The real reason drug costs are so high in America 

Earlier this month, President Biden and Sen. Bernie Sanders (I-Vt.) published an oped about “the outrageous prices that the pharmaceutical industry charges the American people for prescription drugs.” It is the latest step in Sanders's ongoing campaign about drug prices. 

In June, Sanders, who is chairman of the Senate Committee on Health, Education, Labor and Pensions, announced that Lars Jorgensen, chief executive officer of Novo Nordisk, one of the world’s largest pharmaceutical companies, had agreed to testify voluntarily before Congress. That hearing, according to Sanders’s office, will focus on the “high prices Novo Nordisk charges Americans for their blockbuster drugs, Ozempic and Wegovy.” 

Both drugs attract extensive press coverage these days, mostly because their ability to control diabetes (Ozempic) and aid weight loss (Wegovy) has made them popular with celebrities, whose use has helped popularize them to the general public. Clearly, Sanders hopes the drugs’ notoriety will afford him a large audience, to which he can make one of his perennial talking points, as he did with the president in their op-ed: the cost of drugs in the U.S. is too high. “The American people,” Sanders said recently, “are sick and tired of paying, by far, the highest prices in the world for prescription drugs.”  

Sanders likes to single out Ozempic as an example. According to Sanders, “Novo Nordisk currently charges Americans with Type 2 diabetes $969 a month for Ozempic, while this same exact drug can be purchased for just $155 in Canada and just $59 in Germany.” When Jorgensen appears before the Senate committee, Sanders says he “looks forward to [him] explaining why Americans are paying up to ten or 15 times more for these medications than people in other countries.”  

Actually, there is a fairly straightforward reason why Americans are paying more for drugs in general — and Ozempic in particular — compared to other countries. The problem is the Pharmacy Benefit Manager, commonly known as a PBM.  

The first PBMs came into existence in the late 1950s and handled mundane tasks such as processing reimbursements on certain drugs for patients and drug stores. But the PBM morphed into its current-day version in 2018 as a direct result of the Affordable Care Act, which was signed into law by President Barack Obama eight years earlier, in 2010. 

One of the myriad stipulations in Obamacare said an insurance company was required to spend 85 percent of each dollar on the patient, meaning a company could devote only 15 percent of each dollar to overhead and profit. The rule was an obvious attempt by lawmakers to cap an insurance company’s ability to post huge profits at the expense of patients. Since insurance companies now saw their profit-making ability limited, the modern PBM emerged to provide the same management as the insurance company, but with one catch: a PBM has no cap on the profit it can make because it is not an insurance company. 

In a recent expose about drug costs, The New York Times detailed how insurance companies have invented, acquired or merged with PBMs to get around Obamacare’s 85 percent rule in order to post substantial profits. “The giant health insurers Aetna and Cigna,” according to The Times, “were trying to achieve the growth demanded by Wall Street. They sought to merge with the PBMs, whose profits were soaring. Aetna and CVS combined. Cigna bought Express Scripts. ... UnitedHealth had built its own PBM.” 

Under this new scheme, for a pharmaceutical company to be able to sell a drug through a pharmacy, the company must go through a PBM, and the PBM is allowed to demand the pharmaceutical company pay a rebate, which does not go to the patient but to the PBM. The rebate can be modest or, more often than not, sizable. The amount of money that must be paid to the PBMs through what is essentially a shakedown process — if the pharmaceutical company does not pay the rebate, the PBM will not allow the drug to be sold in the pharmacy — has made PBMs profit centers of astonishing proportions. Just how much a pharmaceutical company has to pay as a rebate normally remains unknown, since (and this detail is hard to imagine) rebates are considered trade secrets and thus undisclosable.  

These rebates, in short, are the main reason why drug costs are so high in the U.S. 

Consider the numbers. In 2016, 266 million Americans saw their drug purchases handled by a PBM and, to quote one source, “manufacturer rebates to PBMs increased from $39.7 billion in 2012 to $89.5 billion in 2016.” The Times notes that “the three biggest PBMs would each rank among the top 40 U.S. companies by revenue. The largest, Caremark, generates more revenue than Ford or Home Depot.” And in a perverse move, some PBMs are now creating another level of middle-management called a group purchasing organization, or GPO, which can also become a profit center. 

For all this revenue, what value do PBMs add? Attorney General David Yost, a Republican in Ohio, believes PBMs are “seeking to extract from the system, without creating any corresponding value for the system. The patients are the ones that are suffering.”  

So, when Sanders convenes his committee in early September, perhaps a logical place to start the questioning would be: What percentage of the $969 Novo Nordisk charges for a months’ supply of Ozempic in the U.S. constitutes rebates to PMBs? Some estimates place it at around 70 percent, which more than explains why the price of Ozempic is so high in the United States, where PBMs are allowed to operate, as compared to the rest of the world, where PBMs do not exist.  

Only then can we get at the real reason for high drug costs in America. 

Paul Alexander, a former reporter for Time, is the author of books about John McCain, John Kerry and Karl Rove. He often writes about politics and public policy.