How does Big Pharma set prices? In a word: high

A pharmacist contacted me a few months ago offering documents that reveal wholesale drug prices and how much pharmacies charge indigent people for them.

Neither my anonymous source nor I knew the depth of the drug pricing rabbit hole I was entering, or what it would reveal about health care costs in America.

I’ve written many times about how doctors, hospitals and drug companies charge whatever the market will bear in a health care system that encourages profiteering. But our system is not without safety nets.

The federal government requires pharmaceutical companies to provide discounted drugs for the indigent through the 340B Drug Pricing Program. Congress mandated specific rebates from the average manufacturer price for outpatient drugs distributed by eligible hospitals and clinics. Special 340B pharmacies fill the prescriptions.

The pharmacist, who would lose his job if I named him or her, allowed me to review hundreds of pricing documents. They show the 340B pharmacy’s acquisition cost, the average wholesale price and the price charged to the needy patient. I looked up the retail prices online and found the numbers shocking and confusing.

• Humalog, a form of insulin, had a retail price of $1,755, an average wholesale price of $1,180, an acquisition cost of $8.30 and was sold to a patient for 30 cents.

• Epizicom, an HIV drug, had a retail price of $1,561, an average wholesale price of $1,550, an acquisition cost of $517 and was sold to a patient for $1,316.49.

• Dulera, an asthma inhaler, had a retail price of $1,250, an average wholesale price of $987.96, an acquisition cost of $289.38 and was sold to a patient for $795.96.

• Azithromycin, an antibiotic, has a retail price of $213, an average wholesale price of $46.65, an acquisition cost of 80 cents and was sold to a patient for $8.80.

Collating the documents revealed no discernable pricing pattern. The prices also changed from month-to-month and year-to-year. The pharmacist, with more than 20 years of experience, couldn’t explain the prices either, which is why he called me.

Were taxpayers subsidizing these prices? Was the acquisition cost an accurate reflection of the cost to make the drug? Are pharmaceutical companies losing money on 340B sales?

These are important questions because 7 percent of all drugs sold in America last year passed through a 340B pharmacy, for a total of $21 billion in sales, according to the journal Drug Channels.

Frustratingly, the answer to these questions is “kind of.”

“The 340B program, like so many other government programs, has become so very convoluted, that it’s very hard to follow as a consumer, or as a reporter, or as a lobbyist, in my case,” said Mike Strazzella, an industry expert and head of federal government relations for Buchanan, Ingersoll and Rooney’s Washington, D.C., office.

Average prices change with every new rebate to an insurer, every generic entering the market, every new distribution deal and every revised marketing strategy. And like all drug pricing schemes, the 340B program is controversial.

“There is definitely a fight going on right now. If you listen to the hospitals, their drug spend is so significant, that the exorbitant pharmaceutical prices have gotten to the point where the 340B program is extremely necessary,” he added. “The pharmaceutical companies have argued that higher drug prices for the public are partly to make up for lost dollars from the 340B program.”

The 340B prices are only a tiny part of a broader pricing strategy that drug companies keep secret.

“Because a number is listed, it does not mean that’s what it cost to make. It does not mean that’s the number where it will be profitable,” Strazzella said. “It’s a number that has been listed that allows them to operate and make a profit across many different payment systems.”

Every American knows they are getting gouged; pharmaceutical industry profits are proof. The mystery is where regulators can make a difference.

President Donald Trump wants prices advertised and linked to prices paid by socialized systems overseas. Congress is looking to force change, most likely through spurring competition. Drug company lawyers, though, are geared up to fight any attempt to change the status quo.

I hoped that these numbers, typically kept secret, would clarify drug costs. But they only serve to demonstrate the madness of our system and further hinder our quest to calculate a fair price that rewards the industry without bankrupting patients. Which is precisely what profiteering drug companies want to avoid.

Tomlinson writes commentary about business, economics and policy. chris.tomlinson @chron.com twitter.com/cltomlinson