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Mike Shedlock

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. He operates the blog MISH'S Global Economic Trend Analysis and believes in the Austrian School of economics.

Behind the EpiPen Pricing Scandal: Why Generics Don’t Necessarily Reduce Prices – Mish Proposals

11 days ago

Despite widespread availability of generic versions, customers do not often use them. Why?

In some cases, pharmacies are under obligation to not mention cheaper alternatives. Some pharmacists may not be aware of cheaper alternatives because they do not know what a plan covers.

And behind the scenes, there is the complex role of middleman pharmacy-benefit managers (PBMs), who take a cut out of sales and collude with drug makers to keep prices high.

Please consider Behind the Push to Keep Higher-Priced EpiPen in Consumers’ Hands.

Something strange happened when Alice Bers went to the pharmacy earlier this year to fill her son’s EpiPen prescription: The doctor had prescribed the generic, but it would have cost her more out-of-pocket than the branded version.

So the pharmacy asked her son’s doctor for a prescription for the brand-name EpiPen, and her health plan got a bill for $438.53, or $227.52 more than the generic would have cost it. Many EpiPen customers, from a range of different health plans, have wound up getting the more expensive brand.

“I couldn’t believe how crazy our system is that it cost us less to get the brand name, while of course it cost our insurer more,” Ms. Bers said.

One reason, according to multiple people familiar with the drug industry, is that a middleman can profit from the sale of pricier medicines, such as EpiPen.

“The complexity in the system and lack of the right information available to buyers at the right time costs the country billions of dollars, unnecessarily,” said Michael Rea, chief of executive of Rx Savings Solutions, which sells software to help patients and their employers choose the least-expensive medicines.

When Ms. Bers picked up an EpiPen two-pack in March, several companies beyond the drugmaker Mylan were involved in filling the prescription. These middlemen warehoused, shipped and handed over the drug. Overseeing it all was a pharmacy-benefit manager, or PBM.

Each was paid for their involvement. For a typical brand-name drug listing for $300, middlemen generally receive more than $37 in gross profit, according to Adam Fein, president of Pembroke Consulting, which advises drug companies on the drug-distribution chain. A PBM gets the biggest share, $18.

PBMs typically don’t reveal the rebates they negotiate even to their health insurer and employer clients.

Drugmakers and others in the industry also say that PBMs can profit from costlier drugs because that means bigger rebates. “Their incentives align more to a higher gross price and a higher discount than to truly reducing the cost to everyone involved, so there are questions whether they are actually driving lower cost,” said Howard Deutsch, who advises drugmakers on working with companies involved in the drug-supply chain at ZS Associates.

Some PBM contracts prevent pharmacists from telling patients a drug’s true cost or whether an alternative might be cheaper for them, said Kevin Schulman, a Duke University professor of medicine who has written about the intermediaries.

When Erin Morrow, of Franconia, Pa., went to a local CVS pharmacy to pick up a prescription for her young son in April, she said she didn’t know about the Mylan generic and the pharmacist didn’t tell her one was available. Her plan paid $357.04 for the EpiPen Jr. two-pack. Later, a “health advocate” working for her employer told her that she could have gotten the generic, which would have cost her plan $81.54. Ms. Morrow said her health plan began limiting the coverage to Mylan’s generic and a rival product, starting July 1.

Consumers like Ms. Bers, a lawyer from Longmeadow, Mass., say a number of factors in the complicated health-care system seem to push them to the costliest version.

Ms. Bers’s drug plan—administered by the PBM Express Scripts—has no incentive to favor the cheaper generic version of EpiPen over the brand name. Her copay is the same either way—$30.

When she went to the local CVS pharmacy in March to replace a two-pack for her 17-year-old son that had expired, she wanted to use a coupon from Mylan to cover the copay. But the pharmacist said she couldn’t use it for the generic, she says. She says the pharmacy never told her that Mylan also offered copay help for its generic.

Ms. Bers says she learned later, by looking on the websites of Express Scripts and her Blue Cross Blue Shield of Massachusetts health insurer, how much more the brand-name EpiPens cost her health plan.

People familiar with the industry say Express Scripts, the PBM, could have made more from the sale of brand-name EpiPen depending on the amount of the rebate and other concessions it may have won from Mylan, and what it passed along to Ms. Bers’s health insurer.

