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- [Presenter] You might think the process that determines how much you pay for something is pretty straightforward, and it often is. For example, here's the supply chain for a beverage you might buy at the drugstore, say, a Pepsi. Pepsi Co. Manufactures the soda and sends it to a retailer, who sells it to a customer. The customer pays the retailer, and the retailer pays Pepsi Co. Simple, right? Well, that is not the case for the products behind the pharmacy counter. The drugs. Here's a typical supply of chain for prescription drugs. It looks really different. That's because the way that drugs are priced is not at all a straightforward process. Experts and politicians argue that the very complexity of this chain is part of why drug prices have grown so high for customers. - Everyone involved in the broken system, the drug makers, insurance companies, distributors, pharmacy benefit managers, and many others contribute to the problem. - [Presenter] To understand this debate, first, you should understand the flow of drugs and money within this chain. Let's start here with the pharmaceutical companies. They are the ones who develop a drug and set a price, known as the list price. This isn't a straightforward as it might look, which I'll explain in a moment. Next you have the wholesalers who transport the drugs and sell them to the pharmacies. The patient pays the copay and the pharmacy sends out a bill that gets paid by the insurance company. That's simple enough, but we're missing a link. The link that manages this transaction and adds a lot of complexity to the chain. Meet the pharmacy benefit managers or PBS. They are who the drug companies and some politicians are talking about when they refer to middle men. They work for insurance companies, big employers, and government agencies. And a big part of their job is to bring down the cost of drugs for their employers. They do this by negotiating with pharmaceutical companies for rebates. Yup, for many of the drugs a pharmaceutical company sells, it pays a rebate to the PBM. The PBM sometimes pockets a portion of the rebate and passes another portion on to the insurance company or employer. Why the pharmaceutical company pays these rebates is the source of a lot of controversy. What happens is the drug company gets moved up on something called a formulary. So what's a formulary? It's the list of drugs that the insurance company covers. And it's grouped in tiers. Each tier represents what portion of the list price the patient pays and what portion of the list price the insurance company pays. The highest tier in the formulary is the lowest copay for the patient. And the lowest tier is the highest copay for the patient. When the pharmaceutical company pays a higher rebate, the PBM will move the drug up on the formulary. Pharmaceutical companies want high placement on the formulary. That's because patients are more likely to take the drug that's most affordable. And that usually means higher sales for the pharmaceutical company. If the patient wants to take a drug that's lowered down on the formulary or not on it at all, they have to pay higher copays or even the full list price of the drug. If this seems confusing, that's because it is. Let's take another walk through that transaction, this time with an example. Say a hypothetical drug costs $100. A PBM negotiates a $50 rebate, $10 of which they pocket, and $40 of which they pass on to the insurance company or employer. In return for that rebate, the PBM moves the drug to a better spot on the formulary making it cheaper for the patient to buy the drug. This transaction is important because the pharmaceutical companies say it's a big reason they keep raising the price of drugs. You've probably seen a chart like this before. It's the rise in the price of a drug in the US, in this case, Humalog, ing to its maker Eli Lilly. Th pharmaceutical company say they have raise less prices to protect their sales and profits from the demands of these higher rebates. Here's the CEO of the pharmaceutical company Merck at a hearing on drug prices. - If you bring a product to the market with a low list price in this system, you get punished financially and you get no uptake because everyone in the supply chain makes money as a result of a higher list price. - [Presenter] And here's that Humalog chart again this time with a net price, where the average revenue that Eli Lilly says they take in under this system. For their part, the PBM say that drug companies don't have to raise prices to boost their bottom lines and that rebates reduce the cost of drugs, not inflates them. They say rebates reduce the real cost of prescription drugs because they lower the price that insurance companies pay. That helps the insurers lower the premiums that the patients have to pay for their plans. Here's Derica Rice, an executive vice president at CVS Caremark, one of the pharmacy benefit managers. - Our job is to work with the employers, unions, and government programs who serve to ensure that when their members get to the pharmacy counter, they get the medicines that they need at the lowest possible cost. - [Presenter] So what does all of this mean for the patient back at the pharmacy counter? That the heart of all this is what the patient pays is often based on the list price, not the price the insurance company is responsible for after the rebates. And patients who don't have insurance or coinsurance or who have really high deductibles sometimes pay the entire list price. It's important to know that the details surrounding rebates are shrouded in mystery. Pharmaceutical companies and PBMs don't release their rebate data saying it's proprietary. But it's clear that different people and different insurance companies pay different prices for the same drugs. As you can see, the way that prices work behind the counter is totally different from how they work in front. (calm techno music)