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Drug Pricing Is Weird

Stanley Feld MD, FACP,MACE

Many of my readers have asked me to explain drug pricing. I have not covered the pharmaceutical industry’s pricing in this blog because I have not been able to figure out drug pricing.

I do know there is a lot profit in both the retail and wholesale drug business. I know government pricing is different that benefit management pricing. I know there has been a growth in drug benefit management companies.

My sense is neither the pricing for Medicare Part D or private insurance drug benefits are for the patients’ advantage.

I recently asked a good friend Dr. Dale Fuller, a retired radiation oncologist, to explain the outrageous cost of oncology drugs (Drugs used to treat patients with cancer).

I wanted to know the reason the government pays almost twice as much to hospitals for the same treatment patients get in the oncologist’s office even though the treatment is given by the same oncologist.

I have added a couple of comments to Dr. Fuller’s note into the body of his reply.


Dr. Fuller writes,


"Is pharmaceutical pricing weird, or what?"

Dale Fuller M.D.

"Lately I have been thinking about pharmaceutical pricing, and as an old pharmacist turned radiation oncologist, it was the pricing of cancer drugs that caught my interest.

Then, my wife showed me some information about a product called “Symbicort” that she uses on a regular basis. 

Introduced into the US in March of 2009, it goes off patent in 2014.  The other day she brought home a 90 day supply for which she had paid $120.00, and Medicare part D allegedly paid $839.89.  At least, the package from Walgreen’s informed her that her “insurance had saved her that $839.89”.

The $839.89 plus the $120 or $959.89 is going to be charged against her Medicare Part D donut.

During the initial coverage phase, you pay a copayment or coinsurance, and your Part D drug plan pays its share for each covered drug until your combined amount (including your deductible) reaches $2840.

Once the patient and the patient's Part D drug plan has spent $2,840 for covered drugs, the patient will be in the donut hole.

Previously, the patient had to pay the full cost of your prescription drugs while in the donut hole.

Starting 2011, the patient gets a 50% discount on covered brand-name prescription medications. The donut hole continues until your total out-of-pocket cost reaches $4,550.

This annual out-of-pocket spending amount includes your yearly deductible, copayment, and coinsurance amounts.

When you spend more than $4,550 out-of-pocket, the coverage gap ends and your drug plan pays most of the costs of your covered drugs for the remainder of the year.

The patient will then be responsible for a small copayment. This is known as catastrophic coverage.

In 2014, Medicare will pay 28% of the price for generic drugs during the coverage gap. You'll pay the remaining 72% of the price.

What you pay for generic drugs during the coverage gap will decrease each year until it reaches 25% in 2020—in 2015, you'll pay 65% of the price for generic drugs during the coverage gap.

Confusing isn’t it.

 That would be a total of $959.89 for her 3 months’ supply of medication, or $319.96 a month, or $2.67 a squirt, of which there are four a day.  Who knows how much Uncle Sam actually paid Walgreen’s for his share of the bill.

 How to save 85% on Symbicort.

However a senior cannot buy this inexpensive brand named Symbicort using his Medicare Part D drug plan because he would be buying it from a Canadian Pharmacy.

So much for competitive innovation in a global economy. Government control trumps innovation.

Similar abstruse drug pricing strategies exist in abundance in the field of medical oncology.

Consider first the situation in the office of the medical oncologist.  The physician purchases pharmaceuticals from a supplier.  He must retain at least a basic inventory of frequently used products, some of which are very expensive.

The “acquisition cost” becomes the basis for the reimbursement the doctor receives from Medicare for the drug.  To the acquisition cost the doctor was allowed to add 6%, which was intended to cover the preparation for administration.

The actual infusion of the medication in the doctor’s infusion room, including the cost of the nurses working there, was reimbursed at a rate of $133 per hour (“chair time”).  Keep that figure in mind.

The US budget debacle in which Uncle Sam cut everything he paid for by 2%, actually amounted to a 33% reduction in the 6% the doctor was allowed,  leaving ~4% to underwite the preparation for administration of the drug required for the care of a Medicare patient.

There are other patients who come to the infusion room, as well.  Some have private insurance, and some have no insurance at all.

The private insurance may carry a different level of reimbursement for pharmaceuticals from that paid by Medicare, or it may not.

Very few uninsured patients have the wherewithal to pay out of pocket for the cost of their care.  The doctor has two choices in handling their situations:  charity or referral to a hospital where the cost of chemotherapy agents and their administration is handled in a different way.

The absence of any significant profitability for many medical oncologists has resulted in the closure of at least 400 practices between 2007 and 2012, and closures continue to this day.  Patients in these situations have been forced to seek outpatient infusion services in local hospitals, where administration reimbursement to the hospital is an average of $299 per hour in comparison to $133 in the doctors’ offices.

It is said that hospital outpatient infusion services use more drugs (see below for how they are acquired), charge higher prices, and require higher co-pays from patients.  Go figure.

And, don’t forget the drugs!  Doctors are now reimbursed by Medicare at acquisition plus 4%, while hospitals, under “340B” programs enjoy a margin of about 30% versus the doctors’ 0-2%.

Remember the Symbicort example I started with?  The 304B acquisition price for  Symbicort  is listed at $88!  Even with a 50% markup for a patient, a month’s supply would come to  $132. Go figure.

 The evolution of this mess has prompted a congressional advisory organization called MedPac to call for changes to equalize payments for oncologists’ care in their offices as compared to payments for services provided in hospital outpatient departments.  And, who can argue against the creation of a level playing field?

Symbicort is now generic. I tried to find the price of the generic drug. I could not without providing a prescription. Go Figure.  Is this transparency?

Patients and physicians are being taken advantage of here. They are the pawns that drive the profits in the healthcare system.

Someone has to stop it for the sake of good medical care delivery.

I wish to thank Dr. Dale Fuller for this submission.

The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.

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