Perverse Incentives: Why Everyone Prefers High Drug Prices -- Except for Those Who Pay the Bills

97 Pages Posted: 18 Apr 2018 Last revised: 19 May 2018

See all articles by Robin Feldman

Robin Feldman

University of California Hastings College of the Law

Date Written: April 13, 2018

Abstract

Health care spending rarely follows an ordinary, rational model. Yet even in that context, prescription drug prices are rising at a puzzling rate. What is causing the phenomenon? Quite simply, incentives percolating throughout the prescription drug market push players toward higher prices. At the center, lies the highly secretive and concentrated PBM industry — middle players who negotiate between drug companies and health insurers, arranging for rebates and establishing coverage levels for patients.

Contracts between drug companies and the middle players are closely guarded secrets. The PBM customers, including Medicare, private insurers, and even their auditors, are not permitted access to the terms. And the middle players are not alone; everyone is feeding at the trough.

Markets, like gardens, grow best in the sun; they wither without information. Thus, competitive distortions and suboptimal outcomes are unsurprising.

Despite the extreme secrecy, details have begun to seep out — through case documents (including recent contract disputes among parties), government reports, shareholder disclosures, and industry insider reports. Piecing together these sources, this article presents a picture of incentive structures in which higher-priced drugs receive favorable treatment, and patients are channeled towards more expensive medicines. In exchange for financial incentives structured in different ways to appeal to hospitals, insurers, doctors, and even patient advocacy groups, drug companies ensure that lower-priced substitutes cannot gain a foothold. It is a win-win for everyone, except of course for taxpayers and society. This article also analyzes popular proposals that are unlikely to work and suggests approaches for aligning incentives.

Suggested Citation

Feldman, Robin, Perverse Incentives: Why Everyone Prefers High Drug Prices -- Except for Those Who Pay the Bills (April 13, 2018). Harvard Journal on Legislation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3162432 or http://dx.doi.org/10.2139/ssrn.3162432

Robin Feldman (Contact Author)

University of California Hastings College of the Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

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