Robin Feldman on Drugs, Money, and Secret Handshakes

Episode Summary

Executive Summary: Russ Roberts and Robin Feldman examine why prescription drug prices keep rising despite patents, rebates, and supposed competition. Feldman argues the market is distorted by PBMs, secret rebates, formulary exclusions, and secondary patents that extend monopolies, often rewarding minor tweaks over true innovation. The conversation also highlights how third-party payment systems and Medicare rules amplify prices for patients and taxpayers.

Main Topics: Drug price inflation and who pays (Priority: 5/5): The episode opens with evidence that prescription drug prices, especially for common medications, have risen sharply and are causing real pain for patients despite rebates and insurance. PBMs, rebates, and secret contracting (Priority: 5/5): Feldman explains how pharmacy benefit managers mediate access and pricing through opaque rebate deals that favor high-priced drugs and exclude cheaper rivals. Formularies and market exclusion (Priority: 5/5): The discussion shows how tiered formularies are used to steer volume toward preferred drugs, making it difficult for lower-cost competitors and generics to gain traction. Secondary patents and extended monopolies (Priority: 5/5): A major theme is that companies often patent minor tweaks to existing drugs, prolonging exclusivity and reducing the market’s ability to shift toward generics. Insurance design and distorted incentives (Priority: 4/5): Roberts and Feldman discuss how employer insurance, ACA rules, and Medicare cost-sharing can unintentionally encourage higher list prices and less price discipline. Competition, innovation, and policy reform (Priority: 4/5): The conversation closes with proposed reforms such as limiting minor patents and a 'one and done' exclusivity rule, alongside concerns about legislative fatigue.

Key Arguments: Drug prices have risen substantially overall; the problem is not just a few headline-grabbing drugs but common medications as well. PBMs often do not lower prices for patients because rebates are tied to high list prices and many patients pay deductible or coinsurance amounts based on those inflated lists. Secret rebate arrangements and formulary placement allow large-volume drugs to block cheaper competitors, similar to a retailer raising price before a sale. The market is not a normal competitive market because patents, exclusivity extensions, and third-party payment distort incentives at multiple levels. A large share of new patents cover existing drugs rather than truly new therapies, indicating recycling and repurposing instead of breakthrough innovation. Minor changes in dosage, delivery, or formulation can still receive long patent protection even when the patient benefit is modest. The ACA’s 80/20 rule and Medicare reinsurance can unintentionally increase premiums or encourage plans to favor expensive drugs because the government bears part of the cost. Meaningful reform would include limiting patents on obvious tweaks and possibly giving each drug only one major protection period ('one and done').

Data Points: Medicare spending for brand-name drugs: up 62% from 2011 to 2015 - Used to illustrate broad prescription drug price growth even after rebates PBM market concentration: 85% dominated by the big three players - Shows how concentrated the pharmacy benefit manager market is Commercial plan rebates: 20% to 30% average - Feldman notes rebates still leave prices rising because list prices climb faster New patents tied to existing drugs: more than 3/4 (over 75%) - Supports the claim that drug firms often repurpose old drugs rather than invent new ones Profit margin on drugs after development: about 76% marginal cost margin - Used to explain why firms favor high-markup products and secondary changes Employer plans with full deductible exposure: 30% of plans - Patients pay 100% out of pocket until deductible is met, based on list price All top-selling insulin drugs: increased protection by at least 20 years - Shows how exclusivity has been repeatedly extended in insulin markets Insulin protections: one product had 55 protections - Illustrates extreme patent/exclusivity stacking Treximet example: $800+ for 9 pills vs. $10–$15 for separate ingredients - Demonstrates how combining old drugs can command very high prices Price protection target in PBM contracts: 2% to 4% annual increase cap - Describes contracts marketed as protection against rising prices ACA insurer medical spending rule: 80% of premiums must be spent on medical claims - Roberts and Feldman discuss how this can incentivize insurers to raise premiums Medicare reinsurance coverage: government pays 80% after out-of-pocket threshold - Creates incentives for plans to favor expensive drugs once patients reach the donut hole

Pivotal Quotes: "markets like gardens grow best in the sun" — Robin Feldman: On why secret rebate deals and hidden contracting harm competition "the greater drug's volume, the more the drug company can spread out a persuasion payment across each unit of the drug sold" — Robin Feldman: Explaining how volume rebates let large firms exclude smaller rivals "We're getting a smart car and we're paying Lexus prices" — Russ Roberts: A metaphor for his view that consumers are paying premium prices without receiving equivalent value

Implications: Listeners should see drug pricing as a system problem driven by patents, rebates, and insurance design. Policy changes that increase transparency and limit minor patent extensions could lower prices and restore competition, but entrenched interests and legislative fatigue make reform difficult.