On Healthcare: Knowing What You Pay For

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I was recently diagnosed with an ulcer and a Vitamin D deficiency. Neither of these diagnoses is necessarily chronic or life-threatening, so there isn’t any real cause for worry. But when I went to pick up my prescriptions from the hospital, I was a bit overwhelmed when I took them out of the bag.

I decided to distract myself with prices. For these medicines, I paid $29.36 at Walgreens. Curious to find out what the real cost of the drugs was, I looked for the fine print, and after a fairly significant effort, I found it: for four drugs, I paid $6.00, $5.36, $10.00, and $8.00. For those same four drugs, my insurance company paid $6.33, $10.90, $132.79, and $106.99. Completely random, right? One was subsidized by 51%, and others subsidized 90%. One cost $12.33, and another cost $142.79.

Now, I have a PPO health insurance plan with a well-known carrier, and I chose this policy after reading the fine print very carefully, so I would like to think I am at least above average in terms of my understanding of how my health insurance works, and in terms of my access to quality information. But I have absolutely no idea how much these drugs are worth, or should be worth. But here’s the thing – it’s not that I don’t know if they should be $4/gallon or $7/gallon, like the price of, say, unleaded refined petroleum. It’s literally orders of magnitude difference between two drugs, and no way for me to understand it. So where is the breakdown here?

As if this weren’t bad enough, I’m told by the folks at Oration that if I ordered the prescription to CVS, or if the pharmacist were to package a generic version of the same drug, in the same city, the price would change again – and I wouldn’t notice, because I would be paying the same amount I’d paid at Walgreens. The health insurer absorbs this price volatility and then charges the consumer a rate that they couldn’t possibly understand. In no other industry does the purchaser have as little price transparency as this. The amount of diverting, rerouting, absorbing, and subsidizing just in prescriptive pharmaceuticals is insane to me. I have to imagine that in-patient clinical services are similarly opaque. 

Apparently the pharmaceutical suppliers today operate much in the way travel agents did in the first era of commercial air travel. In healthcare, the big pharmaceutical companies make their pills, which are then sent by the million to suppliers, who then package them by the thousand in such a way that they can then sell them to pharmacies, who then package them by the dozen, or whatever the dosage is, until they look like the orange bottles you see above. In commercial flight, the travel agents managed all of the purchasing and reselling, and had full ability to price-fix as they saw fit, which is why one travel agent could be “better” than another. Today, of course, Southwest’s point-to-point and first-come seating coupled with Expedia/Kayak/etc has rendered the travel agent moot, and price transparency for air travel is at an all-time high, and the ways of differentiating oneself are manifest to the consumer.

In what other industries is a purchaser’s access to the cost of goods so thoroughly opaque as in prescriptive pharmaceuticals? I am genuinely curious. Imagine if a purchaser knew how much they were paying for a service in healthcare? You have to think that would go a long way.

Let me say a word about CVS, while I have you. In merging with Caremark, they became a prescription benefits manager. It’s a pretty unassuming-sounding phrase, but the implications are very profound on the industry. By aggregating purchasers (us), they negotiate discounts on meds from the drug manufacturers, and can ether pass those costs onto consumer, to the payer, or keep the margin themselves. CVS Health is of this writing the second-biggest PBM in the world. And as long as you continue to think of CVS as your go-to place for prescription drugs (and whatever less), their influence and ability to drive margin here only gets stronger. Demand aggregation!

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