Blame Game: The $130 Billion in Fees Mylan Says Pushes Up Prices

  • Mylan CEO likely to cite ‘broken system’ in Congress: analyst
  • Drugmakers say rebates aren’t lowering costs as they should

When Mylan NV ’s chief executive office testifies before Congress Wednesday about the company’s EpiPen allergy shots, part of her explanation should shed light on a corner of the U.S. health-care system that drugmakers say drives up prices but is little-discussed outside the industry: rebates.

Those rebates, which are fees pharmaceutical companies pay to distribution intermediaries, are likely to be at the crux of CEO Heather Bresch’s defense: Mylan actually sees only a portion of the $600 list price that has drawn outrage from lawmakers and patients. Bresch will probably point to a “broken system” that incentivizes drugmakers to raise prices in order to secure lower co-pays for their products, Wells Fargo analyst David Maris said.

Heather Bresch

Photographer: Michael Nagle/Bloomberg

The intermediaries, including wholesalers and pharmaceutical benefits managers, or PBMs, are key players in deciding which drugs get used and how much they cost patients. While the rebate amounts are usually kept under wraps for competitive reasons, the case of EpiPen is offering a rare insight into how the system works -- and the blame game resulting from it. Drugmakers say the price increases fund ever-rising rebates, while PBMs say costs would be even higher if they didn’t negotiate the discounts on behalf of insurers and employers.

“The PBMs say things like ‘It helps us keep our prices low to our customers,”’ Maris said of rebates. “But that’s not what’s going on, it’s part of their business model now.”

‘Opaque and Frustrating’

At stake are billions of dollars. Rebates more than doubled in four years to an estimated $100 billion to $130 billion today in the U.S., according to Pratap Khedkar, a managing principal at ZS Associates, a marketing firm with a focus on health care.

Bresch, in prepared testimony ahead of her hearing before the U.S. House Committee on Oversight and Government Reform Wednesday, said she regrets that some patients had difficulty affording EpiPen. She also pointed to the “opaque and frustrating” pricing system for drugs, which contributing to a misconception about the actual price of EpiPen. Nina Devlin, a company spokeswoman, declined to comment.

Mylan has boosted the list price of EpiPen, an epinephrine auto-injector that can be life-saving for people with severe allergies, more than five-fold since 2007 to $608 for a two-pen package. Of the list price, the company said it takes home about $274 -- before costs associated with research and development, as well as marketing. The $334 difference per prescription, goes to PBMs, insurers, wholesalers and retailers, in the form of discounts and rebates, according to Mylan, which has a legal address in the Netherlands but is run from Canonsburg, Pennsylvania.

While EpiPen’s list price rose sharply after Mylan acquired the product nine years ago, data compiled by Bloomberg shows that the net price didn’t increase as quickly. That indicates rebates have been growing. In 2013, the difference between the $128 list price for a single pen and the net price was $12. By 2015, that gap was $92 per pen, according to company filings and estimates from health investment researcher SSR Health.

Rising Rebates

The reasons for the rise in rebates -- and drug prices -- are multiple.

PBMs increasingly rely on “price protection” clauses that require drugmakers to give back a portion of a list price increase if it exceeds a pre-determined amount. That’s on top of the traditional rebate that comes in a percentage of the drug’s list price. In drug classes where there are several rival products, rebates may also get bigger as a result of the competition,  according to ZS Associates’ Khedkar. Another reason is that minimum rebates under the Medicaid government health-insurance program have increased under the Affordable Care Act, known as Obamacare, he said.

PBMs, for their part, say they play a critical role in keeping costs down in the health-care system.

For instance, Express Scripts Holding Co., an industry leader, has put programs in places to reduce the costs of older drugs and cancer treatments. About 90 percent of the rebates the company receives flows through to its clients -- insurers and large companies -- according to David Whitrap, a company spokesman. In EpiPen’s case, while the list price has increased 51 percent over 18 months, patient co-pays have remained stable through Express Scripts, he said.

At CVS Health Corp., rebates negotiated by the PBM unit helps clients lower patients’ out-of-pocket spending, said spokeswoman Christine Cramer.

Negotiating Discounts

“Without PBMs, prescription drug costs would be 30 percent higher,” said Mark Merritt, CEO of the Pharmaceutical Care Management Association, an industry association that represents PBMs. “We’re there to use our scale to negotiate price rebates and discounts.”

And drugmakers still benefit from pushing up the list prices for their drugs, even when they do pay high rebates, said Maris, the Wells Fargo analyst.

Maris pointed to the profit margin of Mylan’s specialty pharmaceuticals division, which largely represents sales of EpiPen: the margin has risen to 60 percent in the second quarter of this year, up from 34 percent in 2011 and 8.8 percent in 2008.

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