.

And with that we should add that PBM clients have been getting mad at them lately. Earlier this year, some of America's biggest employers - including American Express, Macy's, and Coca-Cola - created an organization called the Health Transformation Alliance with the aim of breaking with "existing marketplace practices that are costly, wasteful, and inefficient, all of which have resulted in employees paying higher premiums, copayments, and deductibles every year."

Other clients are just flat out suing. Anthem Insurance, a client of the largest PBM in the country, Express Scripts, is suing the PBM for failing to negotiate its 10-year contract "in good faith" and is seeking $15 billion in damages.

Meanwhile, in Washington

Pharmacists aren't the only ones concerned about the lack of transparency. A number of people in Congress have grown tired of the PBMs and are calling for more transparency in their dealings.

OmnicareRx, owned by UnitedHealth, is the largest PBM managing Medicare Part D formularies, and congressman Doug Collins (R-GA) called them out for anticompetitive actions in a congressional hearing last year.

"Tricare" - the Defense Department's healthcare program - "did a study where it found that, if it eliminated PBMs from the Tricare program, it would save roughly $1.3 billion per year," he said. "We are up here arguing about problems in our budget, and we could save this much money?"

He - along with Rep. Buddy Carter (R-GA), the lone pharmacist in Congress - believes the PBMs are especially targeting small pharmacies. They wrote a letter to the Committee for Medicare and Medicaid (CMS) warning of predatory pricing driving small pharmacies out of business. They accused insurer Humana, which owns a PBM, of amending its pharmacy provider agreement to squeeze out little guys.

"Under this proposal, a pharmacy could meet most of the CMS benchmarks, provide quality customer care, and still not be reimbursed by Humana," the letter read. "Humana's criteria has little to do with patient care, and everything to do increasing their profit and driving community pharmacies out of the market. Some of these metrics, including 'patient adherence' are beyond the control of the pharmacists. Pharmacies already compete for customers and business, let's not set a precedent to make them compete for reimbursement by insurance companies as well."

But that's exactly what they're doing, and it's driving some decades-old family businesses around the country to the brink.

"I love being a pharmacist, I love living in the community that that I grew up in, I love taking care of people that took care of me when I was a kid here," Mitchell said by phone on his way to pick his kids up from football practice.

"But I may not be around forever. I may have to go work for a big chain ... I love what I do, but the PBMs are taking that away from me. I think the time has come for small pharmacies and large pharmacies to stand up to big PBMs and make a difference for our profession and in our patients lives."

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