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Last December, The Fair Pricing Coalition issued a report, “Tackling Drug Costs: a 100 Day Roadmap.” This report discusses a major challenge:  containing health care costs while maintaining health care services. This challenge is crucial for the HIV communities. The authors of the report, Sean Dickson and Tim Horn, argue for modernizing drug cost formulas, and increasing penalties for excessive price increases.

The economics of health care differs from that of the classic market. With many products, potential buyers can delay a purchase until the price drops. For life-saving medications and procedures, that cost constraint cannot work. Delay equals death.

Dickson argues that medication pricing differs from market pricing. Medications are not interchangeable. Using HIV medications as an example, Dickson explained, “Single tablet regimens work differently for different people. They're not truly competing against each other. If you have only one drug that can achieve something, then there is no competition.”


Fix the Formulas

In the U.S. health care payment “system,” health insurance companies function to contain costs. Federal and state safety net programs have a similar function. Those safety net programs include Medicaid, Medicare Part B, Ryan White Care, and the VA. These companies and programs contain costs when they use their purchasing power to negotiate costs downward. 

In the early ‘90s, the safety net programs and the pharmaceutical industry agreed upon complex formulas to calculate prices and costs. With some modifications, those ‘90s formulas still determine costs to the safety net programs. Those formulas are tightly interwoven. Medicaid's formulas trigger calculations of medication costs across multiple safety net programs, including those for HIV meds.

The report argues that changes in the pharmaceutical industry require updating of those ‘90s formulas. Those changes include consolidation of insurance companies, utilization of Pharmacy Benefit Managers (PBMs), and the development of back-end discounts and rebates. The term “back-end discounts” refers to money exchanges among the “players” along the distribution network. These “players” include manufacturers, wholesalers, insurance companies, PBMs, and pharmacies. PBMs manage prescription medication costs for insurance plans. 

The ‘90s formulas focus on costs at the level of retail community pharmacies. Health economists refer to those costs as “front-end costs.” Back-end discounts involve rebates, discounts, and offsets along the distribution networks. These back-end discounts do not enter into the ‘90s formulas, but in 2014, these back-end discounts amounted to $14 Billion.

This report argues that these back-end discounts result in a different and lower cost than the front-end costs. In other words, the ‘90s formulas cause the safety net programs to overpay for medications. Contemporary formulas should take into account these back-end discounts. 


Increase the Penalties

According to Dickson, controlling medication costs throughout the system depends on changing the inflation penalty. Current Medicaid and VA policies “cap” that penalty so that it cannot exceed the price. Dickson argues that a price increase much higher than inflation allows a company to easily offset its loss in the relatively small Medicaid market. Instead, such a price increase allows that company to reap large profits in other sectors. “Manufacturers are willing to take a little bit of a loss on their Medicaid sales, in order to jack up the price for everybody else,” Dickson said. 

Michael Shkreli’s price hike of 2015 provides an example of this trade off. His company, Turing Pharmaceuticals, raised the price of Daraprim, from $17.63 per pill to $750 per pill. Doctors prescribe Daraprim to treat toxoplasmosis, an infection associated with AIDS. The $750 per pill price refers to a list price. Pharmacies would only charge that to people without insurance or without access to a safety net program. People without access to either have the least ability to pay, but face the highest prices.

In 2016, Nancy Retzlaff of Turing testified before a House Committee. She said that the actual purchase price paid for Daraprim ranged from 1 cent to $750 per pill. About 60 percent of Turing’s Daraprim sales were for 1 cent per pill. Only 24 percent of its sales occurred at the higher end of that range. The price range from 1 cent to $750 per pill refers to the negotiated prices paid by either private health Insurance or a safety net program. The company accepted a loss on 60 percent of its sales in safety net programs to make profits in other sectors.

If we could increase that inflation penalty,” Dickson argues, “we reduce the incentive for drug manufacturers to increase their prices in the private market.” Changes in the safety net programs could contain costs in the private sector.

People need to learn about cost containment to win upcoming political battles. This report provides a good starting point to learn about these issues.


In order to find out more about the Fair Pricing Coalition, please visit

To view a webinar based on this report, please visit

To read the full report, please visit

Follow Sean McShee on Twitter @Sean McShee