Rotten to the Core

What applies to EpiPen applies across the board. Collusion, nondisclosure agreements, and government laws that do not allow cheap drug imports all act to keep prices higher in the US than anywhere else in the world.

Consider this snip from the article:

“When Erin Morrow, of Franconia, Pa., went to a local CVS pharmacy to pick up a prescription for her young son in April, she said she didn’t know about the Mylan generic and the pharmacist didn’t tell her one was available. Her plan paid $357.04 for the EpiPen Jr. two-pack. Later, a “health advocate” working for her employer told her that she could have gotten the generic, which would have cost her plan $81.54. Ms. Morrow said her health plan began limiting the coverage to Mylan’s generic and a rival product, starting July 1“.

What’s going on here? Why would a plan restrict coverage to a generic?

Such actions make little sense other than providing a mechanism for the healthcare companies to bitch about what patients cost the plan, so the plan can hike prices.

Then again, the entire system is so perverted and corrupt there could be other answers even if they are not readily apparent.

Mish Health Care Proposals

Published fees: Fees for routine services, medicine, and operations need to be published, not set by government mandate. Whether or not someone is insured, the fees should be the same.

Shopping Around: People should be encouraged to shop around for the lowest-cost provider of drugs and services.

Under this mechanism, insurance providers and hospitals can allow specified amounts for specified services. Other than emergencies, the insured can then shop around for the best provider of that procedure. Why should the medical insurance company care where the service is performed other than weeding out or disallowing unreputable places? Auto insurance companies typically don’t.

As for drugs, consumers should be able to get them from any reputable provider, even overseas. US prices will quickly fall to global prices under this provision.

Foreign Services: Plans should be allowed to offer foreign operations for non-emergency operations, for those able to travel.

Savings are immense. For example, a Bloomberg report shows that a Heart Surgery in India for $1,583 Costs $106,385 in U.S.

Demand treatment in the US? Fine. You should have to pay for it with a higher insurance bill. Obviously, this provision does not apply to emergency services like an accident or a heart attack.

Drug Pricing: There should be a price schedule for drugs. Pharmaceutical companies should not be allowed to charge less to overseas buyers than US buyers. There can be volume discounts but they have to be across the board.

Medicare/Medicaid: M/M should mandate generics where available.

M/M should buy supplies from the lowest-cost reputable provider, including importers.

Right now, those over 65 simply do not care much what things cost. Incentives are necessary to make sure they do. This includes forced overseas treatment for those able to travel.

Right to Die: No one should be kept alive if they want to die. Nor should someone be artificially kept alive if they do not have insurance, or their spouse or designated appointee wants to pull the plug on someone’s behalf.

Right to Refuse Service: If someone is not insured, hospitals should have the right to refuse service.

If people know they will be turned away, they will get insurance or take the consequences.

Patent Restrictions: Patent laws need to be revised to prohibit making minor changes and renewing patents for extended periods again and again.

Eliminate State Restrictions: Allow any insurance company in any state sell insurance in whatever states they want.

Age-Based Insurance

It is logical to expect medical insurance to cost more the older you get, just as with term life insurance. The one-price-fits-all model of Obamacare introduced massive distortions causing the young and healthy to drop out.

The one-price-fits-all model of Obamacare introduced massive distortions causing the young and healthy to drop out.


Pre-Existing Conditions

One reader previously proposed a waiting period of 3 years for those who attempt to game the system by opting out of insurance then suddenly wanting it. An alternative is to simply allow the insurer charge much higher rates. Either way, the free market will work if competition is guaranteed and services can be denied. No government rules are necessary, other than allowing the practice.

This would easily work going forward. There is still a debate about those with pre-existing conditions now, under Obamacare rules. What may be best from a free market aspect may not be socially allowable.

What may be best from a free market aspect may not be socially allowable.

Abortions, Birth-Control Pills, Etc.

The government has every reason to stay out of it. If insurance plans want to provide those services they will, if not they won’t.



My plan is fair. Rather than forcing everyone to buy insurance, it provides strong, free-market incentives for everyone to do so.

Customers will have a huge incentive to shop around. In turn, this ensures competition at every point in the system!

My proposals provide significant cost savings opportunities forced on drug providers, allowed by hospitals, allowed by insurers, and encouraged by insureds.

Mike “Mish” Shedlock