ven in the boardrooms of Pfizer, they had to have expected President Trump’s Twitter outburst on Monday. If anything, the Pfizer executives set themselves up to be a target.
Let’s look back to the end of May, when Trump promised that some big drug makers would take “voluntary, massive” price cuts in two weeks.
Well, it’s been close to six weeks and, so far, most large brand-name drug makers have not heeded his call, although few companies raised prices by any meaningful amount, either. This is a time of year, after all, when the pharmaceutical industry traditionally increases prices.
Yet Pfizer has something of a stubborn streak — and of late it has stuck out like a sore thumb, boosting list prices last week on more than 40 medicines by more than 9 percent, well above inflation.
So predictably, Trump lashed out, tweeting that, “Pfizer & others should be ashamed that they have raised drug prices for no reason… We will respond!”
Trump can threaten all he wants. He figures such posturing looks good to his base. But his ranting simply reveals an inability to accept that delivering on his promise will be much harder than he realized.
Why? Very simply, drug pricing is a Byzantine world.
For starters, when most people talk about drug prices they are usually referring to list, or wholesale, pricing. But consumers with insurance do not actually pay that price. Instead, their out-of-pocket costs are determined by a series of behind-the-scenes deals between drug makers, health plans, and pharmacy benefit managers, which negotiate insurance coverage.
And these deals are predicated on rebates, which are generally tied to list prices. Basically, if list prices rise, so do rebates that flow back to pharmacy benefit managers and health plans, which means there is really no incentive for prices to drop.
“Given the way the system is structured, it’s incredibly difficult, if not impossible, for manufacturers to lower list prices,” explained Adam Fein, who writes the Drug Channels blog. “Unlike a consumer product, where a reduction would just flow through the channel, a reduction here would disrupt an entire system of contracts.”
“The economics are weird,” he continued, “but the problem is that consumers, in general, are exposed to a phony price that doesn’t reflect real transactions.”
This is not to say the Trump administration is not trying to find a salve.
Over the past few months, his team has released a blueprint that floated various ideas, although none expressly included a dictum that drug companies would lower prices. Instead, there are proposals aimed at rejiggering how government programs might pay for some medicines. Sources say the administration is trying to come up with ways to pass through rebates, but such notions are likely to take months.
Perhaps Trump thought he could make things go quicker by hiring Alex Azar, a former Eli Lilly executive, to head the Health and Human Services Department and, notably, tackle the pricing problem.
Azar, after all, is the consummate insider who understands pricing and rebates all too well.
But that doesn’t mean every drug company will fall in line.
Pfizer chief executive Ian Read has been as resolutely stubborn as Trump, in fact. He regularly argues that the insurance system is to blame. At industry conference after industry conference, he regularly repeats this mantra: “It’s not drug pricing that’s the problem, it’s drug affordability.”
Meanwhile, Pfizer has regularly raised prices — and by large percentages.
In 2016, the company twice raised list prices — once by an average of 10.4 percent and then by 8.8 percent. At this time last year, Pfizer raised list prices for 91 medicines between 5 percent and 13 percent.
Pfizer refused to put someone on the phone to explain the thinking, but a spokesman wrote me that the weighted average net selling price hike was 3 percent last year and there was no such increase in the first quarter of 2018, thanks to rebates that were paid.
“There is nothing that is going to force these companies to lower the price and Trump talking about is not going to change that. It’s just baloney for public consumption,” said Ira Loss of Washington Analysis, which tracks regulatory and legislative changes in the pharmaceutical industry for investors.
“Right now, industry is united in pointing fingers at pharmacy benefit managers and many of the drug companies are saying they’re sticking to this voluntary cap of raising prices less than 10 percent. And even with large price increases, they can claim victory and say they are being good citizens.”
Over the next few months, we can expect more proposals from the Trump administration and — Pfizer aside — most large drug makers will try to keep a low profile so they can avoid being named in tweets.
But the average American will have to wait longer for any relief.
And for that, Trump is the one who should be ashamed, since actions really do speak louder than words.