Why is it that in a world of cheap generic and biosimilar drugs, many of which are developed in the US, does the country still suffer from elevated healthcare costs and especially sky high drug costs?

It is one of the puzzles of our age. We have cheaper rockets to space, cheaper (and better) consumer goods, cheaper electronics of all types but more expensive healthcare costs.

If you listen to politicians (and especially the Biden administration) the blame lies largely in the fault of pharmaceutical companies themselves. But, as we have discussed before, it is both more complicated and interesting than that.

Below we return to a previous theme and build out not just for evidence for why the innocently named Pharmacy Benefit Managers are responsible for a lot of high drug costs but also why we may need to get far more surgical in our reform efforts.

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Earlier this spring we wrote about Pharmacy Benefit Managers (PBMs) and how they were responsible for a lot of the unreasonably high profits and drug prices in the US healthcare system.

The idea was not really to let the drug companies (or health insurers) off the hook but more to explain that the politicized narrative around drug companies "ripping off" American taxpayers and healthcare recipients is, well, both too simplistic and even pretty false.

Our other aim was to make clear who is making out like a bandit from the inefficient and incredibly untransparent American healthcare system. As you may recall, at the time we focused our fire on the very public debate about the price of insulin but there are plenty of other worthy examples.

If you missed it you can find our old work here .

For a topic that we thought might be a little niche and also rather boring it got a lot of (positive) attention and so less than two months later, we thought we would dive back in from another angle.

First, off, if you are curious you can find a list of the most prominent PBMs on our App found here .

We have packaged them together into a "Pebble Theme" that can be monitored, traded and shared to your heart's content. Check it out and play around. Let us know what you think!

Second, it is notable and yet not surprising that the political backlash against high drug prices is slowly finding its way to the actual culprits - the PBMs. Perhaps the best evidence of this is the fact that the unwelcome attention is having an impact on their stock prices.

For instance:

• Unitedhealth's stock is down ~8% year-to-date.

• CVS (owner of Express Scripts) is down a stunning ~25% over the same time period.

• And Cigna's is down ~14% in 2023 at the time of writing.

These are serious numbers for very large and very successful companies. You cannot easily move a $400 billion market cap company's stock around almost no matter who are.....

While it is certainly true that these companies are huge healthcare conglomerates and the PBM portion of revenues and profits is only a (sizable) slice, the slide in the share prices as criticism of the role of PBMs has grown isn't a coincidence either.

Moreover, it is worth pointing out that Unitedhealth used to be in the top 10 companies in the S&P 500 and has just recently fallen out of that top tier. That could be the case for good. One of our most core tenets is that there is actually far more change in market leadership than many investors realize - hence the importance of indexing.

Unitedhealth isn't going anywhere as a company but its high point as a stock may be behind it. The healthcare giant may remain very large but it may also struggle to achieve the relative size and prominence it has enjoyed over the last decade of supercharged performance.

The problem is that, while the political attacks will likely gather steam as we grind towards yet another contentious American election year, we are not sure that these criticisms have accurately found their mark.

Why?

For the simple reason that the reform efforts in DC are not yet targeting the poorly constructed structure of the healthcare system that give the PBMs their pricing power.

The problem with high drug prices is drug makers are incentivized to have a very high price so they can then negotiate down with the PBMs by offering rebates, discounts etc. As you may remember, that was the problem with insulin. To just invent some round numbers, the price for the drug says $100 a vial but it drops to $40 after the drug company rebate to your PBM and you pay $16 after your insurance company pays its share.

Now, $16 may still be too much but a) it isn't $100 and b) most of the above payment isn't going to the drug company. So it stands to reason that if you want lower drug prices you need to go after the company gaining the lion share of the profits.

The problem is to go after those profits you have to directly attack the fact that drug companies themselves are setting high prices to try and then negotiate a higher dollar price per treatment or pill.

But that is just the start.

In most of America - including for finance companies! - such a rebate system would be considered a kickback scheme and therefore VERY illegal.

In the US, a company cannot sell another company's product because they are being paid to do so. This is especially the case if that payment or kickback is hidden from view.

Instead of a free and competitive market, this is selling a market to the highest bidder. You don't want to buy a set of tires because someone paid the tire shop the most to carry them. You want the best possible tires for your vehicle at a price you can afford.

For reasons we won't get into, there is a legal exemption for PBMs. They are, for really no good reason at all, special.

That is eye opening enough but what is really nuts is that it is this legal advantage that makes it so difficult to solve the expensive drug problem in the US.

For instance, even when cheaper pharmaceutical alternatives come along to challenge the expensive drug incumbents, the real question is not the price difference between the drugs but the scale of the rebate from the drug company to the PBM.

Therefore, when a far cheaper generic or "biosimilar" drug comes along that could dramatically cut the cost of the name brand treatment many insurance plans will not cover it because it is not approved by their PBM. There isn't the money from a rebate to make it worthwhile, despite the cost savings.

It is worth pointing out that while you may think that the PBM has nothing to do with you, it very much does:

• For one thing, as a taxpayer, you are paying elevated drug costs through Medicare and Medicaid.

• But for another, as a likely health insurance recipient you are also subsidizing these more expensive treatments which filter into higher costs overall as the insurance companies try and spread out the damage.

• Lastly, drug companies smooth out these rebate costs to other drugs to try and protect their own profit margins so even if you are the rare American who does not pay taxes or receive private insurance, you are paying via higher drug and healthcare costs more generally.

Remember, under 2% of drugs are responsible for well over 50% of drug related costs and so you do not need to receive an expensive drug to be subsidizing its use.

In the end, for every dollar spent in the US healthcare system far too many of them show up in PBM coffers for reasons that are, frankly, hard to pin down whatsoever.

On the plus side, while PBM fortunes (and stock prices) may recover somewhat as their inbuilt structural advantages prove harder to remove than we might expect, the criticism of their role will likely not abate.

In fact, eventually, regulators and politicians - perhaps even assisted by drug companies and their lobbyists - will hit on the right formula to limit the power of pharmacy benefit managers to ensure high drug prices (and high profits for themselves).

That will take root and branch reform however and we are pretty cautious about expecting that anywhere in modern America let alone such a rich and important sector of the economy.

Until then, their time at the top of the S&P 500 is likely over. You can always contribute by removing the PBMs from your own index using Pebble. Or simply track their slow but steady demise as they are slowly politically pulverized in the pincer move between budget constraints on the one hand and an ageing and increasingly unhealthy population on the other.

We leave that up to you but now at least you are better informed as to what the hell is even going on with both your drug costs and why you can't get a cheaper option.

Now if someone could just explain our health insurance statements to us....

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Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.